Our collective memories of the lessons learned from wars and crises past have faded. Frances Coppola looks for future guidance.
The longer our financial and economic system goes without a major crisis, the more violent the shift when the crisis eventually happens. The present paradigm emerged from the twin horrors of World War II and the Great Depression of the 1930s. Now, as these events fade from living memory, the consensus that has maintained it for over 70 years is breaking, and the shadows of the past are returning. The resurgence of inflation, financial crises and wars signals that a major shift is underway. Where are we going, and what will be the cost?
The first half of the 20th century saw the biggest destruction of human, physical and financial capital in recorded history. In his book, Capital in the 21st Century, Thomas Piketty starkly illustrates the scale of the devastation (see charts).
Capital destruction in the US appears less dramatic than in European countries. This is partly because it was less directly affected by the world wars, though it was deeply scarred by the Great Depression. But the main reason is that in the second half of the 19th century the US had transformed itself from a poor, mainly agrarian country to a rich industrial powerhouse. We sometimes forget how young the richest country on earth really is.
Horrified by such devastation, our forebears designed a system they thought would end war and bring prosperity. They created the Bretton Woods system of managed currencies anchored to gold via the US dollar; the EU, an experiment in political and economic union between countries that had just torn each other apart in the worst war in history; and the United Nations (UN), an even bigger experiment in cooperation between warring nation states. They agreed a convention to ensure that people fleeing persecution, torture and death would always be able to find safe refuge. They enshrined human rights in international law and created international courts to bring to justice those who murdered millions of people.
Horrified by such devastation, our forebears designed a system they thought would end war and bring prosperity.
We have been fairly successful at creating a stable, prosperous global economy: we haven’t had another world war; we’ve successfully avoided a nuclear conflagration; and in developed countries, we’ve extended longevity, improved nutrition, almost eliminated the scourge of infant mortality and provided education, pensions, healthcare and social support for millions of people. In the past two decades, we have substantially reduced global poverty, though not inequality.
This has been made possible by a long period of relative economic and political stability. Until 2008, there had not been a major economic crisis in developed nations since the 1970s, nor a global financial crisis since 1929. And until 2022, there had not been a war in Europe since 1945.
But the post-war paradigm has a darker side. The Bretton Woods system enshrined the dominance of Western countries, and, in particular, the US. To this day, the two Bretton Woods institutions, the International Monetary Fund (IMF) and the World Bank, are always run by, respectively, a European and an American, and their funding predominantly comes from the US. The US has regarded it as its prerogative to decide which countries these institutions should support, and what form that support should take. Too often, “support” has meant imposing Western ideals of economic management, to the detriment of local people and customs.
After the Bretton Woods system collapsed in 1971, there was a period of economic and political chaos, out of which eventually emerged the international dollar standard backed by the financial reserves of powerful oil-producing nations. Under the “petrodollar” standard, developing countries that paid for imports with borrowed dollars suffered repeated debt crises. The IMF – originally created to prevent destabilisation of the Bretton Woods currency system by trade imbalances – became the vehicle for enforcing the transfer of resources from developing countries to their Western creditors.
The post-war paradigm hasn’t prevented either wars or crises. Indeed, since 1945, there have been rather a lot of wars, many of which have caused economic crises.
And the post-war paradigm hasn’t prevented either wars or crises. Indeed, since 1945, there have been rather a lot of wars, many of which have caused economic crises. The collapse of the Bretton Woods currency system is arguably attributable to the US’s burgeoning fiscal deficit during the Vietnam war, which made it impossible for the dollar to hold its peg to gold. The inflationary oil price shocks of the 1970s were caused by wars in the Middle East. The USSR’s disastrous war in Afghanistan was the proximate cause of the fall of the Iron Curtain in 1989. And the subsequent reuinifcation of Germany, combined with an oil price shock due to yet another war in the Middle East, led to the UK’s ignominious departure from the European Monetary System in 1992.
During the period between 1992 and 2008 – that Western economists like to call the “Great Moderation” – there were wars in Afghanistan, Iraq and Libya. There were also no less than five economic crises: Mexico’s “tequila crisis” of 1994-5, the collapse of the “Asian tigers” in 1996-7, Russia’s default in 1998, the dot-com crash of 2000-1, and Argentina’s default in 2001.
Of course, we have learned from these and previous crises. The prices and incomes policies of the 1970s are now a thing of the past: inflation is regarded as a monetary phenomenon and central banks have been tasked with controlling it. Developing countries now maintain foreign exchange reserves to protect themselves from currency collapses and sudden stops. Successive rounds of international trade negotiations, culminating in the creation of the World Trade Organisation, have largely ended damaging trade wars. Ben Bernanke’s study of the Great Depression led him to conduct an experiment with monetary policy that probably prevented the 2008 Great Financial Crisis becoming a second Great Depression. And the Great Financial Crisis led countries to impose much tighter regulation on banks and financial institutions.
But years of austerity have shredded the social safety nets put in place after World War II. Economic policies that favoured the old over the young and the rich over the poor have progressively widened inequality within countries. As a result, social cooperation and interdependence have given way to a mass outbreak of selfishness and callousness. Open borders have encouraged companies to move production to developing countries, to the detriment of working classes in developed countries. The elimination of capital and exchange controls after the collapse of Bretton Woods has enabled the rich to place their wealth out of reach of tax authorities and caused damaging flows of hot money that have particularly, though not exclusively, destabilised developing countries. Monetary policy and “growth-friendly” fiscal policies have widened inequality, creating exorbitant wealth for a few at the expense of social safety nets and public investment.
