A myth pervades modern economic thinking: that prosperity naturally leads people to have fewer children.

The measured fact to be explained is that fertility rates tend to drop below replacement in countries with a high measured economic output per person. This is both a big long-run problem and a puzzle. Microeconomists typically construe this as rational individual choice, as though people in wealthy societies simply discover better things to do with their time than raising families. But this causal explanation is backwards.

From a microeconomic perspective, if the state wants less of some behavior, it should tax it, increasing its cost, which can be expected to reduce the frequency of that behavior. If it wants more of some behavior, it should subsidize it, reducing its cost, which can be expected to increase the frequency of that behavior. But at least in the USA - and probably in other high per-capita GDP countries participating in the same economic system - fertility is suppressed in large part by the macroeconomic policies with which the state constructs and regulates stores of financial value. If we are rich within this system of account, that means we can demand a great deal of labor from young people who might otherwise be producing and caring for their own children. We cannot pay young people enough to offset this without reversing much of the measured increase in rich-country wealth since 1971.¹

This arrangement did not emerge through open deliberation about how we wanted to arrange our society. Rather, it developed through a series of historical contingencies and power struggles following the closure of imperial frontiers. Fixing this problem would not be a relatively modest technical adjustment to a well-understood system of inputs and outputs, but would constitute a radical change in how our society functions, with hard to predict consequences that would likely seriously disrupt our current modes of governance.

Fertility and Stores of Value

Animals tend to balance their nonemergency activities between obtaining enough resources to reproduce, and reproduction itself. In many animals there appears to be a range (different for males and females) within which available metabolic energy is positively related to both the behavioral tendency to seek sexual encounters, and fertility. Too skinny?² Your sex drive drops, to better focus on feeding yourself. Metabolic problems that lead to energy being stored instead of used? Your sex drive drops. Too few calories in a day? Lowered sex drive.

If you're a certain sort of smart animal, like many mammals are, your behavior is also determined by your interpretation of your environment. Is food abundant? If not, animals that plan ahead will build up a hoard. Do you have friends you can rely on for mutual aid and protection? If not, many social animals will focus on fixing that first. People lacking friends tend to display similar behavior patterns to those characteristic of undernourished people: desperation (trying increasingly unusual or drastic actions that might fix the problem) or torpor (burning less energy while waiting for conditions to change).

So we would expect by default, a society that became fantastically rich relative to some baseline, and is continuing to become richer over time, would become fertile relative to that baseline as well.

So, how to become rich? One can form friendships. But past a certain point, a society's well-connected enough that the marginal additional friendship doesn't offer much insurance value; and the total amount of help available doesn't change, only the capacity of the system to dynamically allocate it where it's needed.

How does one increase the amount of future help available?

Concrete solutions include harvesting crops now and placing them in relatively stable storage in order to feed one’s family during the winter or dry season, building a durable shelter now in order to benefit from it for the rest of one’s life, or conceiving, birthing, feeding, and caring for children, so that they become capable adults who will gratefully and lovingly care for you when you are too old to care for yourself. One can also improve one’s future capacities or save oneself future work by making tools to solve various problems easier, or giving non-relatives gifts of goods or services to create bonds of gratitude and expectations of mutual aid.

In highly specialized and alienated societies, we are offered the alternative of generic stores of value. Without planning for the details of one’s future needs, one one could instead simply help others in whatever way one can exchange for the greatest quantity of a highly compact, stable, persistently difficult to manufacture (and thus persistently scarce) commodity such as gold or silver. Such a commodity would retain a persistently high exchange value, so if you have a lot of it, that means you can expect to be able to exchange it in the future for the goods and services you will need, delegating the specific planning process to society’s aggregate planning abilities, i.e. Adam Smith's Invisible Hand. Thus, in relatively alienated societies oriented around arm's length transactions with strangers, one's perceived wealth - i.e. power to purchase needed goods and services from others - can function as a socioeconomic analogue to the hormones that signal abundant resources in the body.

In an undercapitalized society, one can do even better than hoarding precious commodities by lending one’s purchasing power (by lending the underlying commodity) to someone else to empower them to engage in some productive venture of their own, productive enough to pay back principal and interest and still be profitable for the borrower. Before about 1890 (the consensus date for the closure of the American frontier), the USA was undercapitalized in the relevant sense; there were few enough people willing to defer claims on present consumption in order to realize future profit, that skillful and careful investment of one’s savings could be highly profitable without state support beyond mere adjudication and enforcement of property rights.

We currently live under a different system, which encourages most people to think of their economic situation in terms of careers, education, and housing, and financial assets.

Formal education is best understood as one stage of a career, which requires long hours away from home. If you keep up the performance, your income continues to rise. This suppresses fertility locally by reducing the number of hours available for child care. When people who have advanced in a career are paid a lot of money, this can locally compensate them somewhat for the cost of the performance by letting the performer buy help from others, but that only reallocates the help available, it does not increase it globally.

We might imagine that careers are part of a system that realizes economies of scale to more efficiently provide child care support than individuals could do for themselves, but in practice, this is false. Most of the growth in hours spent at work is, by that metric, simply wasted time, especially in the better-compensated careers; the income available for being the sort of white-collar client that requires periodic bailouts is generally substantially higher than the income available for schoolteachers or nannies, for instance. (See Systems of Bullshit Work.)

