With more and more people lashing out against markets, globalization, and economic growth, it is worth pausing to consider the world we may be losing. Both current challenges and the past failures of economic planning suggest that we need more market pricing, more globalization, and more growth, not less.
Our world has become both confusing and confused. The international economy works well, but the political economy is mired in hostility toward markets, frustration at globalization, and skepticism about growth. Each of these beliefs interacts with, and reinforces, the others. Even large segments of the global elite are wringing their hands over the perceived failures of markets, globalization, and growth.
It is easiest to see where the hostility toward markets came from. Markets depend on prices, but prices have become a source of anxiety and puzzlement for many people. Not only have prices risen, but many twenty-first-century marvels have no obvious price at all. Consumers are now accustomed to universal internet connectivity and freely available services like search engines. They can download or stream an infinite supply of entertainment, and they are saturated in news media – most of which they do not pay for (at least not in any traditional sense). In many countries, people also receive medical services apparently for free. Even America’s notoriously expensive health-care system handed out COVID-19 vaccinations and tests.
At the same time, expansive fiscal and monetary policies, along with supply-chain disruptions stemming from the pandemic and Russia’s invasion of Ukraine, have fueled inflation, making everyday existence (energy, food, housing) feel more expensive. We have a vision of the future in which everything is free, yet our current reality feels unaffordable and exploitative. With citizens demanding government intervention to moderate or reverse the price surges, politicians face enormous, irresistible pressure to respond.
But those responses often make matters worse. When governments try to hold down prices, for example, demand continues to rise and shortages of basic goods persist. These shortages then fuel concerns about the economy’s dependence on distant resources – be it Russian gas, Taiwanese semiconductors, Chinese electronics, or Indian antibiotics.
A naive trust in global interconnectedness has been replaced by the dangerous fallacy that it would be better to unwind all those international linkages and respond nationally to national needs. The pandemic and Russia’s war have intensified the apparent slowdown in globalization that began with the 2008 financial crisis. National self-sufficiency is the new order of the day.
That brings us to the new skepticism about growth. Though deglobalization cannot fail to make resources costlier, some will ask whether we even need so many distant goods in the first place. Shouldn’t we stop thinking primarily in terms of economic growth, and start focusing on the sustainability that we could achieve through simpler lifestyles?
Books outlining this no-growth or degrowth agenda have become best-sellers. In Japan, philosopher Kohei Saito argues that capitalism has reached its environmental limits and needs to be replaced by degrowth communism. In Germany, journalist Ulrike Herrmann follows the same logic to forecast an “end of capitalism.”
But the appeal of this message lies less in its logic than in its intended audience. Japan and Germany are extreme cases of a demographic phenomenon that is widespread across advanced economies and – more recently – in China, too. Birth rates have been falling, and people have been living longer, resulting in societal aging and shrinking populations. Longstanding concerns about economic sustainability have thus mixed with newer fears about the old rigging the political system to their advantage. But, as economists Charles Goodhart and Manoj Pradhan contend in an important 2020 book, these demographic trends and the backlash against globalization will not help. On the contrary, they jeopardize the foundation of price stability.
To be sure, the new anti-growth manifestos at least try to offer a blueprint for an alternative, non-price-based, non-globalized economy. But the historical parallels they draw are deeply flawed. For example, they take inspiration from World War II Britain, where strict rationing ensured that the rich could not consume too much. But, in fact, 1940s Britain was extraordinarily dependent on the United States – that is, on external supplies and an external productivity revolution.
As in every controlled economy, Britain suffered shortages, and a black-market economy run by shady dealers and spivs emerged. It is precisely these kinds of underground, opaque markets that foster corruption, distrust, and social decay. The alternative to a transparent market economy is not a rationally administered economy, but a worse form of capitalism.
Some planned systems are so rigid – so unresponsive to feedback – that they break under the pressure of scarcities. As the brilliant Hungarian economist János Kornai showed, shortages – and the hoarding and dysfunctionality that accompany them – are what undermined and eventually destroyed communist command economies in the twentieth century.
Dealing with today’s global challenges requires honest prices that reliably convey information about costs – not price suppression. But that, in turn, will require considerable innovation and ingenuity. For example, we may need negative prices to make clear to consumers that “free” digital services are in fact selling their personal information; in other words, one’s data should command a positive price.
The environmental case for accurate pricing is even more obvious. Polluters must not be allowed to escape paying the real price for their activities. And market-set energy prices are needed to spur consumers to reduce their carbon footprint and give investors a signal to channel resources to cheaper non-carbon energy sources.
The market mechanism derives its power from the way it generates a multitude of dynamic, interacting responses – an emergent phenomenon that cannot be replicated by any planner in an economy of scarcity. The externalities of economic action need to be priced in so that the market can function properly. Transforming the economy for the better calls for boldness and imagination, but it also requires the kind of concrete knowledge that only the price mechanism can generate. Growth provides the resources we need to tackle big problems. But to achieve it, we also need markets and interconnectivity.
Harold James is Professor of History and International Affairs at Princeton University. A specialist on German economic history and on globalization, he is a co-author of The Euro and The Battle of Ideas, and the author of The Creation and Destruction of Value: The Globalization Cycle, Krupp: A History of the Legendary German Firm, Making the European Monetary Union, and The War of Words.
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