The dangers of living in a zero-sum world economy 
(Copyright notice )
By Martin Wolf December 19 2007
We live in a positive-sum world economy and have done so for about two
centuries. This, I believe, is why democracy has become a political
norm, empires have largely vanished, legal slavery and serfdom have
disappeared and measures of well-being have risen almost everywhere.
What then do I mean by a positive-sum economy? It is one in which
everybody can become better off. It is one in which real incomes per
head are able to rise indefinitely.
How long might such a world last, and what might happen if it ends?
The debate on the connected issues of climate change and energy
security raises these absolutely central questions. As I argued in a
previous column ("Welcome to a world of runaway energy demand",
November 14, 2007), fossilised sunlight and ideas have been the twin
drivers of the world economy. So nothing less is at stake than the
world we inhabit, by which I mean its political and economic, as well
as physical, nature.
According to Angus Maddison, the economic historian, humanity's
average real income per head has risen 10-fold since 1820.* Increases
have also occurred almost everywhere, albeit to hugely divergent
extents: US incomes per head have risen 23-fold and those of Africa
merely four-fold. Moreover, huge improvements have happened, despite a
more than six-fold increase in the world's population.
It is an astonishing story with hugely desirable consequences. Clever
use of commercial energy has immeasurably increased the range of goods
and services available. It has also substantially reduced both our own
drudgery and our dependence on that of others. Serfs and slaves need
no longer satisfy the appetites of narrow elites. Women need no longer
devote their lives to the demands of domesticity. Consistent rises in
real incomes per head have transformed our economic lives.
What is less widely understood is that they have also transformed
politics. A zero-sum economy leads, inevitably, to repression at home
and plunder abroad. In traditional agrarian societies the surpluses
extracted from the vast majority of peasants supported the relatively
luxurious lifestyles of military, bureaucratic and noble elites. The
only way to increase the prosperity of an entire people was to steal
from another one. Some peoples made almost a business out of such
plunder: the Roman republic was one example; the nomads of the
Eurasian steppes, who reached their apogee of success under Genghis
Khan and his successors, were another. The European conquerors of the
16th to 18th centuries were, arguably, a third. In a world of stagnant
living standards the gains of one group came at the expense of equal,
if not still bigger, losses for others. This, then, was a world of
savage repression and brutal predation.
The move to the positive-sum economy transformed all this
fundamentally, albeit far more slowly than it might have done. It just
took time for people to realise how much had changed. Democratic
politics became increasingly workable because it was feasible for
everybody to become steadily better off. People fight to keep what
they have more fiercely than to obtain what they do not have. This is
the "endowment effect". So, in the new positive-sum world, elites were
willing to tolerate the enfranchisement of the masses. The fact that
they no longer depended on forced labour made this shift easier still.
Consensual politics, and so democracy, became the political norm.
Equally, a positive-sum global economy ought to end the permanent
state of war that characterised the pre-modern world. In such an
economy, internal development and external commerce offer better
prospects for virtually everybody than does international conflict.
While trade always offered the possibility of positive-sum exchange,
as Adam Smith argued, the gains were small compared with what is
offered today by the combination of peaceful internal development and
expanding international trade. Unfortunately, it took almost two
centuries after the "industrial revolution" for states to realise that
neither war nor empire was a "game" worth playing.
Nuclear weapons and the rise of the developmental state have made war
among great powers obsolete. It is no accident then that most of the
conflicts on the planet have been civil wars in poor countries that
had failed to build the domestic foundations of the positive-sum
economy. But China and India have now achieved just that. Perhaps the
most important single fact about the world we live in is that the
leaderships of these two countries have staked their political
legitimacy on domestic economic development and peaceful international
commerce.
The age of the plunderer is past. Or is it? The biggest point about
debates on climate change and energy supply is that they bring back
the question of limits. If, for example, the entire planet emitted CO
2 at the rate the US does today, global emissions would be almost five
times greater. The same, roughly speaking, is true of energy use per
head. This is why climate change and energy security are such
geopolitically significant issues. For if there are limits to
emissions, there may also be limits to growth. But if there are indeed
limits to growth, the political underpinnings of our world fall apart.
Intense distributional conflicts must then re-emerge - indeed, they
are already emerging - within and among countries.
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The response of many, notably environmentalists and people with
socialist leanings, is to welcome such conflicts. These, they believe,
are the birth-pangs of a just global society. I strongly disagree. It
is far more likely to be a step towards a world characterised by
catastrophic conflict and brutal repression. This is why I sympathise
with the hostile response of classical liberals and libertarians to
the very notion of such limits, since they view them as the
death-knell of any hopes for domestic freedom and peaceful foreign
relations.
The optimists believe that economic growth can and will continue. The
pessimists believe either that it will not do so or that it must not
if we are to avoid the destruction of the environment. I think we have
to try to marry what makes sense in these opposing visions. It is
vital for hopes of peace and freedom that we sustain the positive-sum
world economy. But it is no less vital to tackle the environmental and
resource challenges the economy has thrown up. This is going to be
hard. The condition for success is successful investment in human
ingenuity. Without it, dark days will come. That has never been truer
than it is today.
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*Contours of the World Economy, 1-2030 AD, Oxford University Press 2007
martin.wolf@ft.com
[bold highlighting added by ecoglobe]
Welcome to a world of runaway energy demand
By Martin Wolf, FT.com site
Published: Nov 13, 2007
"The increase in China's energy demand between 2002 and 2005 was
equivalent to Japan's current annual energy use." This nugget of
information, buried in the International Energy Agency's latest World
Energy Outlook, tells one almost all one needs to know about what is
happening to the world's energy economy.
