Comparative Advantage and Global Trade Fragility

One of the cornerstones of the global economic status quo is globalisation and integration of markets. Here’s the growth in world trade as a percentage of global GDP since the 1970s:

worldtrade

There have been two key forces behind this outgrowth in global trade. First of all, the American military acting as hegemonic global policeman with bases in more than 150 countries and backed has created a situation generally known as the Pax Americana where goods and intermediaries can be shipped around the globe with minimal fear of piracy, seizure, theft, etc. Second, the international community has incentivised trade liberalisation through the policies of organisations including the International Monetary Fund (IMF), and World Trade Organization (WTO) requiring nations requesting loans or aid to open their markets to foreign trade competitors.

Most global policymakers and trade economists remain committed to and ultra-bullish about the agenda of global integration of markets. The OECD claims:

If G20 economies reduced trade barriers by 50%, they could gain:

More jobs: 0.3% to 3.3% rise in jobs for lower-skilled workers and 0.9 to 3.9% for higher-skilled workers, depending on the country.

Higher real wages 1.8% to 8% increase in real wages for lower-skilled workers and 0.8% to 8.1% for higher-skilled workers, depending on the country.

Increased exports: All G20 countries would see a boost in exports if trade barriers were halved. In the long run, many G20 countries could see their exports rise by 20% and in the Eurozone by more than 10%.

The overarching intellectual motivation for these policies is found in the work of the English classical economist David Ricardo and his neoclassical successors. The concept of comparative advantage introduced by Ricardo and expanded and formalised via equilibrium models by neoclassical economists including Samuelson, Mankiw, Hecksher and Ohlin (etc) has underpinned most of these policies.

Comparative advantage is the idea that nations benefit from specialising in what they are best at. Ricardo introduced the notion during debates about Britain opening her markets to European trade. Ricardo pointed out that total output and welfare would be greater for all countries in total if they specialised in what they were best at, and traded with each other to get what they wanted.

This principle works in Ricardo’s simple verbal model (and in the more sophisticated equilibrium models developed since). However empirical studies and meta-studies of modern day trade liberalisation suggest that there are some problems with this theory in practice.

Dani Rodrik noted in 2001:

Do lower trade barriers spur greater economic progress? The available studies reveal no systematic relationship between a country’s average level of tariff and nontariff barriers and its subsequent economic growth rate. If anything, the evidence for the 1990s indicates a positive relationship between import tariffs and economic growth.

The evidence on the benefits of liberalizing capital flows is even weaker. In theory, the appeal of capital mobility seems obvious: If capital is free to enter (and leave) markets based on the potential return on investment, the result will be an efficient allocation of global resources. But in reality, financial markets are inherently unstable, subject to bubbles (rational or otherwise), panics, shortsightedness, and self-fulfilling prophecies. There is plenty of evidence that financial liberalization is often followed by financial crash — just ask Mexico, Thailand, or Turkey — while there is little convincing evidence to suggest that higher rates of economic growth follow capital-account liberalization.

So what’s the difference between theory and reality?

There are a number of potential reasons why the theoretical promise of comparative advantage has not played out in reality.

First is graft and corruption. If countries are taking on loans from international institutions, and those loans are being deposited in the Swiss bank accounts of corrupt officials or businessmen instead of being spent on improving industry, skills or infrastructure, then what chance do developing countries have of developing?

Second is the danger of bubbles during the liberalisation process. Global capital flows into newly-liberalised countries can stoke bubbles in almost every sector (but especially equities, real estate, etc). When the bubble bursts, capital flows out, leaving the domestic economy deeply depressed.

Third is the social upheaval costs to labour, skills and institutions. As we have seen in the United States, manufacturing jobs and skills migrated abroad. Workers often cannot be retrained cheaply and easily, and often do not want or cannot afford to migrate to wherever their skills would be best-compensated. This stickiness can result in endemic unemployment and resultant economic weakness.

Fourth is the cost to capital stock.

As Steve Keen noted:

Some capital is necessarily destroyed by the opening up of trade.

Since capital is destroyed when trade is liberalised, the watertight argument that trade necessarily improves material welfare springs a leak.

Converting capital stock again and again to keep up with changing economic winds can be an expensive, difficult and mistake-ridden process.

Fifth is the problem of trade fragility.  Events like natural disasters and foreign wars can disrupt production and trade flows. Specialisation could cripple a country that depends on imports from foreign disrupted countries. Dependency on imported goods and intermediates renders countries vulnerable to shocks outside their borders. Wars and disasters that affect exporters have at times seriously disrupted and damaged the economies of importers, and vice versa.

