The Consolations of Economics: How we will all benefit from the new world order, by Gerard Lyons, Faber & Faber, RRP£16.99
Ever since Reverend Thomas Malthus predicted that population growth would outpace agricultural production, constraining the world’s ability to feed itself, economists have been accused of being prophets of doom. The aftermath of the 2008 crisis has been no exception.
Last year Lawrence Summers warned of the risks of “secular stagnation”, arguing that there may not be sufficient investment opportunities to absorb the global savings glut, and that this is likely to weigh on growth for many years. Other US academics, such as Robert Gordon of Northwestern University, have produced similarly pessimistic theses, centre on the idea that US technological progress is likely to slow and that this would put a brake on economic expansion.
Gerard Lyons, former chief economist at Standard Chartered bank and now economics adviser to Boris Johnson, mayor of London, begs to differ. The Consolations of Economics is meant to offer an uplifting alternative. “I wanted to write this book to challenge some misconceptions [including] that we should be cautious about the global outlook. I felt this was far from the truth.”
The book is aimed at debunking the notion that the rich world is bound to lose out from the rise of emerging economies. “The outcome is likely to be win-win for the west and east: a multipolar world with a number of key economic players, and the end result being a bigger global cake,” he writes.
In theory, there is much to be said for this view. The growth of Asia, Latin America and Africa will provide US and European businesses with an abundance of consumers, the likes of which companies a century ago could only dream. Western investors will be in a position to diversify their investments in ways they never thought possible, as capital markets in the developing world deepen, offering attractive returns for ever safer assets. While the rich world is unlikely to experience the return of mass manufacturing, which will continue to chase low wages across the globe, high-end industrial and service companies will offer job opportunities to young westerners.
But while Lyons succeeds in identifying many of the challenges ahead, he often underestimates their scale. The theses of Profs Summers and Gordon are mentioned in passing and never tackled head-on. The book wanders off in several directions, which makes it an interesting primer for those who do not follow closely the gyrations of the global economy – but anyone looking for a clear path to the promised land Lyons depicts in his introduction will be disappointed.
Take, for example, free trade. It is rightly singled out in the book as the engine of global prosperity. But the repeated failures of the Doha round of trade negotiations and the obstacles facing the mega-regional pacts such as the Transatlantic Trade and Investment Partnership should offer reason for greater caution.
When the author ventures into geopolitics, once again he displays excessive optimism. His view that China and the US are too interdependent economically to stop co-operating may be right. But the rise of China will not be without bumps. Recent skirmishes with Japan over the Senkaku/Diaoyu islands in the East China Sea are only a first warning of what is likely to come next.
Lyons is fond of drawing up shopping lists of the reforms each country should pursue (“China needs to reform to avoid the middle-income trap. India needs to reform to benefit from its democracy and realise its demographic dividend. Europe needs to reform, or else it will not be able to afford its generous welfare system”). Yet he spends little time considering the political impediments that have blocked change.
The same applies to the co-ordinated macroeconomic adjustment he advocates. He argues that countries with current account deficits should reduce them while creditors ought to save less and spend more. This is easier said than done, as demonstrated by Germany’s reluctance to shrink its mammoth external surplus. Nor is the solution to these problems simply to delegate more powers to technocrats, following the example of central banking. During the eurozone crisis, Italy picked Mario Monti, a respected professor of economics and EU commissioner, as prime minister. But after successful pension reforms, his attempts to unshackle the labour market and regulated professions were hampered by the revolt of unions and trade groups.
Economics does not need to be a dismal science. But to offer real consolation to the worried western public, optimists need to come up with a more cogent argument than this book has to offer.
The writer is the FT’s global economy news editor