EXCERPT: Outrageous Fortunes
The global economy is changing more quickly than ever before in its history. The technologies that have made it more integrated–primarily those that have improved transportation and the exchange of information–continue to develop, and the number of interactions among people from all parts of the world is growing exponentially. These changes are having a profound effect on our lives. In the past two decades, we have seen hundreds of millions of people escape poverty, but we have also seen a severe deterioration in our natural environment and the bursting of huge financial bubbles.
Despite the refinement of economic policies designed to manage the business cycle, the volatility of commodity prices, trade flows, government budgets, and many other important indicators of the global economy continues to increase. As a result, it is easy to get caught up in the stream of numbers that spew out every second and to lose sight of the long term. That’s a problem for our future. Personal fortunes may be gained and lost in a day, but national fortunes are gained and lost because of deeply ingrained economic factors that take years to develop and, if necessary, to change. Certainly, idiosyncratic events can push countries to one side or the other of their long-term economic paths. But over the course of decades, those paths tend to be determined by economic factors with very deep roots indeed.
These deep factors do not necessarily explain why stock markets rise and fall in the course of a single day, hour, or minute, but they do set limits on the material standards of living that an economy can achieve. If the pursuit of economic growth is a race, then these factors determine the location of the finish line. Because the finish line can often seem very far away, however, they do not receive very much attention in the daily pronouncements of pundits, politicians, and even people who know a little bit of economics.
This book aims to change that. It begins by explaining how, over long periods of time, countries with similar deep factors tend to reach similar limits of growth and prosperity. Those limits will start to bind, perhaps sooner rather than later, for the current darling of the global economy, China. China’s rapid growth–and the notion that this growth will continue for decades to come–has attracted investment from around the world. Yet its long-term prospects are not as rosy as investors might hope. The European Union has also been a popular target for investors because of its political stability, its huge internal market, and the potential of its newer Eastern members. Its euro currency has given central banks, sovereign wealth funds, and other major investors a long-awaited alternative to the dollar. But all is not well in the Union, nor in the euro area, both of which are beginning to fall apart because the member countries are facing different limits to growth.
As countries strive to reach their limits and offer their citizens the highest possible living standards, they will come upon a series of obstacles. Their economies need resources–both natural and human–as well as a certain measure of stability. In the coming decades, many countries will face shortages of all three of these items, and those shortages will slow their headlong dash toward the finish line. Some countries will colonize others in a bid to secure the natural resources their economies need to grow: raw materials for manufacturing, crops to feed workers, fuel, and water. This time, the colonial conquests will be achieved through monetary rather than military means, but the results will likely be counterproductive for both the colonizers and the colonized. Rich countries, with their aging populations and low fertility rates, will change their immigration policies to draw in more workers from around the world. Even as poor countries develop, it will be harder for them to hold on to their most productive citizens. Meanwhile, many countries that have embraced left-leaning populist governments in recent years will first shift to the right, then continue to swing back and forth like political pendulums. The resulting regime changes will slow their economic growth–an unfortunate reality, since growing may be the only way to settle the pendulums down.
In the midst of these limits and obstacles, there will also be new opportunities. As the booms fueled by technology and cheap credit in the 1990s and 2000s fade into the background, Americans will be looking for new sources of jobs and income. They will find some of them in an unexpected place, drawing on a little-recognized but fundamental pillar of their nation’s economic success: selling power. The restructuring of the global economy–ever more intertwined, ever more digital–will also allow workers to seize new opportunities by straddling two or more markets at a time and acting as gatekeepers of profit. Changes in how people work will lead them to change where they work as well; in the future, a growing class of mobile professionals will populate a new set of economic hubs founded on lifestyle choices rather than business imperatives. And the slow collapse of the World Trade Organization will actually allow countries to pursue freer trade, opening up new gains from doing business abroad.
Despite the opportunities it presents, the road to growth is not always smooth. Even if a country manages to avoid the obstacles along its particular path, there are still risks that affect everyone in the race. The recent financial crisis showed that negligence, malfeasance, and herd behavior in a couple of financial centers can stunt growth around the world, setting some countries back years in their pursuit of higher living standards. One result of the new regulatory framework facing the world of finance will be the blossoming of an enormous black market whose presence will bring new risks to the global economy. At the same time, climate change–often touted as an opportunity for new industries in rich and poor countries alike–will actually separate these countries even further, creating a threat of instability that could hamper growth in both. To solve these problems, countries will have to work together. Yet the political institutions that provide the framework for global problem-solving may not be up to the task.
Even generalists have their areas of strength and weakness, so this book does not take on every pressing economic issue. Other writers are better equipped to predict which fuel will power the transport of the future (indeed, some already have), which super- and semi-conductors will carry the global economy’s data, and whether that mode of transport and those data will help humankind to develop the resources of the moon, other planets, or faraway galaxies. The task of prediction is difficult enough without venturing so far afield in so many different directions.
