The Levelling

by Michael O'sullivan

  The rise of the Right, the budding of the New Left, and the disillusionment of the many are now the norm in politics. Some cultivate these trends for darker ends. Many more are in denial and hope that political volatility will disappear. This is unlikely. The fracturing of the political system in the developed world is just the beginning of a new, deep-seated trend. The aim of this book is to stand back and examine the tectonic forces acting on the world and to try to plot a way forward. Globalization, which has carried so much forward, is in retreat and will not return. Peace, in the form of the end of communism, the reunification of Germany, and the opening up of many former communist emerging economies, provided the basis for the wave of globalization we have experienced. Globalization has arguably been the most prosperous period in the history of humanity. Remarkably, it has been a period of relative calm during which there have been few wars, and no wars between democracies.

  As the tide of globalization goes out, it leaves more and more socioeconomic imbalances exposed. Some of these imbalances are caused by globalization; others are simply blamed on it. Some occur within countries, others happen between countries. Geopolitically, societies and political leaders in the old world will have to become accustomed to the rise of new countries and to the impact that rise has on relative wealth, trade, and immigration and on the shape of world institutions. Consider that in the mid-seventeenth century, India and China made up approximately 50 percent of world GDP.51 China, at least, has still not gotten over the shock of losing its perch. Voters, unlike politicians, it seems, realize that the world is at a turning point, and their behavior at the ballot box is betraying a nervous sense of foreboding.

  THREE

  WHAT’S NEXT?

  Déjà Vu All Over Again

  WE NOW LIVE IN A FRAGILE WORLD—ONE WHERE MANY SOCIAL, TECHNOLOGICAL, and physical changes are happening before us. Voters are beginning to react against the established order that has grown up over the past thirty years; imbalances like indebtedness and obesity are slowing growth; and, most importantly, globalization, the magic sauce that has made the world prosperous and relatively peaceful over the past three decades, is beginning to wither. Very soon we will want to know what comes next.

  We can turn to history for some help in thinking through an answer. For some, globalization today still has a shininess and appears very new. Many of the technological aspects of globalization are so glittering that it is hard to imagine that it has occurred before or, indeed, that we could now do without its fruits—the iPhone X, bitcoin, or artificial intelligence. But globalization does have a precedent, and it is a cautionary tale at that. Though the current wave of globalization is coming to an end, we can get a glimpse of what might happen next by going back in time to the first wave of globalization, in the period 1870 to 1913.

  Economic Consequences of the Peace

  At the turn of the twentieth century, the first wave of globalization was in full swing, and London was its epicenter. It was gripped by a consumer culture not seen before. John Maynard Keynes captured its spirit in his 1919 book Economic Consequences of the Peace:

  The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep; he could at the same moment and by the same means adventure his wealth in the natural resources and the new enterprises of any quarter of the world, and share, without exertion or trouble, in their prospective fruits and advantages, or he could decide to couple the security of his fortunes with the good faith of the townspeople of any substantial municipality in any continent that fancy or information might recommend.… Most important of all, he regarded this state of affairs as normal, certain and permanent except in the direction of further improvement, and any deviation from it as aberrant, scandalous and avoidable.1

  The world Keynes described bears a striking similarity to our own. One can imagine a twenty-first-century Keynes, sipping his morning tea in bed, speculating on commodities with iPad in hand, booking a flight to South Africa, and remotely running his stockbroking business.2 If Anthony Trollope were to find himself in our world and if he were to try to rewrite The Way We Live Now, it might very well focus on technology. His central character would be not Augustus Melmotte but an Asian woman, wearing a designer T-shirt rather than a morning suit, and she would speculate on bitcoin rather than railway stocks. Technology today is the great creator of new wealth and the primary force changing human behavior—socially, politically, and economically.

  Technology’s role in the zeitgeist is manifest in many of the more intriguing economic puzzles that confound us. It reveals itself in the role of algorithmic and computer-based trading in financial markets, in the massive changes it has enabled in how we work, and in the structure of the labor market. Moreover, technology has manifestly been the enabler of enormous structural changes in retail and consumer goods and in the rise of new financial assets from exchange-traded funds (ETFs) to cryptocurrencies.

  Keynes’s snapshot gives a sense of what globalization is: the increasing interdependence and integration of economies, markets, nations, and cultures. It also shows up the parallels between the world of the first wave of globalization and the world of today. In this respect, it is worth journeying back in time to see how globalization first formed and—importantly, given the threats to it today—how it ended and what lessons we can learn.

