For millennia there was no remarkable growth in the world. The lives of the sons were much like the fathers. But the industrial revolution, which started in Coalbrookdale in England around 1850, ushered in a completely new and unique period in world history of uninterrupted growth. But growth is driven by human needs, which are not infinite and insatiable, as the old economists believed. Therefore, the industrial revolution will lose its power as needs become saturated. Author Bent Hansen, last modified 2023-12-02.
1. National economic growth
Opening of a Target shop Black Friday. Photo Wikiwand.
A nation's growth must in principle mean that more citizens experience increased prosperity, or the already prosperous move up Maslow's pyramid of needs - thereby achieving greater happiness or utility. But you cannot measure that, and therefore you try to describe the amount of happiness quantitatively using the national product, assuming that all growth in consumption represents growth in happiness.
We thus assume that we will only spend money on new goods and services if we believe that these will make us happier.
The first cause of growth is man's innate insatiable needs, which motivates the second cause, which is men's restless craving and search for new solutions that can satisfy such needs, give men status, recognition, and access to women's love, and thus the nations are driven towards ever greater productivity and increased technical finesse. This psychodynamic is part of the "white men's culture" that has created our wealth.
Politicians in democratic states want to create conditions for growth and thereby generate increased happiness. They can traditionally do this in two ways.
Politicians can seek to stimulate the first cause of growth, which is needs, demand, by, for example, printing more money and giving it to the citizens, or by creating increased security and optimism in society, so that citizens will spend their money to demand products and services instead of saving them for uncertain times, or the state itself can create increased demand by launching large construction works. This last solution was what Keynes recommended a hundred years ago to solve the problem of unemployment in the thirties. Such a policy is called "Demand-side economics".
Alternatively, politicians can seek to increase supply by creating favorable conditions for the second cause of growth, namely the restless craving of businessmen and the search to exploit the needs with new solutions, new business opportunities and new products. Politicians can, for example, create lower corporate and personal taxes, free trade, less bureaucracy with tax, customs, VAT, CO2 quotas, employee regulations and more. Such a policy is called "Supply-side economics". Donald Trump was successful with such a policy in his first term as president of the United States.
But in these modern times, when people in the western countries already have had the basic needs of food, clothing and shelter met, the deep current that must drive national economic growth, the first cause, namely the human needs, is not so strong, as it have been throughout the past 170 years since the start of the industrial revolution.
Chinese growth rates from 1978 to 2014. It was stated as 4.9% for 2022. Photo Coolgeography.
A few decades ago, it was fashionable to blame European nations for their low growth compared to the Chinese double-digit growth rates. But it was an obviously unfair criticism, because the Chinese still had very strong needs for food, shelter, clothes, yes, simply everything. Millions of Chinese still lived in simple shacks with corrugated iron roofs and ate little but rice every day. But armed with the Western technology that they quickly acquired, they were able to quickly meet these needs and thereby create great growth.
During the German Wirtschaftswunder that started in 1948, which was the country's recovery after World War II, the German economy was characterized by annual growth rates of 7-12%. But it was because the Germans simply had extremely strong needs, because they lacked everything, their entire country lay in ruins.
It took several decades for the rest of the European nations to recover from the war, which is why in the 1960s they were still able to show average growth rates of 5.4% because they had strong needs and they could make use of technologies and business opportunities that were already developed in a United States that was not affected by the devastation of war.
This must be compared with just published figures from Eurostat, which show that GDP growth in the euro area today was 0.1 per cent. in the fourth quarter of 2023. Had it not been for growth in Ireland of 3.5%, the figure would have been negative.
2. Human needs and aggregate demand
The classical economists, Adam Smith, Ricardo and Malthus are assumed to have believed that "human needs are infinite and insatiable". They probably thought that, but it seemed so self-evident to them that they found no reason to put it down on paper.
Jean-Baptiste Say 1787-1832. He was born in Lyon in France. He worked in England until 1786, when he was employed by a life insurance company in Paris. He was 22 years old when he experienced the French Revolution. He got into trouble with Napoleon in 1804 and set up a textile factory in Calais. He wrote a number of books on economics and press freedom. Photo Wikipedia.
But the insatiable needs are an unspoken premise of Say's Law, which states that "As soon as a product is created, it will from that moment create a market for other products of the same size as its own value;" which is usually expressed: "supply creates its own demand".
