Conclusions

I have tried in this book to summarize where the world economy has come from in the past three centuries and to set out the core of the agenda that lies before us as we face the century ahead. This century, for the first time since the mid-18th century, will come to be dominated by stagnant or falling populations. The conclusions at which I have arrived can usefully be divided in two parts: one relates to what can be called the political economy of the 21st century; the other relates to the links between the problem of the United States playing steadily the role of critical margin on the world scene and moving at home toward a solution to the multiple facets of the urban problem. As for the political economy of the 21st century, the following points relate both to U.S. domestic policy and U.S. policy within the OECD, APEC, OAS, and other relevant international organizations. There is a good chance that the economic rise of China and Asia as well as Latin America, plus the convergence of economic stagnation and population increase in Africa, will raise for a time the relative prices of food and industrial materials, as well as lead to an increase in expen ditures in support of the environment. This should occur in the early part of the next century, If corrective action is taken in the private markets and the political process, these strains on the supply side should diminish with the passage of time, the advance of science and innovation, and the progressively reduced rate of population increase. The government, the universities, the private sector, and the professions might soon place on their common agenda the delicate balance of maintaining full employment with stagnant or falling populations. The existing literature, which largely stems from the 1930s, is quite illuminating but inadequate. And the experience with stagnant or falling population in the the world economy during post-Industrial Revolution times is extremely limited. This is a subject best approached in the United States on a bipartisan basis, abroad as an international problem. It is much too serious to be dealt with, as it is at present, as a domestic political football.

Technology and Investment

Technology has been at the heart of economic growth, from the swift Dutch commercial boats of the 17th century—called "fly boats" in English—to the latest computer or product of genetic engineering at the end of the 20th century. Since the middle of the 18th century, economists have recognized two categories of technologies. Adam Smith, for example, drew a line between the inventions of those whom he called "philosophers" (and we call scientists) that involved "new powers not formerly applied" and incremental improvement in ways of doing things that more or less automatically accompanied the widening of the market and consequent specialization. Since there were limits to the widening of the market and Smith assumed his scientific inventions were sporadic, it followed that, in the end, decreasing returns would set in. The process ended as stagnation or decline when nations had acquired their "full complement of riches." However, that is not the way it happened in the last two centuries, when innovation became a flow rather than an occasional event. A preliminary word about technology and investment. Private, domestic investment is conventionally divided into nonresidential, residential, and inventories. Nonresidential investment is the sum of business structures plus producers' equipment. Residential is primarily nonfarm structures, although relatively small items for farm structures and producers' durable equipment go with these structures. Inventories fluctuate rather stably in a 3.2 to 3.5 relation to final sales. The most volatile items in this statistical array are the linked figures for business structures and equipment and residential nonfarm structures. The hypothesis at which I have arrived is that the macroeconomic convention of viewing investment as dependent on the rate of growth of consumption (or in a fixed proportion to consumption) is too aggregated a view of the investment process. Net business investment (excluding obsolescence requirements) is primarily a function of the size of the technological backlog a country has available. The bulk of business investment that takes place is a consequence of the plowback of profits.

The Critical Margin and America's Inner Cities

I agree with British economist Alfred Marshall about the high costs of "wasteful negligence" of the poor and with the Economist that the slums in our cities constitute "America's main domestic challenge." But those judgments alone would not justify making the urban problem the subject of the final substantive chapter of this book. What argues for coming to rest here on the contemporary urban problem is the view that it will be impossible, over a period of time, for the United States to play the role of critical margin on the world scene if we do not solve the urban problem. By "solve," I do not mean a reduction of the social pathology within the inner cities to the level of the more affluent counties that surround them. That will take time, perhaps a generation or more. Indeed, it might never happen. In any case, there is no quick fix. By "solve," I mean the bringing about of a systematic and substantive process of decline in the social pathology of the inner city. That demonstration will convince those who live there and the community as a whole that the job is doable. Right now, the greatest obstacle to a solution of the problem is the belief both in the inner city and the community at large that the job is not doable. As I said on another occasion:… When i am asked how I would rate the urban problem on the agenda of national-security problems, I reply it is our number one nationalsecurity problem. If we succeed in mastering the current urban problem of our country, we shall strengthen our hand on the world scene. We shall demonstrate that we can he a truly multiracial society, which is at the same time true to the international ideals to which we as a nation have long been committed. Nothing constructive can be accomplished in this dynamic, contentious, aspiring world without the active participation of the United States. But, ii we fail to master the urban problem, we shall, I fear, turn inward, away from the world. We shall he unable to play our part at the critical margin. And we shall risk a world environment of chaos.

