- Reaction score
- 6,109
- Points
- 1,260
American economist Adam Posen posits, in this article which is reproduced under the Fair Dealing provisions of the Copyright Act from the Financial Times, that we are heading for a repeat of the 75 year period from about 1840 through to 1914:
http://www.ft.com/intl/cms/s/0/6e4d3ee2-fdd7-11e2-8785-00144feabdc0.html#axzz2bEJZv1Du
Although this is an economic argument by an economist it points ~ as economics often does ~ to strategic issues, too.
Let us consider 1840:
Britain, which was the dominant global power, had already begun its long decline from global superpower to leading middle power;
France, which was "great power" was in a decline which had started (much) (centuries) earlier and it was already a second rate power, even if that fact wasn't obvious;
The USA was just beginning its long march to global superpower status, but it had little global influence;
Japan was on the verge of looking, seriously, at entering the modern, Western, industrialized world;
Russia was poor but, relatively, powerful in its own region; and
Brazil, China and India were all irrelevant.
Seventy five years later Britain's (many) weaknesses were more evident, as were those of France. Germany was a "great power" which had, already defeated France more than once. Japan was a newly "modern" country and had won a war against feeble Russia. The USA was a global economic powerhouse and had just (Spanish-American War) proven that its military reach was also global. Brazil, China and India were all irrelevant.
The end result of Posen's "old normal" was the bloodbath we call the Great War. If his "old normal" is our "new normal" then I wonder what the end state will be.
http://www.ft.com/intl/cms/s/0/6e4d3ee2-fdd7-11e2-8785-00144feabdc0.html#axzz2bEJZv1Du
The global economy is now distinctly Victorian
The Old Normal is looming large on our horizons, writes Adam Posen
By Adam Posen
August 6, 2013
The global economy is getting back to normal. That does not mean a rapid return to full employment nor to a low-risk world for investors. It means that the underlying realities of globalisation are becoming clearer: ours is a multipolar world, where the technological convergence between rich nations and capable poor ones is rapid. Middle classes are expanding quickly in emerging markets – a group that politicians focus on everywhere, while ignoring recurrent protests from others, particularly low-skilled labour. The world has and will have high real economic volatility despite relative price stability. This state of affairs is, in fact, a return to the Old Normal of the late 19th century. It is a world that we can understand, even if we do not like it.
In international politics, as has long been foretold, the “American century” of 1945-2000 has given way to a world where the US remains the leader but is losing dominance. So the global system is somewhere between outright conflict and smooth international governance. Reflecting this diffusion of economic and military dominance, a few major currencies – not just one – are increasingly being used for invoicing and reserve management, and that trend will only continue.
The link between currency usage and geopolitical ties is strong, and so the dollar will not be suddenly displaced, but regional alternatives will continue to rise. This has a feel of the 19th century: as Barry Eichengreen, a professor at the University of California, Berkeley has argued, there have been long periods of history where multiple reserve currencies coexisted, like at the end of the 1800s, and we are now in one of those periods – which contributes to economic volatility and uncertainty for national economies and investors.
This multipolar world is also one where no one has sufficient authority to fully protect global public goods, such as intellectual property rights. A weakening of those protections will increase the pace at which emerging markets capable of converging will catch up with advanced economies. Some see this trend as a result of China’s rise or digital piracy, but remember that Germany and the US reverse engineered British innovations in the Victorian age, and even pirated the IP of Charles Dickens and Arthur Conan Doyle.
At the same time, a lack of IP protection reduces incentives to invest in innovation, as Elhanan Helpman of Harvard has demonstrated. So the technological leaders will advance more slowly, which will also boost catch-up. This, in turn, will erode the relative power of the US and other advanced economies, further reducing their ability to enforce IP rules. The whole cycle will increase competitive pressure on incumbent multinational businesses.
Active national rivalries, multiple reserve currencies, eroding intellectual property rights and increased corporate competition in many industries will increase volatility of the real economy and diminish investment. Large state-backed national infrastructure projects, as dominated late 19th century development, will be a growing asset class as a result. The division between investments yielding safer low returns and speculative higher-return assets will be quite sharp.
But as was the case from the 1840s until the first world war, today’s convergence and competition – and the volatility that results – can and I believe will persist for a long time without globalisation breaking down. It held up for a long time then because, even as there were arms races and conflicts, France and Germany, let alone the UK and the US, had an interest in maintaining the status quo. And, as then, today’s dominant powers wish to maintain their legitimacy against non-state actors, including terrorists and revolutionaries, and preserve cross-border flows of trade and finance.
Furthermore, politicians are responsive to their own upper middle classes, whose wellbeing depends upon maintaining globalisation and keeping international disputes within limits. These groups are also creditors whose desires for price stability, combined with the pressures from currency competition, creates strong incentives for keeping inflation low. On average, such motivations will dominate over temptations to inflate their problems away. So, just as most countries usually adhered to the gold standard over a century ago, they will stick with independence for their central banks and fiscal consolidation now.
There was little or no response to recurring spasms of protest or calls for radical change by low-skilled workers in the 19th century, except when mass movements were assimilated into mainstream political parties with support from the elites. Something similar is at work today, with the protests of southern Europe and the demands of the Occupy movement largely ignored by policy makers catering to the voters of the (older) bourgeoisie.
The Old Normal is thus a tale of the global economy returning to unfettered markets in many ways, and – at the national level – to more volatile economic conditions with slower average growth as a result. This is a situation which I am predicting, not endorsing. While domestic politics and international relations have changed greatly since 1914, the creation of safety nets and welfare states (even if now curtailed), and the development of nuclear deterrence among the major powers only strengthen the status quo bias of the current governments.
The Old Normal is not nice, but it is likely to last.
The writer is president of the Peterson Institute for International Economics
Copyright The Financial Times Limited 2013.
Although this is an economic argument by an economist it points ~ as economics often does ~ to strategic issues, too.
Let us consider 1840:
Britain, which was the dominant global power, had already begun its long decline from global superpower to leading middle power;
France, which was "great power" was in a decline which had started (much) (centuries) earlier and it was already a second rate power, even if that fact wasn't obvious;
The USA was just beginning its long march to global superpower status, but it had little global influence;
Japan was on the verge of looking, seriously, at entering the modern, Western, industrialized world;
Russia was poor but, relatively, powerful in its own region; and
Brazil, China and India were all irrelevant.
Seventy five years later Britain's (many) weaknesses were more evident, as were those of France. Germany was a "great power" which had, already defeated France more than once. Japan was a newly "modern" country and had won a war against feeble Russia. The USA was a global economic powerhouse and had just (Spanish-American War) proven that its military reach was also global. Brazil, China and India were all irrelevant.
The end result of Posen's "old normal" was the bloodbath we call the Great War. If his "old normal" is our "new normal" then I wonder what the end state will be.