It sounds a bit cryptic, but the point is that a businessman will only keep the liquidity that seems strictly necessary to him - as illustrated by the liquidity analyzes in the financial textbooks. With the rest of the money, he will immediately buy materials, goods or the like that he believes he can benefit from in the future, thereby creating demand for other businessmen's products. Say assumed that there will always be needs in society that can be exploited by new businesses, and therefore a businessman will take advantage of any available liquidity.
If one considers the individual product, the individual good, separately, it is easy to realize that the need for this good is not infinite and insatiable.
A family will work hard for the first car. They will be willing to give up other goods to afford it. They will forego restaurant visits and holiday trips to afford a car. The next car, the "wife's car", will only be purchased by a family for special reasons, and the third car in the family will only be bought if they can't really find anything else to spend the money on.
A family will be ready to give up many other goods in order to have their own house, a house of a suitable size, e.g. 120 square meters, they will feel a strong need. But the need for additional square meters is decreasing. The need for the first 50 square meters is stronger than the need for the last marginal square meters, if, for example, you already have 200. A married couple without children may find a house of 200 to 300 square meters unmanageable. All these useless rooms that they never enter, filled with things they don't use.
But the need for goods in total is also decreasing with the number of goods that a family has already acquired. Because it takes time to consume and enjoy them, after all there are only 24 hours in a day and life is finite.
For around 8 hours, the consumer sleeps in a tasteful bed with some good quality bedding. It takes a few hours to eat some healthy and delicious food, possibly with a good bottle of wine. Some hours are spent driving to and from work in a new and smart car. The family spends two to three hours in front of their new large flat screen TV. Before bed, you can visit the Internet with a high speed computer via a fast broadband connection.
But when you have now chosen to enjoy life to the fullest and spend your time enjoying all these goods, it becomes difficult to also find time to ride the 12-gear aluminum racing bike you may be considering acquiring, or to play golf with a titanium golf set, which you know some colleagues have already acquired.
Indian village in Palghar district in Maharashtra. Photo Mumbai Magic.
It is logical and obvious that the need for the last marginal goods is decreasing, not only because consumers cannot afford an unlimited number of goods, but mainly because they do not have time to consume them. Because there are only 24 hours in a day and life is finite. In other words, national demand for goods as a whole decreases with the quantity supplied. Just as the demand for the individual specific goods is decreasing with the quantity supplied. Therefore, it is not unconditionally true that "human needs are infinite and insatiable".
In Western countries, most strong and basic needs are already satisfied, everyone has housing, clothes, food, television and telephone, and most have a car and computer. The needs are far from as strong as they were at the beginning of the industrial revolution. Therefore, it is relatively difficult for businessmen in Western countries to create further growth with new products and services. It is the deeper reason why the Western European countries can no longer create significant growth rates.
In less rich countries, such as China and Indonesia, there are still millions of people who have strong basic needs that it is technically and commercially possible to meet with known technology.
Millions of people in the Global South dream of better housing, more food, television, cars, telephones, vacations and computers. Therefore, it is possible for the governments there to achieve far greater growth rates than the western countries can demonstrate. It is relatively easy to exploit already known technologies and business opportunities with abundant available cheap labor, supported by strong needs.
So, it is the case that even if new technologies are invented which can form the basis for new types of products, new "goods", it will still be difficult to create significant growth in Western countries. Because customers already have their hands full consuming the existing types of products, and have no time for more, as there are only 24 hours in a day and life is finite. New product types will simply push others to the periphery. Overall demand will generally not increase significantly.
An embryo with 8 cells ready for transfer 3 days after fertilization. Foto Wikiwand.
We can walk through a Sisters Grene or Total store full of bargains and only buy a box of licorice lozenges because we have all these things already.
Only products and services that satisfy very strong needs will be able to really break through in Western countries. It must be technologies that address very deep and basic human needs. One can imagine drugs against fatal diseases or life-prolonging drugs, fertility treatments that select the most genetically promising embryos so that the resulting children will be strong, beautiful and intelligent. There is a need for that. Because that's what we humans deep in our hearts want, to be free from deadly diseases, a long life and beautiful, strong and intelligent descendants.
2. The technical possibilities and the aggregate supply
The concept of "national economic locomotives" is well suited to explain the growth in the number of business opportunities and hence the growth in the aggregate supply.