The fact that trade liberalisation can have large social costs, create economic fragility and produce asset bubbles is a cause for pause. Is IMF-imposed globalisation opposed by the wider public really producing freer markets, or is it a misguided central planning experiment? Has the dogmatic pursuit of globalisation left global industry fragile to supply chain shocks caused by natural disasters and wars? Can the status quo really even be considered free trade, given that it is supported and smoothed by huge military-industrial subsidies? Does freedom of trade not also include freedom of nations to choose to protect domestic industries, institutions and supply chains from foreign competition? Why should the industries of developing countries be expected to compete against corporate multinational juggernauts?

While global trade may have provide a major disincentive against trade-disrupting wars, it seems probable that it has created a deep underlying systemic fragility. Trade interdependence means that regional or domestic shocks to production like a war or natural disaster may have consequences throughout the entire world, transmitted through dependencies. Similarly to the interconnective global financial system and the 2008 financial crisis, geopolitical shocks in coming years may well be magnified by globalisation.

The Absurdity of NATO

The whole world knows the name Gavrilo Princip, and that of he man he assassinated, Archduke Franz Ferdinand. Princip’s shot triggered the Austro-Hungarian invasion of Serbia that set in motion the chain of events leading to the Great War of 1914.

After Serbia appealed to Russia for help, Russia began moving towards mobilization of its army, believing that Germany was using the crisis as an excuse to launch war in the Balkans. Upon hearing news of Russia’s general mobilization, Germany declared war on Russia. The German army then launched its attack on Russia’s ally, France, through Belgium, violating Belgian neutrality and bringing Great Britain into the war as well.

Is it possible that a similar chain of events may have already begun unfurling with the Syrian downing of a Turkish F-4 fighter jet? Turkey have already invoked a full meeting of NATO,  claimed that Syria have fired on a second Turkish plane, and vowed that Syria’s actions “won’t go unpunished”.

The vast and sprawling system of national alliances that existed prior to the events 1914 were considered by policy makers of the time to be a counterbalance against excessive tension and the threat of war. The great powers created alliances ostensibly for the purpose of deterring war. The dominant view was that the potential for dragging in allies reduced the chances of an attack. In reality, it just meant that one spark could set the entire world aflame.

This is functionally the same as the interconnecting mesh of derivatives and shadow intermediation that foreshadowed the crash of 2008. As financial parties sold each other more and more “hedges“, the consensus of the time was that this made the system safer, as it allowed risk to be dissipated around the system. The theory was — and there were plenty of inaccurate mathematical models to back this up — that spreading risk around the system made the financial system safer. As it turned out, it didn’t. In the wake of MF Global and the London Whale, we know that the financial system has not learned the lessons of 2008. But it seems even more absurd that the diplomatic system has not really learned the lessons of 1914. 

The NATO system — set up to oppose the Warsaw Pact system, which no longer exists — functions the same way — rather than dissipating risk, it allows for the magnification of international tensions into full-on regional and global wars. In the late 20th century the threat of nuclear war proved a highly-effective deterrent which limited the potential for all-out-war between the great powers, offsetting much of the risk of the hyper-fragile treaty system. Yet the potential for magnifying small regional problems into bigger wars will continue to exist for as long as NATO and similar organisations prevail.

We do not know exactly what arrangements Syria has with Russia and China — there is no formal defensive pact in place (although there is one between Syria and Iran) though it is fair to assume that Russia will be keen to maintain its Syrian naval assets, a view which is supported by the fact Russia heavily subsidises the Syrian military, and has blocked all the UN-led efforts toward intervention in Syria.

After the Cold War, the Warsaw Pact was allowed to disintegrate. Until NATO is similarly allowed to disintegrate, the threat of magnification will remain large. Could a border skirmish between Syria and Turkey trigger a regional or even global war? Under the status quo, anything is possible.

Austerity & Extremism

I noted yesterday that anything the government gives you, the government can take away, and that dependency on government services — which might be withdrawn — leaves citizens weak and unfree.

One cause for the withdrawal of government that I neglected to mention (intentionally, as I hoped someone would pick it up in comments) was the matter of austerity. While the example I was bouncing my ideas off — of denying treatment to smokers or the obese — remains theoretical, the withdrawal of government services and spending as a result of austerity is very much a reality, especially in Europe.

