In the postcrisis economic order, there are likewise two kinds of economies. Those with vast accumulations of assets, including sovereign wealth funds (currently in excess of $ 4 trillion) and hardcurrency reserves ($ 5.5 trillion for emerging markets alone), are the ones with loaded guns. The economies with huge public debts (which now total nearly $ 40 trillion worldwide), by contrast, are the ones that have to dig. In such a world, it pays to have underground resources. But these are not distributed at all fairly. By my calculations, the estimated market value of the world’s proven subsoil mineral reserves is around $ 359 trillion, of which just over 60 per cent is owned by just ten countries: Russia, the United States, Australia, Saudi Arabia, China, Guinea (which is rich in bauxite), Iran, Venezuela, South Africa and Kazakhstan.8
Now we enter the realm of the known unknowns. We do not know by how much resource discoveries (especially in unsurveyed Africa) and technological advances (such as hydraulic fracturing) will increase the supply of natural resources in the years to come. Nor do we know what impact financial crises will have on commodity prices and therefore the incentive to exploit new sources of fuel and material. Finally, we do not know with any certainty how politics will affect a sector that is more vulnerable to expropriation and arbitrary taxation than any other because of the immobile nature of its assets. We know that the unrestricted burning of fossil fuels is likely to lead to changes in the earth’s climate, but we do not know exactly what these will be or when they will be disruptive enough to generate a meaningful policy response. Until then, the West will indulge itself with fantasies about ‘green’ energy, and the Rest will continue to burn coal as fast as it can be dug up, instead of doing the things that would really reduce carbon dioxide emissions: building nuclear and cleancoal powerplants, converting vehicles to natural gas and in -creasing the energy efficiency of the average home.9 All these known unknowns explain the extraordinary whipsaw movements in commodity prices that we have witnessed since 2002.
Also in the category of known unknowns belong two distinct kinds of natural disaster: earthquakes and the associated tsunamis they cause, which are randomly generated by the movements of the earth’s tectonic plates (so we know their location but not their timing or magnitude), and pandemics, which arise from the similarly random mutation of viruses like influenza. The most that can be said about these two threats to humanity is that they will kill many more people in the future than in the past because of the increasing concentration of our species in cities in the AsiaPacific region which, perversely, are often located close to fault lines because of the human fondness for coastal locations. Add to this the problem of nuclear proliferation, and it does not seem unreasonable to regard the world as a more dangerous place than it was during the Cold War, when the principal threat to mankind was the calculable risk of a worstcase outcome to a simple twoplayer game. Today we face more uncertainty than calculable risk. Such is the result of exchanging a bipolar world for a networked one.
By their very nature, the unknown unknowns are impossible to anticipate. But what of the unknown knowns – the insights that history has to offer, which most people choose to ignore? Asked in late 2011 to name ‘the key risks that could derail growth in fastgrowth markets over the next three years’, nearly a thousand global business executives identified assetprice bubbles, political corruption, inequality of income and failure to tackle inflation as the four biggest.10 By 2014, these fears may seem misplaced. From an historian’s point of view, the real risks in the nonWestern world today are of revolution and war. These are precisely the events we should expect under the circumstances described above. Revolutions are caused by a combination of foodprice spikes, a youthful population, a rising middle class, a disruptive ideology, a corrupt old regime and a weakening international order. All these conditions are present in the Middle East today – and of course the Islamist revolution is already well under way, albeit under the misleading Western label of the ‘Arab Spring’. The thing to worry about is the war that nearly always follows a revolution of such magnitude. For despite the optimistic claim that the longrun trend of human history is away from violence, the statistical incidence of war exhibits no such pattern.11 Like earthquakes, we know where wars are likely to occur, but we cannot know when they will break out or how big they will be.