Global World GDP from 1800 from 1800. It can be seen that, probably for centuries or millennia, there had been no particularly economic growth in the world. Only around 1850, with Abraham Darby's discovery in Coalbrookdale in England that it is possible to produce steel and iron from coke, which is degassed coal, in unprecedented quantities, did the world's GDP begin to stir. Figure from "Prospects for Economic Growth in the 21st Century: A Survey Covering Mainstream, Heterodox, and Science-Oriented Perspectives" by Eva C. Alfredsson and J. Mikael Malmaeus.
In Coalbrookdale in England around 1820, Abraham Darby discovered that it is possible to make iron from iron ore and coke in unprecedented quantities. It was the signal for the industrial revolution, which changed the world beyond recognition.
After that it went from blow to blow. The invention of the steam engine was one of the first national economic locomotives. It was the technical basis for new products and new services, which created the possibility for growth in the amount of economic transactions, i.e. national economic growth.
The invention of the steam engine opened up many new business opportunities. It became possible to travel by rail and steamship - much faster and more conveniently than it had been before. Many people realized that they actually had a need for it.
Sophisticated spinning and weaving machines, made of steel and powered by steam engines, made it possible to produce textiles cheaply and in unprecedented volume.
The invention of the steam engine opened up great new possibilities. Steam powered excavators and cranes made large construction works possible. The Titanic and other large ships were built, the Suez Canal was dug, steam-powered machine factories were built, the production of artificial fertilizers became possible and much more.
The English steam locomotive Agenoria from 1829. Photo Stourbridge.
All these new business opportunities were exploited because there proved to be need for the products. More money was earned and spent and the nations' total income grew. All incomes increased and thereby the nations became richer.
Edwin Drake found oil at a depth of only 20 meters in 1859 while drilling in Titusville in Pennsylvania, USA. It was initially converted into kerosene, which saved the whales, which until then had been hunted for the whale oil, which was used for lighting.
The explosion engine, also called the combustion engine, was the next important national economic locomotive. The new mineral oil, extracted from the Earth's interior, had an unprecedented energy density and was far easier to handle and transport than coal. The oil could easily be converted into kerosene, petrol and diesel.
In 1867, the Germans Otto and Langen manufactured the first gasoline engine. In 1897, their compatriot Diesel succeeded in making the first usable diesel engine. It was water-cooled, single-cylinder and with an efficiency that was significantly better than that of steam engines.
It created additional product possibilities, automobiles and airplanes. People realized that they actually needed to drive and fly. They hadn't known that before. The new business opportunities were exploited, and the nations' total income and thus the gross domestic product rose again.
The world's first car - Benz Patent Motorwagen 1886 - Mercedes-Benz Museum.
Electricity was a major and important national economic locomotive, which created a new wave of business opportunities. The new invention was combined with those already existing in factories, cars and planes. Electricity enabled many new possibilities in connection with the telephone, telegraph, energy, lighting and hydropower.
It turned out that the oil from the earth's interior could be converted into plastic, which became the next important national economic locomotive. The new materials were combined with the already existing product options and created countless new business opportunities themselves. Again, a technical innovation created growth in the economic activity of nations and their total income.
Computers have so far been the last new national economic locomotive, which created new business opportunities, growth and thus increased wealth. All previously introduced products have been combined with computers. Consumers realized that they simply had to have a computer in their home.
The period from about 1850 to the present day has been unique in world history. In a historically furious pace, one great invention after another has entered the world. Never before in the history of the world has technology developed so quickly, and never before has the economy of Western nations achieved such growth.
The Canadian Commodore 64 system from 1982, which was the first real PC, i.e. Personal Computer. Photo Wikipedia.
We have a strong and optimistic belief that this rapid development will continue to go on forever, we believe in progress. We believe that there will be a constant and endless stream of new inventions.
When you think about the latest inventions within robotics and artificial intelligence and the pace of establishing broadband networks, you have to recognize that there may still be many pages in nature's great book of physics that we have not yet opened. But as it may be possible to open in the future.
But new inventions will not necessarily be the cause of remarkable national economic growth, as they will in the main simply displace an older technology and replace it with a new and better one; in the same way that diesel and electricity have supplanted steam engines, and broadband is replacing telephones and so on.
In the long term, new inventions will not necessarily provide national economic growth and thus increased job opportunities. In reality, it is most likely that a high-tech development will reduce the number of jobs.