  Déjà Vu All Over Again

  One of the defining markers of the nineteenth- and early-twentieth-century period of globalization was the way in which prices of the same goods in different parts of the world converged. Take commodity prices as an example: London to Cincinnati price differentials for bacon fell from 93 percent in 1870 to 18 percent in 1913, the London to Bombay cotton price spread fell from 57 percent in 1873 to 20 percent in 1913, and the London to Rangoon rice price spread fell from 93 percent to 26 percent over the same period.3 Other parts of the world saw similar balancing out in prices. Ronald Findlay and Kevin O’Rourke’s exceptional book on trade, Power and Plenty, notes, “Between 1846–55 and 1871–79 the price of raw silk rose by 50% in Japan, where it had been relatively low, but climbed by just 19% in world markets, while the price of cheap tea rose by 64% in Japan and just 10% elsewhere.”4 Findlay and O’Rourke’s book is a life’s work from two top-level economists and should be required reading for those pondering how the rise of nations is intertwined with trade flows. Memorably, they note, “The greatest expansions of world trade have tended to come… from the barrel of a Maxim gun, the edge of a scimitar, or the ferocity of nomadic horsemen.”5 Ominously, so have the greatest economic contractions.

  Echoing this, thanks to advances in technology (especially transport via boats and trains), during this early period of globalization costs fell dramatically in much the same way as communications, travel, and business process costs have been disrupted over the last twenty years. Consider a few examples: the process of surfacing roads developed by John McAdam meant that it took thirty-six hours to travel from Manchester to London in 1820, compared to five days in 1780; the expansion of canal networks across the world greatly facilitated transportation by steamer; and the opening in 1869 of the Suez Canal, over one hundred miles long, “brought Asia 4,000 miles nearer to Europe.”6

  Against this backdrop, the level of world trade surged, so that by 1913 merchandise exports as a share of GDP in Western European economies reached a level of 17 percent, up from 14 percent in 1870 (subsequently falling to around 6 percent by 1938 and rebounding to above 17 percent again in the 1990s).7 Similarly, the fantastic power that capital markets seem to wield today makes it difficult to appreciate that the financial world could have been anything as developed as it is now. Yet a number of countries (especially those outside the United States) were more financially developed in 1913 than they were in 1980.8 For instance, in proportion to GDP, the market capitalization of the French stock market was nearly twice that
of the United States in 1913 but had fallen to a quarter of it by 1980. Stock market data for the past hundred or so years also shows how the fortunes of various countries have changed: in 1900 the UK stock market made up one-quarter of the value of all equities globally, with the United States making up 15 percent. Today the United States is 51 percent of world equity capitalization and the United Kingdom is only 6.3 percent. In 1900 Belgium made up 3.5 percent of world equities and France had 13 percent; today, in late 2018, France has dropped to 3 percent, and Belgium is barely visible.9 Today China has 3.1 percent, and if in the twenty-first century its financial markets develop like those of the United States in the twentieth century, the size and depth of its financial markets will grow quickly.10

  Generally speaking, the development of financial markets over the course of the last hundred years reached its nadir in 1980, from which point it has increased toward and beyond the levels of development seen at the turn of the last century. Yet a lesson to today’s highly globalized countries (like Singapore and Ireland) is that the countries that were the most financially developed in 1913 (such as Argentina) did not necessarily remain so. Argentina is an interesting country, not least from the point of view of its economic history, having defaulted on its debt eight times since independence in 1816. In 1924 the GDP per capita of Argentina was seven times that of Brazil (today it is 1.5 times Brazil’s) and three times that of Japan (it is only 50 percent of Japan’s today). It was one of the richest countries in the world, a center for finance, trade, and agriculture. Many of the buildings that still adorn Buenos Aires, such as its Opera House, date from that period. However, Argentina did not follow the lead of other economic powers in diversifying its economy toward manufacturing, nor did it make its agriculture sector competitive and open. As a result, the onset of the Great Depression exposed its structural weaknesses (meat exports to Europe collapsed by over two-thirds from 1924 to 1930) and the rigidity of its political system.

  Seen It All Before

  There are many parallels between the first wave of globalization and the current one, the most important being the rise in trade, the growth of financial systems, and the rapid diminution in the cost of doing business as transportation and communication costs dropped. It is also interesting to note that stock market bubbles arose during both periods of globalization, driven by the advent of new technologies. In the early twentieth century it was primarily the railway, telephone, and radio stocks that led the rise in share prices. In 1900, over 60 percent of the market capitalization of the US stock market and 50 percent of the UK market was made up of railway stocks, which have all but disappeared today. In 1999 information technology was the chief culprit, followed by the financial sector in 2008. Cryptocurrencies are the new “railway stock” in that respect.

