Essential Wisdom Lost

Who needs economics?

The post-WWII New World order established by America and Europe was guided by a simple philosophy. Open markets, free global trade, and limited state interference would lead to greater shared prosperity. Hardly a mention of industrial policy or a whiff of state intervention. It was the economy, stupid. Developing issues such as labor inequality, trade imbalance, or climate change were a distant and almost unnoticed threat.

Add to this, interacting with totalitarian states, evil empires, and noneconomic socialist policy-based countries like Russia and China was not an issue. Welcoming them into the same New World Order would be beneficial for everyone. Those countries would grow into economic, market-based countries where freedom, prosperity, and ultimately, democracy could be achieved. The world would be a safer and more prosperous place. Nothing else seemed to matter.

Never Mind

Government intervention, guiding an economic future, with far-reaching industrial policy, along with national security and climate change, is now the highest priority. Emphasis on free markets, open trade, free exchange of ideas, and mutual prosperity are all a thing of the past.

Gone are “prosperity,” “mutual benefit,” and “shared destiny.” Now we speak of “economic security” and “strategic autonomy.” In other words, government policy should guide a country or economic bloc (such as the European Union), and not free markets.

This Time It’s Different – Not

The United States and the European Union believe it can reduce the risk of global confrontation, especially with China, via restricting trade and government directives. While the Old World Order allowed America’s industrial base to be outsourced and traded away through global interaction, these created economic dependencies that could be exploited for geopolitical gain. Despite the cost savings, unprecedented prosperity, improvement in the quality of life, and overall gain in prosperity and wealth, this is somehow seen as a bad idea now.

We Want Inequality – Yes, Read That Again

Even though prosperity, by definition, creates inequality because those who are innovative and spark wealth creation will prosper disproportionately, everyone prospers. Inequality continues to be a misleading metric if everyone is benefiting and even if some are benefiting more. Innovation and wealth creation are still good ideas.

“Inequality” means keeping everyone at a low level because, without innovation, outcomes don’t change. But, without innovation, life does not improve, and no one prospers.

For some reason, this obvious conclusion is lost on policymakers.

Climate, Security, and Market Mechanisms

Market-based mechanisms are seen as insufficient to solve climate issues, much less provide additional security. Global trade and prosperity were used for geopolitical gain against less savory regimes and it undermined democracy – so goes current thinking. Pursuing greater security, tackling climate change, and seeking to counter threats from countries like China, as well as Russia (obviously the more aggressive and belligerent member of the unsavory alliance) still involves many trade-offs.

Economic considerations may be dismissed too easily. Disciplined economics has much to say about potential solutions.

Economics can be a powerful weapon. In tackling climate change, when “green” products are more expensive, consumers balk, and greater use and distribution of those products is untenable. But, if a less carbon intense product or service is more economical, adoption is easy.

Price and Profit Matter

The solution to climate change is better economic alternatives for less greenhouse gas-intensive products. It’s a simple solution and economics gives a valuable lesson.

The total cost of ownership matters. Adoption by any profit-based business is not going to happen unless there is an uneconomic and unsustainable government subsidy (which will never reach the scale required and is likely to be massively wasteful) or fundamental positive economics that will drive adoption and change.

Economics as a Weapon

Sanctions have never proved effective. Yet, we continue to revisit Einstein’s definition of insanity by doing the same thing again and hoping for a different outcome. The latest example is Russia’s invasion of Ukraine which continues to be a test case that shows the nonsensical approach to sanctions – especially against the Russians. If nothing else, Russia has more fortitude than most and can withstand whatever deprivations the West believes it can inflict.

But once again, it comes down to economics. If Russia has no market for its products – after all, they are an energy, commodities, and grain company with a flag – then Russia has no resources to fund its military machine. That is a very different approach and one that, while challenging to implement, would be the only sustainable solution.

Then There’s China

Russia has products and services that go one way toward the West. It is energy, metals, industrial materials, and food production. The same cannot be said for China.

China represents global trade and interaction, from basic consumer products to advanced technologies.

Much debate has circled around semiconductors, battery technology, and advanced software – especially artificial intelligence – as well as fundamental inputs and parts that are typically sourced from China’s industrial base.

It seems absurd to describe the world in the form of two blocs, “East” and “West.” These blocs interact more to the benefit of everyone than has been grasped via public policy.

The world is interconnected and allows for prosperity from small open economies, like South Korea, as well as once geriatric backwaters such as China who transform themselves into a world-leading industrial and technology behemoth, as well as becoming the world’s second-largest economy.

Technology Diffuses

Technology not only permeates all aspects of our lives, but components of technology also permeate all aspects of each product. It is a crucial ingredient to economic growth globally and has created tremendous opportunities on a broad base.

Specializing in highly technical inputs, the Japanese economy has remained buoyant. China and India, to a lesser degree, each provides components from diffuse sources that combine to form extraordinary products that we consume globally. The iPhone is simply one of many outstanding examples.

The Climate

While economic incentives will ultimately solve issues of climate change, government policy is nowhere near allowing this. The United States has set aside more than $1 trillion over the next decade for green stimulus and manufacturing. There have been high-profile investments but without a doubt, money will be wasted, this will be inefficient, and solutions are most likely not to appear or even be sustainable.

Intervention on this scale has never proven to be effective. While these schemes spark initial capital investment and employment, that outcome is never achieved or sustained.

Green subsidies are unwise. Economic efficiency to maintain a stable climate, limited resources, and even government budgets, is still the only solution worth pursuing.

We Hope Therefore It Shall Be

Policies based on hope and good intentions that ignore efficient outcomes and the metrics required to achieve success always fail. The policies of a New World Order will also fail.

The Old World Order Was Right

Industrial policy, restricted trade, government subsidy, and overall intervention are not only challenging to get right but are hoping to achieve multiple goals simultaneously. One subsidy does not tackle climate change, boost industrial and economic growth, or enhance security. It is bound to fail.

This conventional wisdom is promoting a “one-size-fits-all” solution. This is only a dream and never works.

The Old World Order throught innovation, growth, and opportunity were reasonable goals. The new consensus is misguided to think this is somehow still not the best way to achieve essential goals like addressing climate change and enhancing security.

Time to revisit how things actually work through incentives to innovate, sensible economic models, prosperity, and wealth creation. No other mechanisms drive change or address the world’s most critical issues. The New World order makes no sense and is bound to fail.