A recent post by me on “the intriguing 20th century” focused on John Maynard Keynes’ prediction of an eight-fold increase in GDP per capita in the century following 1930. Part of the commentary and conversation focused on a related Keynes prediction – that leisure would increase to to the point where people would only work 15 hours a week. More should be said about why this last prediction failed.
Mark Brady of San Jose State University drew our attention to the book by Lorenzo Pecchi and Gustavo Piga (Eds.), Revisiting Keynes “Economic Opportunities for Our Grandchildren” (MIT Press, 2008). It contains an interesting chapter by Richard Freeman of Harvard University, entitled “Why do we work more than Keynes predicted?” (pp. 135-142). The crucial technical passage regarding recreation is as follows:
[Keynes] missed the mark by failing to assess the power of economic incentives to induce people, even those with a high standard of living, to work long and hard. He did not expect the increase in the cost of leisure due to rising wages to dominate the income effect that induces people to take up more leisure. … Textbooks often displayed backward labor supply curves to illustrate this point. But the race between substitution effects and income effects turned out to be fairer than the surefire guaranteed winner your local tout predicted.
A particularly interesting chapter is that of Gary Becker (the famous Nobel economist) and Luis Rayo, “Why Keynes Underestimated Consumption and Overestimated Leisure for the Long Run” (pp. 179-184). Their analysis also relies heavily on the distinction between income and substitution effects, combined with a very Beckerian analysis of human capital:
Keynes assumed that higher incomes would lead to increased demand for leisure through what is now called the “income effect”. But the same year that Keynes published this article, Lionel Robbins published a classic article showing that higher hourly earnings have contradictory effects on hours worked. …
Keynes was misled in his predictions about the effect of higher income on hours worked by the behavior of gentlemen in Britain – which Keynes said offered a window into future behavior as income of each increased. Their behavior gave a distorted picture of what to expect because these gentlemen had considerable wealth in the form of physical and financial assets, but no human capital or high incomes. Thus, economic theory would predict that these gentlemen would take more leisure than equally wealthy people in the future who, in fact, would hold the vast majority of their assets in human capital rather than land and other assets. English gentlemen indeed had mainly only an income effect, while those who had to work would also have powerful substitution effects.
The reference to Robbins is interesting in itself because it betrays the kinship between the Austrian-influenced economist from the London School of Economics and Becker, the quintessential neoclassical economist from Chicago. In My Regulation review from Robbins’ famous 1932 book An Essay on the Nature and Meaning of EconomicsI wrote:
THE Essay defined economics as the science that studies human behavior by allocating scarce means among competing ends, a definition that has become standard. We can see the influence of this definition when we realize that it was adopted by Gary Becker, the standard-bearer of mathematical and empirical economics, who is at the antipodes of the Austrian school.
“The polar opposite” is too strong (I should have written “seems to be”) as Robbins and Becker themselves demonstrated. Robbins’ book and my review review these important ideas.