These 3 challenges are threatening to shake up economics

by Harold James, Apr 10, 2018

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Economic and financial issues nowadays tend to be discussed in intellectual silos, by specialists who give little mind to security concerns or the interplay between national and international objectives. But sooner or later, economists will realize that global security demands a new approach, just as it did in the interwar period.

Now that the world is facing a trade war and the growing possibility that the West could find itself in a real war, we would do well to reconsider the lessons of the interwar period.

Many of today’s economic and security disorders are frequently attributed to the 2008 global financial crisis. In addition to exposing the flaws in conventional economic policies, the crisis and its aftermath accelerated the global rebalancing from the Atlantic to the Asia-Pacific region, while fueling political discontent and the rise of anti-establishment movements in the West.

Likewise, the Great Depression of the 1930s is usually thought to have produced a seismic shift in economic thinking. According to the conventional narrative, policymakers at the time, having vowed never to repeat the errors that led to the crisis, devised new measures to overcome their economies’ prolonged malaise.

The conceptual and institutional reordering of economics that followed is usually credited to one towering figure: the British economist John Maynard Keynes, who published The General Theory of Employment, Interest, and Money in 1936. Keynes also orchestrated the 1944 Bretton Woods conference, which led to the creation of the World Bank, the International Monetary Fund, and the post-war global monetary order.

According to Keynes’s collaborator and biographer Roy Harrod, Keynes enjoyed a god-like presence at the Bretton Woods talks. But some of Keynes’s other contemporaries, notably the British economist Joan Robinson, always doubted that he deserved so much credit for ushering in the new order.

After all, the real reason that Keynesian thinking took hold was that its method of calculating aggregate consumption, investment, and savings proved invaluable for American and British military planning during World War II. With consistent national accounting, governments could make better use of resources, divert production from civilian to military purposes, and curtail inflationary pressures, thereby maintaining consumption and staving off civil unrest.

The same tools turned out to be just as useful in reorienting the post-war economy toward higher household consumption. But the point is that the revolution in economics, followed by the economic miracles of the post-war era, was a product of wartime calculation, not peacetime reflection. Pressing security concerns and the need to ensure domestic and international stability made policymakers more willing to challenge longstanding economic orthodoxy.

This era holds important lessons for the present. Nowadays, many economists complain that the financial crisis did not prompt a serious rethinking of conventional economics. There are no modern-day equivalents to Keynes. Instead, economic and financial issues tend to be discussed in intellectual silos, by specialists who give little mind to security concerns or the interplay between national and international objectives.

Still, as in the interwar period, there are security threats today that will make rethinking economic assumptions necessary, if not inevitable. Though the financial crisis did not lead to a holistic intellectual reckoning, three broader challenges to the liberal international order since 2016 almost certainly will.

The first challenge is the existential threat of climate change, which will have far-reaching geopolitical consequences, particularly for areas already facing water shortages, and for tropical countries and coastal cities already experiencing the effects of rising sea levels. At the same time, some countries will enjoy temporary gains, owing to longer growing seasons and increased access to minerals, hydrocarbons, and other resources in polar regions.

The world’s greenhouse emissions. Image: CAIT Climate Data Explorer
Ultimately, reducing the amount of greenhouse gases in the atmosphere will serve the common good. But, without an international mechanism to compensate those most at risk of a warming planet, individual countries will weigh the trade-offs of reducing greenhouse-gas emissions differently.

The second global challenge is artificial intelligence and its foreseeable disruption of labor markets. AI threatens not just employment but also security, because it will render obsolete many technologies that states use to defend their populations and deter aggression. It is little wonder that larger powers like the United States and China are already racing to dominate AI and other big-data technologies. As they continue to do so, they will be playing an increasingly dangerous and unstable game, in which each technological turn could fundamentally transform politics by rendering old defenses useless.

The third challenge is the monetary revolution being driven by distributed-ledger technologies such as blockchain, which holds out the promise of creating non-state money. Since Bretton Woods, monetary dominance has been a form of power, particularly for the US. But alternative modes of money will offer both governments and non-state actors new ways to assert power or bypass existing power structures. Cryptocurrencies such as Bitcoin are already disrupting markets, and could someday alter the financial relations on which modern industrial societies are based.

In the new political geography, China, Russia, India, and others see each of these challenges as opportunities to shape the future of globalization on their own terms. What they envision would look very different from the model of the late twentieth century. China, for example, regards AI as a tool for recasting political organization through mass surveillance and state-directed thinking. By replacing individualism with collectivism, it could push global politics in a profoundly illiberal direction.

Fortunately, there are alternative paths forward. In rethinking economics and security, we will need to develop an approach that advances innovation within a framework of coordinated deliberation about future social and political arrangements. We need to apply human imagination and inventiveness not only to the creation of new technologies, but also to the systems that will govern those technologies.

The best future will be one in which governments and multinational corporations do not control all of the information. The challenge, then, is to devise generally acceptable solutions based on cooperation, rather than on the destruction of competing visions.