Only recently, in fact, have economists truly begun to understand just how difficult prediction is, both at the individual level and for an entire economy. Through the 1960s, as the science of economics lurched toward maturity, an implicit part of many economists’ predictions was the notion that people would make the same mistakes time and again. For example, if consumers saw a big increase in their salaries, they might take it as a signal of bigger buying power, even if the raise was always followed by an increase in prices for the things they liked to buy. In the 1970s, a new school of economics began to hold sway. It was based on the opposing idea that people were too rational to make the same mistake twice; consumers might be fooled by the raise the first time, but the second time they’d wait to see if inflation would erase their apparent gains. This new school dominated economic thought for a couple of decades, before another revolution in economic thinking came along in the waning years of the twentieth century: behavioral economics. The behavioralists, sitting at the intersection of economics and psychology, saw that people might seem rational at a moment in time but were not always consistent over the long term. They asked why people deliberately did things that they regretted in retrospect, and why people could not always commit themselves to act in a certain way in the future. No behavioralist would be surprised if people who understood inflation perfectly well went out to spend part of their raise. Unlike the economists of the 1960s, though, the behavioralists didn’t think these people were being fooled by their raises. Instead, they probably thought these people could not resist the temptation to spend, perhaps figuring that they would scrimp in the future to make up for it–but only if they had to.
For several decades, economists have realized that simply extrapolating trends is not the best way to predict the future (though this does not stop many from continuing to do it). The move toward behavioral economics has helped to make sense of some economic trends, especially those that change suddenly as mob psychology or hysteria takes over. Nonetheless, economics still isn’t very good at forecasting those sudden changes, either in their direction or their timing.
This is partly because economists still don’t completely understand how people’s minds work, but it’s also because they often focus on the wrong things. A huge chunk of the world’s economic brainpower is focused on the financial markets, where the typical time horizon ranges from a few minutes to three months. Whether it’s a snap trade to offset risk in a derivatives market, or a prediction of a company’s quarterly earnings, there’s not much thinking about the long term. Even the more academic economists who work at places like the World Bank and the Organization for Economic Cooperation and Development usually think about the long term as a period of just five or ten years. For this reason, they often neglect the deep factors that really move the global economy over the course of decades.
Yet those deep factors are the most important ones. They will determine whether entire generations–hundreds of millions of people–live better or worse than their predecessors. The deep factors’ origins lie in geography, climate, culture, politics, and historical accident. They are so powerful that they can swamp the effects of thousands of discrete events that may seem hugely important when they occur, such as the bankruptcy of General Motors or the re-election of Hugo ChvÂ°vez as Venezuela’s president.
Some economists, to whom I will refer later in the book, have begun to study these deep factors, for instance, by tracing how the systems of government set up by colonial powers in the eighteenth and nineteenth centuries have affected the scope of financial markets in the twenty-first. But by and large, these important forces are still neglected and poorly understood.
The first task of this book is to rectify that situation, by refocusing economic prediction on the very long term–decades away–and concentrating on the deep factors that will influence that future. That said, I do not presume to be the economic Nostradamus; economics is hardly an exact science, and since economists have at best an imprecise understanding of the world around them, it would be unfair to expect their predictions about the future to be anything other than educated conjecture. Moreover, the further you look into the future, the more difficult prediction becomes; for each moment you extend a forecast, the level of uncertainty rises sharply, since so many more events and actions can interact to change the outcome. Graphs of the forecasts for government budgets, for example, often take the form of a wide-open set of jaws rather than just a single line, because the actual budget could fall anywhere between the two jaws. The area of uncertainty grows with each year added to the projection.
And there is one more complication: predictions about the future may become public, and, when they do, the predictions themselves may affect the future. Economists thus face a kind of uncertainty principle similar to the one proposed by Werner Heisenberg for the physical realm. Heisenberg posited that the more precisely you measured the location of a particle, the more difficult it was to tell where that particle was going, and vice versa. Similarly, the more precisely you predict the future of the global economy, the less likely it may be that the future will conform to your prediction.
This principle need not be disheartening, however, and it certainly does not invalidate the premise of this book. I am fond of recounting a conversation I had with a college roommate over a meal in our dormitory’s dining hall. Pointing out the imprecision of economic science, he put it to me that economists’ predictions were no better than glorified weather forecasting. In the end I had to agree, but I pointed out to him that a weather forecast that’s correct 70 percent of the time is much better than no weather forecast at all.
In fact, a frequent goal of prediction is to alter the future–to warn of impending danger so that it can be avoided. If you’re driving a car along a country road and your passenger says, “Watch out for that cow!” then presumably you’ll swerve instead of seeing whether your fan belt can slice up some brisket.
If this book does alter the future, not just by allowing its readers to avoid perils and seize opportunities but also by encouraging them to work against those perils and to enhance those opportunities, then it will have more than served its purpose. I hope readers will begin to think about the deep factors that shape the global economy, not just to expand their horizons but to expand their time horizons as well.
Excerpted from Outrageous Fortunes by Daniel Altman.
Copyright 2010 by Daniel Altman
Published in 2010 by Henry Holt and Company
All rights reserved. This work is protected under copyright laws and reproduction is strictly prohibited. Permission to reproduce the material in any manner or medium must be secured from the Publisher.
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