The Next Level of Rich

An Exercise in Definite Optimism (Part 2)

Pieter Bruegel the Elder, The Land of Cockaigne. Wikimedia Commons.

After spending months cataloging our problems, I’m now trying to envision what success looks like. How do we make the leap from today’s material plenty to tomorrow’s mass flourishing? What technological breakthroughs, institutional innovations, and cultural shifts are needed to produce a social order in which most people “live wisely and agreeably and well”?

The way I see it, attaining the next level in social development will require big strides of technological and social progress — advances needed to resolve two fundamental conflicts created by industrialization and the transition to mass affluence. First, as I discussed in the last essay, we need to resolve the conflict between humanity’s technological dynamism and the rest of the biosphere by moving to cleaner, sustainable systems of energy and food production. Let me turn now to the second challenge: resolving the conflict between modernity’s liberating individualism and our nature as social animals.

Mobilization into capitalism’s vast impersonal order has imposed heavy strains on the vital personal relationships essential to human flourishing. And the strains are heaviest for ordinary people, who generally lack the compensations of interesting work, economic security, and high status that buoy the elite. What paths can progress take to alleviate those burdens?

The most straightforward path, operating within the structures of the system, is to make modern life much more affordable than it is at present. A cheaper cost of living facilitates extra consumption, yes, but it also encourages extra leisure and reduced work for pay.

This was the path that Karl Marx believed would lead to the “realm of freedom.” Even after capitalism had been overthrown, Marx recognized, there would still be work that had to get done to provide sustenance and shelter. To that extent, then, people under socialism would still inhabit the “realm of necessity.” In other words, rather than enjoying leisure and doing things for the intrinsic satisfactions they bring, people would still have to work for extrinsic rewards — namely, keeping scarcity at bay. “The realm of freedom actually begins only where labor which is determined by necessity and mundane considerations ceases,” he wrote in Capital, “Beyond it begins that development of human energy which is an end in itself, the true realm of freedom, which, however, can blossom forth only with this realm of necessity as its basis. The shortening of the working-day is its basic prerequisite.”

It turns out that Marx’s simple binary — work and necessity versus leisure and freedom — misses some important middle ground. First, many types of work feature at least some intrinsic satisfactions, and these satisfactions bulk especially large in the jobs of the managerial, professional, and entrepreneurial elite. Second, many of our most fulfilling leisure activities have some work-like elements: the tedium and frustration one must overcome to develop skills, boring parts of projects that lay the groundwork for the fun stuff. There isn’t a sharp line that separates, say, working some extra hours to afford a great vacation abroad and straining in one’s off hours to learn some of the language they speak there to make the trip more enjoyable.

I think this middle ground helps to explain why Keynes, in the essay where he identified humanity’s “permanent problem,” erred so badly in predicting how fast work effort would recede in the face of growing wealth — recall that he thought we’d only be working 15 hours a week by now. In the United States, average working hours at top income levels have actually increased in recent decades. You can call it workaholism if you want, but it’s not ascetic drudgery — it’s a reflection of how genuinely absorbing intense competition and close camaraderie can be (as well, of course, as the attractions of using income and wealth to “keep score”). Mixed motives exist outside the elite as well: Keynes badly underestimated the degree to which new goods and services would spur people to keep their work hours up. This happens because the ongoing accumulation of wealth ratchets upward the standard of living considered to be decent and respectable; also, though, there has been a huge expansion in commercially available leisure activities (movies, TV, internet, dining out, vacationing), and this creates incentives to work hard and play hard.

All these points carry weight, but there’s another, simpler reason why commitment to paid employment remains so strong: we’re not nearly rich enough yet. Yes, ordinary people today enjoy comforts and conveniences that would be the envy of yesteryear’s aristocrats, but that enjoyment doesn’t come easy nor is its continued availability at all assured. To have access to what we consider a middle-class standard of living requires unremitting effort, and even then for most people one nasty financial reversal is all that’s needed to send them tumbling downward.

Rather than focusing on how to boost ordinary people’s money incomes, though, I believe that the most promising strategy for achieving mass enrichment is to focus on dramatic reductions in the cost of living. Yes, it’s possible that technological breakthroughs now on the horizon — in particular, cheap clean energy and AI — could trigger robust growth in total spending, which then could translate into smartly rising money incomes for ordinary workers. But even without a boom in total output of that kind, those and related breakthroughs could make dollars stretch much further by slashing living expenses.

The biggest, fattest, juiciest target is housing. Housing now accounts for 33.8 percent of total U.S. consumer spending – a share that has actually edged up over time. Back in 1950, at the dawn of mass affluence, housing accounted for only 27.2 percent of total spending. Of course, homes are much bigger today, but look at what’s happened to spending on life’s other basics — food and clothing. Despite big improvements in food variety and quality, and an explosion in relatively expensive dining outside the home, the share of consumer spending dedicated to food has plunged from 29.7 percent in 1950 to 12.4 percent today. And despite the fact that we own so much more clothing than our parents and grandparents did — if you’re familiar with older houses, you know how little closet space they have — spending on apparel has dropped from 11.5 percent of total spending in 1950 to only 2.6 percent today.