If we construe prosperity in terms of the entitlement to command the time of others, and the opportunity to waste one's own time in exchange for that entitlement, and that process grows faster than real efficiency gains in child care or household management, we should expect fertility to decline as total capacity to raise children diminishes.

Another common way to try to enrich oneself is through investing in a home. This has a positive return on investment mostly because of secular trends in home values, not material improvements to the house. But if your savings are made of your house becoming more expensive over time, that means that they're made of rising rents, i.e. an increase in the cost of housing. When people have to work longer hours simply to be allowed to live somewhere, those people will have less time to care for their children, which likewise should be expected to reduce total fertility.

Housing costs and career advancement constitute such a large share of what we experience and measure as wealth, that it's very unlikely that we could increase the amount of time available for child care without appearing by our consensus metrics to become poorer. That does not necessarily mean that by wasting less of our time, we would actually reduce the aggregate quantity or quality of legitimate goods and services available, only that we would appear to be poorer by the specious metrics we are currently using.

So, how did we end up with a measure of wealth radically at odds with the single most central, essential case of production, one of the few forms of durable value creation that can’t be commoditized or outsourced? And how did the civilization that ended up there create so much obviously legitimate wealth along the way? We've got flying machines, near-instantaneous global communication, hospitals and medicines that really do save lives sometimes, food in abundance, and labor saving devices that automate many tasks that were previously as tedious or strenuous as they were necessary. So our measure of value didn't start out totally perverse

Medieval Europe's Surplus Bodies: How to Get Rid of People Politely

Here’s a stereotyped and simplified account of the Western European equilibrium, prior to the colonization of the Americas. There is, approximately, a fixed supply of agriculturally viable land that can sustainably feed more people than are required to work it sustainably, and more than enough people to work that land. Some of the surplus produced is captured by the people working the land. In the short run this takes the form of leisure and in the medium to long run it takes the form of fertility above replacement. Some of the surplus compensates merchants who move goods from place to place, and skilled artisans who make things farmers use. But an important part of the surplus is taxed.

Much of that land, and the people living on it, is assigned to a manorial lord, who captures some of the agricultural surplus via taxation, and can therefore afford to pay people to serve him. Here’s the investment problem faced by a manorial lord, or a feudal lord with manorial vassals: He owns, directly or indirectly, some agriculturally viable land, which is continually being converted into extra people who eat up the surplus food. While some of them can work to increase the agricultural productivity of the land (e.g. by developing new tools and techniques, or facilitating trade), much of the benefits thereby produced are externalized to other places who can copy them, and there are diminishing returns to new people serving in support roles. Eventually, the value of feeding the marginal person is negative - the food they consume destroys more capacity than they can add - so it starts to seem desirable to destroy or remove them. I am not claiming that it was in principle impossible for new people to create more wealth by other means on the margin, only that it was generally understood to be impossible for new people after a certain point to create enough additional capacity to pay for themselves within the context of the social, economic, and technological traditions of the time.

In short, this way of relating to economics sees surplus population initially as a potentially hazardous byproduct that has to be disposed of somehow, and only secondarily as a potential resource that might be exploited.

One response to this problem is to recruit surplus people into monastic or other celibate clerical institutions, which perform administrative, bureaucratic, and propaganda services while limiting the total fertility of the population. For a while, the Roman Catholic Church dominated Western Europe with this model. The continuity of Roman clerical institutions may have constituted a gradual accretion of wealth in the form of information and information processing capacity; for instance, the modern university system comes from the Roman clerical educational system. The Church also accumulated another sort of “wealth” this way: the compliance of the populace, as increasingly widespread and sophisticated religious indoctrination (as well as persecution of dissenters) caused Europeans to understand themselves as members of the Church and therefore under its authority. Eventually, the Church could credibly threaten to delegitimize temporal rulers who were sufficiently troublesome.

Another thing to do with extra men is train them to fight, to help you displace a rival lord and make use of his land as well. For the winner, this not only directly decreases the number of surplus mouths to feed, but also increases the amount of land the winning lord can tax. But a conflict with a winner has a loser, so while winning wars can sometimes increase the winner’s wealth on net, it does not increase the aggregate wealth of feudal lords as a class. Since the perceived legitimacy of such fights was greater than the perceived legitimacy of raids on the church, we can understand the Feudal equilibrium as one in which the Church - while ostensibly discouraging such internecine warfare - kept the mundane landlords divided by making fights the main way a lord could enrich himself, at the expense of some other landlord. Even if a mighty lord such as Charlemagne managed to accumulate very large land claims in a single generation (which might give him considerable leverage against rival powers like the Church and thus perhaps increase the aggregate wealth of the lords), if the lords themselves used some of their surplus to reproduce above replacement, they would frequently end up subdividing their holdings among their heirs. (The Capets and the Habsburgs eventually managed to accumulate very large land holdings via strategic marriages, but this came to full fruition only after the old equilibrium was already broken up for other reasons!) The main exception to the zero-sum nature of lordly wealth was the opportunity to seize land from a power outside the system, such as in the Crusades - which, notably, were organized explicitly under the auspices of the Roman Church, and enriched church groups such as the Knights Templar and Hospitaler as much as they did mundane land lords. But as it turned out, the Muslim powers were roughly equal in strength to the European powers, so the pre-Columbian Crusades were not very profitable in the long run.

With the discovery of America, a great expanse of poorly defended land became available.

