The Great Confusion

At one point last Thursday, the Dow Jones industrial average plunged a heart-stopping 527 points on new recession fears. Six weeks before it soared 430 points on signs of recovery—its tenth highest point gain in history. That was just a day after its worst decline since 2008—a 635 point plunge—amid worries about US and European finances. If there’s one thing the market is clearly telling us, it’s that it has no clue where the US—and global—economy is headed.

This uncertainty has infected the economic debate.  Everyone is looking for the magic policy that will fix the economy—especially in the US, where an election is looming—but it’s hard to agree on the right policy “fix” when no one agrees—even three years after the financial crisis—on the source of the problem. Are we mainly suffering the aftershocks of the burst US housing bubble? Or the future shocks of fast-rising China, India, and other emerging giants? Is the problem too little fiscal stimulus, as Paul Krugman and other Keynsians remind us ad nauseum? Or too much debt, as the dour disciples of von Mises and von Hayek would have us believe? Is this the brink of economic collapse, or the cusp of economic boom?

No one knows. This uncertainty partly explains why the policy debate in the US, as elsewhere, has become so shrill and polarized—as if arguing a case loud and long enough will make it true. Uncertainty about the future—ironically—has also made the debate even more dependent on the “insights” of long-dead economists and the “lessons” of economic history—with Hoover, Keynes, and the Great Depression haunting the current economic drama as pervasively as the King haunted Hamlet.

Which is perhaps the biggest problem.  We are all looking in the rear-view mirror when the one certainty about today’s economy is the way it’s being utterly reshaped by technological change—a process which, almost by definition, obscures the future and renders existing models obsolete. Signs of massive economic transformation are everywhere: Google growing from university start up to the world’s most valuable brand (worth a staggering $48 billion) in just over a decade; the US suffering simultaneously from high unemployment and acute labour shortages; a global economy whip-sawed between massive western deficits and massive eastern surpluses; China’s and India’s billions industrializing at a pace never seen in history—and that will never be seen again.

This is Schumpeter’s “creative destruction” on steroids. 

In the long run (and if we don’t screw up), the deep structural changes that are reshaping the global economy—innovation, integration, accelerating development—promise not just a brighter future, but one that’s quite literally ‘unimaginably’ brighter. But in the short-run, change is unsettling—a recipe for uncertainty, disruption, a world gyrating wildly between hope and fear.  

So forget the “Great Recession”, the “Great Stagnation”, the “Great Bubble” and all the other Great Events that experts confidently predict will define the future. Get used instead to the Great Confusion—and learn to live with, if not love, the roller-coaster ride that’s modernity.

Photo courtesy Reuters.