The world economy developed as
the result of increasing economic openness around the world and the fostering of
connections between enterprising people. Will policymakers continue to embrace
this approach, or are we likely to enter an increasingly “closed” era of
retrenchment? I recently discussed this, and much more, with Philip Coggan.
Phillip is a business journalist, news correspondent, and author who has written for The Economist since 2006, where he writes the Bartleby column covering management and work. Before that, he worked for The Financial Times for 20 years. His latest book, More: A History of the World Economy from the Iron Age to the Information Age, was released in March of this year.
Pethokoukis: What have been the key
developments that enabled the global economy to transform from one of
widespread poverty to the unprecedented wealth we have today?
Coggan: I think the underlying mechanism is connections between people. Long-distance trade expanded in the 15th century, which expanded our diets and enabled us to exploit technological innovations. Thanks to technologies like printing and transportation improvements (i.e., sailing, steamships, and trains), these innovations could be spread all over the world, further spreading connections throughout the global economy.
Innovation and connections go together because the more people you have involved in a network, the more the chances that one of them will have a bright idea and spot something that the others haven’t seen. Then the others can be made aware of that idea and exploit it themselves. It’s the ability to make connections with the other billions of people around the planet that has made us more prosperous.
A lot of people think the United States went off track when we opened up to more trade and immigration — that our openness has been a bad thing. Do you disagree?
Yes. Look at the difference between American attitudes post-1918 and post-1945. After 1918, America moved into isolationism, withdrew from the League of Nations, and enacted tariffs once things started to go wrong. So we had the Great Depression in the 1930s.
Meanwhile, after 1945, American bestrode the economic world like a colossus, and it made the far-seeing decision to offer Marshall Plan aid to Europe, realizing that this would create an enormous market for American goods. The result was 25 to 30 years of fantastic economic growth around the world. And America also took part and safeguarded Europe from the threat of communism and the Soviet Union — an incredibly wise piece of altruism.
However, risk comes when you get an emerging power that challenges you economically, which China is doing now. The same thing happened if you go back to the early 20th century, with Germany emerging as both a military and economic threat to Britain. It’s less easy to be altruistic and keep the drawbridge down when you’re facing that kind of challenge. That’s the worry going forward.
Was it a mistake for the West to usher China into the world economy? And is their version of authoritarian capitalism the future?
I don’t think it was a mistake. It could have been done differently — in a way that tied China more into obeying trade rules and respecting intellectual property. But a billion people came out of poverty in the last 20 years as a result of China opening up, so it’s hard to see that decision as a mistake. It’s also worth thinking about what has happened in the last 30 years: China has sold America a lot of cheap goods, and America has paid back China in debt (in dollars), which currently yields less than 1 percent for 10-year treasury bills in a currency that America controls. So you might argue: Who’s actually getting the worst of that bargain?
And while China’s authoritarian capitalism appeals to some countries, I don’t think it’s a better way. Great gains in growth are made when economies are developing, because you’re moving workers from low-productivity areas like agriculture into high-productivity areas like manufacturing. But eventually, you reach the stage where you’ve exhausted all the gains from moving people from agriculture into industry, and you’ve probably over-invested in some sectors and become inefficient. That’s when growth starts to struggle.
In the 1980s, we had similar concerns about Japan, and then they suddenly hit a wall. So at some point, China will run into its own problems too, especially since their workforce is aging quite quickly, unlike plenty of other countries in the developing world. It’s much harder to grow your economy when that starts to happen.
I’m concerned that we’ll come out of this pandemic as a more risk-averse society, where we won’t be trying out as many new business models or innovating. But we might also be made less risk-averse by the pandemic because we see the importance of being a rich, technologically advanced society. At this point, which do you think is more likely?
It’s a very good question. Generally, crises tend to accelerate changes that were already trending. We’ve seen that already with online retailing, which has had a huge lift out of this crisis — as has the cashless society. The economy will also change from people’s discovery that they could work from home and be equally productive. If this continues, businesses will move to supplying people in their local area, rather than relying on them to commute into cities every day. So I’m hopeful, though far from certain.
It depends on the political reaction. If we say, “We imported this virus, so everything from abroad is terrible,” that will be really bad. But populism doesn’t necessarily grow exponentially. Look at populist governments around the world — Brazil has not handled the pandemic very well, for instance. So if you have signs that populism isn’t always efficient, then people might return to understanding that a good government involves cooperating with other countries.
Are we in a period of “late capitalism,” or are we entering a period of transformation into something that will still be very recognizable to people who’ve been alive for the last half-century?
I think it’s the latter. I take that more optimistic view. I grew up in the seventies when we also seemed to face an enormous crisis with stagflation, strikes, terrorism, and two oil crises, yet that was followed by a renewal in the 1980s and the sudden surge in productivity in the late 1990s, which showed that we could generate more productivity despite people talking about late capitalism. So renewal can be done again, but the risk is that we turn inwards politically and stop that from happening — doing exactly the same as people did after 1914. So if I have helped people understand that trade is not a zero-sum game and that immigration has brought enormous benefits, then this book will have served some purpose.