Now here’s a stereotyped and simplified account of the Euro-American situation while the frontier lasted. Europeans with surplus capacity could invest it, rather than on fighting each other, on ventures to establish people on productive land on the frontier. If the land could support more than the people needed to work it, investors could make a profit. These profits could then be reinvested in further settlement or related ventures.

Meanwhile, the frontier also attracted surplus labor. The second son on marginal land in Europe didn’t have to seek his fortune in crowded and unhygienic European cities, or as a member of the clergy or armies; he could instead establish himself on the frontier and end up with valuable land of his own - increasingly valuable as it became economically integrated into the support structure for settlements on the newly pushed out frontier.

This is far from a complete account on the European side - most prominently, it omits the printing press, the successful Protestant reformation, the development of mass literacy, mass military mobilization, and the emergence of the administrative state. It also ignores the existence of cities, which did in some cases survive as meaningful economic units, and therefore - because of feudalism's limited capacity for oversight and corresponding willingness to delegate - survived as political units as well, albeit frequently vassalized as whole self-governing units by some lord or another.

For more on the transition from the medieval to the modern mode of social organization in western Europe, see Calvinism as a Theory of Recovered High-Trust Agency.

Frontier System, 1607-1890: When They Are Making More of It

For most of the period from the 17th through the 19th century, the British colonies in North America had an overwhelming military advantage against the prior non-European inhabitants. This meant that as long as there were large contiguous parts of the continent unsettled by the colonists, they could - for a modest amount of military work - obtain no-longer-occupied land available for the use of settlers. This land was sometimes given, sometimes sold, to homesteaders, or to well-connected speculators who then resold it to homesteaders at a profit. Homesteaders profited by converting now-unoccupied land into farms and other productive arrangements that produced goods for the older settled areas, which profited by selling homesteaders imported consumption goods or tools.

There were different dynamics of settlement, conquest, and trade in different areas of colonization, which I will not cover in detail here.

While the military conquest supporting this process was an actively implemented project and imposed unwanted externalities on the prior inhabitants of North America, it created what seemed from inside Euro-American civilization like a "natural" rate of exchange between labor and capital, and thus a natural rate of interest on capital. There was a supply of free land, limited mostly by the availability of settlers, which created competitive pressure upwards on wages anywhere where people might expect to significantly improve their economic prospects by moving to America. This imposed some relatively exogenous labor scarcity across the common market.

Frontier settlers and their proximate service providers - including the US federal government and eventually its sponsored corporate railroads - expected to profit from the use of better tools and materials, and therefore competed with each other for access to capital, i.e. loans. Combined with a finite amount of surplus wealth in settled areas, this created a market for money (i.e. actual gold or claims on actual gold from reputable counterparties) with an equilibrium interest rate across the Euro-American system.

During this time period, especially after 1860 as the American state centralized a lot of development activity, intermediaries gradually arose between a real process of creating new primary production on the frontier, and the possession of real scarce commodities in more settled areas. People who were well-connected to elites on both sides of the Atlantic ocean, such as the clerical Pierpont and Morgan families with elite connections in both old and new England, served as trust brokers for Europeans with access to gold looking to lend to Americans, and Americans with access to land and other profitable ventures to borrow from Europeans.

Financial Closure, 1890-1945: The Scarcity of Invention and the Invention of Scarcity

The closure of the American frontier ended the prior social process by which financial value was created and stored, creating social pressure to produce a substitute.

1890 is the canonical reference date for the "closure of the American frontier," as around then there ceased to be a meaningful large contiguous territory available for taking by settlers - so land holdings within the system became zero-sum (with the notable exception of the Dutch who did in fact manufacture a small amount of land in a very convenient location), and the market for the tools of settlement seemed likely to shrink over time.

By this point, many people have become accustomed to construe their wealth or social position in terms of the market value of their assets, or in terms of their career, both of which are based on the process of settlement.

Ownership of “wild” space was now fully partitioned. While physically abundant, land was now fully partitioned under formal title. It could no longer be acquired through labor alone, but only through monetary exchange—transforming it from an unbounded resource into a priced asset. This made it scarce in the institutional sense: no longer available without capital. Food, on the other hand, was abundant and therefore much cheaper.

In principle, if there's more than enough food for everyone, that's good for everyone. But the financial system depended on the value of farms, and the value of farms depended on the price, and thus on the scarcity, of food. Settlers who had borrowed money to equip farmsteads ended up owing more than the financial value of their assets. So the financial wealth of settler-farmers declined, in terms of still-scarce gold currency, as did their ability to pay their debts. This in turn decreased the financial value of enterprises that depended directly or indirectly on the continual creation of new land wealth.

The speculative value of large overseas investments sometimes exceeded the ventures' ability to pay back investors, by a lot. So in some cases – e.g. the South Sea bubble, the railroad panic of 1873, and the panic of 1893 – a great many people, all at once, found that their supposed store of value was backed by false promises. This disruption was multiplied by the tendency to treat such speculative stores of value as a basis for extending further credit: just as someone might offer a real asset such as a house as security for a loan, or demonstrate direct productive capacity as evidence of ability to repay, someone might offer a financial security such as shares in a joint stock venture as evidence of solvency, or as collateral - which makes the collapse of that venture's exchange value a problem for otherwise conservative secondary investors. While any economic system with a basis in primary production cannot be entirely circular, speculative bubbles tended to create a large, dense network of nominally wealthy agents with a perceived shared interest in preserving the speculative value of the financial assets in question.

