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I have an op-ed article in the Times today, arguing that
there is light at the end of the tunnel for the world's and the
British economy: the long-term gains from living within our means
Matthew Parris hit a nerve last Saturday with his argument that
we have lived beyond our means and must now expect to have to work
harder and be 25 per cent poorer. It resonated with me as well as
many readers. He cut through all the detail of debt, default and
deficits to extract an essential truth. The West has run a pyramid
scheme, spending borrowed capital to boost current living
standards. From pensions to mortgages, from public spending to
consumer extravagance, the reckoning has arrived.
All true, but here are a few thoughts to cheer you, and Matthew,
up. First, the money was ultimately borrowed from those who had net
assets, mostly the Chinese. Allowing for a few mathematical
wrinkles, the world cannot be in debt - though given half a chance
Goldman Sachs would surely find a way to arrange a loan from the
Martians. So the world economy as a whole cannot be a pyramid
And the world economy as a whole has continued to grow: it
shrank by just 0.6 per cent in 2009 then rebounded upward by 5 per
cent in 2010, according to the IMF. The last four years have been
rotten ones for us, but good ones for Chinese, Indians, Brazilians,
even Africans. Nigeria is growing at 9 per cent a year.
Much of Africa, having stagnated in the 1980s and 1990s, has
begun growing like an Asian tiger, incrementally raising life
expectancy and living standards, inexorably cutting birthrates and
poverty. Since Africa holds many of the world's poorest people,
this is great news for anybody who cares about humanity as a whole.
There is a long way to go, but the pessimists who said that Africa
could never emulate Asia are increasingly being proved wrong.
Cold comfort for Britons, you say? Asian tigers have eaten our
lunch: if African lions are joining the feast, what hope have we? A
lot, actually. Sure, we could have grown faster too if we had
borrowed less and trained engineers rather than community outreach
co-ordinators. But trade is not a zero-sum game. Other people
getting richer means more customers for our goods and services.
Some European exports to China, ranging from insurance to perfume,
are booming. Asian airlines are ordering Airbuses as if they were
There is an opportunity there to be grasped.
Besides, a decade of stagnation while we pay down (or default
on, or inflate away) our debts, if that is what we face, does not
mean a decade of technological stagnation. The 1930s brought a rash
of innovations - from neoprene to nylon, from Lego to Biro, from
sliced bread to television - that made life better and so will the
2010s. Economic growth works by shaving seconds off the time you
must work to afford something you want, freeing you to spend that
spared time satisfying a new need. The more we work for each other,
and the more we amplify our productivity with gadgets and gas, the
more wants we can each satisfy.
Take last week's news that Blackpool is sitting on a truly
gigantic gas field, now accessible thanks to new technology. Cheap,
clean, relatively low-carbon shale gas can cut the costs of
electricity, transport and manufacturing, as it has started to do
in America already. That will lower the costs of goods and
services, freeing consumers to afford more of them, which creates
jobs and raises living standards. (And it makes the increasing of
fuel poverty and desecration of landscapes by wind farms
Think of technological change this way. Even if you
time-travelled back to 1980 with your modern salary, and found
yourself far richer than most people, you still could not find
wheeled suitcases, mobile-phone signals, hepatitis C vaccines or
decaf mocha lattes on the high street. Likewise, time-travel
forward to a prosperous 2040 without a wage increase and you might
find yourself relatively poor. But think of the products you could
find there, some of them supplied by newly rich and inventive
Africans. Other people getting rich means other people working to
invent things for you.
This is why Matthew Parris is wrong to say that the free market
does not guarantee growth - at least for the world as a whole. The
expansion of specialisation and exchange around the world will all
but guarantee the world a steady stream of innovations that raise
living standards. It is our job to make sure that we can grab our
share of those benefits.
If Britain continues to live beyond its means, and continues to
pick losers such as wind power and (God forbid) Miliband-defined
"producers", then we will indeed slip down the economic league
table. We could even be stupid enough to emulate North Korea or
Somalia and achieve absolute decline, missing out on the new ideas,
services and goods that the world will be making. But that would
require heroic efforts of collective madness that are surely beyond
even us. Aren't they?
So it is only half the story to say that we need to get back to
work if we are to work off the debt and afford the lifestyle we
thought we already had. In the long run it is more positive than
that. If we get back to work, productively, there is a gigantic
opportunity - to sell enough goods and services to the consumers of
the world so that we can afford to buy all the wonderful things
they could supply us in return. That's how we can double our real
per capita income yet again, as we have already done three and half
times since 1830.
Prosperity is not a heap of
assets. It is a system of efficient supply and demand. Remember
what Lord Macaulay said about the aftermath of the South Sea
Bubble: "If any person had told the Parliament which met in
perplexity and terror after the crash in 1720 that in 1830 the
wealth of England would surpass all their wildest dreams ... that
stage coaches would run from London to York in 24 hours, that men
would be in the habit of sailing without wind, and would be
beginning to ride without horses, our ancestors would have given as
much credit to the prediction as they gave to
Gulliver's Travels. Yet the
prediction would have been true."