‘The World in 2018’ is a world full of concerns about the future, yet a world that seems to be getting slightly more optimistic about its economic prospects. Ten years after the onset of the financial crisis, there are hopes that the global economy may have turned the corner and could finally be starting to pick up after years of slow growth. Are we seeing light at the end of the tunnel – or rather getting deeper into the fog?
To make sense of ‘The World in 2018’, what we need is maybe not so much to try guessing what might be on our way over the next 12 months than to develop a more acute consciousness and comprehension of the road we are travelling, of where it is leading us, and of where we currently stand on that path. This is certainly not an easy task: volatility, uncertainty, complexity and ambiguity (‘VUCA’) reign more supreme than ever, and, together with the ever-accelerating pace of global change, they make it increasingly difficult to understand the world’s trajectory and situation. Some key themes of the ‘global conversation’ can however give us a few clues about how these trajectory and situation tend to be perceived at this particular moment in time.
In early 2018, the ‘global conversation’ seems to denote a growing sense of concern about a whole series of ongoing events or developments and about their possible or likely ramifications into the future. These include America’s descent into a spiral of political insanity and retreat from global leadership, the multiple and often widening cracks in European unity, the erosion of the international liberal order and of liberal democracy in many places, as well as the rising or persisting geopolitical tensions in Asia, the Middle East or Eastern Europe. These also include the relentless advance of the ‘digital revolution’, and in particular the rapid development of artificial intelligence and the approaching prospect of machines outsmarting humans and taking their jobs. These include, as well, the continuous deterioration of our natural environment and our continuous failure to reverse or stop it. As pointed out by thousands of world scientists in a ‘Warning to Humanity’ published at the end of last year, we humans are utterly failing to take the urgent steps needed to safeguard our imperilled biosphere, and there are rising concerns that we may actually be already well advanced in the process of making the planet inhospitable or even uninhabitable for ourselves.
Despite these mounting and multiple concerns, though, what tends to dominate the overall perception of the world’s trajectory and situation at this moment in time – just like at any moment in time, in fact – is probably “the economy, stupid”… And in early 2018 the perception of the global economy’s situation and prospects seems to denote rising optimism. Over ten years after the onset of the global financial and economic crisis, hope is rising that the world economy may have turned the corner, and that it could finally be starting to pick up after years of paltry growth. Somewhat unexpectedly, economic growth indeed gathered steam in developed as well as emerging economies in the course of 2017, and it is now widely forecasted to further speed up this year. International organisations such as the World Bank (WB), the International Monetary Fund (IMF), or the Organisation for Economic Cooperation and Development (OECD) have all revised their global growth forecasts up in recent months, after years and years of having to regularly revise them down.
This global upswing is likely to come as a relief to the populations of many countries, who probably welcome the perspective of somewhat brighter prospects in terms of jobs, opportunities, wages and living standards after the years of crisis and low growth. As a consequence, economic optimism is now rising and spreading almost everywhere. It just reached an 11-year high in the U.S., and is also going up sharply in Asia, in Europe, or in Latin America. Optimism is surging even in the most unlikely of places, such as Japan, which has been experiencing a near stagnant economy for over two decades, or France, which was until recently the gloomiest nation on earth.
The brighter outlook also probably comes as a relief to many economists and policy makers across the world, after years of head scratching about the global economy’s persistent lack of dynamism and of concerns about a possible descent into ‘secular stagnation’ or even outright depression. Despite repeated warnings coming from various corners, there has so far been no repeat of the financial crash that nearly brought down the global financial and economic system in 2008, the world economy has not fallen back into recession, and the various doomsday scenarios envisaged in recent years have not materialised. The worst has apparently been averted, the system has held so far, and the global economic engine seems to be restarting at last. Unemployment is down, global trade is up, investment is up, and even productivity seems to be improving slightly, prompting some to wonder whether secular stagnation could be in the process of morphing into secular expansion.