In an economic depression, an overleveraged web of customary exchange is suddenly withdrawn. So people with cash money become theoretically much richer, but now have to use their imaginations to decide what they want, and people in need of money have to be more entrepreneurial to get it. And people whose financial positions are more leveraged (they've either explicitly borrowed against assets like a mortgage, or mainly own things like stocks that embed leverage in the asset) become poorer in relative terms, and many of them become insolvent.

It is, in the long run, good for people not to be busy doing wasteful nonsense, and to instead have the leisure to act on their imaginations, but you can see how a sudden shift would be upsetting and disorienting for many people and not all of them would make it.

What would deleveraging have looked like, had the prior legal regime remained in place?

Counterfactual: The Unbearable Lightness of Being a Post-Scarcity Society

Food prices are at historic lows, as a huge amount of agricultural land has just been settled. In the short run, the commodity price of food continues to decline due to the continued improvement of already-settled land which increased its total output, and continued improvement in tools and logistical support for bringing food to market. On net, this causes farmers' nominal incomes (which scale with food prices) to decline, while their dollar-denominated debts remain nominally constant.

There is no longer, however, an effectively unlimited labor sink in the form of the opportunity to convert labor directly into a claim on land. While there is still plenty to do to further develop newly settled land and supporting systems of logistics and transportation, the prospect of a labor overhang now looms.

Many farmers lose their land to foreclosure, and their land is sold on the open market, which drives down the price of agricultural land as well - at least relative to baseline, and maybe in absolute terms. At these lower land prices, buyers might find it profitable to rehire the same people to work the same land in the same way, much as in the present day, large firms that buy out owner-operated small businesses frequently offer the seller a salary to stay on as manager. In this case, the price of food would not be further affected. Or buyers might be able to farm the land more efficiently. This would further lower food prices, causing further insolvencies and foreclosures. Or, they might use the land for other purposes, possibly noncommercial ones, which would cause the price of food to rise somewhat, reducing the total number of foreclosures necessary before the market clears.

An analogous process plays out in other, derivative parts of the economy. Many other ventures that were profitable under conditions of continually expanding settlement become unprofitable, so the value of owning them decreases, possibly to zero as these enterprises become unable to pay their own debts. In the former case, this would sometimes make the assetholders insolvent, if they had significant dollar-denominated debts, diminishing the financial value of those in turn, propagating a wave of deleveraging through the financial economy. This also causes the holders of such assets have reduced spending power, thus further reducing the price of many tools and other capital goods and most consumer goods, which further reduces the dollar-denominated enterprise value of firms producing such goods. If these ventures actually become insolvent and are forced to declare bankruptcy, this would additionally result in the sale of the unprofitable firms' assets to pay off creditors, either together as a going-concern bankruptcy which is still profitable before taking into account debts, or separately if the firm would not be profitable even with its debts wiped out. In either case, the price of the capital assets involved (e.g. land, equipment) is correspondingly reduced as well, leading to decreased revenues for firms producing capital assets, and so on.

If the effect of this deleveraging is large, then anyone who owed a significant amount of money ends up assetless, anyone who mainly owned shares of leveraged businesses or businesses premised on a continuation of the old pattern of expansion is wiped out, anyone who mainly owned nonmonetary assets unencumbered by debt is doing about as well as they had before, and anyone who had hard currency has vastly increased purchasing power.

In such an economic depression, an overleveraged web of customary exchange is suddenly withdrawn. In principle, such a situation is a wonderful opportunity to collectively relax and figure out what we would like to do together. It is now very cheap to employ someone at an efficiency wage, support them charitably, or buy them a homestead, so the extent and nature of the employment economy is mostly limited by the imagination and desires of the participants. Society in the aggregate can easily afford many more physicians, massage therapists, tinkerers, entertainers, inventors, philosophers, experimental scientists, poets, novelists, mathematicians, Christmas tree decorators, karate instructors, intentional communities, athletes, regenerative farms, and experimental kindergartens. But our word for the sort of buyer who can employ their imagination in such a way is "patron," and our word for the sort of seller who can is "entrepreneur," and we can observe that not everyone whose situation calls for the virtues of a patron or an entrepreneur is able to answer the call. It feels not like looking up to a vast vista of opportunities, but like staring into a terrifying abyss

As this process of deleveraging began, Americans' economic intuitions were generating emergency signals that no longer corresponded to actual material scarcity. They were panicked, depressed, and disoriented. British economist John Maynard Keynes, the economist widely credited with developing the macroeconomic theories that eventually guided the government's response, attributed market fluctuations to "animal spirits." US President Franklin D. Roosevelt, who was responsible for implementing much of the response, similarly diagnosed not resource misallocations but "fear itself" as the enemy in his inaugural address. So the authorities decided to reorient them. Well-connected intermediaries such as JP Morgan, and later the federal government itself, took actions to preserve the system of social relations that had emerged as a functional support to the process of settlement.

Counterweight: The Reaction

There was and remains some confusion about what was going on, but over the transitional period from the late 19th century until the election of Woodrow Wilson as President of the United States, investors seem to have been in aggregate more willing to believe unrealistic promises of return on investment (expressed in terms of gold, as an annual percentage increase in the lender's wealth), than to accept the lower rate of interest on money available from individually sound investments. At the institutional level this was probably aggravated by limited liability and owner-operator situations in which financial ruin was a discrete event, and there was no practical difference between being a little bit bankrupt and extremely bankrupt; only between a lower and higher probability of bankruptcy. If you're going broke in the default scenario, you might as well reroll the dice and hope for a win. But given the outcome of major political concessions to the otherwise insolvent, this behavior must have been in large part the implementation of tacit coalitional strategies. Likewise, people selling their labor to ventures premised on growth were at critical junctures unwilling to take pay cuts or unable to find acceptable-to-them alternative employment when their employers turned out to be less profitable than anticipated.

