My much-esteemed ex-colleague Andrew Stuttaford has written several times on the dangers of robotics. He believes that our living standards may come to suffer an “Engels Pause” similar to the impoverishment Friedrich Engels, writing in 1844, saw resulting from the early Industrial Revolution. Having studied that period in my work on Lord Liverpool, I will suggest that Engels was wrong about the Industrial Revolution. I also claim that whatever the unknowable future effects of robotization, we should today be more fearful of not Engels’ Pause but his statist Paws, meddling like an economically illiterate King Kong with the ineffably efficient wealth-optimizing mechanisms of the free market.

The Engels Pause is a thesis outlined, not by Engels (who thought worker immiseration was a permanent intrinsic problem of industrial capitalism) but in a 2007 paper by Robert Allen of Nuffield College, Oxford. Allen claims that real wages rose by only 12% between 1780 and 1840, at a time when output per worker rose by 46%. He even asserts that real wages were constant between 1800 and 1830, a highly implausible claim given what we know about social and economic conditions during the period. His rationale for the lack of wage growth is that the capital intensity of the economy increased, as did the profits thereon. On that I agree with him – we will come back to it. However, to demonstrate the pause Allen uses a workers’ wage index developed by Charles Feinstein, which is considerably below the consensus of other economists who have studied the period.

If you use the statistics in British Historical Statistics (ed. B. R. Mitchell, Cambridge, 2012) the picture becomes much clearer. BHS gives a wage table (Labour Force 21A) for 1790 to 1860 and a price index (Prices 3) for 1800-1860, which we can extrapolate backwards using the Prices 1 table covering 1790-1800. 1790 is a good start date for analysis; it was a prosperous year at the end of a period of peace and good economic management under William Pitt the Younger. In 1790 wages in Britain were the highest in the world. In 1776, according to Adam Smith, American wages had been higher, but then the silly people chose independence, breaking up established trading patterns, violating property rights, defaulting on debts and generally impoverishing themselves, so by 1790 Britain was considerably richer than the new United States.

Then on the BHS figures, real wages between 1790 and 1845 (the year after Engels wrote, and the starting point for a generally-agreed period of faster wage gains) rose by 30.3%, or by 0.48% per annum. No Engels pause there, apparently.

However, when you break the 55-year period into three, a different pattern emerges. From 1790 to 1810, workers were indeed modestly impoverished; real wages declined by 6% over that period. That is hardly surprising; from 1793 onwards Britain was at war, with heavy military expenditures, prices almost doubling and taxes heavy and increasing. Jean-Baptiste Say (a better economist than Engels), visiting Britain in late 1814, thought taxes were so burdensome and costs so high that the country would be unable to compete internationally now that Europe was no longer at war. He turned out to be wrong, but it wasn’t obvious at the time.

Then from 1810-31, the core of the Industrial Revolution, the picture changed dramatically. Real wages in that 21-year period rose by over 40%, or 1.6% per annum. There were two reasons for this. First, economic management was exceptional, under Perceval, Liverpool and Wellington. Second, the necessary increase in capital intensity in manufacturing to effect industrialization was funded by a huge capital gain on Consols, which rose in price from around 55 to a peak of 90 in 1813-24, giving profits to their holders that totaled 70% of GDP. Manufacturers, who borrowed little and financed expansion from retained earnings, kept their spare capital in Consols and so benefited greatly from this profit (landowners were mostly in debt during this period, having over-expanded during the war.)

Finally, from 1831-45 there was indeed an Engels pause, or more of an Engels hiccup, with real wages declining by 1% over those 14 years. Economic management was much less capable after 1830, with such damaging innovations as the workhouses of the 1834 Poor Law. There were only modest further Consols profits to be had. Most important, there was a massive further increase in the economy’s capital intensity, with the construction of the railways, which reduced the share of wages in the economy. The railway construction bubble burst in early1846, after which their benefits to the economy arrived in full force and real wages rose rapidly. Engels said workers’ living standards were a problem “since the Reform Act” (1832) – he was only a year out on the timing, but it was a temporary problem mostly caused by railway construction.

Turning now to the 21st Century, the possibility of an Engels Pause from robotization is given increased plausibility by the lousy wage growth in the last decade, both in the United States and in Stuttaford’s and my native Britain. If wage growth can be so sluggish even while full employment is returning and robots have yet to make their full mark, then robotization appears indeed to have the potential to immiserate us all.