To wit:

That more austerity produces less GDP (and very often bigger deficits due to falling tax revenues — as exemplified by Portugal) is self-evident. That society is — for lack of a better word — pissed with this outcome is the clear reality on the ground. Made dependent upon government largesse, society now finds the crutch of services, spending and government jobs withdrawn. And of course, this has political blowback.

As Tyler recently put it “nationalism is back with a bang”. But it’s not just the nationalists who are doing well, so too are the far left. Just as in the 1930s many people who have been failed by the mainstream parties are angry, and their instinctual reaction is to reject the political mainstream and look to the fringes.

Let’s look at Greece.

From the WSJ:

Two political mavericks—one a soft-spoken former Communist, the other a firebrand nationalist—are tapping into public anger at incumbents and the harsh austerity measures Greece must adopt to stay in the euro, as support for mainstream parties withers ahead of May 6 elections.

Right-wing economist Panos Kammenos and left-wing lawyer Fotis Kouvelis are poles apart ideologically. But they are currently among the most popular party leaders in Greece, and their parties have sprung from nowhere to challenge Greece’s political establishment and the austerity policies that many Greeks blame for deepening their country’s economic crisis.

Between them, Mr. Kammenos’s Independent Greeks and Mr. Kouvelis’s Democratic Left could win around 20% of the vote. Their rise is cutting deeply into support for Greece’s two mainstream parties — the conservative New Democracy party and the center-left Socialists, known as Pasok — that share power in a fractious coalition government.

Given the utter train wreck that the Greek economy is, it is shocking that these figures are not significantly higher. In the recent first round of the French Presidential election, the far left and far right polled over 30%, a post-WW2 high.

All over Europe, the unemployed and dispossessed are becoming increasingly frustrated with the status quo.

From Bloomberg:

Europe’s front against austerity has expanded in recent weeks after Spain struggled to meet European Union-imposed deficit targets, election campaigns in Greece faced anti- austerity rumblings and a revolt against extra spending cuts in the traditionally budget-conscious Netherlands propelled Prime Minister Mark Rutte’s coalition toward an early breakup.

Europe has been here before. Hitler came to power, lest we forget, on the back of a devastating period of German austerity.

As I noted in November:

After just two years of “austerity” measures, Germany’s economy had completely collapsed: unemployment doubled from 15 percent in 1930 to 30 percent in 1932, protests spread, and Bruning was finally forced out. Just two years of austerity, and Germany was willing to be ruled by anyone or anything except for the kinds of democratic politicians that administered “austerity” pain. In Germany’s 1932 elections, the Nazis and the Communists came out on top — and by early 1933, with Hitler in charge, Germany’s fledgling democracy was shut down for good.

It’s the same story; more austerity means more misery, means more political and social rumbling, means a greater support for radical political parties. We haven’t gotten anywhere near the scope or magnitude of the 1930s (yet), but the present European contraction has not dampened the technocratic fervour for deeper and faster cuts and tax hikes (which, quite obviously lead to bigger deficits, which trigger more austerity, ad infinitum). Could this at some point mean revolutions that put radicals into power? It becomes increasingly plausible.

And the initial problem in my view is excessive dependency on the state and centralisation. If the state makes up 50% of GDP, cutting spending in the interests of paying down debt will cause a severe contraction throughout the entire economy. If the state makes up 15% of GDP, less so. If the state is only a small fragment, austerity in the interests of paying down debt — even during a recession or depression — is feasible. If the state is a goliath, it will lead to a crippling economic contraction (and of course, the attendant realities of public fury and politcal extremism).

Centralised systems are always and by definition fragile to shocks and mismanagement, because the activities at the centre are transmitted throughout the entire system; poor decisions at the centre metastasise throughout the system. In a robust decentralised system, mismanagement only hurts at the local level, because there is less of a mechanism for the transmission of shocks.

The lesson sticks: anything the government gives you, the government can take away (sometimes deliberately, sometimes not). That could be healthcare, that could be security, that could be economic growth. If it’s delivered by central fiat, it’s fragile.

Global Trade Fragility

Yesterday I got my new iPad.

Yeah, I bought one like millions of other suckers. Apple can take my dollars and recycle them buying treasury bills and so partially fund, at least for a short while, America’s unsustainable debt position.