This optimism is, of course, rejoicing financial investors and pushing world stocks from record to record. Financial markets were arguably already levitating irrationally high long before global growth started to accelerate in recent months, but soaring economic enthusiasm is now sending them ever higher into euphoria territory. Market volatility is reaching record lows, signalling that investors do not seem to fear anything anymore in what they increasingly perceive as a “Goldilocks economy”, i.e. an economy that is neither too ‘hot’ – thus avoiding the risk of too much credit driving instability and disruptive volatility – nor too ‘cold’ – thus avoiding the risk of too low credit creation to sustain economic growth. An economy, in other words, which is just at the right temperature – like the third bowl of porridge in the folk tale – and that allows a ‘market-friendly’ monetary policy to continue.
Renewed optimism seems to be progressively spreading beyond the economic realm, and spilling over to other areas. According to various public opinion polls, confidence appears to be growing across the world in our ability to address and solve global issues such as climate change, poverty, inequality, or food (in)security. A group of thinkers and commentators, which seems to be gaining in influence, even contends that humankind has in fact never had it so good and that things are getting better all the time. According to these ‘New Optimists’, 2017 was the best year in human history, and 2018 will probably be even better as major gains in health, education and human welfare continue to be recorded. What’s still holding us back, they say, is just a pessimistic, “it was better before” bias, which leads us to make misguided individual and collective choices. In other words, there is nothing inherently wrong with the global economic system, but only with the mistakes we make and that prevent it from working to its full extent and from bringing us into the right direction at full speed. Provided we shift our mindset and make the right choices, our progress can accelerate and bring us into ever more desirable territory. The New Optimists do not necessarily all agree on what that territory should or could be, but all believe that getting there is a something that is firmly under our own control.
This optimistic outlook and this belief in human agency constitute of course an attractive alternative to the more pessimistic and fatalistic narratives that dominated the global conversation in recent years, and they are gaining traction partly as a reaction against those. After all, optimism is widely thought to be leading to better health for individuals, and there are reasons to believe that it may be conducive to healthier societies as well. Yet optimism can only be beneficial over the long term if it is grounded in reality, otherwise it typically ends up causing delusion and frustration. Hence, it is probably worth wondering if a new wave of optimism is really warranted today. Is the world really turning the page on the years of crisis, and embarking on a new cycle of expansion that could see the world economy double in size over the next quarter century or so, as it has done on average over the last 200 years? Is this new cycle likely to be a long-term technology-driven ride towards a world of artificial intelligence, virtual and augmented reality, abundant clean energy, driverless electric cars, and space tourism, as many contend or hope?
Enjoy the party while it lasts
There are actually quite some reasons to remain cautious about the seemingly brightening global economic prospects. First because despite increasing talk of a ‘booming economy’ the current uptick is rather modest and global growth – current and forecasted – still remains below pre-crisis levels. Second because there have been several false economic dawns in the past decade, and it is still early to say whether this time is going to be really different. According to the World Bank’s recently published ‘Global Economic Prospects’, the current upswing is broad-based but could be short-lived as “the global outlook is still subject to substantial downside risks, including the possibility of financial stress, increased protectionism, and rising geopolitical tensions”. Financial stress is probably the major concern, and could result from an oil or commodity price spike, from the crash of the bitcoin/cryptocurrency speculative craze, from excessive credit pile-up in China or elsewhere, or more fundamentally from global liquidity drying up as the world’s main central banks attempt to wind down their crisis-era expansionary monetary policies by raising interest rates and shrinking their balance sheets.
Even if financial stress does not spike and stop economic growth in its tracks this year, the current economic upswing may anyway constitute little more than a cyclical rebound in investment, manufacturing activity and trade after the post-crisis low of 2016. According to the World Bank, this cyclical rebound is likely to be temporary and could even peak this year, after which underlying structural problems of weak productivity growth, low levels of investment and workforce ageing will weigh on economic growth over the next decade. In other words, the growth uptick we are currently experiencing could be a short respite rather than the long-expected recovery, an interlude rather than a turning point. This is probably why this year’s gathering of the global elite at the World Economic Forum (WEF) in Davos (Switzerland) seems to be hesitating between popping the champagne and worrying about the potential threats to the current outlook. ‘Enjoy the party while it lasts’ seems to be the dominating mood in the Swiss Alps this year…
The trouble with economics
If economic uncertainty remains so prevalent, even among the world’s rich and powerful, it’s probably because ‘economic science’ is still struggling to come to terms with what happened in the last decade and to come up with compelling narratives of what it may mean. As is widely known, most economists utterly failed to see the financial crisis coming, leaving the world – and themselves – to wonder how they could ‘get it so wrong’. They also struggled to make sense of the persistence of low growth in the years that followed the crisis, when several key rules of the economics textbook seemed to no longer apply and the economic engine stubbornly failed to restart despite massive stimulus efforts.