Institutional responses varied. In 1896, Americans elected William McKinley as President, with a mandate to preserve "sound money" (the gold standard), which pushed the system towards a process of deleveraging: recognizing where trust had been misplaced, and passing along the bad news to secondary or tertiary claimants that indirectly relied on underlying speculative misrepresentations. On the other hand, the financier JP Morgan coordinated people who had received a lot of trust to strategically invest in systemically important ventures in danger of losing access to capital. Eventually Woodrow Wilson was elected President, and initiated a three-faceted program of radical economic reform.

(1a) The imposition of drastic restrictions on immigration, to limit how many people were physically in the country and thus had to be nominally enriched to preserve the illusion. Some of this predates the first World War, but passports were nominally a wartime measure.
(1b) Restrictions on trade that kept the prices of some domestically produced goods high enough to keep domestic production profitable, justified in part as a national security measure.
(1c) The reimposition of explicit racial segregation at scale, to isolate classes of people who could be excluded from otherwise-shared prosperity.

(2) The Federal Reserve system, ultimately leading to the imposition of fiat currency.

(3) The World Wars, and in between, the New Deal.

One way to think about it this reform is as a response to a collapse in the external return on investment of the process of settlement. The problem to be solved is that there is a powerful coalition of different groups of people that variously feel entitled to retain the financial value of their assets or incomes, and moreover, to see that value increase over time. They don't need or expect in practice to be fully paid out in terms of actual gold – in fact, they generally prefer to reinvest their wealth, which gives the system some operating flexibility to respond – but if nominal prices increase too much too quickly, it will be uncomfortably obvious to them that the real value of their income or assets has declined. The points they scored still have to feel like they're worth something. So the nominal value of the relevant incomes and assets has to continue to increase, while prices of the most commonly consumed goods and services have to remain stable. The solution to this problem takes three parts:

(1) Limit the scope of the problem, by limiting new entrants to the classes that need to be made to seem richer every year in terms of a zero-sum unit of account (or actually richer every year in terms of an apparently zero-sum unit of account).

(2) Acquire the ability to arbitrarily edit the accounting system at a central node, so that nominal assets and incomes can arbitrarily diverge from material assets and consumption. The government can then make arbitrary nominal purchases without risk of running out of money, thus allowing the people being kept busy providing services to the government to understand themselves as enriching themselves rather than as being enslaved.

(3) Create an emergency situation justifying high levels of government spending in conjunction with a rationing regime and strong social pressure to defer gratification. This allows nominal incomes to rise, supporting increases in asset values, without the corresponding increase in effective purchasing power that would tempt people to call the system's bluff.

The policies of the Democratic presidencies bracketing the period of the World Wars (Wilson and Roosevelt) can be well-modeled as an implementation of this plan.

The World Wars, related restrictions on trade and immigration adoption of fiat currency shifted large parts of the world from a more open system where transactions are denominated in terms of a scarce physical commodity traded internationally, towards a more closed system where transactions are denominated in terms of tickets issued by the local territorial power that can be used to pay its taxes. In the period from approximately 1913 to 1933, the US government gradually abandoned the gold standard, though this was not officially acknowledged until 1971. Prior to this period, a "dollar" was a claim on a standard quantity of physical gold. But in 1933, the state seized most actual gold and replaced it with new "dollars" that could not in practice be converted back to gold. Banks could hold these "dollars" as numbers on a ledger maintained by the Federal Reserve Bank, which could pay for arbitrary purchases of US Treasury bonds, or pay interest on deposits, by simply marking up the account of the seller. This gave the state effectively unlimited nominal purchasing power, but indirectly enough that it still looked superficially like dollars are conserved in the national budget. Contracts denominated in dollars were reinterpreted to refer to these new dollars.

This allowed the nominal prices of assets, and incomes (largely government spending), to increase without bound, without creating the risk that someone would try to cash out their wealth in terms of the previous reference commodity, gold. If you control the accounting system, you can make people as "rich" as you want (regardless of the true level of wealth) as long as they don't try to spend too much of their money. During the wars, essential goods were even explicitly rationed, and there was also a large propaganda effort to encourage people to invest their excess income in war bonds.

Between the wars, there was a brief period in which newly freed up capital drove a speculative bubble in financial assets, but for the same reasons that this was not sustainable before the first World War, it was not sustainable afterwards. Since there was not political support for explicit make-work programs of adequate scale to make up for the end of the war, eventually the bubble collapsed and this led to a second gigantic war.

People tend to focus on income and sales or VAT taxes when trying to figure out for the basis of the value of currency fiat currencies, because of the large volume of revenue collected, but such taxes mainly serve to limit spending by people already committed to the system; they're not adequate to explain that continued commitment in the first place. To the contrary, they make participating in the formal, state-regulated economy less appealing.

If the state-backed economy is inefficient enough, a person or community could do better by just producing locally and sharing. So the American government overtly suppressed this, especially during the interwar period when the nominal return on capital was collapsing. Two important examples of this suppression of self-sufficiency are the 1921 Tulsa Race Massacre and the 1942 Supreme Court decision in Wickard v. Filburn.

