The Big Push Revisited
(Chapter 10 of The Utopia Thieves)
THE “revolutionary advance” to which Samuelson referred was one that also seemed to demand the overthrow of old, static notions of the economy of the kind that Veblen had made fun of, in favour of a system that would reflect a greater sense of dynamism.
A greater sense of dynamism that would have been in keeping with the incredible, unprecedented advances of the World War II economy.
Of all the seemingly impossible things that could be done when government and industry jointly lent their shoulders to the wheel of some otherwise unbudgeable problem of scarcity, or apparent technical impossibility.
Achievements documented visually in the detailed colour transparencies of official photographers such as Alfred T. Palmer, long forgotten but now online in the Farm Security Administration / Office of War Information Color Photographs collection of the Library of Congress, which contains about 1,600 digitised images.
Although everyone in the photograph just above is a white skilled worker, many other photos of the time highlighted wartime occupational retraining schemes and the technical work that was increasingly being done by female and African-American graduates of the new schemes; as if to show that old, caste-like occupational prejudices no longer applied and that anybody could do anything if properly instructed.
In other words, not only the technically impossible but also the socially impossible was being done.
The increasingly anachronistic qualities of the pre-war system in economics led Samuelson to liken it, in his ‘Credo’, to English country-house novels. Tales that dwelt on the supposedly unchanging world of a social class whose way of life was, in fact, quite threatened by changes happening offstage:
When you read the novels of Jane Austen, never do you learn that the Napoleonic wars were going on while her characters were angling for life-cycle security with amiable spouses.
I don’t know whether Samuelson’s literary criticism is fair to Ms Austen or not. Perhaps her readers simply didn’t want to be reminded of the forever wars of their day, or the latest bloody revolution on the Continent.
But certainly, it is true that the word economics does, literally, mean the management of a household in scholarly Greek. Something inward-focused, predictable, and cut-and-dried.
The idea that there is an excessive assumption of an unchanging domestic order — an excessive focus on peaceful spaces inside the ‘household’ that leads us to overlook all the cannonballs whizzing by outside in the form of the white heat of technological change, the often irrational reasons for why we do big things and the brutal, plundering dispossession by which many investible fortunes are first made — is certainly a criticism that is valid with regard to most forms of economics, whether or not it is valid as a criticism of Jane Austen.
One of the chief contributors to a static worldview was the assumption of universally diminishing returns to scale. By this is meant the idea that each additional input to production makes a diminishing contribution to output. For example, as when the first 100kg of fertiliser on an acre of land has a dramatic effect on plant growth, the next 100kg a less spectacular effect, and so on.
A corollary of diminishing returns is that each additional unit of output costs more than the previous one, because an increasing amount of inputs is required to produce that additional unit of output.
By assuming that returns are always diminishing, and costs thus rising, economists — or rather, the textbook authors — are able to create the familiar diagram of supply and demand, with a downward-sloping demand curve and an upward-sloping supply (or unit cost) curve, as we go toward the right of the graph, by convention the direction of increasing output.
The vertical axis stands for cost, or price, per unit output. As we consume more and more, demand or willingness to pay goes down, as we are satiated and less desperate.
The intersection of a falling demand curve and a rising supply curve leads to a crisp, unique point of free-market equilibrium, around which only small adjustments are possible.
For instance, the government might put a tax on the good supplied, effectively raising its price at all levels of output and thus shifting the equilibrium point upward and to the left. In basic economics courses, students will study many such variations on this theme, all of them leading to the idea that whatever the government does, it won’t drag things very far away from the free-market outcome. Or, at least, not without introducing really gross inefficiencies and a large measure of frustration into the economic system.
Such was the ‘old time religion’ that even Samuelson thought outdated by 1945.
The chief flaw of the old system lay in the assumption of universally diminishing returns.
A clue as to what might be wrong with this assumption can be detected in the fact that virtually every textbook illustration of the phenomenon is both agricultural, and short-term, in nature.
A farmer adds more and more fertiliser to a field, in a given growing season, to obviously diminishing effect.
A farmer, whose best fields are in a fertile valley-bottom, decides to plant some more crops this year on a hillside where the air is colder, the soil less fertile and water more likely to run off.
And so on.
Now, if returns really were universally diminishing, you might think that other sorts of examples could be found.
How about this one? Henry Ford decides to increase the production of Model T Fords, and as a result the price goes up.
But of course, at that point, many people will interject that the price of the Model T Ford went down after production was stepped up. This was especially true in a long-term perspective. The pioneering Model T Ford of 1908 cost US $825 brand new for the runabout version, while by 1925 a new Model T runabout only cost $260.
By 1925, nearly two million Model T’s were being sold each year. So, it wasn’t as if the world was running out of Model T Fords, either.