But really, I bought one to enjoy the twilight of the miraculous system of global trade. An iPad is the cumulative culmination of millions of hours of work, as well as resources and manufacturing processes across the globe. It incorporates tellurium, indium, cobalt, gallium, and manganese mined in Africa. Neodymium mined in China. Plastics forged out of Saudi Crude. Aluminium mined in Brazil. Memory manufactured in Korea, semiconductors forged in Germany, glass made in the United States. And gallons and gallons of oil to ship all the resources and components around the world, ’til they are finally assembled in China, and shipped once again around the world to the consumer. And of course, that manufacturing process stands upon the shoulders of centuries of scientific research, and years of product development, testing, and marketing. It is a huge mesh of processes.

The iPad is an extreme example of the miracle of civilisation. There are less extreme ones. Take, for example, the hamburger. Hamburgers did not exist until the age of regional trade, and refrigeration. The ingredients in a hamburger were not in season at the same time. Cows were not slaughtered at the time when lettuce was harvested. Lettuce was not harvested at the same time tomatoes or onions were typically harvested. For thousands of years previous to this we ate seasonal concoctions, like turkey, yams and cranberries at thanksgiving, as well as smoked and cured foods all year round. In modernity, we have been able to use modern technology to bring about any combination of produce: from greenhouses, to air freighting, to refrigeration, and so on.

I look at the global trade system — which we here in the West rely upon for goods, resources, consumption, etc — and I see something akin to the problem with the financial system in 2006. We abandoned robust and aged local systems, local knowledge, artisanship, etc, in favour of a huge interconnected mesh of trade where all counter-parties are interdependent, and where one failure can break the entire system.

This is a beautiful age. We have truly allowed our imaginations to run wild.

But is it sustainable?

Paul Krugman notes:

The world economy was, to an extent never seen before, truly global. It was linked together by new technologies that made it possible to ship products cheaply from one side of the globe to the other, to communicate virtually instantaneously over huge distances. But it was also, more importantly, linked together by the almost universal, if sometimes grudging, acceptance of a common economic ideology: the belief that free markets, with secure property rights, were the only way to achieve economic progress; and in particular that a nation hoping to make its way forward needed to welcome foreign trade and foreign investors with open arms. And this shared ideology did indeed lead to unprecedented transfers of Western capital and technology to emerging economies – transfers facilitated by the fact that everyone knew that any country that strayed from the path would be punished by financial crisis, and would soon be obliged to accept the harsh austerity prescribed by teams of Western technocrats.

The year, of course, was 1913.

So a truly global trade system has come crashing down before, and we bounced back pretty well from that. But it was a painful time. That particular collapse seems to have arisen from the complex and internecine system of warfare pacts binding great powers to the whims of smaller ones. When small powers went to war, the great powers were dragged in alongside. It was a hyper-fragile system where one small breakdown could trigger a much larger one, just like the problem that led to the present system of financial derivatives. If one counter-party fails, the whole system can be brought down.

Great powers are once again aligning themselves around smaller allies. China and Pakistan and perhaps Russia seem willing to back Iran, while the United States is reluctantly backing Israel.

But there is a new factor at play today: the service economy. While nations in 1913 were freely trading, and while the concept of comparative was widely known, no nation took interdependence to quite the extreme that so many nations have today. And many nations have taken this idea so far that without imported goods and energy, their internal economies might completely collapse, or at very best struggle with the adjustment from supranational back to local.

Here’s the situation in the United States:


And for the United States, this hasn’t been a two-way street. America is importing a lot more than she is exporting. In other words, America is now dependent on international trade.

Here’s the United States’ current account balance as a percentage of GDP, (in other words exports – imports as a percentage of GDP):

Simply international trade has become too big to fail.

The problem is, we know from history that the system of international trade can fail, and as we move deeper into the ’10s, there are a number of obvious threats emerging. The boneheaded answer from certain tenured professors and high-flying MBAs might be that the incentives to keeping the international trade system wide open (and cheap) are enough to force countries to co-operate. Tell that to Binyamin Netanyahu, who seems increasingly fixated on striking Iran, and forcing Iran to retaliate with a closure of the Strait of Hormuz. Tell that to Mitt Romney who seems ever-more intent on starting a trade war with China. Tell that to Barack Obama who — instead of pushing for the United States to mine its own deposits of rare earth minerals has run squealing to the WTO complaining of Chinese price manipulation.

This post is not a prediction. I am not necessarily predicting a breakdown in the global trade system, although there are surely many obvious dangers as well as hidden black swans. I am merely forecasting that the world is extremely fragile to one, and that the consequences to certain countries with a negative current account balance could be, shall we say, painful.

