Musings Report #16 4-20-13 The Rise and Fall of Great Powers
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For those who are new to the Musings reports: they are basically a glimpse into my notebook, the unfiltered swamp where I organize future themes, sort through the dozens of stories and links submitted by readers, refine my own research and start connecting dots which appear later in the blog or in my books. As always, I hope the Musings spark new appraisals and insights. Thank you for supporting the site and for inviting me into your circle of correspondents.
The Rise and Fall of Great Powers
Having finished How Rome Fell: Death of a Superpower by Adrian Goldsworthy last week, I have tackled Paul Kennedy's influential book from 1987, The Rise and Fall of Great Powers.
Kennedy avoids the temptation to extract grand theories from history, quietly mocking Wallersteins's "world systems" and related analyses. In this he follows fellow historian Fernand Braudel, who also hesitated to draw overarching theories from the messy history of capitalism.
Kennedy proposes one mechanism that he claims does hold true over time: it's not the absolute wealth and power of any one nation or empire that matters, it's the economic growth rate of competitors and its wealth and power relative to theirs that matter. A nation whose economic base is growing at a lower rate than a competitor slowly become relatively weaker than its rival, even though its absolute wealth is still increasing. (This does not seem true of Rome, as its only real competitor was Persia, a considerably lesser power.)
He also notes a tendency for powers in relative decline (i.e. those growing less robustly than their neighbors/rivals) to spend more on military security as their position in the pecking order weakens. This diversion of national surplus to military spending further saps their economic vitality as funds are shifted from investment to unproductive military spending. This creates a feedback loops as lower investment weakens their economic base which then causes the leadership to respond to their weakening power with more military spending.
This feedback creates lags, where an economically weakening power may actually increase its military power, until the overtaxed economy implodes under the weight of the high military spending.
This dynamic certainly seems visible in the history of the Soviet Union, which at the time of this book's publication in 1987 was universally considered an enduring superpower with a military that many believed could conquer Western Europe with its conventional forces.
This debate over the relative superiority of Soviet arms now seems quaint in the light of the collapse of the USSR a mere four years later, but it is worth recalling that one of the most influential defense-doctrine books of the mid-1980s was The Third World War: The Untold Story, a novel by Sir John Hackett, about a fictional Soviet attack on Western Europe in 1985.
It was widely recognized by the late 1980s that the Soviets' relative power was in decline compared to the U.S., as the U.S. had worked its way through the malaise and restructuring of the 1970s and re-entered an era of strong economic and technological growth in the 1980s, outpacing the sclerotic Soviet economy.
It's also worth recalling the truly dismal status of the Soviet and Eastern Bloc economies compared to the Western economies: inexpensive consumer items such as kitchen toasters were uncommon luxuries. In other words, while the Soviet economy was probably still expanding in the 1980s, the rate and quality of its expansion was considerably less than the growth of the West.
If one economy grows by 1% a year and another grows by 5% a year, in a mere decade the faster-growth economy will have expanded by more than 50%, while its slower-growing rival's economy grew only 10%.
Many observers (especially on the Left, where suspicion of military spending is never far below the surface) see the U.S. as following this same path to decline and fall, as post-9/11 defense spending has skyrocketed while growth has stagnated. Despite what I see as terribly wasteful spending on overlapping intelligence agencies and insanely costly programs like the F-35 fighter, U.S. defense spending remains around 5% of GDP (Pentagon/National Security budget is around $690 billion, GDP is around $15 trillion).
Though statistics from the Soviet era are not entirely reliable, various scholars have estimated that fully 40% of the Soviet GDP was being expended on its military and military-industrial complex. During the height of the Reagan buildup, the U.S. was spending about 6% of its GDP on direct military expenditures. If you include the Security State (CIA, NSA, et al.), the Veterans Administration and other military-related programs (DARPA, etc.), the cost was still less than 10% of GDP.
How about America's position relative to other Great Powers or alliances? Interestingly, America's decline has been noted (and predicted) since the 1970s. Other nations such as Japan were growing much faster and were expected to overtake the U.S., based on the extrapolation of high growth rates into the future.
Once again the same predictions are being made, only this time it is China that is logging high annual growth rates that are being projected into the future. The more things change, the more they remain the same.
Kennedy ends his book with a brief chapter looking ahead from 1987. He is careful not to make any outright predictions, but it is fair to say that he completely missed the bursting of Japan's miraculous high growth economy and the implosion of the Soviet Union a mere four years later in 1991. With the benefit of hindsight, we can discern the dynamics that led to these abrupt declines of relative power. But at the time, Japan's economy was universally regarded as superior to the U.S. economy and the USSR was widely viewed as a permanent superpower rival to the U.S.
How can we be so wrong about projecting present trends 5 or 10 years when we have so much data at our disposal? Why can't we identify the trends that end up mattering? Reading political-economic history books written a few decades ago reinforces our humility: we cannot predict the future, except to say that projecting present trends leads to false predictions.
