The Case for Optimism
Isolationism, fragmentation, and pessimism always fail.
In 1930, as global economies began to suffer, economic pessimism permeated the world and led to a spiral of protectionism, disintegrating trade, political isolation, and ultimately global destruction.
John Maynard Keynes presciently said, “we are suffering from a bad attack of economic pessimism.” He went on to say how a downward spiral of pessimism would lead to bad policy, conflict, and ultimately outcomes undesirable for everyone. To say that he understated these consequences of what was to come is putting it mildly.
More presciently, he insisted a better world was possible and a brighter future could be achieved if countries acted together. While things are not as bleak as in 1930, Keynes’s observations are no less true. Facing fragmentation and isolation, we are heading for worse outcomes.
Bleak but Not Dark
Globalization has been everyone’s favorite punching bag for a while. It is hard to feel optimistic about its prospects. However, globalization has a better future.
Let’s look at the two 800-pound gorillas. The United States and China together account for almost 25% of world trade, but, even though this cooperative relationship has been mutually beneficial on an extraordinary and unpredictable scale, this relationship is deteriorating. Acerbic political rhetoric and a variety of protectionist policies from both are increasing. Of course, Chairman Xi cozying up to Vladimir Putin and Russia is not helping.
But, looking beyond that, the two greatest beneficiaries of cooperation and globalization are likely to recognize once again that the expansion of the last 25 years is hardly anything to be considered irrelevant. It’s in everyone’s best interest to expand and cooperate. The United States and China, especially through its most enlightened business leaders, understand this privately and will ultimately enact this publicly. Acerbic rhetoric and protectionism don’t benefit anyone.
This has played out before. In the 1800s, globalization emerged with the industrial revolution and the development and efficiencies in transportation. However, we know how the movie ended – economic nationalization and conflict among great powers destroyed the emerging global trading system and ended in catastrophic destruction beginning in 1914.
Catastrophe and a Few Stray Balloons
A new Cold War seems absurd. The previous Cold War between the United States and the Soviet Union was possible because a bright line, the “Iron Curtain” was drawn globally. That is not the case today. The United States and China are economically intertwined.
We have learned our lesson (at least I hope we have) that a “new Cold War” would be a profound misuse of capital, and resources, and a worrying distraction. Aside from a few bellicose politicians, no one benefits. However, we now have distrust and a suspicious atmosphere – both literally and figuratively via misguided balloons.
Protecting and subsidizing domestic firms has become a national pastime for each United States and China. The enormous scale of resources dedicated to “strategic” industries and companies is not only mind-boggling, but it will also undoubtedly be wasteful and inefficient. Market mechanisms work best regardless of political rhetoric and policy expediency.
Globalization’s immediate prospects have certainly looked better. But, in this bleak environment, it’s helpful to look back on Keynes’s observation. Things can be better.
A Minor Adjustment
Technological progress, economic development, and demographics are likely to drive more cooperation and integration. History teaches us it always does.
Trade policy responds to scarce resources and comparative advantage. The 19th century experienced a boom in immigration that helped drive economic growth and wealth creation. However, this reached a point where labor became scarce, and barriers were erected to slow both trade and people. This led to a downward economic spiral and contributed significantly to the US depression of the 1930s and impacted global economies similarly. No one listened to Keynes even though he was right. They don’t seem to be listening again. But the prospect of a continuing economic downturn compared to components that can drive economic growth, and suddenly the components of greater economic growth win.
That means more cooperation among countries and increased globalization. A minor adjustment.
Are We Forgetting Something?
We are experiencing a similar story today. Labor-rich China provided inexpensive goods and services to large markets, especially the United States. However, perceiving an imbalance, the United States is now increasingly protectionist as it experiences outrage over depressed domestic wages.
However, this is changing. Unemployment is low across much of the developed world, especially in the United States. Combined with protectionist legislation and industrial policy intended to develop domestic production of key industries, the demand for workers will increase even as the domestic labor pool is shrinking.
The irony is that some of this protectionist public policy will need to loosen immigration, access to labor, and activity among global markets if it is going to be successful in any way. Unintended consequences are never repealed.
We Can’t All Be Robots
Increasing production, building out domestic industries, and transportation infrastructure, not to mention new infrastructure required for alternative energy and other emerging domestic industries, labor will be required. Although advances in robots and other robotic technologies will help address some workforce shortages, the scale the United States and other Western countries are looking to expand production will need a boost in the workforce. This will require additional labor and the sourcing of goods and components via global supply chains. Those supply chains will be in countries with abundant labor supplies and other economic advantages.
Comparative advantage will win once again.