Governments are advised to go out of their way to make sure that back-up systems in terms of medium-to-long-term food supply, fuel supply and medicine supply are in place so that the consequences of a breakdown in the system of global trade can be minimised.

This is an example of a process that the philosopher Nassim Taleb has called robustification.

Unfortunately, governments seem very busy doing other things, which are far less relevant to national security.

Nations ignore figures like Taleb — surely the Nietzsche of our homogenised and manufactured age — at their peril.

Technocrats, Technocrats Everywhere!

In surely the dumbest news of the week month year, Europe is giving austerity a last throw of the dice.

From the Washington Post:

ROME — Italy’s premier-designate Mario Monti began talks on Monday to create a new government of non-political experts tasked with overhauling an ailing economy to keep market fears over the country from threatening the existence of the euro.

Investors initially cheered Monti’s appointment, following quickly on Silvio Berlusconi’s weekend resignation, though concern lingered about the sheer amount of work his new government will have to do to restore faith in the country’s battered economy and finances.

Improving market confidence in Italy is crucial to the future of the eurozone as the country would be too expensive to rescue. A default on its €1.9 trillion ($2.6 trillion) in debt would cause massive chaos in financial markets and shake the global economy.

As in Greece, where a new government of technocrats also took over last week, the hope is that administrations of experts not affiliated to parties will be more willing to make the tough but necessary decisions [i.e. slashing spending to pay off bankers] that politicians have so far balked at.

Monti appeared to have the respect of many Italians, eager to see an end to the financial crisis that threatens their own well-being.

The likelihood is that these technocrat-driven austerity programs will totally fail to reduce the debt load and suck Europe even further into the abyss. Reducing government spending in an already depressed economy tends to leave the middle class with less disposable income in the short term, which tends to turn a bad situation into a worse one. A classic example of this is the Brüning administration, which led Germany from 1930 to 1932 — and whose technocratic austerity program made the German people hungry for change, and a charismatic new leader.

From Alternet:

After just two years of “austerity” measures, Germany’s economy had completely collapsed: unemployment doubled from 15 percent in 1930 to 30 percent in 1932, protests spread, and Bruning was finally forced out. Just two years of austerity, and Germany was willing to be ruled by anyone or anything except for the kinds of democratic politicians that administered “austerity” pain. In Germany’s 1932 elections, the Nazis and the Communists came out on top — and by early 1933, with Hitler in charge, Germany’s fledgling democracy was shut down for good.

The issue is that if a nation is to lower the government’s participation rate in the economy (usually a very good idea — the market is usually a more efficient allocator of capital than central planners), it must not do so during a time of wider crisis. That’s because switching from dependence on the state is a stressor in itself. This can compound the problem.

Now obviously the debt is unsustainable — as was the load of war reparations that Brüning sought to pay down in Germany. A deflationary austerity program is the last throw of the dice creditors have to get an intact pound of flesh. The reality is that they made bad investments in the sovereign debt of countries without a sovereign printing press — and that means they will (in the end) have to accept big losses on their investments — either via direct default, or via nations leaving the Euro and printing huge inflationary quantities of their new national currency to maintain state spending and pay down debt.

Monti — and his Greek technocrat counterpart Papademos — must be aware how the Brüning administration ended. If they are not, I am sure there are millions of furious Greeks and Italians who would be willing to show them.

The Domino Effect?

The BBC has an interesting (and very deluded) article on Europe, Greece, Germany, etc & their debt problems:

In October, Europe’s leaders reached yet another wide-ranging deal to prevent economic problems from causing financial meltdown in the eurozone.

For many onlookers, the issues they face may seem complicated and interconnected.

But essentially they boil down to four big dilemmas:

  1. Borrowers vs Lenders
  2. Austerity vs Growth
  3. Discipline vs Solidarity
  4. Europe vs the Nations

Actually, I think we can simplify much further.

There is one big dilemma:

  1. Delusion vs Reality
That delusion is that the global financial system can be so interconnected, and so leveraged that it can continue to exist in a state whereby the default of one small country can trigger a death spiral so severe that much of the system has to be bailed out over and over just to avoid the dreaded default cascade, and mass insolvency. The reality is that the system is so interconnected and leveraged (“too big to fail”) that it will keep failing and failing and failing until it is allowed to fail. Interconnection and leverage means fragility. What we need is independence (so that fragile things can fail without bringing down the entire system).