4. The future after the Industrial Revolution
We want growth, most likely because of restlessness and curiosity, but also because we believe that growth creates increased economic activity and thus jobs, and thus identity and a meaningful life for the many.
But we should not imagine that new digital technologies can create the same revolutionary breakthroughs as steel production, the steam engine, the internal combustion engine, electricity, telephony, radio, TV and the Internet did. Because we in the West have reached a state where the needs are relatively saturated and have lost their strength.
It is actually most likely that artificial intelligence and robots will reduce the number of jobs.
A dystopian future scenario. The lone individual among billions of others. Photo Netflix.
The technical miracles, which changed society beyond recognition from the beginning of the industrial revolution to today, simply cannot be repeated and therefore the high national economic growth rates will not return.
We no longer buy clothes because we want to keep warm, we buy them most often because we want to put ourselves on stage and signal a certain type or attitude. The Psychiatric Foundation can tell that 200,000 people in this country suffer from shopping mania.
Several economists have reminded us that noticeable economic growth only entered the world a litle more than 150 years ago with access to cheap energy from coal and oil, and the downturn in economic growth rates started when the price of oil exploded in 1973-74. The era of high growth has been borne and made possible by an energy source of unprecedented energy density, the likes of which the world will never experience again, goes the reasoning.
In 2015, the consulting firm McKinsey wrote in a major analysis that "unless we can increase productivity dramatically, the next half century will be very different. The rapid expansion of the past five decades will be seen as a historical aberration, and the world will slide back to relatively sluggish, long-term growth rates."
But before the Industrial Revolution, all manufacturing was associated with hard and long hours of work. There was work for everyone and everyone had their place in society. But now, a few hundred years later, we can easily produce clothes, food and shelter for everyone without spending nearly as many working hours as before. There will not be work for everyone.
But so what? Should we just accept that in the really long run there is nothing we can do. That the group of unemployed and social clients will inevitably grow ever larger. Will the future be, as shown in some science-fiction movies? A privileged few will form a small group of respectable citizens, who have work and thus identity, an interesting everyday life and an experience of meaning in their lives. While the majority will be made up of a frustrated and troubled underclass, crying out for bread and plays?
Supply and demand. Keynes explained to us that the nation, the society, is a huge factory that produces "goods", that is, goods and services, everything that customers want. After working hours, all the factory's employees are transformed into customers who demand the factory's products.
The Samfunds factory's supply follows a normal rising supply curve. The more customers want the products, the more they want to pay, the more the factory is willing to produce.
Consumer demand follows a normal downward sloping demand curve. They will pay a high price for the first and most basic consumption. When their basic needs are satisfied, customers will only buy if the price is low.
Where the two curves intersect is the actual production of goods.
But Keynes's important point was and is that there is no reason to assume that this cut-off point by itself represents full employment. It would be a unique case if the two curves intersected by themselves at the very level of production that represents full employment.
Photo Israel M. Kirzner.
The main problem with this scenario will be the concept of "Transfer Income". Will it really be possible to finance transfer incomes that can support an increasingly large part of the population. In the really long run, it will be, let's say, more than 50 to 60 percent of the population. It will probably involve income taxes of 70 to 80 percent. Most people will consider this to be pure robbery, and it will not be practically possible.
We want transfer income for ethical reasons; because we think it is a shame for our less fortunate people, who are not able to generate income themselves. But we also want transfer income for national economic reasons; it is absolutely necessary to maintain the demand for the social factory's production of "Goods". A decrease in demand will lead to layoffs, further decreases in demand, more layoffs, and so on, all the way down to the bottom.
Once I was sitting in a site hut and we were discussing taxes. One of my colleagues said: "I pay 90 percent to the tax." "Well, it wasn't that little," we replied. "Yes," he said, "I give all the money to my wife, and she lets me keep a few hundred for myself." He was quite satisfied with that arrangement.
But that reflects the problem with transfer income. We wouldn't mind transferring income to people we feel emotionally connected to. But to have more than half of the salary confiscated in a completely anonymous and impersonal way, knowing that this income is being transferred to people, whom we do not know at all and who probably are not even grateful. It would feel like robbery.
We could consider how we can strengthen and expand the emotional relationships in society, family, friendship and neighborhood. Transfer income channeled through these avenues will be far more acceptable. It is the only viable way forward in the really long run.