  Still, there are crucial differences between the two periods. Chief among them is the fact that today more countries and more people are touched by globalization, and in most cases they are better off as a result. The roles of multinational corporations and foreign direct investment (FDI) have been much greater since the late 1980s than they were in the late nineteenth century. In general, the period 1870–1913 saw foreign direct investment flowing mainly from developed countries to other developed countries, whereas now more FDI has flowed from developed to developing countries. In addition, the state of the world before the first period of globalization was different from that before the second: Before the first period of globalization, the entire world was poor and agrarian. When the second wave began, it was sharply divided between rich and poor nations. Globalization today has a much greater reach. This is partly due to the facts that, compared to the early twentieth century, more people than ever before enjoy electoral franchise of some form, and people are much better connected in terms of telecommunication and social media penetration and related factors, such as the rise in urbanization.

  Advances in technology now occur more rapidly and, in fields like telecommunications, they have sped up the transfer of ideas and information and made globalized forms of production more feasible. Corporations have grown in size and influence over the last hundred years, to the extent that corporations are the dominant force behind globalization today. As a result, there are now far many more global products or brand names than there were in the period 1870–1913. Fiat, Hoover, General Electric, and Sunbeam were established then, and Gucci, BMW, and Ford were only getting started.

  A final difference between globalization now and in the nineteenth century is the growth of institutions and transnational governance. Though the nation-state is still very much a viable entity, power is increasingly placed in the hands of unelected policy makers. This shift is reflected in a number of quarters, such as the standardization of banking regulations and of accounting and financial measures. Institutions have taken over the role played by the gold standard, the Pax Britannica, and the ideological consensus that prevailed in the nineteenth century, which gave structure to the world order and acted to channel its various geopolitical and economic crises. Until recently this sense of structure has been manifest in bodies like the WTO, the Federal Reserve, the United Nations, the European Union, or the IMF and has, broadly speaking, been beneficial in preventing and resolving crises, and in particular in placing a premium on negotiating skills rather than military power. These same institutions are now under scrutiny in a changing world, and in many cases (e.g., the WTO) they are becoming less relevant as countries like the United States circumvent the procedures and rules they themselves have put in place.

  Against this cheery backdrop, the really important lesson of nineteenth-century globalization is how it came apart. In 1909–1910, the writer Norman Angell published a book entitled The Great Illusion in which he argued that the world was so intertwined economically that war was unlikely (i.e., it would be too costly). He was wrong on this front, though his warnings about the growth of great navies in Germany and Britain resonates today. However vibrant globalization was at the turn of the twentieth century, burgeoning levels of trade, finance, and technological advances (in transport and communications) soon led to imbalances in the European, Latin American, and American economies, which in many cases were dealt fatal blows by poor policy making.

  Economic openness quickly gave way to protectionism and the application of tariffs. The rise in poverty and unemployment that was brought about by inflation in the price of goods and deflation in asset prices forced an eventual response from governments that had come to fear the greater say the poor had in politics because of the expanding electoral franchise. Whereas small government had previously been in vogue (in 1912 government expenditure in developed countries was about 13 percent of GDP), governments were now expected to spend and protect their way back to prosperity. Thus, protectionism, economic decline, nationalism, and finally war brought down the curtain on the first period of globalization.

  In many corners of the world, the Great Depression that followed the end of globalization ushered in an economic dark age that only ended with the fall of communism and the resurgence of globalization as we now know it. Some of the political trends we see today—the apparent rollback of liberal democracy, the rise of populist nationalism, and the emergence of strongmen leaders—creates a tension that has many fearing a repeat of the 1930s. Is this—the Great Depression, its international political consequences, and yet another world war—to be our fate?

  Overreaching

  The global financial crisis of 2008 did not end in an economic depression, though neither has it produced a true economic renaissance. Many of the factors that caused the crisis in the first place—indebtedness, corporate risk taking, and poor governance—have simply been in abeyance, hibernating, and are now again emerging into the daylight. A consequence of these persistent economic fault lines is that we are in a political depression. In this light, some respected commentators—notably, Madeleine Albright in her book Fascism: A Warning—draw parallels between political figures today and those of the 1920s and ’3
0s.

  Today there are certainly economic and political parallels with the late 1920s. For instance, there are already many who compare Donald Trump, the US president as of this writing, to Herbert Hoover (president from 1929 to 1933). Hoover distinguished himself in various ways, notably in his humanitarian work in Belgium, with the US Food and Drug Administration, and in Central Europe in the aftermath of the First World War. In other ways, he has several things in common with President Trump: German/British parentage, a business background, and a mastery of new communications channels, in Hoover’s case the use of radio (rather than Twitter) to reach voters and the introduction of the press conference as a regular political event.