The Limits to Growth

Economists have never believed that trees would grow to the sky. They have always assumed, explicitly or implicitly, that some forces from the side of supply or demand would produce limits to growth. In the course of these recurrent speculations, they faced and wrote about many of the issues that the world economy will face, if I am more or less correct, in the century ahead. The first five chapters of this book dealt with characteristics of growth from the 18th century to the last decade of the 20th. In that interval, by and large, most men and women in the industrial world became accustomed to think that endless growth was more or less normal and automatic. This chapter will be somewhat different. After taking the oscillations of the Chinese dynasties as an example of the limits of traditional societies, it will deal with the reflections on the limits to growth that run sporadically as a minor theme from Adam Smith to John Maynard Keynes and beyond to our own day. I will then turn to what we can say about the next half century in terms of the limits to growth. Until Europe, after some four centuries of preconditioning, invented via Britain the Industrial Revolution, the long cycle was the normal economic and political pattern of the traditional society. The Chinese theory of the long dynastic cycle, for example, is paraphrased memorably by Mary Wright:… In brief, the theory was this: A new dynasty at first experiences a period of great energy, and vigorous and able new officials put in order the civil and military affairs of the Empire. In the course of generations the new period of vigor is followed by a golden age. Territories acquired earlier arc held, but no new territories arc conquered. Learning and the arts flourish in an atmosphere of elegance. Agricultural production and the people's welfare are supported by the maintenance of peace, attention to public works, and limitations of taxes. This golden age, however, carries within it the seeds of its own decay. The governing class loses first the will and then the ability to meet the high standards of Confucian government. Its increasing luxury places a strain on the exchequer. Funds intended for irrigation, flood control, maintenance of public grain reserves, communications, and payment of the army are diverted by graft to private pockets.

Cycles

The reason for tracing in this chapter the history of cycles, as a prelude to speculating about the future, lies in two features of cyclical history: the fact that this history includes the global depression of the 1930s that helped trigger World War II and the fact that a number of economists have underlined the role of population increase, stagnation, or decline in determining the length and amplitude of depressions and of cycles themselves. Cycles viewed historically, then, are not irrelevant to the issues of the next century. Trend periods, treated in Chapter 4, have a rhythm that runs through a series of business cycles. Trend periods affect the price level, interest rates, terms of trade, capital movements, and direction of migration. Business cycles, unlike trend periods, consist of fluctuations in employment and output. The length and intensity of businesscycle upswings —and the extent of overshooting they yield —are partially determined by the time lags involved in the particular leading sectors of the boom. The shortness of the inventory cycle—about three years — is related to the simple fact that inventories have a short life. Unlike a factory, a road, or a house, they are used up rather promptly in the production process. Inventory overshooting, therefore, tends to be capable of correction fairly soon. Housing stands at the other extreme. Houses last a generation, and their replacement (relative to inventories) is more postponable. Against this brief background, the character and timing of businesscycle patterns are examined in four periods: the 18th century, 1783— 1914, the interwar years, and post-1945. Then the cyclical problem as now foreseen for 1996-2050 will be discussed. Britain is the only country where business fluctuations in the 18th century have been examined in a reasonably systematic, if still exploratory, way. Moreover, Britain gained primacy in the course of the 18th century and remained at the heart of global cyclical fluctuations through about 1914. T. S. Ashton's chronology of turning points in British business fluctuations of the 18th century is given in Table 5.1.

The Framework

The title of this book, The Great Population Spike and After: Reflections on the 21st Century, requires some explanation. The Great Spike is illustrated in the figure that serves as the book's frontispiece.1 The figure plots the rate of growth of global population from 8000 B.C. to 8000 A.D. In highly stylized form, it exhibits an average growth rate of zero except for the period between 1776 and 2176. In that interval, the spike occurs: the growth rate rises to a bit over 2% per annum in 1976, and then falls to zero again in the next century. Falling growth rates for the global population, the downward part of the spike, are already upon us. I should emphasize the word "stylized." The world's population growth rate was evidently not static at zero from 8OOOB.C. to the middle of the eighteenth century, nor will it remain static for the 8,000 years after the spike. It will fluctuate with the vicissitudes of history. But despite the illustration's oversimplicity, its message is significant. Figure 1.1 shows, in absolute terms, the leveling off of the global population, which will take place gradually. Global population will attain, according to present estimates, an absolute level of about 10 billion people as opposed to about 790 million in the mid-18th century. This rise, along with the rise in income per capita, is a rough measure of what the Industrial Revolution has achieved since the 18th century, but the industrialization of the globe also set in motion forces that will bring about a decline in the rate of increase in population. The demographic transition decrees that after a certain point the birth rate will fall as income per capita rises. These negative forces will come to dominate the 21st century. Thus, this book concentrates on the period from the 1990s to around 2050, set against the background of the past several centuries. It deals, in effect, with both sides of the Great Spike. It is suffused, however, with the proposition that the 21st century, if it proves relatively peaceful, will soon face a period in which a rising population and effective demand in the presently developing nations will strain technologies and existing resources, followed by a long period in which the Industrial Revolution will have been largely diffused around the world.

