Richard Pomfret

In a nutshell

This book is about adopting a longer-term perspective to understand the world we live in.

In the 1800s a handful of countries, initially in western Europe and lands settled by Europeans, illustrated the potential of market economies to increase output to unprecedented levels. The formula was no secret and other European countries and Japan were experiencing economic growth by the end of the century. Traditional societies loathe to increase individual liberty fell behind, while countries which prospered in the Age of Liberty came to dominate a global economy and their empires spanned the globe.

By the early 1900s success was breeding tensions, centered on the distribution of the fruits of prosperity. Tensions between established and rising economic powers fuelled a war of unmatched battlefield killing, which led to the collapse of dynastic empires centered in Saint Petersburg, Constantinople, Vienna, and Berlin. In Russia, and later in Germany, new regimes emerged which rejected unfettered capitalism in favor of state-controlled economies aimed at benefiting workers (Communism) or the nation (Fascism). The market economies with democratic political systems and individual liberties were slow to respond to the challenges, and the 1920s and 1930s were dismal decades for most of them.

Conflict between systems erupted in a war which saw the defeat and discrediting of Fascism by 1945, and in a cold war which ended with the disintegration of central planning and widespread rejection of Communism. The winner was the market economy, but not the unbridled capitalism of the 1800s.

Successful high-income countries introduced measures to protect those disadvantaged in a market economy (the old, the disabled, the involuntarily unemployed, etc.) and to promote equality of opportunity (through public education and healthcare). The extent and nature of these measures varied from cradle-to-grave support in Scandinavia to more limited provision in the United States, but all provided basic schooling and accepted responsibility for the destitute.

Outside the high-income countries, the interventionist government policies adopted by modernizing countries in mid-century were jettisoned in the final decades of the century, following the lead of the Asian tigers whose economies embraced “Asian values” but clearly involved resource allocation driven by world prices and a welfare state.

By the end of the century, the idea that the desirable economic system was market-based with government intervention to promote equality of opportunity and of outcomes was dominant worldwide. The world experienced greater prosperity than ever before, and greater equality than a century earlier within and across countries. Yet, this is not the end of history.

Many states remain autocratic and unequal, although such regimes have been under increasing pressures for change, especially in Africa and in the Arab world. Some high-income countries, notably the United States, have experienced growing inequality in recent decades, but relevant political debates are not about abandoning either the market economy or government provision of social services. The extent of government involvement is debated in the early twenty-first century, focusing on healthcare in the United States and on tertiary education in western Europe. And aging populations raise concerns about support for the elderly. But the principle of public policies to mitigate inequality is unquestioned.

The long-run challenges in the twenty-first century will be how to live in an interdependent world. Disputes between powerful nations cannot be settled by force in a world with weapons of mass destruction. Uncoordinated national policies will be inadequate to address global warming, epidemics, or unpredictable threats such as stray asteroids. The consequences of failed states may be felt by others (e.g. Somalia-based piracy) and raise issues of responsibility to protect people from genocide or other crimes when their own state fails to do so (e.g. in Libya). To enjoy the benefits of the globalized economy will require an Age of Fraternity.

The wide angle

The Age of Equality is aimed as a counterweight to the short-term perspective of media discussion of economic affairs.

I am constantly struck by the gap between what we teach students in terms of the forces of demand and supply driving market economies and what the students read in the press.

On a personal level, this was brought home by oil shocks. Around 1980 reports were of permanent energy shortages and $100 oil, just as energy-saving measures and exploitation of new oilfields were about to drive oil prices down to $10 by 1986. The same short-termism occurred in reverse in the late 1990s when The Economist newspaper extrapolated current low oil prices to predict an era of $5 oil in the first decade of the twenty-first century.

As a policy advisor I have experienced a similar challenge, especially when seconded to the United Nations for a year (in 1993) advising governments of the former Soviet Union. After abandoning central planning, they faced monthly inflation rates of over 50%. Their inclination was often to blame monopolists for raising prices, if not to blame capitalism itself. They could have learned from the experience of Germany in 1923, or from other hyperinflations, that they faced a monetary policy challenge rather than having to deal with identifiable evil monopolists.

Today we are concerned about financial crises and their consequences, but it is important to understand the crucial role that the financial sector plays in a market economy—illustrated by the part that the lack of a financial sector played in the dismal long-term economic performance of Fascism or Communism.

We worry about rising inequality in the United States and other high-income countries, but the fact that people are concerned and see economic equity as a public policy issue in a market economy is a positive (and not inevitable) thing.

The economic rise of China, India, Brazil and other emerging market economies since the final decades of the twentieth century poses challenges to the status quo, but it is a good thing that the great divergence of the previous two centuries, when the gap between rich and poor countries widened continuously, is now being reduced.

A close-up

The first three pages of the Preface set the scene. If you are in a bookstore that allows more leisurely browsing the thirteen-page Introduction sets out the principal arguments—this is not a mystery book. The first eight chapters connect the dots in 172 pages, with more details and evidence in the endnotes. The final chapter presents the more speculative case for the Age of Fraternity.

Lastly

The Age of Equality is about economics as the long-term driving force behind the evolution of the world we live in. Economics is not the only force, but it is very powerful and its power is under-appreciated by many people.

Zhou Enlai is often quoted as responding to a question about whether the 1789 French Revolution was a good thing with “It is too early to tell.” The consequences of the industrial revolution of the late 1700s are also not yet fully clear. They include unprecedented material prosperity, creation of a global economy, and weapons of mass destruction. To realize prosperity required an Age of Liberty, in which inherited privileges and restrictions were greatly reduced; and an Age of Equality, in which the benefits of material abundance would be more equitably shared within and across countries; and it still requires an Age of Fraternity in which the world's population faces existential challenges.