Virtually no one in 1987 foresaw the limited Internet of the time exploding into a globally dominant technology, yet a mere decade later the web browser, cheaper memory, faster processors and broadband cable and DSL launched a digital revolution.
In 1987, pundits were predicting that Japan's "5th generation" computing would soon eradicate what was left of America's technological edge. They were spectacularly wrong, as the 5th generation fizzled and Japan became an also-ran in software and web technology, a position it still holds despite its many global electronic corporations and vast university research system.
Japan's modern economy was set up in the late 1940s and early 1950s to exploit the world of that time. Sixty years later, Japan is still a wealthy nation, but its relative wealth and power have declined for 20 years, as its political-financial power structure clings to a model that worked splendidly for 40 years but has not worked effectively for the past 20 years. The decline is not just the result of debt and political sclerosis; Japan's vaunted electronics industry has been superseded by rivals in the U.S. and Korea. It is astonishing that there are virtually no Japanese brand smart phones with global sales, and only marginal Japanese-brand sales in the PC/laptop/notebook markets.
The key dynamic here is once the low-hanging fruit have all been plucked, it becomes much more difficult to achieve high growth rates. That cycle is speeding up, it seems; western nations took 100 years to rapidly industrialize and then slip into failed models of stagnation; Japan took only 40 years to cycle through to stagnation, and now China has picked the low-hanging fruit and reverted to financialization and rapidly rising debt after a mere 30 years of rapid growth.
The key takeaway in my view is that the Chinese leadership knows deep reform is necessary but the incentives to take that risk are low. Perhaps that is a key dynamic in the cycle of rapid growth leading to stagnation: the leadership, like everyone else, cannot quite believe the model no longer works. There are huge risks to reform, while staying the course seems to offer the hope of a renewal of past growth rates. But alas, the low hanging fruit have all been picked long ago, and as a result the leadership pursues what I call "doing more of what has failed spectacularly."
Director Michael Apted has been filming a remarkable series of documentaries following the lives of 14 English people since the age of 7: The Up Series is a series of documentary films produced by Granada Television that have followed the lives of fourteen British children since 1964.(The titles: 7 Up, 14 Up, and so on, the latest being 56 Up.)
We expect those children with few advantages in life (i.e. lower-class) to do less well than those with more advantages, and this linear expectation is fulfilled in some cases. But in most cases, the individuals' lives are entirely non-linear: some decades they do less well, in others they do much better, and the dynamics that arise and dominate each stretch of their lives are not very predictable.
This series reinforces our humility about predicting the life paths of individuals.
So is there a unifying theme here? I would say yes, and it is embodied in this quote from Charles Darwin, co-founder of our understanding of natural selection and evolution: "It is not the strongest of the species that survives, nor the most intelligent, but the ones most adaptable to change."
Market Musings
The collapse in the price of gold--which incidentally began shortly after Goldman Sachs issued a "short gold" recommendation--was certainly novel and exciting. What does it mean? I hesitate to render any judgments, but it seems many observers feel gold is "done" and as a result the gold miners are also "done." Perhaps this is so, but just based on sentiment (roughly 99% bearish), we can expect some sort of reversal in the miners, even if it all the retrace does is relieve oversold conditions and set up another decline.
It's one of those situations where it's better to take things one step (each week) at a time rather than draw over-arching conclusions. In general, huge spikes down characterize ending moves, not beginning moves. Another remarkable feature of the current mood is the outbreak of schadenfreude, as pundits scuttled out of the woodwork to celebrate the destruction of gold bugs' assets and confidence.
Sometimes extremely negative sentiment reflects the general acceptance that bankruptcy is now inevitable. In other cases, it is an emotional swing that does not reflect financial realities. Right now, sentiment on gold and gold miners is extremely negative. Is that a tradeable extreme? Gold has bounced from $1,321 to $1,400. Is that a bounce that sets up a further decline, or is it the start of a real recovery? There is no way to know, we'll just have to watch each week's action for clues.
The stock market seems oversold and may be due for a bounce, but how enduring that bounce may be is in question. A lot of things are rolling over. However "buy the dip" has been rewarded for 4+ years, so the Pavlovian response (reinforced by official buying and liquidity injections) may well lift markets into May, just to spoil the "sell in May" party.
The best thing that happened to me this week
I've written 15,000 words of my next book, roughly half of the first part. (Working title: FUTURE SCHOOL) I feel like I'm making progress. That always feels good.
From Left Field
Aviation fans may have already seen these: non-fans, please bear with our delight in large aircraft and fighters swooping through clouds:
The 10 best Hawaii beaches (video) this is too long to watch; just look up each beach on Google. I might have visited the Maui beaches 40 years ago, I don't recall their names. Any list of "best beaches" depends on what features you want most: kid-safe, easy swimming, uncrowded, scenic, body surfing, etc. Shore-break beaches like Mokuleia and Hapuna (two of my favorites, neither on this list) are very scenic but not good for swimming on rough days....
"Panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed by its betrayal into hopelessly unproductive works." (John Stuart Mill)
Thanks for reading--
charles