Neoclassical economics analysed economic growth in terms of capital,
labour and technical progress. But, I now think, it is more
enlightening to view the fundamental drivers as energy and ideas.
Institutions and incentives provide the framework within which the
development and application of useful knowledge transforms the
fossilised sunlight on which we depend into the stream of goods and
services we enjoy.
This is the world of abundance that China and India are now joining.
Nothing short of a catastrophe will stop them. For the pessimists,
however, particularly climate-change pessimists, catastrophe will
follow. What is certain is that the challenges ahead are huge.
Here, then, are the highlights of the new report.
First, if governments stick with current policies (which the IEA calls
the "reference scenario"), the world's energy needs will be more than
50 per cent higher in 2030 than today, with developing countries
accounting for 74 per cent, and China and India alone for 45 per cent,
of the growth in demand.
Second, this huge increase in overall demand occurs even though energy
intensity of gross world product falls at a rate of 1.8 per cent a
year.
Third, fossil fuels are forecast to account for 84 per cent of the
increase in global energy consumption between 2005 and 2030.
Fourth, world oil resources are, insists the IEA, sufficient to meet
demand at prices close to $60 a barrel (in 2006 dollars). But the
share of world supply coming from members of the Organisation of the
Petroleum Exporting Countries will rise from 42 per cent to 52 per
cent. Moreover, "a supply-side crunch in the period to 2015, involving
an abrupt escalation in oil prices cannot be ruled out".
Fifth, coal's share in global commercial energy is forecast to rise
from 25 per cent to 28 per cent between 2005 and 2030, because of its
role in power generation. China and India already account for 45 per
cent of world coal use and drive over four-fifths of the increase
under the "reference scenario".
Sixth, some $22,000bn (a little under half of 2006 world gross
product) will need to be invested in supply infrastructure, to meet
demand over the next quarter century.
Seventh, even with radical measures to reduce the energy intensity of
growth under the "alternative policy scenario", global primary energy
demand would grow at 1.3 per cent a year, only 0.5 percentage points a
year less than in the "reference scenario".
Eighth, China will become the world's largest energy consumer, ahead
of the US, shortly after 2010.
Ninth, under the reference scenario, emissions of carbon dioxide will
jump by 57 per cent between 2005 and 2030. The US, China, Russia and
India alone contribute two-thirds of this increase. China becomes the
world's biggest emitter this year and India the third largest by 2015.
Tenth, even under the IEA's more radical "alternative policy scenario"
CO2 emissions stabilise only by 2025 and remain almost 30 per cent
above 2005 levels.
The rest of the world, then, wishes to enjoy the energy-intensive
lifestyles that have, hitherto, been the privilege of less than a
sixth of humanity. This desire does, however, have big consequences
for the world's economic, strategic and environmental future.
The obvious economic question concerns future prices. Today, the price
of oil, deflated by the unit value of exports from the high-income
countries, is higher than it has been since the beginning of the 20th
century. Barring big technological breakthroughs in energy supply or
unexpectedly large finds of oil and gas, energy would seem likely to
remain relatively expensive.
Yet, to many, a surprise of the 1980s was how much supply finally came
on stream and how low demand growth became after the price shocks of
the 1970s. Might such an adjustment happen again and, if so, how
quickly? Or should we regard the combination of fast-growing giant
emerging economies and the dominance of national energy suppliers as
fundamentally different?
The big strategic questions concern energy security and the shift in
the balance of power towards unattractive regimes, be they Vladimir
Putin's Russia, Hugo Chávez's Venezuela, Mahmoud Ahmadi-Nejad's Iran
or the House of Saud's Arabia.
The shift in the balance of power occurs in two ways: first, a growing
proportion of the fuels vital for what we now think of as civilised
life come from just a few, not necessarily friendly, suppliers;
second, these countries are becoming vastly richer. Thus, Opec
revenues are forecast to triple (admittedly, in depreciating dollars)
between 2002 and this year.
The challenge to security comes partly from the difficulty of
replacing oil as a transport fuel. Thus, the concentration of likely
supply in the Middle East is, inevitably, a concern. So, too, is
Europe's growing reliance on Russian gas.
Concerns over energy security also come from the potential for
competition for supplies among the big consumers. The sensible
approach is to rely on the market. But that may be hard when prices
shoot up. At some point, American politicians may ask why the US
expends blood and treasure in order to achieve security in the Middle
East for the benefit of China. True imperialism - the attempt to seize
energy resources for one's own benefit - would be a ghastly error. But
to err is all too human.
Finally, we have global warming. Three points shine out on this.
First, despite the blather, nothing effective has been done or yet
seems likely to be done. Second, effective policy will require big
changes in incentives across the globe, including, not least, in the
large emerging economies. Third, dramatic changes in technology will
also be required, the most important of which will be towards
carbon-capture-and-storage at coal-fired power plants.
What is the bottom line? It is simple: commercial energy is the staff
of our contemporary life. As demand for energy rises, nothing is more
important than ensuring increased supply and efficient use, while
curbing environmental damage. Today's high prices are a start.
Fundamental innovation and high prices on greenhouse gas emissions
must follow.
We have reproduced these article for scientific reasons only because of the volatility of the internet. Copyright The Financial Times Limited 2007
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