Why has housing spending stayed so high? Part of the answer lies in a stunning and mysterious failure of American capitalism: decade after decade of apparently negative productivity growth in both residential and commercial construction. It’s hard to exaggerate how bizarre this is: the data seem to show that we’re going backwards, unlearning how to build things in a cost-effective manner. A recent paper by Austan Goolsbee and Chad Syverson reviews the matter thoroughly and concludes that something genuinely is amiss: while measurement problems may be part of the explanation, there is a clear divergence between performance in this sector and in the rest of the economy.

But why is this happening? No one clear, obvious culprit presents itself, but the best guess is that construction’s degenerative condition is a product of contemporary culture’s progressive loss aversion. In an Ezra Klein column about the Goolsbee-Syverson paper, Chad Syverson commented, “There are a million veto points. There are a lot of mouths at the trough that need to be fed to get anything started or done. So many people can gum up the works.”

The loss-averse vetocracy thus does a double whammy on housing prices. First, through zoning and other increasingly restrictive land-use regulations, it’s withholding permission to build new housing and thereby driving up prices through artificial scarcity. And then, even when permission is granted, construction is hobbled by a dense tangle of regulatory and political constraints.

The YIMBY movement has been scoring regular successes of late in pushing back against restrictions on new housing at both the local and state levels, and its efforts deserve our appreciation and support. But the missing complement to this movement is an ambitious project to revolutionize housing construction with a view toward driving down building costs dramatically.

The biggest obstacles confronting such a project are probably cultural rather than technological. With a hundred years of suburbia behind us, we are deeply committed to the current model of single-family homes built on site in one-off fashion. And that commitment has been formalized in zoning plans and building codes that lock in established ways of doing things. Radically new methods of construction and new styles of housing would struggle to win consumer acceptance even if they cleared all the legal hurdles.

Moreover, in the United States and many other countries, we have embraced the truly perverse practice of considering homes as an investment rather than as consumption. The Substack “Good Reason” had a really nice rant on this subject recently, and it’s worth quoting at some length:

I think that the idea that home prices should outpace inflation is insane and maybe has broken modern society.

When you invest in a company, you expect the stock price to rise because the company becomes more productive. It hires employees and buys resources to develop technology, improve processes, and eventually produce more widgets, services, or addictive digital videos. The company becomes worth more because it has generated, and can generate, more.

When you invest in a home, you expect the price to rise because*shrugs* it just does….

[H]ouses are pretty much the only physical good that are expected to 1) appreciate in value, and 2) be used all the time. Oil paintings and Faberge eggs appreciate in value, but they’re put behind glass cases so that they remain in the exact same state they were in when purchased. Tellingly, they appreciate in value not because they’re useful but because they’re rare.

All other physical goods — cars, beds, furniture, appliances — lose value with time. Your car loses value the moment you drive it off the lot. You can’t sell a couch on Craigslist, charge double the retail price, and claim “It’s worth more because I put a lot of sweaty equity into this baby.” You use it, it takes wear-and-tear, and you resell it at a discount….

In other realms, we expect new versions of consumer goods to 1) do more than their old counterparts, 2) be cheaper relative to inflation, or 3) both. Cars can now instantly show where they are and find directions to anywhere. A fraction of a standard modern television screen has higher resolution than the best TVs 30 years ago. Despite those improvements, cars and televisions (and furniture, and apparel, and just durable goods in general) have all gotten much cheaper on an inflation-adjusted basis over the last 30 years.

Meanwhile, for housing, we expect that a 40-year old house with a bunch of renovations is somehow worth more than it was when it was built. We’d be surprised if it weren’t.

It’s worth more because, like oil paintings and Faberge eggs, it’s rare.

That last point is crucial. Treating housing as an investment commits the entire society to a gigantic Ponzi scheme: the key to your investment paying off is having the good luck to get in before other investors — i.e., to buy your house before a big wave of escalating land prices. The increasing prices are due simply to the scarcity of the land — which creates enormous incentives to boost that scarcity artificially with restrictions on new building. We stand at the tail end of a century-long mistake.

It doesn’t have to be this way. In Japan, homes are not expected to last for generations: the government treats them as depreciating assets that are considered valueless after 20 years or so, and sellers frequently tear their down their old home before putting the lot up for sale. In Germany and Switzerland, home ownership is much less common than in most advanced countries: the home ownership rate is under 50 percent in Germany, and under 34 percent in Switzerland.

For this exercise in definite optimism, let’s imagine a cultural and legal opening to start over: a comprehensive liberalization of land use to eliminate artificial housing scarcity, a broad turn away from the “housing as investment” philosophy that incentivizes artificial scarcity, and new greenfield developments that are given the regulatory flexibility to experiment with entirely new designs, materials, and construction methods. Imagine that such experimentation produces high-quality living space at a fraction of the price of traditional homes, and that such developments start spreading across the country. The end result: declining real home prices over time, and a steady drop in the percentage of spending devoted to shelter.