Relative Prices

In viewing the time ahead, especially the next quarter century, I have been inclined to conclude that the industrial progress of India, China, Southeast Asia, and the major countries of Latin America are likely to produce a phase of rising prices in foodstuffs and raw materials and increased outlays to deal with the forces of environmental degradation. It is my hypothesis that for a time, in the early part of the 21st century, these developments will outstrip the deceleration of population. The more or less regular occurrence of such phases of demand pressure has marked the story of the world economy since the end of the 18th century. At least since about 1789, there have been successive periods when foodstuffs and raw materials were expensive and then cheap, relative to manufactured goods. From 1789 to 1920, these periods lasted about 25 years. After 1920, the cycles were much less regular and were significantly affected by wars, by the successive rise in the importance of oil, by outlays to preserve the environment, and finally by the involvement more directly of politics in the setting of basic prices. But economic historians are likely to agree that the period 1789-1914 was marked by two-and-a-half long relative-price cycles in raw material versus manufactured goods (see Figure 4.1). Although he had several predecessors, N. D. Kondratieff, a Russian economist who was immortalized by Joseph Schumpeter as the discoverer of the Kondratieff cycle or long wave, identified, dated, and discussed analytically this long cycle in the interwar years. He died in one of Joseph Stalin's labor camps in Siberia. The approximate dates and length of these long cycles through 1920 are shown in Table 4.1. The successive phases of falling and rising relative prices continued to follow one another despite two world wars, a pathological interwar period, and an unexpected postwar recovery, illustrated in Table 4.2. The peak of the early 1980s came in the second quarter of 1982 (or, on an annual basis, in 1981).

The Role of the United States in the Post-Cold War World

As in the other chapters in this book, it is wise to begin by recalling the past. In this case, I begin with the history and concepts that have guided U.S. foreign policy. This historical survey is useful first because the issues we will confront in the next half century, while distinctive, will not be wholly new. Americans have wrestled with them, wisely or otherwise, in the past, and that should help provide perspective as we face the future on the other side of the Great Spike. Second, looking forward, it is necessary to see the past as objectively as we can. There are endless aphorisms about the usefulness of history to illuminate the present and the future, as well as many concerning its lack of usefulness. In general, the use of history as a guide to the future has a bad name. Samuel Taylor Coleridge in one century and Lewis Namier in another both asserted that humanity could only look at the past and was incapable of looking forward. But in a book about the future, there is virtue in trying to belie Coleridge and Namier and, looking backward as well as forward, in trying to clarify where we have come from and what we face in the time ahead. In the half century from the Revolutionary War to President James Monroe's message to the Congress in 1823, the United States evolved from a group of colonies to a nation-state. In this half century, the United States gained its independence with the decisive aid of France. It struggled through another war with Britain over a neutral country's right to freedom of the seas. In 1823, it moved to guarantee the independence of its hemisphere against military intrusion from outside. There was an abiding security as well as an ideological component in the Monroe Doctrine. As for security, it warned the nations of Europe, including Russia, not to extend their military presence in the hemisphere. John C. Calhoun, then secretary of war, wished the United States to guarantee not merely the independence of Latin America from any extension of European power but also Latin America's movement toward democracy. John Quincy Adams, then secretary of state, had two objections. First, he felt that "the feudal and clerical heritage" of Latin America would render its movement toward democracy problematic.

Population and the Stages of Growth

Hamish McRae's The World in 2020 begins its discussion of population with this blunt sentence: "Of all the forces that will change the world over the next generation, demography is probably the most important." 1 agree. After all, men, women, and children determine the demand for things; men and women determine the size of the workforce; and if the supply of goods and services they produce and export is not adequate, people go hungry, lack medical services, and all too often perish too young. The rhythm of human life is such that those who are born now will, by and large, live through the middle of the next century. We owe them some things. However, as this chapter argues, the future is complicated by more than simply the rate of increase of the population. There are those who do not trace the beginning of modern economics to David Hume, Adam Smith, and their colleagues in the Scottish Enlightenment of the 18th century. They prefer the "Political Arithmeticians"— the statisticians—of the late 17th century, the greatest of whom was William Petty. Petty ranged widely over the field of economics including some wise and subtle reflections on the role of minorities in international trade. In 1695, Gregory King estimated the national accounts of England and Wales as of 1688. He used, essentially, a modern balance-sheet method, demonstrating the relationships between output and expenditure for five sectors of the economy. But it was John Gaunt as early as 1662 who cast the longest shadow on the future with his estimates of death rates in London based on the bills of mortality. His work is the beginning of modem demography. What stirred these late-17th-century inquiries? It was not a precocious academic interest in measuring population and national income; it was a sense that the nations of Europe were emerging from the feudal past and its internal struggles for power into an international arena of hostility and combat. In the following century, Britain and France, for example, were at war for more than 43 years.