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Friday, 18 April 2014

A tale of two half-centuries

Ethical economy: A tale of two half-centuries

The future rarely turns out as expected. Imagine, for example, two sets of economic predictions for the half-century that began in 1962. The first, the Blind Guide, is written with only the knowledge available then. The second, the Retrospective Guide, is based on what actually happened.

The biggest economic issue a half-century ago was the battle of economic systems: communism versus capitalism. The Blind Guide would have predicted a lively rivalry in 2012. True, communist countries were already falling behind economically in Europe, but political oppression would keep the system well entrenched. Besides, 50 years ago many Western experts still believed that communism’s social levelling and central planning offered poor countries the best hope of rapid economic growth.

In the retrospective volume, the future abject failure of communism has a prominent place. The decline would be slow, but the people would inevitably become increasingly disenchanted with the system’s incompetence, hypocrisy and cruelty. The will of the people ultimately prevailed.

Next comes the plight of the wretched of the earth, to use the English title of Frantz Fanon’s 1961 book on post-colonial society. Although the nascent Green Revolution in agriculture was encouraging, the blind prediction would be for another half-century of wretchedness. While the policies and practices which could eliminate abject poverty were fairly well understood, many generations would be needed to overcome the effects of colonial oppression and to spread industrial culture. In the interim, there would be social disorder, numerous wars and firmly entrenched repressive regimes.

It has not turned out that way. While the retrospective forecast calls for much shocking poverty in 2012 and some dreadful wars - Vietnam, Iran-Iraq, Congo - along the way, it also predicts tremendous improvements in living standards in most poor countries. For example, the share of global oil consumption accounted for by poor countries moved from a quarter to a half, while the proportion of young people in secondary education has more than doubled. Dictatorships have become scarcer and less secure.

The Blind Guide would also have given prominent place to the disasters expected from what Paul Ehrlich was soon going to call the “Population Bomb”. According to the Retrospective Guide, however, there was no problem. The world was about to enjoy an unprecedented combination of increased prosperity and decreasing family size. By 2012, the major demographic concern was not too many people but rapidly ageing populations - and absolute declines in such economic leaders as Japan and Germany.

Finally, in 1962 the blind view was clear: Europe was a problem. The United States and Soviet Union might avoid all-out conflict there, but the likely French rejection of the British application to join the European Economic Community (that happened in 1963) was a sign of bad things to come. Retrospectively, however, Europe was looking forward to what were definitely the most prosperous and probably the most tranquil five decades in its history.

The conventional economic wisdom of 1962 was mostly wrong. Fortunately, the errors were largely of excessive pessimism. What about the next half-century?

It would be nice to predict that more mostly good news, but such optimism might tempt fate. I would hate to predict prosperity and find calamity. Still, journalists and economists should not be afraid of looking foolish, especially posthumously, so I will hazard one bold prediction: by 2062, finance as we know it will have disappeared almost entirely.

It may take a few decades and a few more crises, but I believe that politicians and economists will eventually realise that to welcome greed throughout the financial system is akin to welcoming foxes into chicken coops. Financial greed - seen in the desire for unwarranted high returns from investments in stocks, bonds or real estate - will be seen for what it really is: an impediment to economic progress. That thought is at least as revolutionary as the idea that Europe should be peaceful. It will lead decision-makers to decide the current system is unfit for purpose. A critical look at every aspect of finance, from debts with maturities and fixed interest rates to supposedly independent central banks, will show that many instruments promise more certainty than is possible in an uncertain world. Others are too generous to financial intermediaries or are simply not suited for modern economies.

Once the old system appears to be obviously outdated, new ways will be found. Perhaps debt and its alluring promises will simply disappear, and be replaced by financial instruments which are like shares, basically permanent and always subject to losses in value. Maybe governments will stop borrowing from financial markets; they could simply print money directly to pay for deficit spending. And economic authorities in search of stability might find more potent tools than policy interest rates and crude bank regulation.

Improbable? Yes, but no more so than what actually happened in the last 50 years.

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