Technology and Optimism
Disruptive technological innovation brings positive change, regardless of what modern-day Luddites think. Going back to the 1800s, railways and telegraphs brought a sharp decline in costs and enabled much more effective communication. This enhanced infrastructure and a significant drop in cost enabled economic integration and, by necessity, the dropping of trade barriers.
Over the last 50 years, information technology, and shipping costs (helped mostly by standardized containers and ever-larger container ships) created and integrated global supply chains. While these benefits are obvious, bellicose privacy and national security concerns have led to fragmentation into bad policy.
On top of this, modern technology enables seamless flows of digital information, and governments are increasingly unhappy about that. This is magnified in China and the state’s control of information and access. But the United States is not that far behind. For example, the US government has declared a media war upon TikTok because short videos are somehow linked to the Chinese central government’s military plans. Not only this, but domestic companies like Google and Meta are also in government policy crosshairs. This is a bit of paranoia but is permeating global policymaking.
Now for Artificial Intelligence
The world’s most pressing problems, ranging from climate change to food scarcity to pandemics and other global challenges can only be met effectively with advances in technology and global cooperation.
Artificial intelligence will be the vanguard in cooperative solutions that cannot otherwise be imagined independently, but will not be realized in a fragmented world. These are existential challenges that must be met, and there is now a new tool – artificial intelligence – that can enable this. Politicians can yell and scream all they like, but Balkanization and limiting the flow of information and technology will not solve these existential issues.
Renewable energy creates an entirely new energy bloc (the oil-producing Middle Eastern countries and OPEC nations have had their day). These new sources of energy will require new networks and new patterns of resources, processes, and applications.
This is one example of essential global cooperation. Labor is another. Remote work technologies have already reduced the cost of providing services independent of borders. Advanced technologies and communication services are independent of political barriers, especially when labor shortages arise. But the benefit of accessing skilled labor globally will overcome any attempt at political barriers.
An underrated yet powerful tool is improvements in machine translation and speech recognition. The cost of interacting among different cultures and languages drops significantly because there is now a platform to communicate. AI-driven systems have now created a common language via its effective translation.
A Global Boom (and It’s Not Chat GPT)
Artificial intelligence is permeating all aspects of the global economy well beyond large language learning models. The long-term effects are difficult to predict, but a high-powered economic boom is likely. That will drive a global flow of investment capital and goods.
Reducing friction, whether through a railroad and a telegraph in the 1800s, container ship, and a global communications network over the last 50 years, or global AI predictive systems, generating interaction, integration, and cooperation makes everyone better off – and it will overwhelm political friction and policy aimed at fragmentation and isolation.
Productivity and Prosperity
As productivity increases and economic growth accelerates, the political will for fragmentation and lack of cooperation will dissipate. For example, as the United States produces more, it will be eager to export that new production and look for measures to liberalize trade globally.
The economic shock in 1929 sparked a depression. A similar economic shock in 2008 did not cause a depression because policymakers understood how to avoid the errors made in the 1930s.
The most recent pandemic taught us that public health cooperation ensured outbreaks like the influenza pandemic of 1918 to 1919 would not happen to that scale again, even though we have a much greater population that is more interconnected.
Most importantly, an integrated global economy where fragmented politics and isolationist public policy emerged led to decimation in 1914 – and a repeat in 1939 to 1945. We know the draconian consequences of such silly thinking.
If you are a fan of globalization, cooperation, and comparative advantage, the last decade has been extremely challenging. Ten years ago was a time of optimism on a global scale. However, economic and geopolitical forces have combined to add friction and fragmentation to global exchange.
However, considering all of these difficulties, global trade is only slightly below its peak from 2008.
More optimistically, history has taught us that nothing lasts forever, especially in geopolitics. Trends that seem irrepressible end. The Cold War divided the world and then it was gone. Confidence in the spread of democracy was irreversible and now that has changed significantly. China would dominate the globe, but, much like the worry related to Japan in the 1980s, this is overblown and unlikely. The United States and China cooperated substantially for over 25 years to both countries’ mutual benefit. Why stop?
The benefits are now even greater and with everyone’s self-interest and mutual benefit, this geopolitical stalemate will pass – more quickly than is commonly thought today.
Uncertainty, Mistakes, and Better Thinking
Uncertainty is certain. Almost as certain political mistakes, short-term thinking, and bad policy. But the global economy has overcome this combination of bad thinking and always will, even if the path is fraught with inefficiency, detrimental policy, and even destruction. Mistakes will continue to be made, and we will remain in an uncertain world. But while we have seen what has gone wrong, we also know what works.
Cooperation, integration, and mutual benefit win in the end. It is a time to be optimistic once again.