Nominally triggered by an unsubstantiated accusation against a young black man, the 1921 Tulsa Race Massacre was a coordinated attack by white residents, including law enforcement and National Guard members, on the Greenwood District of Tulsa, Oklahoma, known as “Black Wall Street” for its concentration of successful black-owned businesses and properties. The violence led to the systematic looting and burning of over 1,000 homes and businesses. Estimates of deaths range from dozens to hundreds, though exact numbers remain uncertain due to deliberate underreporting. Insurance claims were largely denied, and no reparations were paid. While Tulsa is the most documented case, similar violent suppressions of black economic autonomy occurred elsewhere, including in Rosewood, Florida (1923), and in East St. Louis (1917), suggesting a broader pattern of violent enforcement of racialized economic stratification during a period of national financial consolidation.

Disadvantaged minority communities, excluded from many mainstream institutions like banks, property markets, and corporate employment pipelines, relied more heavily on dense local networks: mutual aid societies, community credit, informal land tenure, and emergent formal economic coordination among small businesses. Structurally, the Tulsa Race Massacre and similar events can be understood as a pattern of suppressing local systems of capital allocation that functionally competed with the emerging, nationally managed financial regime.

In 1942, the Supreme Court of the United States ruled on Wickard vs Filburn. In order to guarantee a high price for agricultural products (and thus keep farms financially solvent), the national government punished a farmer for producing too much grain for his own use, because he would otherwise have bought wheat on the national market. The Supreme Court found that the government had this power, under the Commerce Clause of the Constitution.³ This demonstrates a commitment to respond to anyone who attempts an economically important level of self-sufficiency, by taxing them until they need enough new dollars to effectively force them to integrate into the common system.

Likewise, increased acceptance of eminent domain seizures of property, regulatory oversight with wide discretion and little formal legal accountability, and similar expansions of executive discretion over economic activity, most likely intimidated major property holders into avoiding attempts to cash out their holdings and buy real assets at scale. Doing so would have embarrassed the authorities by revealing the limits of aggregate purchasing power.

So real as well as nominal assets end up in the hands of people who accept acculturation into the new elite, allowing themselves to be moved by prospect of accumulating government currency or indirect claims on government currency, with no guarantees as to what that can be exchanged for.

Baby Boom and the Early Cold War, 1945-1970: Bring Home Our Factories

The old privileged classes accepted the new regime because it preserved the apparent opportunities to save for the future with a positive return on investment, or to earn high incomes and buy one's children a higher level of privilege. Approximately 1945-1971 (roughly the Baby Boom), the men who had been employed in wartime manufacturing, logistics, and supporting services were reallocated in large part to producing machines designed for sale to individual households. This centrally managed corporatism produced a legitimately obvious, huge postwar expansion of nonwar productive capacity, so there really was a way to increase almost all Americans' apparent claims on basic capacities and help.

For instance, automobiles (and telecommunications devices like telephones, radios, and televisions, though these were largely developed earlier) enabled people to participate somewhat in central culture and production while living in more spacious homes on larger lots, which - since they monopolized more area per person housed - necessarily had to be built at longer distances from city centers. Mass-manufactured labor-saving devices such as automated washing machines and kitchen appliances also freed up a lot of household time, as did consumer products like disposable diapers and mass-produced ready-to-eat foods. While some of these come with clear downsides, it's easy to see how more spacious shelters, more immediately accessible outdoor space to enjoy, and help with household tasks, afford real capacity improvements or time savings that might be worth spending significant amounts of time away from home to afford.

Ordinary workers could now be paid more without breaking the perception of money's scarcity value, because there were corresponding new goods they could buy that were really helpful. Soldiers were inducted systematically into the clerical privilege class, also known as the Professional-Managerial Class, through programs like the GI bill. Farms were kept profitable through a combination of price supports and food subsidies for the poor. And raw materials and foreign goods could be bought at advantageous exchange rates due to the US's extreme institutional dominance; one way to interpret the postwar Bretton Woods currency arrangement was that the subordinate postwar powers agreed to treat a new US dollar as though it were backed by gold even though it was being spent like an unbacked fiat currency. In this way, most participants in the system got the plausible impression that they were becoming richer over time, and while in hindsight the accounting for this didn't quite add up, someone living through this time might reasonably have inferred from the trend that the next generation would be correspondingly richer and more free. This extended even to African-Americans, who had been systematically disadvantaged under the older Wilsonian system, but now were increasingly integrated into centralized systems of socialization and promotion.

Significant coercion was also applied to keep people participating in the system; there were an awful lot of lobotomies and involuntary psychiatric commitments in this era. This was on a continuum with softer nudges such as widespread voluntary participation in psychotherapy, and the creation of the postwar advertising industry. Large, coordinated groups like some Mennonites and especially the Amish did manage to opt out of this process and keep their labor mostly in their local communities. This was likely in part due to high barriers to entry, so that allowing them to opt out was little threat to the rest of the system, and in part because the executive branch of government was unwilling to conspicuously carry out a genocide against American citizens.

