"In the long run we are all dead," John Maynard Keynes (1883-1946), the great British economist, wrote in 1923 on the debate in Great Britain on restoring the pre-First World War fixed exchange rate system known as the gold standard.

"In truth, the gold standard is already a barbarous relic..." he wrote in 'A Tract on Monetary Reform,' published in Dec 1923. "Advocates of the ancient standard do not observe how remote it now is from the spirit and the requirements of the age." It would result in the "surrender [of] the regulation of our price level and the handling of the credit cycle to the hands of the Federal Reserve Board," which had set up "a dollar standard ... on the pedestal of the Golden Calf."

Our interest here is on the long run and this is the context:

"But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again."
 

A decade later when a US senator said during a congressional hearing on New Deal relief programs that “the economy will work itself out in the long run,” Harry Hopkins, a close adviser to President Roosevelt, famously replied: “People don’t eat in the long run senator, they eat every day.”

In 2013 Niall Ferguson, the historian and conservative pundit, apologised for "stupid and tactless" remarks in which he suggested that John Maynard Keynes did not care about future generations — because he was childless and gay.

It was of course foolish to suggest that a person of Keynes' intellectual calibre would consider the long-term of no consequence.

Economists should focus on the short and long terms but most economists in the years leading up to 2007 were prisoners of conventional wisdom — a term coined by the Canadian-American economist John Kenneth Galbraith (1908-2006) in 'The Affluent Society' (1958). 

Thomas Kuhn (1922-1996) noted in his famous book, The Structure of Scientific Revolutions (1962), that new ideas are generally resisted by the establishments that didn't create them and in 'The General Theory of Employment, Interest and Money,' Keynes's most famous work first published in Dec 1935, he established himself as a pioneer in creating a theory that addressed the facts of persistent unemployment. That some hoped for equilibrium could be achieved in the distant future was not a credible solution for policy makers.

In 1931 Keynes wrote a preface for a collection of essays beginning with the 1919 searing indictment of the peace treaty at Versailles where he had been a member of the British delegation. It had been first published as 'The Economic Consequences of the Peace.' The collection includes 'The Economic Consequences of Mr. Churchill,' written in 1925 after Winston Churchill, chancellor of the exchequer, made a fateful decision to return Britain to the gold standard at the pre-war sterling-US dollar rate of $4.86. The collection includes 'Economic Possibilities for our Grandchildren' (1930) and it has been republished as an ebook by Project Gutenberg Canada.    

"Here are collected the croakings of twelve years — the croakings of a Cassandra who could never influence the course of events in time. The volume might have been entitled "Essays in Prophecy and Persuasion," for the Prophecy, unfortunately, has been more successful than the Persuasion. But it was in a spirit of persuasion that most of these essays were written, in an attempt to influence opinion. They were regarded at the time, many of them, as extreme and reckless utterances."

This is the prescient warning on the Treaty of Versailles:

"If we aim at the impoverishment of Central Europe, vengeance, I dare say, will not limp. Nothing can then delay for very long the forces of Reaction and the despairing convulsions of Revolution, before which the horrors of the late German war will fade into nothing, and which will destroy, whoever is victor, the civilisation and the progress of our generation."

The long run

There are no fixed definitions of short, medium and long term or long run and generally in macroeconomics, short term can be viewed as 1 to 2 or 3 years; medium term up to five years and long term from 5 years to 20 or 25 years. Ageing and climate change generally are subjects that have longer term horizons.

The long run is speculative in economics and governments typically operate in accordance with the election cycle of up to five years. However, it is economic growth in the long run that is key to the standard of living in a country.     

A 2013 economic letter from the Dallas Federal Reserve Bank says: "Technological progress is the key to a country’s long-term increase in its material well-being, the work of Nobel laureate Robert Solow and economist Trevor Swan showed in the 1950s. The contribution of factors of production, such as capital or labour, is only temporary."

A small economy can import technology via foreign investment and buy technology in the form of IT systems or factory equipment. Copying structures/ systems that successfully works elsewhere is also very important.

We reported last week on an OECD research project which shows that the productivity growth of the globally most productive firms remained robust in the 21st century but the gap between those high productivity firms and the rest has been increasing over time. "This rising gap raises questions about why seemingly accessible knowledge and technologies do not diffuse to all firms."

Typically new innovative sectors are not a significant driver of economic growth.

Improving productivity in an economy is not only dependent on invention and innovation but issues such as education, management, the power of vested interests, the difficulty or ease of setting up a business, court procedures and human resource training.

Regulation can promote or hinder this and can impact competition and productivity.

According to a Reserve Bank of Australia paper, population growth and improving trade can mask the true productivity performance in an economy. Relative to the US, Australian labour productivity is back to where it was in the mid 1970s.

Irish data are also distorted by large foreign-owned sector and change at governance level if it happens at all, is typically at glacial speed.

There is a lack of focus on the long run — whether it is the overdependence on foreign direct investment (FDI) or the limitations of the available data

Times can change and The Economist reported in Feb 2014 on Argentina — once one of the world's richest countries:

"In the 43 years leading up to 1914, GDP had grown at an annual rate of 6%, the fastest recorded in the world. The country was a magnet for European immigrants, who flocked to find work on the fertile pampas, where crops and cattle were propelling Argentina’s expansion. In 1914 half of Buenos Aires’s population was foreign-born. The country ranked among the ten richest in the world, after the likes of Australia, Britain and the United States, but ahead of France, Germany and Italy. Its income per head was 92% of the average of 16 rich economies. From this vantage point, it looked down its nose at its neighbours: Brazil’s population was less than a quarter as well-off."  

John Maynard Keynes - Masters of Money - BBC documentary presented by Stephanie Flanders:

 

Pic above is screen grab from only known film of Keynes. He was commenting on the 1931 decision to drop the gold standard after six miserable years link here as the embed facility is disabled.