Then & Now

The economic history of the last century has been marked by sinusoidal swing between government fine tuning of the economy and free markets. The failure of the Federal Reserve to intervene in the wake of the 1929 stock market crash was the turning point for the adoption of Keynesian economics. Today we see a strikingly similar repetition of the past.

Although the world economy did not plunge to the depths that the US economy did during the Great Depression, the cycle of government and control and free markets is very apparent. A system of economic modality is only as good as the bubble it can sustain. When the bubble bursts we see a new system introduced. This back and forth motion between government intervention and free markets was very evident during the Great Depression, the Great Stagflation and today in the aftermath of the 2008 Financial Crisis.

An IB economics teacher once told me that economics is akin to driving down a hilly stretch of road with the front windshield covered. Indeed, our modern economic tools have not yet able and will never be able to allow mankind to have a-priori knowledge of the future state. It would appear that the world economic modality is condemned to a cycle between government and free market economics. It is as if the world is a blind child navigating its way through an alleyway of infinite length. Only when we have hit the wall do we realize that it is too late, the economy has overheated and a new direction must be taken. In light of this we must accept the fact that the rules of the game in the competitive landscape has changed.

The massive government bailouts and stimuli following the Financial Crisis is already a sign that the economic modality has shifted towards intervention. The recently introduced Frank-Dodd Act in the United States places quite drastic regulatory reforms on the financial services industry and as introspective analysis of what went wrong nearly three years ago continues we can only expect to see more regulations.

Businesses operating in this more complex environment must be prepared domestically to vie for weaker demand, but also face tougher competition from emerging markets. In some ways, the Financial Crisis lessened the gap between developing and developed nations as much of the economic set backs were felt in those nations with the greatest exposure to the financial services industry. From this we can infer that the power asymmetry we saw during the Cold War with the world roughly aligned in a binary opposition is far weaker today. Developed economies are facing a spending limbo as they try to reduce massive budget deficits. The world is becoming more fragmented with localized powers such as China, Brazil and India emerging to challenge the hegemony of the United States. For these emerging powers, their growth model is very simple – copy the technologies and growth mechanisms that have propelled the developed nations to their place.

This growth model is most apparent in China, where labor costs are rising to such an extent that we are seeing the beginnings of a shift towards higher value added products in computer software or photovoltaic modules. China currently has significant market share in solar wafers and has put massive emphasis on the production of light emitting diodes. Now these technologies are by no means cutting edge in developed nations for they have been around for at least a decade. The key question is how will developed nations grow in the face of stiff higher value added technological production from emerging markets?

For the United States, the answer can be found in Silicon Valley which is still the innovation capital of the world. Research being conducted in nanotechnology and the University of California, Berkeley or genomic sequencing at Stanford University will be the key for US growth. We have witnessed this type of innovation driven growth in the US during the 1980s with the rise of Microsoft and IBM, both of which revolutionized the way professional work is conducted. The emergence of information technology has subsequently spurred a plethora of nuanced industries. However, since then we have seen too much speculation in very low entry barrier internet companies and the financial markets. Such irrational exuberance as John Maynard Keynes once said is not sustainable. The United States and other developed nations now need to focus on ground breaking innovation once again.

Such innovations need to be outside the internet startup paradigm, for they need to be completely new and radical technologies which can truly change human living standards. Technologies such as genomic sequencing for personalized medicine, nano-scale targeted drug delivery vehicles or even the long talked about fusion reactor need to have more funding to make them a reality. Though these technologies may be capital intensive and require significant research, the returns if successful will far outweigh the costs. This shift in funding may be from government and market solutions. Already we see that a significant number of internet startups are being acquired by large conglomerates like Google or Cisco. This trend of consolidation will continue and may shift more focus for entrepreneurs to lucrative new technologies in the fields I have mentioned above. In conjunction, governments and the private sector must also take measures to educate more young students in math and science based subjects to offer a ready talent pool that is needed for the major technological breakthroughs.

Indeed, the mean reverting nature of world economic paradigm has put us in a period of increased government regulations, while also allowing developing economies to play catch up. Speculation and the movement of capital which fuelled the Financial Crisis are not sustainable growth models. Developed nations must be willing to accept the reality that a more long term growth model in real innovation is required which has the potential immense long run returns. My vision for world growth and innovation is thus that we will see a world with greater power distribution where developing nations copy the growth model of the developed, while developed nations must pursue real technological innovation.

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