------------ EH.NET BOOK REVIEW --------------
Published by EH.NET (February 2010)

Lorenzo Pecchi and Gustavo Piga, editors, _Revisiting Keynes: Economic
Possibilities for Our Grandchildren_.  Cambridge, MA: MIT Press, 2008. 
xi + 215 pp. $30 (cloth), ISBN: 978-0-262-16249-4.

Reviewed for EH.NET by Linda Carter, Department of Economics, Baylor
University. 


John Maynard Keynes’ short essay, “Economic Possibilities for Our
Grandchildren,” provides the focal point for this book. In that essay,
published in 1931, Keynes looks past the “economic pessimism” of the day
and confirms his optimism regarding the long-term prospects of
capitalism (p. 17). Despite the economic conditions surrounding him in
the midst of a deep recession, he forecasted substantial increases in
living standards by 2030 and provided an insightful, modern account of
the determinants of the economic growth that was to occur in the
interim. Keynes went on to predict that these increases in living
standards would herald the end of the economic problem, that his
grandchildren would live in a state of abundance, and that the future
generations -- once free from the necessity to work and save -- would
spend most of their time in leisure, finding ways to “pluck the hour and
the day virtuously and well” (p. 25). Following a brief introductory
chapter and a reprint of Keynes’ own essay, sixteen contributors,
including several Nobel laureates in economics, each react to the essay.


An opening contribution by Fabrizio Zilibotti presents historical trends
in economic growth and work patterns that bring some of the questions
arising from Keynes’ essay into sharper focus. In particular, he
describes world growth patterns, with increases in GDP per capita well
beyond Keynes’ predictions, the uneven distribution of growth between
OECD and non-OECD countries (an event not anticipated or discussed by
Keynes), and the fact that solving the economic problem (and the
adoption of the 15-hour work week Keynes predicted) is still a very
distant prospect for much of the world. In the next chapter, although
Joseph E. Stiglitz notes that Keynes grossly underestimated the economic
growth that would occur in subsequent decades, he uses Keynes’ essay as
a springboard to consider why developed nations have not taken advantage
of the substantial technological progress that has occurred to better
our lives to a greater extent. He points toward apparent preferences for
quantitative rather than qualitative consumption, the tendency for
Americans to work so hard they scarcely have time to spend with family
or enjoy other aspects of life, streams of made up “needs” to pursue,
and the deterioration of communal life. He then offers various
hypotheses to explain why increases in wages might not lead to more
leisure (as Keynes had assumed would happen) and might not even lead to
increases in well-being. Then, in his essay, Robert Solow turns more
fully to the question of distribution. He and many other contributors
note how Keynes’ concerns over the lack of purposeful occupation that
will exist upon solving the economic problem seem meaningless today,
given the vast majority of the world that is still poor and will remain
so even in 2030. After giving some historical context for the rise of
corporatism in the 1920s, in Chapter 5, Edmund S. Phelps argues that
Keynes’ corporatist dissatisfaction with the market and the failure to
recognize the satisfaction that accompany economic pursuits (such as
entrepreneurship, innovation, etc.) in a capitalist economy are the
chief reasons Keynes’ predictions about future work and leisure patterns
were so wrong. 

In his essay, Lee E. Ohanian takes a substantially different approach by
sketching a model that generates predictions of declines in the work
week strikingly similar to Keynes’ predictions, which were stated with
little explanation of the underlying theoretical basis. Ohanian points
out, however, Keynes’ social commentary and especially his pabout the problems increased leisure would present for a society
accustomed to working and saving were based on neither empirical
observations nor theoretical foundations, despite related work by his
contemporaries that drew strongly on both. In Chapter 7, Axel
Leijonhufvud argues that Keynes’ class, as well as the time period in
which he lived, account for the strange contrasts between his
predictions and the trends we ultimately observed. In the next chapter,
Benjamin M. Friedman points out that -- aside from medical progress --
the material progress we have made over the past 75 years may or may not
have made us “better off in some fundamental sense” (p. 125). However,
he also discusses the positive social and political externalities (such
as greater tolerance and a deeper commitment to fairness and democracy),
which accompany and reinforce growth. With more relevant timing than he
could have realized at the time of writing, Friedman offers his own
prediction for Keynes’ “grandchildren” arguing, “If the current
stagnation of incomes and living standards for the broad cross section
of citizens were to continue, the likely consequence would rather be the
re-emergence of familiar social, political and, yes, moral pathologies
that have often afflicted economically stagnant societies in the past
but have typically atrophied when a clear majority know that they are
getting ahead and have confidence that their living standard will
continue to advance” (p. 133).

