Summary: A brilliant economist sees the future as a triumphalist continuation of today’s trends, a return to the past of the Gilded Age. Posen asks the big question, one long discussed on the FM website: has the post-WW2 era ended, and what will follow. It’s worth careful consideration.
“What the return of 19th century economics means for 21st century geopolitics by Adam Posen, former Member of the Monetary Policy Committee at the Bank of England and President of the Peterson Institute of International Economics. Speech given to the Royal Institute for International Affairs at London on 17 January 2012.
Posen also wrote a brief version of this: “The global economy is now distinctly Victorian“, Financial Times, 6 August 2013 – “The Old Normal is looming large on our horizons, bringing with it unfettered markets”.
Excerpt from the speech
We have seen before a world in which global economic integration proceeds against the background of international relations somewhere between a clear hegemon and outright conflict. This kind of multipolar world is what existed in the late 19th century, roughly between 1870 and 1910.
… The economic implications of such a world are worth drawing out. Looking back at what happened to macroeconomic aggregates from 1870-1910 tells a coherent and relevant story. While one cannot map precisely from then until now, I think the parallels will prove rather tight in coming years, not least because most of the dominant political interests in the major economies have interests and ideologies similar to their noble and haute bourgeois counterparts of the Belle Epoque. Where one spoke about landed interests in the late 1800s, one should now think of holders of government protected franchises (be they broadcasting, banking, lawyering, medical services, or the like). Where one spoke of declining transport costs driving change and threatening those interests then, one should think of internet technology doing the same now. And where one spoke of the United States then, one should think of China now (and of the United Kingdom then, the US now).
The first thing to recognize is that the late 19th century was a time of relatively high real economic volatility. While GDP growth rates were reasonable on average, they fluctuated a great deal (figures 1 and 2). The burden of adjusting these fluctuations fell primarily on labor, so unemployment rates fluctuated as well around a low average level (figures 3 and 4). Partly, this was due to the monetary regime in place at that time, the gold standard, which did not allow much room for stabilization policy by central banks (or the non-existence of a central bank in the US), so we should be able to avoid some of this real volatility in future.
That said, some of this volatility was due to the emphasis on price stability and budgetary discipline, which does apply to our current monetary arrangements. And some of this volatility was due to the incidence of real economic shocks, which also applies to our current situation (the early 2000s were a lucky respite). As seen here, the average growth rate of the lead economy (the UK then, the US going forward) was not spectacularly high, while the average growth rate of the catching-up rival (the US then, and China now) was sustained at a high though variable rate.
… Given these factors, and the shift in relative economic weights from West to East, there will be a leading global currency, but not a single dominant reserve currency – much as Sterling, dollar and franc co-existed, each with their own adherents in the 1870-1910 period. As with the gold standard, there will be temporary suspensions or depreciations by countries that face extreme short-term adjustments. But re-entry to approved monetary policies and standards will be clearly demarked, and enforced by sovereigns’ creditors. Credibility of policies compared to other monetary authorities in other currencies and economies will be a first order concern.
… The main conclusions that I would like you to take away from my claim that international economics will return for the next couple of decades to what I call the Old Normal of 1870-1910 are:
- Globalization in the form of integration of national economies and markets across borders will continue, with increasing support from important constituencies in emerging markets;
- As US hegemony, that is relative economic dominance, recedes into multipolarity, the international economic system will have less strict rule enforcement and be subject to greater economic volatility;
- The erosion of (intellectual and other) property right enforcement will have significant effects on the global division of labor, which will reinforce this multipolarity and income convergence;
- Price stability will prevail, with sharper fluctuations around low average inflation driven by real (relative price) shocks, and deflation will occur from time to time;
- More than one currency will play a global or reserve role, and the benefits in terms of lower interest rates from having such a role will diminish;
- International diversification of investment will increase, and so will the gross flows of capital, with capital accounts in the major emerging markets moving more towards balance if not deficit.
This is a tale of getting closer to unfettered markets in many ways, which I hasten to say I am solely forecasting, not recommending or endorsing. That being the case, it raises a host of potential parallels with the late 19th century in politics, regarding popular protest from labour, status quo countries coordinating against ‘revolutionary’ and non-state actors, rivalry being moved into imperial competition for markets and resources, and of course the eventual political limit to international integration that contributed to the First World War and what Harold James has called “the end of globalization.”
Domestic politics and international relations have changed far more than economics in the intervening century since 1910, given the lessons of the world wars, the spread of democracy, the development of nuclear deterrence among the major powers, the creation of safety nets and welfare states even in emerging markets, and the strong barriers against outright imperialism.
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Linear extrapolations like this are the start of the forecasting process, since trends in motion tend to stay in motion. And the past does repeat. In this case, moving back to the future — rebuilding the Gilded Age America of rising inequality, falling social mobility, and unfettered corporate power (aka “markets”). Governments as servants of plutocrats.
In this vision the Great Recession has effects like that of the Long Depression of 1873-1879, a bump on the road to the Ayn Randian rule of Nietzschean Übermensch plutocrats. That story did not end well. The Gilded Age was modified by the Progressive Era reforms, but fundamentally stopped only by the Great Depression. We could easily follow a similar path. Rolling along until pressure builds for mild reforms, followed by pressure continuing to build until our elites take us over a cliff.
The number of factors at work make for one certain forecast: interesting times ahead. But unpredictable.
- Climate change — both natural and anthropogenic factors
- Resource pressures: fresh water shortages, rising energy prices, soil erosion and exhaustion
- Demographic change: rising population, radical changes in national age profiles, continued fertility declines — then possible population collapse
- Technological changes: the robot revolution (automation doing to services what it did for farming and manufacturing), genetic engineering, perhaps even AI
For More Information
Duncan Weldon gives a critique of this speech at Touchstone (blog of the Trade Unions Congress), 8 August 2013. This speech echos Thatcher’s famous statement: Thatcher said that we have no alternatives. Progress requires that we prove her wrong., 9 April 2013.
Posts about plutocracy:
- Origins of what may become the 3rd American Republic (a plutocracy), 8 April 2011
- Why Americans should love Tolkien’s Lord of the Rings – we live there, 13 December 2011
- The new American economy: concentrating business power to suit an unequal society, 27 April 2012
- The voice of plutocrats yearning for dominance and control, 16 September 2012
- Watch as plutocrats mold us into a New America, a nation more pleasing to their sight, 18 July 2013
- Why the 1% is winning, and we are not, 26 July 2013