To be fair, the financial crisis of 2007-2008 and subsequent Great Recession did trigger some soul searching and even some self-criticism in the economics profession. However, most of the profession’s internal debate has revolved around its methods rather than its theoretical underpinnings. Widely discussed has in particular been its increasing focus and reliance on complex mathematical models rather than on experimental research methods.
In September 2016 American economist Paul Romer delivered a scathing critique of his discipline, asserting that “macroeconomics has gone backwards” for over three decades and has regressed into a math-obsessed ‘pseudoscience’, i.e. “a special type of belief field that claims to be science” despite saying “things that are inconsistent with the facts”. The reason of this regression, according to Romer, is that macroeconomics has failed to “recognize how difficult it is to make reliable inferences about causality from observations on variables that are part of a simultaneous system”, yet has managed to escape challenge by becoming “so much more opaque” through the construction and use of ever-more complex “post-real” models such as the real business cycle (RBC) model and subsequent ‘dynamic stochastic general equilibrium’ (DSGE) extensions. Modern macroeconomic models, Romer says, “attribute fluctuations in aggregate variables to imaginary causal forces that are not influenced by the action that any person takes”, and they use “incredible identifying assumptions to reach bewildering conclusions”. In other words, economists often resort to making up imaginary or arbitrary inputs, assumptions or restrictions to ensure that their models deliver the desired answers: “Assume A, assume B, … blah blah blah … and so we have proven that P is true”.
Needless to say, Paul Romer’s harsh words infuriated a lot of his colleagues and triggered a vivid debate on the role and limits of macroeconomic modelling, or even the role and limits of macroeconomics itself. This debate is still ongoing, with most economists defending their discipline and contending that macroeconomics is not perfect but nevertheless “good enough for government work”, as recently claimed by Nobel laureate Paul Krugman. This debate, however, has not fundamentally shifted the theoretical foundations of the discipline, i.e. how economists conceive the way the economy works. The failure to forecast the crisis, according to Mr Krugman, “did not come down to a lack of understanding of possible mechanisms, or of a lack of data, but rather through a lack of attention to the right data”. And the crisis was then “sufficiently well-handled by policy-makers that there was no irresistible pressure for change” in economists’ views.
As British economic historian Robert Skidelsky recently pointed out, the Great Recession has therefore produced no intellectual shift in economics similar to those that were triggered by the Great Depression of the 1930s – which produced Keynesian economics – or by the stagflation of the 1970s – which produced Milton Friedman’s monetarism. No new ‘general theory’ has emerged this time, and from a conceptual point of view macroeconomics has thus remained pretty much where it was ten years ago. It is still dominated by the New Classical and New Keynesian schools, which keep arguing about pretty much the same things and in the same way. Neither school – “sect might be the better word”, says Mr Skidelsky – has been challenged to re-think first principles. Consequently, the debate about the causes and consequences of the crisis has not substantially evolved over the last decade, and theoretical dissent has remained confined to the fringes of the economics profession.
Yet despite Mr Krugman’s assertion that macroeconomics was and is still ‘good enough’, the crisis and its aftermath laid bare a number of flaws and blind spots in economic theory, which still remain largely unaddressed. To build a meaningful understanding of our economic trajectory and situation, and hence to assess whether and to what extent the apparent renewed optimism over our economic prospects could be justified, an exploration of these flaws and blind spots is thus required. This, in fact, is what we really need to understand and make sense of ‘The World in 2018’. This, in fact, is what we will discuss in the third part of this series.
To be continued…