We Will Be Poorer -- Why Should We Care?

Most educated observers of the global economy recognise that we in the West are likely to be relatively poorer over the coming decades than we have come to expect.  Our children are one of the few generations in recent centuries who cannot reasonably expect to be wealthier than their parents (on a society-wide basis of course, not individually).  This is a rather troubling development on its face, but the answer to the question "Why should we care?" is not as straightforward as it seems.

The reasons for the less the rosy economic prognosis are a fairly clear litany of challenges -- including:

• excessive debt of governments and (to a lesser extent) the private sector,
• competition from developing markets from which there is little protection in a globalised world,
• population growth and the related challenges for food and water security,
• climate change and associated costs, and
• global security challenges, driven largely by some of the foregoing.

Some of these challenges (e.g. population growth and climate change) have a greater effect on the developing than developed world, but nevertheless have materials effects in restricting growth opportunities for developed countries.

So, why should we care?  Two reasons that quickly spring to mind for many are, in my view, not the main concerns.  First is nationalistic competition -- e.g. let's not let those Chinese beat us!  There is no easy answer to this argument, except perhaps "Get over it."  We should not bemoan the success of others, but rather concentrate on our own circumstances.  It is a commonplace of international economics that the global economy is not a zero-sum game.

Second, many simply like having more wealth (i.e. more material goods and comfort).  But putting to one side the effects on growth and prosperity of reduced consumption (which admittedly is a big thing to ignore given the multiplier effect), the people of most developed countries in fact have far more than they need (on average, that is -- poverty does of course remain a problem).  Studies show that beyond a level of basic comfort, greater wealth does not bring greater happiness, and that it is relatively poverty that causes the greatest psychic pain.

This brings us to the heart of the problem.  In countries that face challenged economic times, the gap between rich and poor tends to widen.  This has been happening in the US and many other western countries in recent decades, and the process seems to be accelerating.  This problem of inequality of income and opportunity seems to me the real reason we should care about economic hard times, and there is no easy way to avoid it.

One partial solution, related to the theme of this blog, is to increase entrepreneurial opportunity.  There is historical precedent for this.  Many great innovations have occured in economically hard times, and it is flexible economies that have best weathered economic storms.  In my own business, I have observed that today's hard times have driven an increased appetite for creative, flexible solutions -- as opposed to the tried and true.  Furthermore, digital technologies have made it increasingly easier for new economic actors and smaller players to challenge incumbents, as I have written in The Big Shift -- Opportunities for Innovation and Risks of Growth.  In sum, I hold out some hope that by maintaining flexible, entrepreneurial economies, the societies of the West can preserve well-adjusted, well-functioning economies -- even if most of us end up with a few less toys.