The displacements due to suburbanization destroyed many informal networks of support, forcing parents to rely on more formal institutions like schools and propaganda films, official and unofficial. While this does not appear to have seriously impaired first-generation fertility (hence, baby boom), and produced children who performed well on the sorts of things the authorities cared about, like formal tests and compliance with authority. Overall, the functionality of this system seems roughly likely to match up to the times & places where the Flynn Effect of a secular rise in IQ was observed. But these children seem to have been incompletely socialized, to have had fewer children than their parents did, and to have played a less active role supporting those children when they themselves had children. Some of this may be a direct affect of their inadequate socialization; we might call this the fractional Romanian orphanage hypothesis. Some of this may have been due to increased perceived costs and reduced perceived benefits per child, as this generation was more likely to engage in what has been called "helicopter parenting," trying to make up for a lack of dense networks of latent support through investing more parental hours per child, and more likely to have begun their career expecting a centrally guaranteed pension in their old age.

On the whole, someone in the workforce who wasn't a social theorist or predisposed to social skepticism could reasonably have expected to be working to build a better life for their children. The mass mobilization of men into the sort of manufacturing called for by the World Wars was able to produce a range of new goods valuable enough to legitimately make participants in this new sort of economic growth increasingly glad they weren't Amish. But there are only so many hours of labor in the home that could be saved by labor saving devices applying basically World Wars era mechanical technology to the problems of home use, transportation, and communications, so this process had strongly diminishing returns built in.

Monetarism, Deregulation, and Bullshit Jobs, from 1971 Onwards: The Theater of Full Employment

There are only so many hours in the day.

If you work ten minutes to buy pre-sliced bread at the grocery store, which saves you half an hour's worth of food preparation, cleaning, and loss due to waste, you've got twenty more minutes to rest, recreate, and play with your children, which may make you more inclined to have another. But the bread only costs you ten minutes now - how are you going to save the next twenty?

If you work forty hours to buy a washing machine, which means that washing the laundry takes one hour of your time instead of five each week, then after the first year, you've saved 168 hours you can use to rest, play with your children, and make new ones. The remaining time spent per year is 52 hours. How are you going to save the next 168 hours?

Maybe the next thing you buy is a dishwasher, saving time on a different household task. But there are only so many household tasks a cleverly designed box for soaking things in soapy water and rinsing them can do. You can't use it on a baby, and it can't fold your laundry or put away your dishes.

So there are only so many things you can buy before you hit diminishing returns.

The postwar manufacturing boom seems to have run out, empirically, around 1971, when the US formally abandoned the Bretton Woods agreement; around the same time, the US began to experience high levels of price growth in basic goods and services, as the growth in nominal wages was no longer matched by corresponding growth in new useful home goods for sale. While at the beginning of this period the government experimented with the reimposition of explicit price controls, once this policy clearly failed and resulted in serious shortages of important goods, it became clear that some promises were going to have to be broken.

The central promise that broke was the tacit guarantee that nominal incomes would continue to correspond to real purchasing power gains. Instead of continuing to try to match the old growth expectations through state coordination of prices or direct stimulus, policymakers began to reinterpret the problem not as one of material capacity or social coordination, but of expectation management. Inflation was reconceived not as a symptom of real economic misalignment, but as a technical failure of central monetary control, a problem to be solved through cybernetic adjustments to the interest rate.

This new paradigm, called "monetarism," held that the proper role of government was not to directly ensure prosperity, but to maintain the stability of the unit of account. If promises had to be broken, better that they be broken cleanly through monetary contraction than eroded slowly through inflation. By the late 1970s, the Federal Reserve had embraced this view, culminating in Paul Volcker’s deliberate and explicit policy of raising interest rates high enough to induce a recession in order to bring inflation under control.

From a macroeconomic perspective, this policy shift amounted to a reallocation of pain: instead of distributing loss diffusely to the majority of the voting public through gradual inflation, it concentrated it sharply in apolitical minorities in the form of unemployment, business failures, and household insolvency. The recession that followed effectively liquidated many marginal or debt-dependent enterprises, especially those that had depended on the perpetuation of 1960s-style expectations of perpetual wage and demand growth. The labor market was “disciplined,” and the economy restructured around higher real interest rates, lower worker bargaining power, and a broader tolerance for inequality.

In parallel with the monetary realignment, policymakers pursued deregulation. Trade liberalization and the removal of regulatory constraints on telecommunications, air travel, and consumer goods led to genuine price declines and quality improvements. Imports from newly industrializing economies, particularly in Asia, lowered the cost (especially adjusted for quality and reliability) of cars, electronics, and household appliances. Deregulated airlines drove down ticket prices and made commercial flight accessible to the middle class. These changes improved the lives of consumers, and allowed apologists for the regime to claim with some plausibility that things were getting better all round.

Their other function was to sustain the profitability of firms in a world where real end-consumer demand was no longer growing at a reliable rate. In the absence of enough new classes of transformative home goods like those that had justified wage increases during the postwar boom, profits had to come increasingly from cost-cutting. This shift from demand expansion to cost compression allowed asset prices, particularly equities, to continue rising, even as the experiential benefits to households plateaued or declined.

Housing has been the exception. Unlike consumer goods, it is not subject to meaningful global competition. On the contrary, inelastic supply and increasing financialization allowed home prices to rise persistently, even as wages stagnated. According to research by Gianni La Cava, the appreciation in housing assets accounted for a substantial share of the increase in capital’s share of national income. So older people got richer, in a way exactly corresponding to younger people having to work longer outside the home and away from their families just to break even. For instance, women entered the workforce en masse.