In Chapter 9, Richard B. Freeman offers perspectives that contrast
sharply with other contributors who view the observed increases in hours
of work and decreases in leisure (despite growing income per capita) as
negative or even pathological behavior. He argues that high returns to
extra hours of work (e.g., due to incentives in the retirement system,
low safety nets, and performance-related compensation), increased ease
of working away from a traditional office setting, and the social
benefits of work explain much of the observed positive relationship
between hourly pay and hours worked. He argues this is not only
reconcilable with standard models of economics, but also desirable since
“there is so much to learn and produce and improve” (p. 142).  Although
Keynes dismissed the importance of context in consumption, in Chapter
10, Robert H. Frank provides an interesting discussion of the importance
of context that reaches beyond standard discussions of “conspicuous
consumption” or “relative needs.” He also hypothesizes that -- if
context matters more for demand of some goods than others -- free
markets may not generate efficient outcomes. 

In a chapter that economic historians will find _disturbingly_ titled
“End of (Economic) History,” Jean-Paul Fitoussi implies that Keynes’
essay presents further evidence of his anti-Semitic views. On a similar
note, Michele Boldrin and David K. Levine provide a critical assessment
of the “classist, sexist, Eurocentric” viewpoint reflected in Keynes’
essay, the disregard for the majority of the world living in poverty,
and the “sloppy description of human preferences” underlying his
predictions (p. 173). Gary S. Becker and Luis Rayo detail many of the
blindspots in Keynes’ analysis that have become clear only with the
benefit of hindsight. For example, they argue that Keynes failed to
consider the differences in income effects of wage increases for
individuals with all wealth in land, assets, etc. (as was the case with
the idle rich of Keynes’ era) and individuals with wealth in the form of
human capital (as is true in recent decades). In Chapter 14, Leonardo
Becchetti draws on the recent economics literature regarding happiness
to highlight the part of Keynes’ social commentary that was right,
namely the increased value individuals would begin to place on
(relatively scarce) immaterial goods as income continues to grow.
Finally, a closing chapter by William J. Baumol highlights the “value of
erroneous forecasts” by emphasizing the tremendous progress we have made
as a society in the past 75 years that is brought into bold relief
against the underestimates of economic growth made by an incredibly
optimistic individual and brilliant economist (p. 202). 

In this review, I’ve focused on some of the unique (or especially
thorough) discussions in each contribution, but -- as one might expect
in a volume of responses to Keynes’ brief essay -- there is a
substantial amount of overlap between the chapters. And, it is far from
surprising that some of the contributions are more intriguing and easier
to follow than others. Each chapter, however, adds distinct perspectives
on Keynes’ work and the whole volume is certainly greater than the sum
of the individual contributions. In reacting to Keynes’ essay, several
contributors echo the sentiment succinctly expressed by Fitoussi, “What
matters is not so much the way Keynes answers the questions he poses but
the nature of the questions themselves” (p. 151). I would say the same
about this book. Whether one agrees with some (or none) of the
contributors’ perspectives, economists -- or indeed any reader with an
interest in thinking about catalysts for and impediments to human
progress in the long run -- will enjoy pondering the questions each
contributor poses while reflecting on Keynes’ essay, as well as the
arguments and answers outlined in each chapter. Economic historians, in
particular, will appreciate many of the contributors’ efforts to take
seriously the historical, institutional, and personal context in which
Keynes’ penned his essay and to analyze his predictions within that
context. The differences in the contributors’ research backgrounds and
disposition toward Keynesian ideas add richness to the analysis as they
bring their own perspectives to bear on Keynes’ work and most readers
will likely agree that the book could not be more timely. As Keynes
wrote while formulating the final draft of his essay, “The fact is -- a
fact not yet recognized by the great public -- that we are now in the
depth of very severe international slump, a slump which will take its
place in history amongst the most acute ever experienced” (Harrod 1972,
p. 469, quoted on p. 2). Since this book went to press on the eve of the
current recession, the contributors were not in a position to
incorporate the events of the past two years in assessing the validity
of Keynes’ predictions or soundness of his arguments. As such, the
evaluation of Keynes’ work is undertaken through a longer-run
perspective than would likely emerge in the current climate of
uncertainty. This is perhaps a loss for us, however, since it would have
been incredible to hear more from these contributors about the economic
possibilities for _our_ grandchildren in the midst of _today’s_
widespread “economic pessimism.”

Reference:

Harrod, F. R. 1972. _The Life of John Maynard Keynes_. London:
Macmillan.


Linda K. Carter is an Assistant Professor of Economics at Baylor
University. Her current research examines the rise, diffusion, and
impacts of evening schools for working children and immigrants in the
late nineteenth-century United States.

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Humberto Barreto
Elizabeth P. Allen Distinguished University Professor
Dept. of Economics & Management
DePauw University
Greencastle, IN 46135