The next biggest category of consumer spending is transportation, coming in currently at 16.4 percent of total purchases. The achievement of clean energy superabundance discussed in the last essay would put a dent in this (gasoline purchases now account for about 2.5 percent of total spending), but the biggest cost savings are those that autonomous vehicles could bring. The current practice of having personally owned vehicles for each individual or household, all of which spend virtually all of their time parked and inactive, is extravagantly wasteful. A system of autonomous taxis available for immediate hailing any time would fully satisfy most people’s needs at a fraction of current outlays.

Recent spectacular developments in generative AI based on large language models hold out the promise of transformative change in both healthcare and education, which together comprise nearly 10 percent of total consumer spending (8.1 percent for healthcare, 1.8 percent for education). Both sectors have seen prices run well ahead of inflation for many years, and both are not coincidentally dominated by government funding and controls. Reforming either is famously difficult, as the status quo is defended tenaciously at every turn by its self-serving beneficiaries.

AI, however, provides a miraculous opportunity to bypass the bloated healthcare and education establishments altogether, offering vastly better service at dramatically reduced cost. To be sure, AI will be put to use within both establishments: check out this exciting glimpse at how doctors and nurses can use ChatGPT to improve at patient interaction, diagnosis, and treatment. But to my way of thinking, the truly revolutionary upside of AI in both healthcare and education lies in the direct, personalized service it can provide. In education, think of AI tutors offering infinitely knowledgeable, infinitely patient, individually tailored instruction for every child; in healthcare, imagine your personal healthbot with constant access to real-time readouts from wearable or implanted body sensors, deftly managing daily preventive care and spotting worrisome conditions for early treatment.

Healthcare spending is heavily skewed toward the elderly: think of it as a long, drawn-out, but ultimately losing battle against the degenerative effects of aging. Encouraging progress in anti-aging research, though, holds out the hope of turning the tide of battle. The grand prize of success would be additional years — additional decades — of youthful vigor and vitality, but also significant would be the huge cost savings as anti-aging therapies substitute for the enormous expense of managing large populations with heart disease, cancer, Alzheimer’s, and other age-related conditions.

Put all the optimistic scenarios sketched here together with the revolutions in energy and food production discussed in the last essay, and we can see the outlines of a much richer world — one in which access to a high standard of living is far more affordable. Even without special measures designed to encourage the trend (more about those later), there is every reason to believe that one effect of that progress would be a significant reduction in work for pay — and thus a significant increase in freedom from capitalism’s rigors and disciplines.

The effect of rising real income (whether in the form of higher money wages or a lower cost of living) on work effort comes down to a contest between what economists call the “income effect” and the “substitution effect.” The income effect refers to the increased purchasing power that comes with higher pay, while the substitution effect refers to the changes in relative prices that result. Economists see leisure as a “normal” good — that is, as people make more money, they want more of it (as opposed to “inferior” goods like, say, Ramen noodles). Accordingly, the income effect results in increased “purchases” of leisure as real income rises. The substitution effect, on the other hand, pushes in the opposite direction: the opportunity cost of leisure (i.e., the purchases of goods and services foregone) rises with rising income, thus discouraging people from taking time off. So which effect wins out? Historical experience to date shows that people typically split the difference: rising incomes lead to both more consumption and more leisure.

Demobilization from market work is thus nothing new. In the United States, the average work week fell from 60 hours for factory jobs at the end of the 19th century to the now standard 40 hours over the first decades of the 20th century. Meanwhile, between delayed entry into the workforce because of secondary and tertiary schooling and earlier retirement ages, average paid employment hours over the course of a lifetime fell sharply during the 20th century. According to calculations by the Nobel Prize-winning economic historian Robert William Fogel, average lifetime hours of work for pay dropped from 182,100 in 1880 to 122,400 in 1995 — a 33 percent decline even in the face of dramatically increased lifespans. And although women’s labor force participation rose steadily over the 20th century, it’s been stagnant in the 21st; male participation peaked about 60 years ago and has been falling ever since. Throw in the effects of aging, and average annual hours worked per capita have fallen from 926 in 2000 to 885 in 2019 on the eve of the pandemic.

In a much richer world made possible by the technological breakthroughs I’ve been talking about, there is every reason to expect demobilization from the labor force to continue. The increase in leisure could be distributed in various possible ways: some people could opt for shorter hours over a long working life; others could work when they’re young and then retire relatively early to live off their savings; still others could choose to work episodically to build up savings and then return to the labor market temporarily when those savings have run down. However the extra leisure is managed, the upshot is a big increase in the independently wealthy: people with sufficient resources to limit or eliminate altogether their dependence on work for pay.

Getting richer, with the greater independence that brings, is one way to reduce the strains imposed by capitalism on the strong personal ties that are essential to flourishing. The other way to reduce the market cost of living, and thereby to reduce one’s dependence on the system, is to do things yourself. The possibilities of greater self-sufficiency at the household, neighborhood, and community level are the subject of my next essay, the final part in this exercise in definite optimism.