The state and aligned civil society institutions did not respond to technological efficiency gains by reducing work hours or encouraging informal, community-based provisioning. That would have caused a dire social problem: the cost of basic goods is stable or declining, but people need to work more hours to afford a place to live, so if demand for labor declines, we're stuck in an economic game of musical chairs; don't find a job when the music stops, and you're homeless. Instead, elites coordinated to expand the domain of credentialed and administrative labor. The formal education system absorbed more years of young adulthood, without corresponding gains in practical skill, or really any measurable improvements at all in the people educated (see Bryan Caplan's The Case Against Education).

Hospitals, schools, and government agencies accumulated layers of nonproductive management. Much of this expansion was enabled by preferential credit allocation: easy money flowed toward sectors aligned with the ideology of professional risk management and social control. If a large correlated group of job-creators were in danger of bankruptcy, they got bailed out, but independent decorrelated enterprises were allowed to fail. (See The Debtors' Revolt.) The effect was to allocate labor toward tasks that enacted a dramatic imitation of scholarship, conformity, and bureaucracy.

The reason you don't have more brothers, sisters, and cousins is that mama and papa and all their friends are too busy working at the most tedious state-subsidized theater in history.

I Owe My Soul to the Value Store: Why Johnny Can't Exist

Trying to win a war creates jobs, as the state has to employ many people in supplying and deploying military force. Winning a war creates peace. In peacetime, the jobs created by government are no longer under acute performance pressure, and become valuable sources of patronage. Much of this patronage is awarded based on social class affinity. Competition for patronage based on class affinity rewards people for trying to conform to elite behaviors in order to be awarded class patronage, and punishes them for decorrelating to pursue their private interests. Class affinity itself involves enforcing conformity and preying on the nonconforming, and imitating others costs us degrees of freedom that could otherwise be used to improve living standards and fertility.

Economic growth policies have also tended to contribute to rising average house prices. Jobs with subsidized salaries often require you to live somewhere popular, which makes already-scarce (and highly regulated) housing in dense areas even more expensive by bidding up the price. Some of the house-price hot spots are effectively competition for things like relatively scarce slots in well-regarded school districts, which are part of the elite consumption patterns that give one a leg up in getting “good jobs.” And finding a mate and caring for children are much less costly when people live near potential mates or community members - except for the cost of living in those areas, where housing is frequently explicitly rationed.

Taking care of children is a lot of work, and compelling or manipulating an increasing share of the population into keeping busy with useless or harmful tasks will necessarily reduce the amount of labor available for child care. People climbing the ladder have to spend time away from their children. They might use some of their income advantage to hire a nanny - but you can't be rich enough to hire a nanny without the nanny being poor enough to be hired by you (and thus incentivized to spend time improving your reproductive outcomes that she might otherwise spend on her own).

Someone could in principle live on relatively little savings or occasional remote work, in a low-rent area, and take advantage of the many free or low-cost information services available as a substitute for physical proximity, but isolated weirdos have more trouble finding mates and friends to exchange help with, and are appealing targets for expropriation from people who are moved more by "fear of missing out."

Healthy children require access to a great deal of space to explore as well, and the property system encourages people to keep people off their lawns, which makes it much harder for any children to have freedom to roam, especially in states that legally restrict children’s freedom of movement.

Groups like the Amish, and the Satmar Chassidim, have a reproductive advantage in large part because their local coordination is not mediated by the sort of unbounded conspicuous consumption outsiders use to establish class affinity, so they can afford to spend a lot more time making and caring for children. It is more difficult for individual households to do this. These relatively well-defined groups also tend to collocate, creating a large area where their culture predominates, informally and sometimes even through political mechanisms, so that a relaxed attitude towards children is widely tolerated. They can get away with relatively healthy and rational child-rearing behaviors because they are relatively large and visibly stick by each other, so it's harder to pick them off one by one like an individual household that abstains from needless spending or neurotic guarding behaviors. Individual households that stick out in such ways are likely to be singled out for harassment, which lowers fertility.

1. A sustained fertility subsidy large enough to restore U.S. total fertility to replacement level (2.1) would require supporting an estimated additional 24 million births over time. Empirical elasticity estimates from studies such as Lovenheim & Mumford (2013) and Cohen et al. (2016) suggest that fertility increases by 0.02–0.05 births per woman per $1,000 in annual transfers. This implies a cost of $20,000–$50,000 per additional child, or 1.8–4.5% of U.S. GDP per year if the gap is to be closed on an ongoing basis.
   Assuming the subsidy is financed entirely by taxation on capital income (e.g., corporate profits), and corporate profits are ~10% of GDP, the tax burden would reduce after-tax profits by 20–45%, leading to a proportional decline in equity market valuations under constant P/E assumptions. This corresponds to an equity market capitalization loss of $10.8–$24.3 trillion, or 20–46% of the total asset value gains since 1971. Compared to GDP, this loss represents 42–94% of nominal GDP growth since 1971.
   Any attempt to offset negative labor-side impacts from taxation (e.g. via payroll taxes or pass-through effects on consumer prices) would require additional transfers to maintain fertility incentives—implying that the full program must operate as a systemic reallocation of purchasing power away from capital-intensive activities and toward family formation. ↩︎
2. Too fat doesn't happen if you're otherwise healthy - it's a symptom of emotional or metabolic problems. ↩︎
3. The much more recent decision Kelo vs New London generalized Wickard vs Filburn - the claim that something will handle a lot of dollars becomes ipso facto legal justification for seizing the property even if the prior owner is paying their taxes. ↩︎