We live in “interesting” times. The global economy confronts a range of challenges — from high public debt burdens in many advanced economies struggling with the legacy of financial excesses, failed banking systems and diminished expectations for long-term growth, to fears of a possible return of high inflation, and a threatened collapse of the US dollar that would result in fundamental changes to the international monetary system. At the same time, confidence in the usefulness of economic theory to guide policy and sustain the steady increase in prosperity enjoyed by successive generations has collapsed.
Our interesting times are, therefore, also a new age of uncertainty.
But the news is not all bad. While the industrial countries that dominated the global economy in the late twentieth century may be experiencing the indignities of old age, the rapidly growing, newly developed — or is it industrializing? — economies of Asia, Latin America and elsewhere, have shaken off the “Lesser Depression” and resumed their steady growth. The remarkable rise of these economies reflects two factors: the power of conditional convergence — achieved through sound policy frameworks and integration in the global economy — and their large populations. Given the differences in the size of populations, even modest progress in closing the gap in GDP per capita can lead, ineluctably, to large changes in absolute economic size.
This increase in the economic heft of the countries formerly known as emerging markets could, however, become a source of potential conflict if their legitimate aspirations for a greater voice in global institutions are frustrated. Managed well, the process of financial and economic integration can provide a sound foundation for global growth that would benefit all in a “positive sum” global economy. Mismanaged, the result could be a zero — or worse, negative — sum game of beggar-thy-neighbour policies. The experience of the last “hand off” in global leadership from Pax Britannia to Pax Americana between the two world wars of the last century, vividly illustrates the tragic consequences of getting it wrong.
The early twenty-first century is thus also a new age of uncertainty with respect to the transition in global economic power.
The 1970s were, likewise, a period of considerable uncertainty. That decade was marked by the collapse of the Bretton Woods fixed exchange rate system, oil price shocks, concerns that the “limits to growth” would constrain growth, a steady, progressive increase in US inflation, which threatened to undermine the role of the dollar as the dominant international reserve asset, and economic recession in the industrial economies. The combination of inflation and recession was both unexpected and, initially, unexplained. And, even if Milton Friedman had famously declared “we are all Keynesians now,” it undermined the Keynesian consensus on how to view the economy and the role of policy in maintaining full employment. At the same time, an ideological struggle between two modes of economic and political organization was being fought, both through a “cold” war for ideological adherents throughout the developing world, and in a “hot” war in the jungles of Vietnam, Cambodia and Laos.
In this milieu, John Kenneth Galbraith hosted a BBC television series on the history of economic thought. The Age of Uncertainty successfully captured the prevailing sense of angst created by the uncertainties of the time and, for me, conveyed a simple, yet important, message: economics is not a religion marked by dogmatic adherence to one true faith, nor a “hard” science governed by cosmological constants, but an approach to understanding economic relationships that should evolve in response to changes in behaviour and the economic environment.
In this respect, we can take heart despite the new age of uncertainty in which we live. Just as policies and institutions adjusted to deal with the uncertainties of the 1970s, so, too, can we meet today’s challenges.
The underlying philosophy of this blog is simple: while the global economy does indeed face enormous obstacles to growth, these challenges need not lead inevitably to the nightmarish scenarios foretold by some. Better policies, informed by a vigorous debate and built on strong empirical foundations, can transform the new age of uncertainty into a new golden age of global growth that will serve as the wellspring of prosperity for countless millions around the globe.