However, on inspection the lackluster economic record of the last decade has been a Pause caused not by robotization, but by what we may call Engels’ Paws: clumsy attempts to mess with the economy, distorting the signals sent by the market, to produce more politically attractive results. Needless to say, the Paws have been ineffective, grotesquely increasing asset prices and inequality, and driving the economy far indeed from its optimum state, as Engels-style meddling always does.

The most important destructive Paws meddling with the global economy for the last decade have been the monetary policies of the rich world’s central banks, keeping real interest rates mostly below zero. Rates were a moderate distance from where the free market would have put them even at the bottom of the recession, but have been forced an ever-increasing distance from equilibrium as economies have recovered. In Britain, for example, Mark Carney’s Bank of England is doggedly maintaining rates below 1%, at a time of full employment when inflation is running at more than 3%. Thus, British short-term rates today are a full 5% away from the level at which they would settle in a free market. That has huge distorting effects on resource allocation, pushing the economy a huge distance from its optimum.

Those large and clumsy Paws have caused British house prices in London and the south-east to be bid up to levels completely unaffordable for domestic citizens without giant trust funds. For those London professionals of my generation who have maintained stable employment, this is fine; they bought houses in the 1980s and are now sitting on gigantic capital gains, which they can use to fund retirement if they are prepared to move out of London. For the young or those who have had to sell their houses it is catastrophic; they are cut off from any possibility of buying anything beyond a share of a slum-located hovel.

Even more important, however, is the appalling absence of productivity growth in countries with ultra-low interest rates. Without productivity growth, there is no possibility of a rise in living standards, and only the likelihood of a steady, probably accelerating further decline as unskilled Third World immigrants flood in and undercut the locals’ wages.

Economists in the United States are currently debating learnedly the incentive effects of possible tax cut packages, and whether a particular package may bring back the magic of 3% annual economic growth. However, non-market, Paws-operated interest rates have a far greater distorting effect on economic decision making than any possible tax package. For example, company after company among the Fortune 500 has engaged in gigantic stock buy-backs, rewarding management’s stock options but leaving the company itself denuded of equity and thus hugely vulnerable to even the mildest downturn. When giants such as AT&T and Boeing create balance sheets with negative tangible net worth through stock buybacks, they commit long-term suicide, a decision utterly irrational were they not forced into it by management greed and a decade of ultra-low rates.

In the United States over the last decade, there have been two possible explanations for the productivity lag, both examples of Engels’ Paws. One of them is interest rates; the other is the blizzard of environmental and other regulations under the Obama administration. When the government arbitrarily forces consumers to abandon a type of light-bulb they have been using for more than a century, that is the clumsy Engels in action. When government attempts to shut down the coal industry when many pits are still profitable, the hairy Paw of the subhuman Engels is again visible. The gigantic global scam of climate change, not the scientific reality showing a possible very modest anthropogenic warming but the huge government and supranational superstructure attempting to regulate much of the world economy out of existence, is the most dangerous Paw of all.

Under the Trump administration, economic growth and productivity have returned, at least at moderate rates. The last two quarters showed economic growth above 3% and productivity growth at 2.3%, both far above the levels in the late Obama years. The interest rate distortion has been lessened; real short-term rates have almost reached zero. Nearly as important, Engels’ paws in the regulatory area have been slapped down and tied behind the monster’s back – at least for the moment.

The improvement in growth produced by President Trump, without any great new policies, but simply by lessening Engelian meddling, suggests that our future may possibly be brighter than it appears. Robots will easily take over many of our current tasks, for example long-distance transportation, but will find it much more difficult to handle others, which require specialized motor and human interaction skills they still lack. Just because the middle classes are now threatened by robots in the way handloom weavers were by steam engines does not make the robot threat historically unique. Even among middle class jobs, you can’t tell me robots will in our lifetimes become effective salesmen for residential real estate (1.23 million jobs in 2016).

New jobs will appear, new needs will appear, which humans will fill alongside robots, perhaps with their capabilities enhanced by human-robot interfaces. Provided Engels’ Paws are firmly tied behind his back, the economy will adapt to these new jobs, and wages will tend to rise rather than fall. Only a possible glut of human beings, outweighing the physical capacity of our planet to provide Western living standards for all, remains a threat; Thomas Malthus, like Say, was a much better economist than Engels.

For two centuries, Engels and his leftist successors have been trying to subject us to the whims of government by denying the realities of the Industrial Revolution. Their economically illiterate fantasies, not robots, are the principal threat to our living standards in the next century, as they have been in the last two. The Engels Pause barely existed (and is subject to a simple non-pejorative economic explanation) but the Manichean struggle against Engels’ Paws is central to our existence.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)
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