Clearly, the modern industrial economy had a potential for economies of scale, and long-run transformation, that could jointly blow the old assumption of universally diminishing returns out of the water.
Even in modern agriculture, it was demonstrably the case that the costs of producing food and fibre tended to go down long-term, if not in the short run, where the old observations about not getting so much out of that second bag of fertiliser or the hill paddock still applied, of course.
While diminishing returns remained strong in agriculture and indeed any sector that revolved around the use of land — of which it has been so famously said that ‘they’re not making any more of it’ — it was, nevertheless, the case that revolutionary step changes, such as the introduction of powered tractors, and the Haber process for the manufacture of synthetic fertilisers, kept driving the cost floor down.
It’s estimated that about half the world’s population today owes its nourishment to the breakthroughs in fertiliser availability spearheaded by Fritz Haber and the process named after him.
Though of great importance to agriculture, the Haber process, perfected just before World War One, could also be used to make explosives, and was first used on a large scale for that purpose. As a source of explosives, the Haber Process, also known as the Haber-Bosch process after Haber’s collaborator Carl Bosch, helped to prolong World War One by several years, as the Germans and their allies would otherwise have run out of natural sources of the necessary chemicals by the end of 1915.
Also notorious for his pioneering work on poison gas, Haber was widely regarded as a real-life supervillain or evil genius for many years. Though never actually prosecuted for any war crimes, Haber, who appears shaven-headed in most portraits, resting his chin on his thumb in one, was possibly an inspiration for some of James Bond’s cinematic opponents in the 1960s, not to mention Mike Myers’s Doctor Evil.
Still, on balance, far more people have been rescued from starvation or non-existence by the Haber-Bosch process than have been killed by its military adaptations. Such is the cunning of reason, it would seem. Certainly, the ambiguities of Haber’s life and work, including the fact that toward the end of his life he was reminded of his Jewish heritage by the Nazis and forced to flee Germany, have filled many articles and books.
To continue, when we come to the area of modern manufacturing, as opposed to the land, there seem to be almost no factors that would lead one to assume diminishing returns.
Indeed, in 1936, an engineer named Theodore Wright (who was of a more reassuring appearance than Haber) proposed a mathematical relation whereby the cost of any modern manufactured item will fall, repeatedly, by a certain percentage every time production is doubled. Wright’s equation originally applied only to the amount of labour required to assemble aircraft, but it soon came to be seen as a general law of engineering cost.
In the case of today’s lithium batteries, now headed for US $60 per kilowatt-hour of energy storage capacity when only a decade ago the same capacity cost US $1,200, the Wright percentage seems to be about 28%. That is to say, for every doubling of storage capacity produced, the factory-gate cost of each kilowatt-hour of lithium energy storage falls by 28%.
Likewise, by way of another example, the World War II-era radio proximity fuze, one of the many breakthroughs of the era, by which shells could be made to explode within a damaging distance even if they missed an enemy aircraft.
Procurement contracts increased annually from $60 million in 1942, to $200 million in 1943, to $300 million in 1944 and were topped by $450 million in 1945. Of course, as volume increases cost decreases, and the cost per fuze that had started at $732 in 1942 dropped to $18 in 1945. . . . Cost of tubes declined with increased production from $5.05 in 1942 to $0.40 in 1945.
Moore’s Law, whereby the number of components on a typical computer chip has been doubling every 18 months since 1965, the chip itself not getting that much more expensive, is also seen as a special case of Wright’s Law. As are the apparently rather similar laws that govern the price of flat-screen TVs, and all the rest.
Even in the seemingly mundane instance of urban public transport, it is evident that a city can get ‘stuck’ in
If economists were to draw a realistic graph of supply and demand under the more dynamic conditions of most modern manufacturing, it might look like the following one, in which both the demand and the supply curves generally slope down toward the right, in ways that allow for two equilibria, one before production has been ramped up (‘Transformation’) and another one after.
I’ve shown the supply curve beginning to rise again once we reach the ‘After’ condition, but there is no reason why it could not continue to fall in some other instance.
While the After condition is generally the more socially desirable one, since scarcity has been defeated, there are a couple of issues that may help to explain why a curve of this kind is not more often seen, as opposed to the kind that presumes diminishing returns.
In the first place, getting from ‘Before’ to ‘After’ often requires some kind of government kickstarting, since it is very easy for society and markets to get stuck in the ‘Before’ situation.
To take one of the most mundane and obvious examples, in which almost no element of high technology is involved, the graph might concern the possibility of two conditions in which urban public transport might find itself.
In that example, the ‘Before’ equilibrium might correspond to a city in which public transport consists of the odd occasional bus caught up in traffic.
