naked capitalism

Martin Wolf, the Financial Times’ highly regarded economics editor, looks at a fundamental and troubling issue in his latest article, “The dangers of living in a zero-sum world economy.”

From the Industrial Revolution onward, the world has enjoyed economic growth, producing rising living standards and making possible an extension of democracy (Wolf argues that the elites would not have tolerated the loss of their privileges had they not made considerable material gains). But resource constraints, particularly energy, and the need to combat global warming, may lead to a low-growth/no growth global economy which will lead to political stresses, “a world characterised by catastrophic conflict and brutal repression.”

In a short piece, it’s hard to do justice to as big an idea as Wolf advances, and he therefore leaves himself open to dispute. One of his big assumptions is that greater world prosperity leads to fewer wars:

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

Take out the bit about nuclear weapons, and you have the world view as of summer of 1914. Prosperity did not prevent two world wars with greater devastation than anything that had preceded it, precisely because industrialized economies can prosecute war on a grander, more deadly scale. And the role of nuclear weapons as deterrents is debatable. Jonathan Glover’s book Humanity, which looks into why the horrors of the 20th century came about, also dissects how the Russian missile crisis was averted. He attributes it to two factors: the recent publication of Barbara Tuchman’s The Guns of August, which made clear how World War I was the result of failed communications and rigid assumptions, and a half-day briefing the new President and his key lieutenants received on the horrors of nuclear war. In fact, a gripping passage reveals how Dean Rusk had to go to some lengths to rein in the Navy, which was overly eager to engage the Soviets.

Similarly, the US threat to use nuclear weapons against Iran is a dangerous bit of saber-rattling, and may encourage the use of tactical nuclear weapons, independent of the trajectory of world growth. We may also be near the tipping point where nuclear proliferation (which can likely only be delayed rather than halted) is a destabilizing force.

For rhetorical purposes, Wolf sets up two straw men: the optimists, who believe growth is an imperative and can continue, and the pessimists, who think growth must halt to save the environment (Wolf chastises those who think grappling with the new problems of distributing a static pie will lead to a better society; per above, he believes it will simply produce more fighting). While Wolf favors a compromise, he fails to acknowledge that we may lack a choice as far as growth is concerned. Jared Diamond, in his book Collapse: How Societies Choose to Fail or Succeed, looks at past cultures that have perished. Ecological mis-management, combined with failure to address the looming crisis, is the most common culprit. Diamond believes advanced civilization is currently facing a dozen potential train wrecks (did you know topsoil was on the list?), and failure to address all of them will lead to disintegration. So we may have fewer degrees of freedom than Wolf assumes.

While Wolf makes social and democratic progress sound tidier and more linear than it actually was (these battles were bloody and hard won), it is fair to say we’ve enjoyed considerable gains, despite the disruption. But we’ve poured much of our collective energy into material progress, rather than in figuring out how to get along and manage ourselves better. Biologist E.O. Wilson describes humans as “meat eating primates” and in many ways, we haven’t learned to surmount deeply rooted tribal impulses.

It has now become popular to let the private sector run in as untrammeled a fashion as possible, yet when things get tough, we turn to the government to act as arbiter and problem-solver (exhibit 1: the subprime crisis). The very skill our society has held in poor esteem, that of governing, is going to become increasingly vital.

From the 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