Ninety years ago, in his A Tract on Monetary Reform Keynes famously wrote “In the long run we are all dead”. That observation recently stirred a lot of debate for all the wrong reasons, after Niall Ferguson obnoxiously claimed that Keynes did not care about the future because he was childless. Whether Keynes cared about the long-term future or not (and whether he had children or not) is completely irrelevant in this context, as many (e.g. Brad DeLong and Paul Krugman) have pointed out.
The actual context in which Keynes wrote this observation was a discussion about the quantity theory of money, which states that doubling the supply of money will only double the prices, but will have no consequences for other parts of the economy. This is the classical dichotomy between real and nominal variables. Keynes argued: “Now in the long run this is probably true”. But “In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.” So, Keynes’ point was obviously not that the future doesn’t matter. His point was that simple theories that might describe long-term relationships are just not good enough to deal with current issues. In the short run, changes in money supply can have all kinds of important consequences beyond the price levels. Economists will have to make their hands dirty and delve into the complicated dynamics of the here and now.
That point gives me reason to pause, because today we publish a new issue of Global Development Horizons. In this series, we try to uncover trends that will emerge during coming decades. We deliberately step away from the here and now and focus on long-term trends. We use tools that essentially capture long-term relationships. Although these models are much more complicated than the quantity theory of money, they too try to abstract from short-term dynamics. So, is this effort in Keynes’ words “too easy, too useless a task”, especially since all policy makers and most economists are still occupied with the aftermath of the global financial crisis (as we are living in “tempestuous seasons”)? I definitely don’t think so. Otherwise we would not have published the report.
Under current circumstances, I am tempted to turn Keynes’ argument on its head. Five years after the crisis, it is “too easy, too useless” to continue to merely focus on short-term solutions and short-term dynamics. What was utterly pertinent immediately after the crisis is gradually becoming less and less relevant. We have to shift our focus toward underlying structural issues. Economists have to make their hands dirty by addressing these structural issues. It is quite possible that the real “tempestuous seasons” are to be found in the long-run trends and not in the short-term dynamics. I am not thinking about the debt problems of some governments, but about other issues that should keep policy makers and economists awake at night (and preferably after lunch time too): how can high-income countries regain their competitiveness? How do we bring climate change under control? How can emerging economies reflect their growing economic power and start providing global solutions for global problems? At what pace should emerging economies increase their role in international financial markets? How should developing countries cope with populations that grow old before they grow rich? How should developing countries design their cities, transport systems and energy supply? Just to name a few of the long-term challenges.
If high-income countries keep ignoring the more structural problems they might follow in Japan’s footsteps and enter long periods of stagnation. A short-term and backward looking focus can ultimately sap life out of growth dynamics. In many developing countries policy makers are taking a much longer view, asking themselves how the world might look like a decade from now, how they can alleviate emerging bottle-necks and accommodate necessary changes in economic structure. The resulting reform agendas have been very successful. But even in those countries continued high growth is not guaranteed without further reforms. Being successful today is not good enough. Even as life is not eternal, we all want to be alive in the long run and we all want to thrive in the long run. The latter won’t happen if policy makers postpone measures needed to address emerging challenges.
In this new Global Development Horizons we look at coming trends in saving and investment. The share of developing countries in global investment was stable at around 20 percent for many decades. In the last 10 years that share has started to rise rapidly and the report anticipates that, within 15 years, two-thirds of global investments will take place in developing countries. That raises many questions. Will these economies save enough to finance all the investment opportunities? That is not obvious as ageing populations will save less. Even with enough saving it is a huge challenge to create the needed efficient financial intermediation in the fast growing developing world. Till now, developing countries have been virtually absent from the international financial arena. Once their share in global investment and saving rises to two-third, that is no longer possible. Policy makers will have to carefully prepare for an increasing role as borrower, investor, and intermediator in international financial markets.
Emerging long-term trends pose key challenges for policy makers and economists alike. But how sure can we be about these trends? We even have a hard time forecasting next year’s growth. Why do we think that the attempt to anticipate future trends is useful? If the uncertainty of economic developments during coming decades is truly huge, aren’t we back in Keynes’ realm, and shouldn’t we acknowledge that long-term relationships say little about real life? In a further blog I will come back to the issue of uncertainty while discussing forecasts and scenarios.