The supply of public transport services in the ‘Before’ condition is thus very low and the cost is very high, specifically so once we factor in the amount of time wasted while waiting and worrying whether the bus is going to turn up on time. Under these conditions, not very many people take the bus and so the services are very expensive to run per passenger, regardless of who ultimately pays and the actual poor quality of the service. It is also hard to justify more frequent services, or spending more money on special rights-of-way so that the buses can go faster and be more reliable.
The ‘After’ equilibrium, in the same example, corresponds to a fast, regular, totally reliable public transport system with its own right-of-way, a service used by lots of people at a consequently low cost per passenger even though the vehicles — trains, or something similar — and rights-of-way are expensive. The cost per passenger turns out to be even lower when the low waiting times and relative absence of worry about delays are factored in.
The ‘After’ condition is manifestly, patently superior in this case. And yet we only see it in countries and cities that have an activist form of government. The idea that city government should be hands-off, that as far as possible one’s transport arrangements should be do-it-yourself, is invariably associated with the first outcome, the ‘Before’ which never gives way to an ‘After’.
And what goes for urban public transport, goes for many other potential industrial transformations, or transformations in other fields such as health care.
All the same, there is a determined resistance to these conclusions. And it is possible to determine two sources for that resistance. The first is that the acceptance of a more dynamic economic picture in mainstream Anglo-American economics, the revolution to which Samuelson referred and, ultimately, the revolution that never was, leads of necessity to a permanent acceptance of a mixed economy and of what Mazzucato calls the ‘entrepreneurial state’.
The second is that the ‘After’ position is often less profitable than the ‘Before’ position, precisely because scarcity has been conquered. It just so happens that a generally downward-sloping supply curve also resembles that of a monopolist, who has every incentive not to spoil the market by producing too much.
And so we are likely to find all kinds of glacial and glutinous rationalisations as to why the ‘After’ condition cannot, in fact, be organised, both among the various producers in the marketplace and also in terms of the advice that is being offered to government. Instead, what I have referred to elsewhere as the mountain of monopoly is maintained.
The mountain of monopoly is maintained by replacing the can-do of a Kennedy speech and Palmer’s photographs with can’t-do: with a mood of resignation to failure and scarcity. With Reagan’s defeatist quips that the nine most terrifying words were that I’m from the government and I’m here to help, and that poverty had won the war on poverty.
Yes, that’s really it — defeatism is the leitmotiv of the neoliberal era. We’re not used to thinking of Reagan, or for that matter Margaret Thatcher as defeatists. But that’s probably just because they did a good job of sugar-coating the bitter pill of the end of the can-do era: Reagan, with his trademark grin, in particular.
To come back to the last example, this kind of long-running sabotage of what seems, to many people, to be the obvious solution is most evident in areas to do with the city. Areas such as urban public transport, indeed, or housing. Why, oh why, the average person wonders, does it not seem to be possible organise even that which we have organised in the past?
But voters dwell on these production bottlenecks or failures of state kickstarting only, perhaps, because these are the examples that are most familiar and, in that sense, inexplicable. Inflated healthcare costs are seen as something more mysterious, save perhaps for egregious examples such as the $600 Epipen.
To sum up, perhaps this is the key instance of the revolution that never was in post-World War II Anglo-American economics. An awareness that, far from being a cause of stagnation, the intervention of an ‘entrepreneurial state’ is in fact a crucial kickstarter for driving the nation’s economy down the cost curve and unlocking the abundance that the nation is actually capable of. And that if this doesn’t happen, it is because the state has been captured by rentier interests. Such is the great, modern truth that is concealed by the assumption of everywhere diminishing returns.
In fact, this observation, though rendered more urgent by modern industrial conditions, is not new. Indeed, in the original context in which the concept of diminishing returns was first formulated, more than two hundred years ago, in 1817, by an early economist named Edward West, the author of the concept observed himself that in an economy with a predominantly land-based sector subject to strong diminishing returns, and a manufacturing-type sector in which the principle of diminishing returns was weaker — even in those days, it was understood that some sort of scale-economy principle applied in manufacturing — the landed sector was likely to capture most of the economic gains created by the manufacturers, since its costs would rise more rapidly.
In other words, right from the outset, the diminishing-returns concept had a critical, dialectical relationship with scale economies in manufacturing and the potential pillage of the economy by monopolists, rentiers and landed interests, who might well reap windfalls “in their sleep” if they happened to own the best sites already, such as in the bottoms of valleys or in the city.
Even at the outset, the concept of diminishing returns was thus not intended to be a blanket assumption by which the curves of supply and demand could be made to cross neatly, in ways that seemed to rule out a need for activist and kickstarting government.
The fact that it nevertheless became such a blanket assumption even in the face of industrial facts and attempted theoretical revolutions, such as the one that people expected to follow from Wright’s Law in the 1930s and 1940s, reinforces the contention of the last chapter that American textbook economics really has amounted to a long-running system of ideological indoctrination against activist government and against the idea that we are all entitled to a share in prosperity.