No arbiter decides who gets what in the global economy, and no forecast survives it for long. Convergence opens by asking what we can actually know about the economy, and how poor nations can still find a path to wealth.
Favour Ayorinde
Favour Ayorinde
This is a column about economics.
Our primary pursuit is allocation. In other words, in a world where not everyone can simultaneously get everything they so desire, who should get what things, when, and how?
There are (plausibly) rational methods by which these questions could be answered, but in the real world, these are largely ignored. You could construct a perfect system that gave to each man what he needed and took from him what he could provide, but that would not survive contact in the real world.
The initial problem, as many will point out, is that people aren't really rational, and that's somewhat true. But a more serious problem is that there is no arbitrator, no party outside economics that dispassionately allocates resources amongst competing desires.
Therefore, even if you could find such a perfect system, it wouldn't be universally adopted; there is nothing and no one to force it.
This means most interactions are infinite games. There is no final resolution, and the goal is simply to maximise your current rewards while staying in the game for as long as possible. This means transactions and coercion, coalitions and defections, friends and foes, alliances and rivalries. This means no permanent interests, no permanent rules, no permanent floor to land on if you fall.
Yes.
You may have heard that economists are terrible at predicting the future. They are, and not from want of trying: they have the unenviable job of predicting the economy, a system with four nasty properties.
Every action is connected to other actions, even if their connections are separated by chains too long to trace. A shipping company changes routes in Malaysia, and thus a factory in Canada misses a delivery. Or perhaps a central banker adjusts a rate in Japan, and a worker in the Philippines gets fired. Very few decisions stay put; very few choices are isolated.
Small changes in inputs can produce enormous changes in outputs, and large changes can produce almost nothing at all. A minor default can cascade into a continental banking crisis, or a major stimulus package can disappear without a trace. Relationships that work at one scale can blow up at another.
The system reacts to being understood. Learn something true about the economy and act on it? Now what you've learned is probably no longer true. Everyone else changes their behaviour because of your actions. A weather forecast doesn't alter the weather; an economic forecast alters the economy.
Weather, disease, earthquakes, failed harvests. These do not care what anyone believes; they do not announce their arrivals in advance, and they land on whoever happens to be in their way.
In principle, then, an economy is highly unpredictable.
I'm telling you this early so that you become aware of what you're getting into. This is a madman's game; we are fighting against the violent storm of billions of actions, decisions, and events that pull and push on each other and threaten to drag us along for the ride.
No.
Against this storm, we have managed to extract some principles that hold more regularly than chance. Not too many, and never for certain, but that's more than nothing. It means an economy is highly, but not completely, unpredictable.
This is a tiny victory, but we should take it, firstly because these principles are all we have, and secondly because they are an anchor in the chaos.
Even better, we know almost exactly why it is possible to predict anything about economies in the first place. There are three main reasons.
Accounting identities and budget constraints hold: a person's deficit is another person's surplus. You can't consume what hasn't been produced; if things are expensive, fewer people buy them, etc. These are universal actions and outcomes that reassert themselves over and over again.
Things take time, and that gives enough time for study. Demographic shifts happen in decades, geography in eons; installed capital depreciates slowly, and supply chains persist. Things don't just pop in and out of existence. This slowness of change creates short-term predictability.
First, evidence can underdetermine the lesson. For example, are high tariffs on cars good? The evidence is consistent with "it depends." In such a situation, the action that other agents ought to take is unclear, so they just don't take it.
Second, updating is costly. Sunk cost is a major one, and there is also institutional and ideological inertia, so even if people ought to take action in response to your actions, this may not happen rapidly or reliably.
Third, learning does not imply acting. Other actors may be constrained by problems outside their control, which slows or blocks action. You may imagine a country that has now learned that a mineral is about to become critical to the global economy, but its rival has already bought up most of the supply and is now a price setter, so this country simply declines to act.
All of these work together to carve out islands and isthmuses of stability and predictability that we can study.
"We may never fully understand economies, but that's not what economics is for. Economics is for taking what we can get and using it to get what we want."
About 200 countries today, give or take.
They control mostly stable territory; wars of conquest and annexation have grown unusually rare; however, they differ vastly in wealth, in capital, in what they can build and discover.
There is at least one major economic hegemon, the United States of America, with its dollar currency, and perhaps one challenger: China, an economic miracle, the most dramatic case of convergence we have yet seen.
There are supply chains for virtually all products and services that span the entire globe. No single country can now outproduce these intricate chains entirely domestically, not even China.
The world is deeply linked, a web built strand by strand over decades.
These 200 countries have no arbitrator or higher authority to govern their actions, nor to distribute resources amongst them. So they must reach consensus on every relevant issue, or some countries must override or ignore others.
This is not new.
Not entirely.
It's not obviously true in the modern world, where even the greatest superpowers consult with weaker nations, can be sanctioned by coalitions, and can even be drained of trade by their own partners.
For instance, the most powerful country on the planet, the US, is highly reliant on its allies and networks, and consistently struggles to make unilateral decisions about the direction of the global economy.
Great powers in history have overreached and burned themselves; they've overplayed their hands, and they have lost support from allies. They have died from a thousand cuts they were powerless to stop. They are not invincible.
The power asymmetry between nations is not high enough to justify a blanket claim that the most powerful rule; the strong may impose their will, but they must pay a price to do so.
The argument is not that powerful states do not have disproportionate power to get the things they want, but that they are not rulers; they are, at their best, leaders, and at their worst, bullies.
They must gamble.
"In truth, all nations must gamble; this is fundamentally a game of chance and skill, but weak nations in particular must gamble harder and with a clearer head than everyone else."
A weak nation cannot realistically defend its own sovereignty under attack. It is usually poor, has no chokehold on the global economy, and has a relatively weak economy.
Many of these countries live under the rules set by more powerful countries and often take what they can get, be it foreign aid or trade agreements.
They have limited ability to choose their own forms of government, their own economic systems, their own laws, and even their own morals. Their sovereignty is essentially conditional and revocable.
Under these conditions, the allocation of goods, services, and resources is not entirely autonomous.
But they are not entirely at the whim of powerful nations either. Even the weakest nations have a wide variety of defences against the storm of the economy and geopolitics. They can form alliances, join coalitions, and use asymmetric warfare.
For any nation, its economic outcomes are determined by various factors.
First, its domestic policy: what the government does about the things within its own territory. How it taxes its own people, how it builds infrastructure, how it does, or does not, give freedom to enterprise.
Second, its foreign policy: which great power it aligns with, which trade agreements it can get signed, which coalitions it joins.
Third, policy couplings: how the policies of other countries interact with it. Perhaps a great power hikes interest rates, perhaps a nearby nation begins to industrialise, etc.
Fourth, Black Swans: surprising and unpredictable events that, by definition, can't be prepared for.
Therefore, a static analysis of any single country hides massive variance and interactions, which means proper economic analysis is inseparable from historical and geopolitical analysis.
Study and learn, then plan.
We'll learn what economists have discovered, what they agree and disagree on; we'll learn about the data and the patterns they show.
Then we'll learn about history through the lens of economics and attempt to trace out various causal chains.
Then, from all of these, we'll try to predict the future and plan for it.
As we do this, epistemic humility is paramount; no one can predict the future, least of all economists.
The goal is Convergence. How do weak and poor nations become wealthy in a world of chaos and strife?
Let's find out together.