Against ‘Technoptimism’
Revolution and war are not new threats. In the eighteenth century the disruptive ideology that grew out of the Enlightenment became the basis for two major challenges to the Anglophone empire that then bestrode the globe. In fighting revolution on both sides of the Atlantic, the British state accumulated a very large public debt, mainly as a result of its wars against revolutionary France. By the end of the Napoleonic era, the national debt exceeded 250 per cent of GDP. Yet the subsequent deleveraging – which reduced the debt burden by an order of magnitude to just 25 per cent of GDP – was perhaps the most successful in recorded history. Inflation played no role whatsoever. The British government consistently ran peacetime primary surpluses, thanks to a combination of fiscal discipline and a growth rate higher than the rate of interest. This ‘beautiful deleveraging’[3] fiwas not without its ugly episodes, notably in the mid 1820s and late 1840s, when austerity policies caused social unrest (and failed to alleviate a disastrous famine in Ireland). Nevertheless, the deleveraging process coincided with the key phase of the first Industrial Revolution – the railway mania – and the expansion of the British Empire to very nearly its maximum extent. The lesson of history is that a country that achieves technological innovation and profitable geopolitical expansion can grow its way out from under a mountain of debt.12
Can the United States emulate this feat? I doubt it. First, the evidence suggests that it is very hard to achieve higher growth under a heavy debt burden. In their study of twentysix episodes of ‘debt overhang’ – cases when public debt in advanced countries exceeded 90 per cent of GDP for at least five years.– Carmen and Vincent Reinhart and Ken Rogoff show that debt overhangs were associated with lower growth (of 1.2 percentage points of GDP) over protracted periods (lasting an average of twentythree years), lowering the level of output by nearly a quarter relative to the pre-overhang trend.13 Significantly, the negative impact on growth was not necessarily the result of higher real interest rates. A crucial point is the nonlinear character of the relationship between debt and growth. Because the debt burden lowers growth only when it rises above the 90 per cent of GDP threshold, the habit of running deficits gets well established before it becomes deleterious. This evidence poses a serious problem for those Keynesian economists who believe that the correct response to a reduction in aggregate demand via private sector deleveraging is for the already indebted public sector to borrow even more. It also casts doubt on the validity of the claim that low interest rates on US Treasuries are a market signal that the government can and should issue more debt.14
Equally remote is the prospect that a technological breakthrough comparable with the railways could provide the United States with a ‘get out of jail’ card. The harsh reality is that, from the vantage point of 2012, the next twenty- five years (2013~38) are highly unlikely to see more dramatic changes than science and technology produced in the last twenty- five (1987~2012). For a start, the end of the Cold War and the Asian economic miracle provided oneoff, nonrepeatable stimuli to the process of innovation in the form of a massive reduction in labour costs and therefore the price of hardware (not to mention all those exSoviet PhDs who could finally do something useful). The IT revolution that began in the 1980s was important in terms of its productivity impact inside the US – though even this should not be exaggerated – but we are surely now in the realm of diminishing returns (the symptoms of which are deflation plus underemployment due partly to automation of unskilled work). Likewise, the breakthroughs in medical science we can expect as a result of the successful mapping of the human genome will probably result in further extensions of the average lifespan, but if we make no commensurate advances in neuroscience – if we succeed in protracting the life of the body but not of the mind – the net economic consequences will be negative, because we will simply increase the number of dependent elderly.
My pessimism about the likelihood of a technological deus ex machina is supported by a simple historical observation. The achievements of the last twenty- five years were not especially impressive compared with what we did in the preceding twenty- five years, 1961~86 (for example, landing men on the moon). And the technological milestones of the twenty- five years before that, 1935~60, were even more remarkable (such as splitting the atom). In the words of Peter Thiel, perhaps the lone sceptic within a hundred miles of Palo Alto, ‘We wanted flying cars, instead we got 140 characters.’[4] Travel speeds have declined since the days of Concorde. Green energy is ‘unaff ordable energy’. And we lack the ambition to ‘declare war’ on Alzheimer’s disease, ‘even though nearly a third of America’s 85 - yearolds suff er from some form of dementia’.15 Moreover, technological optimists have to explain why the rapid scientific technological progress in those earlier periods coincided with massive conflict between armed ideologies..(Question: Which was the world’s most scientifically advanced society in 1932, in terms of Nobel Prizewinners in the sciences? Answer: Germany.) The implications are clear. More and faster information is not good in itself. Knowledge is not always the cure. And network effects are not always positive. There was great technological progress during the 1930s. But it did not end the Depression. That took a world war.