Now, as those who experienced the world wars and the Great Depression become fewer in number, the memory of those events is fading. Poisonous myths are proliferating on social media, some promoted by governments intent on asserting their dominance. The shadows of the past are coming to life, sparking wars and threats of wars. And there is little mercy for those unfortunate enough to be caught up in these resurgent conflicts. Instead of welcoming refugees, governments are putting in place measures to keep them out. The rights of minorities and women are under attack. And on the economic front, international cooperation and free trade are giving way to the sort of nationalism and protectionism we have not seen since the 1930s.
The UN, already known to be ineffective in civil wars, has now been shown to be completely toothless where unprovoked aggression by one nation against another is concerned.
The post-war institutions are under attack as never before. The UN, already known to be ineffective in civil wars, has now been shown to be completely toothless where unprovoked aggression by one nation against another is concerned. It condemned Russia’s invasion of Ukraine, an act for which other nations might have had their membership suspended. But Russia is not only still a member of the UN, it is a permanent member of the Security Council – and the UN is powerless to remove it, or to intervene in the conflict in any way. It is hardly surprising that some people are questioning what the point of the UN even is.
The UN’s human rights convention is widely flouted by its member states. The European Convention on Human Rights has historically been stronger, but that too is now under attack, as Britain contemplates leaving it because its provisions won’t allow them to ill-treat refugees, and some European countries stick two fingers up to its rules.
Earlier this year, the World Economic Forum identified ten short- and long-term risks to the global political economy (see table: Global risks ranked by severity over the short and long term).
The World Economic Forum of course has a vested interest in minimising these risks, because the wealth of its members depends on the current paradigm: shoring it up, not helping to bring about a new paradigm in which wealth is distributed more equally, is their objective. So we should treat their insights with caution. But I think the list is nonetheless valuable as an indicator of our current direction of travel.
In the short term, the cost-of-living crisis is the most urgent problem; in the longer term, climate change is our biggest risk. But the whole list is a serious threat to the Western way of life, both in the short- and the long-term.
Financial and economic systems are emergent, brought about over time by the way millions of people interact with each other and with the natural world. The early designers of the current paradigm envisaged a system in which people were supported “from cradle to grave” and nation states cooperated to bring about prosperity. But this is not what eventually emerged from the ashes of World War II. Beliefs are powerful and so is wealth. Powerful people, often wealthy, skew the paradigm in ways that benefit them at the expense of others. And when people think their way of life is under threat, they will fight tooth and nail to preserve it.
I do not think the outcome of the coming paradigm shift will be a more equal world. Rather, the pattern of inequality will change. The balance of power will shift in unpredictable ways: some of those who are currently wealthy will become poor, and people who have historically been poor and downtrodden could become rich. For example, the pivot away from fossil fuels and towards minerals and metals will strip oil-producing countries and their Western masters of political power, while giving it to resource-rich but financially poor developing countries. Those who stand to lose will fight to keep their power, initially using trade and finance as weapons, but ultimately resorting to military force. Historically, wars have often been fought over control of scarce resources. I see no reason to suppose this could not happen again.
Domestically, demographic shifts are undermining the intergenerational contract that underpins all societies to breaking point. An ageing cohort that owns most of the wealth and has promised itself an extended retirement at the expense of a shrinking cohort of younger people is dominating the political agenda. For the first time in history, as far as we know, young people today face a poorer future than their elders, unable to acquire significant wealth (unless they are fortunate enough to inherit it) and loaded with debt from the very beginning of their working lives. They are also increasingly unhappy, with 16-25s the most miserable of all. If the current paradigm shift doesn’t break this unhealthy situation, the next one surely will.
As seen so often throughout history, many people are frightened by the advance of technology, and want to suppress or contain developments that have the potential to overturn familiar organisational structures and ways of working.
There’s also the shock of technology. As seen so often throughout history, many people are frightened by the advance of technology, and want to suppress or contain developments that have the potential to overturn familiar organisational structures and ways of working. We’ve already seen how working from home, enabled by internet technology, has become the norm, at least some of the time. And the crypto world is experimenting with virtual forms of organisation that don’t look anything like traditional companies (although they do look a bit like cooperatives).
Not everyone welcomes the advance of technology. Workers fear being replaced by robots or computers and many long to return to the days when they could count on well-paid jobs for life in manufacturing, extractive industries or transport. The prospect of a future in which most people do the kind of caring and creative jobs that today are poorly paid, insecure and often stigmatised, fills them with horror. I expect there to be more industrial unrest in the future as workers cling to their old jobs and demand better pay for their new ones.
But technology supports and encourages diversity. It frees people from routine drudgery and can support them to make the best use of their skills and abilities. When artificial intelligence overcomes its teething problems and finds its true place in the economy of the future, there could be a productivity boost ushering in a new golden age of wealth creation.
I don’t know how bad things will get before our new paradigm emerges. The resurgence of the nationalist far right, and the growing attacks on minorities, is deeply concerning. The last time the far right rose like this, it did not end well…
But when we emerge from this period of chaos and violence, the financial and economic world, and perhaps even the political world, could look very different. The petrodollar standard may have given way to a multipolar world with several competing international currencies, with stablecoins (perhaps issued by a new global central bank) facilitating international trade. The UN and its satellite institutions could be replaced by new institutions no longer dominated by the Cold War powers. There could be different regulatory structures better suited to an internet-based, virtual, cryptographically secured and, perhaps, decentralised financial system.
There will almost certainly also be new nation states, some emerging as a result of war, others born of the breakup of existing states. As these new entities, and newly powerful existing ones, find their voices and make their presence felt on the international stage, they will shape the emerging paradigm.
But nation states will continue to conflict at the edges and cause economic earthquakes and military eruptions. Inflation may pass, but instability will continue to be endemic. And the resolution of war contains within itself the seeds of the next war. Whatever form the new paradigm takes, it will itself eventually implode under the strains of its inevitable inequalities and contradictions. This will not be the last crisis.