Monthly Archives: January 2007

The world’s economy is in excellent shape, but its politics is disturbing. This contrast, discussed by Lawrence Summers in his column of December 26 2006, was also a focus of last week’s annual meeting of the World Economic Forum in Davos. The question is whether and how this divergence might end. The facts seem clear: the world economy is in a golden period of broadly shared growth, high profits, modest real and nominal interest rates and low prices for risk. It has, on its way, adjusted with some ease to a series of shocks: the stock market crash after 2000; the terrorist outrages of September 11 2001; wars in Afghanistan and Iraq; friction over US policies; a jump in real oil prices to levels not seen since the 1970s; the cessation of negotiations in the Doha round; and the confrontation over Iran’s nuclear ambitions. It has coped, as significantly, with China’s and India’s economic resurgence. This list of shocks is itself partly a consequence of the political pressures: protectionist sentiment, turmoil in much of the Islamic world and nuclear proliferation. To this should be added the damaged moral authority of the US and its failure hitherto in Iraq, the discredit into which many of the world’s leaders have fallen, Russia’s slide into plebiscitary dictatorship, the political stagnation of the European Union and the inability to create a global regime for dealing with climate change. The remainder of Martin Wolf’s column can be read here ( subscribers only). Discussion from our guest economists is free.

By Lawrence Summers The 20th century was shaped by developments in the physical sciences. Issues of national and international security were transformed by the revolution in solid state physics that allowed mankind to take flight and split the atom. Advances in our understanding of physics also led to the development of the transistor, the semiconductor and ultimately to the information technology explosion that transformed economic life. The 20th century was an American century in no small part because of American leadership in the application of the physical sciences. While the foundational ideas of relativity and quantum mechanics were developed in Europe, the practical application of these ideas occurred in the US. If the 20th century was defined by developments in the physical sciences, the 21st century will be defined by developments in the life sciences. Lifespans will rise sharply as cures are found for chronic diseases and healthcare will come to be a larger share of the economy than manufacturing. Life science approaches will lead to everything from further agricultural revolutions to profound changes in energy technology and the development of new materials. The “drugs that help you study” that are now pervasive on college campuses are just a precursor of developments that will make it possible to alter human capacities and human nature in profound ways. Read more

Why did the economies of continental Europe fail to converge on the US after their brilliant post-second world war resurgence and then, more recently, start falling behind again? Why are they mired in high unemployment? What do these facts tell us about their economic model? Last year’s Nobel laureate, Edmund (Ned) Phelps of Columbia University responds by arguing that continentals have chosen the wrong system: corporatism. As Prof Phelps noted in his Nobel lecture, he starts from a rejection of orthodox neoclassical economics. This, he insists, abstracted from the “distinctive character of the modern economy – the endemic uncertainty, ambiguity, diversity of belief, specialisation of knowledge and problem solving”. A central distinction, argues Prof Phelps, is between capitalism and corporatism. By capitalism, he means a system of free enterprise that embraces and motivates entrepreneurship. By corporatism, he means a system in which businesses have to negotiate change with the government and “social partners”. The remainder of Martin Wolf’s column can be read here ( subscribers only). Discussion from our guest economists is free.

Is the discipline of economics built on sand? Most economists would answer with a resounding “no”. But most must also know that the economy is not characterised by perfect foresight and equilibrium, but by trial and error and evolution. That was the intuition of the Austrian economists, Joseph Schumpeter and Friedrich Hayek. But this vision has had next to no influence in the discipline itself. This gap between how economists think and what economies are is evident to any careful observer. But hitherto nobody has closed the gap between rigorous theory and broad vision. This, argues McKinsey’s Eric Beinhocker in a brilliant, thought-provoking and wide-ranging book, published last year, is about to change.* Welcome, he argues, to the world of “complexity economics”, computer-based simulations and more realistic assumptions. Mr Beinhocker has a measure of the complexity of the modern economy – the number of distinct products, or “stock keeping units”. In a stone-age culture the number was a few hundred. In today’s New York, he suggests, the number may be 10bn. Moreover, not just most of those products but the complex system that invented, designed, produced and sold them is largely the result of just the last 250 years out of 2.5m years of human evolution. The remainder of Martin Wolf’s column can be read here ( subscribers only). Discussion from our guest economists is free.

What is going to happen to the world economy this year? The most important points on the short-term outlook were made by my colleague, Wolfgang Münchau, last week (“The good, the bad and the ugly scenarios for the year ahead”). Let us ask, instead, a bigger question: how strong and sustainable is the underlying dynamic of the world economy? As Lawrence Summers noted in his most recent column (“A lack of fear is cause for concern”, December 27), the world economy in aggregate grew more during the past five years than in any five-year period since the second world war. Growth is not merely strong. It is also widely shared. In 2006, according to the World Bank’s Global Economic Prospects, the economies of the high-income countries probably grew by 3.1 per cent, with the US achieving 3.2 per cent, Japan 2.9 per cent and even the sluggish eurozone 2.4 per cent. Meanwhile, the economies of the developing countries, led by the rising giants, China and India, expanded by 7.0 per cent, after 6.6 per cent in 2005 and 7.2 per cent in 2004. This performance has occurred in spite of significant economic and political shocks: the collapse of the stock market bubble in 2000, the terrorist attacks of September 11 2001, wars in Afghanistan and Iraq, the continued uncertainty about future large-scale terrorism, the jump in oil prices, protectionist rhetoric in a number of high-income economies and a breakdown in the Doha round of multilateral trade talks. The remainder of Martin Wolf’s column can be read here ( subscribers only). Discussion from our guest economists is free.