Monday, December 24, 2007

All English Economics Errors Contained Herein

The dangers of living in a zero-sum world economy
By Martin Wolf
Published: December 18 2007 19:02 Financial Times

We live in a positive-sum world economy and have done so for about two centuries. This, I believe, is why democracy has become a political norm, empires have largely vanished, legal slavery and serfdom have disappeared and measures of well-being have risen almost everywhere. What then do I mean by a positive-sum economy? It is one in which everybody can become better off. It is one in which real incomes per head are able to rise indefinitely.

How long might such a world last, and what might happen if it ends? The debate on the connected issues of climate change and energy security raises these absolutely central questions. As I argued in a previous column (“Welcome to a world of runaway energy demand”, November 14, 2007), fossilised sunlight and ideas have been the twin drivers of the world economy. So nothing less is at stake than the world we inhabit, by which I mean its political and economic, as well as physical, nature.

According to Angus Maddison, the economic historian, humanity’s average real income per head has risen 10-fold since 1820.* Increases have also occurred almost everywhere, albeit to hugely divergent extents: US incomes per head have risen 23-fold and those of Africa merely four-fold. Moreover, huge improvements have happened, despite a more than six-fold increase in the world’s population.

It is an astonishing story with hugely desirable consequences. Clever use of commercial energy has immeasurably increased the range of goods and services available. It has also substantially reduced both our own drudgery and our dependence on that of others. Serfs and slaves need no longer satisfy the appetites of narrow elites. Women need no longer devote their lives to the demands of domesticity. Consistent rises in real incomes per head have transformed our economic lives.

What is less widely understood is that they have also transformed politics. A zero-sum economy leads, inevitably, to repression at home and plunder abroad. In traditional agrarian societies the surpluses extracted from the vast majority of peasants supported the relatively luxurious lifestyles of military, bureaucratic and noble elites. The only way to increase the prosperity of an entire people was to steal from another one. Some peoples made almost a business out of such plunder: the Roman republic was one example; the nomads of the Eurasian steppes, who reached their apogee of success under Genghis Khan and his successors, were another. The European conquerors of the 16th to 18th centuries were, arguably, a third. In a world of stagnant living standards the gains of one group came at the expense of equal, if not still bigger, losses for others. This, then, was a world of savage repression and brutal predation.

The move to the positive-sum economy transformed all this fundamentally, albeit far more slowly than it might have done. It just took time for people to realise how much had changed. Democratic politics became increasingly workable because it was feasible for everybody to become steadily better off. People fight to keep what they have more fiercely than to obtain what they do not have. This is the “endowment effect”. So, in the new positive-sum world, elites were willing to tolerate the enfranchisement of the masses. The fact that they no longer depended on forced labour made this shift easier still. Consensual politics, and so democracy, became the political norm.

Equally, a positive-sum global economy ought to end the permanent state of war that characterised the pre-modern world. In such an economy, internal development and external commerce offer better prospects for virtually everybody than does international conflict. While trade always offered the possibility of positive-sum exchange, as Adam Smith argued, the gains were small compared with what is offered today by the combination of peaceful internal development and expanding international trade. Unfortunately, it took almost two centuries after the “industrial revolution” for states to realise that neither war nor empire was a “game” worth playing.

Nuclear weapons and the rise of the developmental state have made war among great powers obsolete. It is no accident then that most of the conflicts on the planet have been civil wars in poor countries that had failed to build the domestic foundations of the positive-sum economy. But China and India have now achieved just that. Perhaps the most important single fact about the world we live in is that the leaderships of these two countries have staked their political legitimacy on domestic economic development and peaceful international commerce.

The age of the plunderer is past. Or is it? The biggest point about debates on climate change and energy supply is that they bring back the question of limits. If, for example, the entire planet emitted CO2 at the rate the US does today, global emissions would be almost five times greater. The same, roughly speaking, is true of energy use per head. This is why climate change and energy security are such geopolitically significant issues. For if there are limits to emissions, there may also be limits to growth. But if there are indeed limits to growth, the political underpinnings of our world fall apart. Intense distributional conflicts must then re-emerge – indeed, they are already emerging – within and among countries.

The response of many, notably environmentalists and people with socialist leanings, is to welcome such conflicts. These, they believe, are the birth-pangs of a just global society. I strongly disagree. It is far more likely to be a step towards a world characterised by catastrophic conflict and brutal repression. This is why I sympathise with the hostile response of classical liberals and libertarians to the very notion of such limits, since they view them as the death-knell of any hopes for domestic freedom and peaceful foreign relations.

The optimists believe that economic growth can and will continue. The pessimists believe either that it will not do so or that it must not if we are to avoid the destruction of the environment. I think we have to try to marry what makes sense in these opposing visions. It is vital for hopes of peace and freedom that we sustain the positive-sum world economy. But it is no less vital to tackle the environmental and resource challenges the economy has thrown up. This is going to be hard. The condition for success is successful investment in human ingenuity. Without it, dark days will come. That has never been truer than it is today.

*Contours of the World Economy, 1-2030 AD, Oxford University Press 2007

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