The writer is professor of history and international affairs at Princeton University
Today’s pick-up in inflation was initially driven by large fiscal packages and supply chain disruptions during the pandemic. It is now certain to last much longer because of military conflict and additional disruption of supply chains. Food and fuel price rises are likely to spark discontent, protests and even revolutions across the world. Does this amount to an end of globalisation, pushing national inflation levels even higher?
Early this century, policymakers and academics identified a relationship between globalisation and a transition to low inflation in rich industrial countries, then in Asian emerging markets and ultimately even in Latin America, where inflation had been a way of life. A global labour market pressed wages down in the rich countries, and poorer countries wanted monetary stability.
Fed chair Alan Greenspan explained in 2005 that globalisation and innovation were “essential elements of any paradigm capable of explaining the events of the past 10 years”, or what was termed the Great Moderation. As late as 2021, Jay Powell, current Fed chair, still referred to “sustained disinflationary forces, including technology, globalisation and perhaps demographic factors”.
Those forces have not ceased to operate, but in order to be harnessed productively they require effective action by governments. That is where history holds out a lesson.
To understand why our future is not necessarily so bleak, and why globalisation may not be ending because of the pandemic or war in Ukraine, look at the decisive turning points of the past. They were inflationary, but they drove the world to more not less globalisation.
Modern globalisation appears as two distinct episodes. The first began in the mid-19th century but was interrupted by the first world war, after which there was a desperate attempt to revive globalisation with a more robust institutional framework. This failed with the Great Depression. Then new-style globalisation took off in the 1970s. Both caesuras started with shortages and inflationary surges.
The antithesis of globalisation can be found in periods of conflict and war, when economic advantage appears as a zero-sum game and fiscally driven inflation drives up prices. The two world wars interrupted globalisation. Now we are living through a 21st-century conflict that may be thought of as a return to the era of world wars and cold war.
Both modern globalisations were technologically driven and involved big productivity gains in transport. The steam engine opened up continents and oceans with railroads and steamships. The container cut the cost of moving goods after the 1970s. But these innovations long predated the moment at which they made an economic impact. Matthew Boulton and James Watt were creating operational steam engines as early as the 1770s. The Autocarrier, usually thought to be the first container ship, was launched in 1931.
It required a specific set of circumstances to realise the transformative character of the innovations. This came with the disruption of big price rises. The new technologies would pay off because of conditions of shortage. The adoption of innovation depended, too, on policy choices: the removal of impediments to commerce, but also a consensus around a stable, internationally applicable monetary framework, whether the gold standard in the late 19th century or modern inflation targeting in the late 20th century.
Before that happened, each era saw monetary and price surges. In the 19th century, this originated in a combination of new gold supplies and banking innovation. Over a century later, there was the same move to inflation, then a push to globalise to alleviate scarcity, then a long disinflation. The Great Inflation of the 1970s began with economic overheating which encouraged the actions of the Opec cartel. Shortages and price hikes destroyed confidence in government, and that required a rethinking of policies. The new vision involved monetary stabilisation and a refocusing of government on core tasks.
It was inflation that helped create a new policy environment in the mid-19th century and in the 1970s. As the economic and political costs of inflation became more obvious and more damaging, it appeared more attractive to look for ways to calm inflationary pressures.
For sure, the disinflationary cure — more globalisation as well as more effective government — was temporarily uncomfortable. But it drove the world to seize technical and geographical opportunities once ignored or neglected. There is, in short, a post-conflict future to which we might look forward with some degree of hope.
Source: Economy - ft.com