The Problem is Fragility

Mainstream opinion on economic conditions at present is a steaming shitheap of errors.

Deluge of hopium from ABC (sponsored by Citigroup, no joke):

Stocks closed higher on Thursday after European leaders agreed on a plan to avert a Greek default and the Commerce Department announced third-quarter gross domestic product grew 2.5 percent, boosted by higher consumer spending, allaying fears that the economy is slipping into another recession.

The Dow Jones industrial average increased about 2.9 percent to 12,209 and the tech-heavy Nasdaq increased about 3.3 percent to 2,784 at the end of the day. The S&P 500 had its biggest monthly rally since 1974, according to Bloomberg, increasing 3.4 percent to 1,285.

The GDP rate was in line with what economists were expecting. The 2.5 percent growth rate is almost triple the 0.9 percent pace of economic growth in the first half of this year, which has been far too slow to generate any job growth. Unemployment has remained stubbornly high at over 9 percent.

The thing is, high unemployment and low GDP growth (now — ahem — magically cured) are (and always were) secondary problems. They’re the things that hurt, sure — but they’re not the cause of the illness — they’re just symptoms The main problem is systemic fragility, and the failure to understand the economy from a systemic perspective, and understand the systemic risks. If the financial system (both global and national) is not resilient to shocks and the unexpected, the system will unravel under the slightest pressure. As I have repeatedly explained, the Western economic paradigm is a highly fragile for two reasons: over-dependence on foreign goods and resources controlled by hostile nations, and the pattern of interconnected financial debt that leaves the system open to collapse if just one significant player collapses:

Not only did the bailouts disable creative destruction (the engine of innovation and social progress), they also created so much debt that they have already damaged the ability of future generations to save, invest and innovate.

Worse, they did nothing to address the fundamental fragility of the system. All of that interconnected debt means the system is still fragile to a default cascade, which means that if the system is to be “saved” again, it will require more bailouts and more debt-acquisition, further eroding the ability of taxpayers to save and invest, as governments tax and inflate the currency to pay down the debt.

I expect future generations to look back on this episode as a bizarre aberration. America — surely the greatest producer and innovator in the history of human civilisation — forgot how markets work and the notion of creative destruction, forgot that an empire dependent on hostile partners (i.e. China and the Arab world) is hugely fragile, and then forgot the fact that America emerged as a superpower as a director result of its status as a great creditor and manufacturer, and that the old European empires lost their superpower status through loss of productivity and massive debt acquisition.

The beautiful thing about artificial abstract systems is that they can be remade at will, unlike ecosystems or organisms. It would be so easy — in principle — to rip up the global financial system and start again, because it’s all abstract. But there are too many vested interests — creditors want their pound of flesh, consumers and businesses want stability and fear change, and so establishment economists and thinkers will hunt ceaselessly for any kind of confirmation for the idea that the system is stabilising, that things are getting better, that things can go back to normal, that prosperity will return.

Well, prosperity may return, at least for a few short years, before the mass of interconnected leverage crumbles back into the murk from which it came. And as credit contracts (as is inevitable in a fractional reserve system) employment will slump, GDP growth will stall, and anger will rise.

The danger is that next time, the gears and wheels of productivity that hold up the abstract falsehoods of finance and consumerism will fail. I am not really a fan of Ayn Rand, but the analogy of Atlas shrugging holds true — in this case, the workshops, mines, and factories of “poorer” exporters holding upon their shoulders the parasitic mass of the consumerist Western nations. It won’t be industrialists and capitalists shrugging — it will be shipyard workers, machine operators, truck drivers, coal miners and construction workers, squeezed and dispossessed. Why should wealthy Westerners live a lavish lifestyle subsidised by the blood sweat and productivity of poorer nations? Because America has nuclear weapons? Because it invades nations that threaten to trade oil in things other than dollars? That kind of belligerence is a house of cards — it works with Third World despots, but not with an angry, politically engaged and dispossessed mob. I see it in the Occupy protests — the police can beat and brutalise protestors, but belligerence doesn’t change anything — the protestors are a hydra, cut off a head and two grow back.

The economic elite of the 20th Century learned to appease their malcontents by continuously raising the standard of living, expanding property ownership, and bringing plenty of food to tables, and new consumer goods to homes around the globe. If the economic elite of the 21st Century cannot learn to do the same I fear the malcontents will unleash hell.