Weary of counterinsurgency warfare and wakening up to the fossilfuel riches made accessible by ‘fracking’ – which could end its reliance on Middle Eastern oil by 2035 – the United States is rapidly winding up four decades of hegemony in that region. No one knows who or what will fill the vacuum. A nuclear Iran? A neoOttoman Turkey? Arab Islamists led by the Muslim Brotherhood? Whoever emerges on top, they are unlikely to get there without bloodshed. Ask anyone who works in the shadowy world of intelligence to list the biggest threats we face, and they will probably include bioterrorism, cyber war and nuclear proliferation. What these things have in common, of course, is the way modern technology can empower radicalized (or just plain crazy) individuals and groups. It will surely not be long before another unknown known becomes apparent to nonhistorians: that it is when empires retreat, not when they advance, that violence reaches its peak. And the violence can manifest itself in the imperial heartland too. The ‘cliometrician’ Peter Turchin argues that ‘the next instability peak [of violence] should occur in the United States around 2020’.16
You Didn’ t Build That
Countries arrive at the stationary state, as Adam Smith argued, when their ‘laws and institutions’ degenerate to the point that elite rentseeking dominates the economic and political process. I have tried to suggest that this is the case in important parts of the Western world today. Public debt – stated and implicit – has become a way for the older generation to live at the expense of the young and the unborn. Regulation has become dysfunctional to the point of increasing the fragility of the system. Lawyers, who can be revolutionaries in a dynamic society, become parasites in a stationary one. And civil society withers into a mere no man’s land between corporate interests and big government. Taken together, these are the things I refer to as the Great Degeneration.
Shortly before I completed this book, the President of the United States gave a speech that neatly illustrated the point:
If you were successful, somebody along the line gave you some help. There was a great teacher somewhere in your life. Somebody helped to create this unbelievable American system that we have that allowed you to thrive. Somebody invested in roads and bridges. If you’ ve got a business – you didn’ t build that. Somebody else made that happen. The Internet didn’ t get invented on its own. Government research created the Internet so that all the companies could make money off the Internet.
...There are some things, just like fighting fires, we don’ t do on our own ... So we say to ourselves, ever since the founding of this country, you know what, there are some things we do better together. That’s how we funded the GI Bill. That’s how we created the middle class. That’s how we built the Golden Gate Bridge or the Hoover Dam. That’s how we invented the Internet. That’s how we sent a man to the moon.17
This surely is the authentic voice of the stationary state: the chief mandarin, addressing distant subjects in the provinces. It is not that the implied interdependence of the private sector and the economy is wrong. It is the overstatement of the case that is disquieting, as if it took government to build every small business or, indeed, to ‘create the middle class’. Even more disturbing is the conspicuous absence from the speech of any future project comparable with those cited from the past (the Manhattan Project would have been an even better example, but presumably it is not politically correct). It is bad enough to see state capitalism touted as an economic model by the Chinese Communist Party. But to hear it deployed by the President of the United States as a rhetorical trope devoid of practical content makes this writer, for one, pine for the glad, confident morning of 1989 – when it really seemed the West had won, and a great regeneration had begun.
[3]?The phrase was coined by the American hedgefund manager Ray Dalio, whose hedge fund Bridgewater has performed exceptionally well during the financial crisis.
[4]?The maximum length of a Twitter ‘tweet’.
f?In West’s words: ‘One of the bad things about open- ended growth, growing faster than exponentially, is that open-ended growth eventually leads to collapse. It leads to collapse mathematically because of something called fi nite times singularity. You hit something that’s called a singularity, which is a technical term, and it turns out as you approach this singularity, the system, if it reaches it, will collapse.’
