The Economics of the 21st Century
By Dr Madsen Pirie, President of the Adam Smith Institute



We already know some of the factors which will govern the economics of this century because they represent timeless truths, many of them first set down by Adam Smith himself. There are others, though, which can influence the course of economic events, and whose shapes we might now only dimly see.The application of electric power to industrial manufacturing in the first course of last century, for example, made a profound difference to development and wealth creation. Will there be similar factors to have as profound an effect on our time?

Everyone talks about globalization and the information technology revolution, as perhaps they should. I wish to pick out five themes other than these, each of which will, I think, have a far-reaching effect on the century, and certainly on the first half of it.

1. People

The first I put forward is the ongoing transition from a capital economy to a people economy. Alec Reed of the Academy of Enterprise has charted the change: first an economy dependent on land, the agricultural economy. Next came one whose basis was capital investment in machinery, the capitalist economy. Now we are rapidly moving to one in which the principal basis of wealth is the talents of people. This is the people economy, and the change will bring consequences.

Less capital investment might be needed to start a business if the right people can be put together, but they will need to be held there. Already companies make efforts to create an attractive workspace, some with play rooms and pool tables, some with fruit bowls and dog-walkers. More seriously, we do not expect the once sharp divisions to remain between workers, management and shareholders. Talent increasingly seeks to acquire part of the wealth it is creating. It will demand equity as well as salary; stock options as well as pay reviews.

What is true about retaining talent within a company will be true for retaining it within a country. The progression from land to capital to people has been a progression in mobility: people can move. If they do not like the tax regime of one country, they can move to another. Land cannot escape tax; capital finds it difficult; people find it easy.

There are other factors which make a country an attractive place to live in. A pleasant habitat which looks nice and has good services might be attractive: so might low crime and good schools. If foreign talent is looking for a place to settle, a tolerant and welcoming attitude can also help.

A people economy might exaggerate regional wealth differences, with talent sucked to attractive and high growth areas. The old remedy of regional grants and subsidies is less likely to work, simply because people can move very easily once the support has ceased.

2. Wealth

My second theme is that the world economy and national economies will be shaped in part by an explosion of wealth. This will happen between nations and within nations. The big fact will be the enrichment of most developing nations. India and China will be the biggest, but they will become rich in the company of many others.

Of course we are told by those with a vested or ideological interest that "the rich are getting richer and the poor are getting poorer; so the gap is growing wider." Like the big lie, if it is repeated often enough, people will believe it. It is still untrue.

An inspection of the last five decades shows that at the start of them the US, Europe and the UK dominions were rich, and the rest of the world dirt poor. Since then Japan has become rich, followed by Taiwan, Singapore, South Korea and Hong Kong. Then countries such as Thailand and Malaysia began to follow that upward path. Much of the world outside Africa is now on the road to economic growth. Parts of Africa, alas, show that genocide and civil war are just as effective as socialism in preventing growth.

Professor Paul Ormerod, author of Butterfly Economics among other works, has calculated Gini coefficients for the world over those five decades. A Gini coefficient of zero would show everyone with exactly the same income, or maximum equality. A Gini of 100 would show one person having it all, and the rest none, or maximum inequality. The Gini for the world has gone down and is falling, just as observation would suggest. Many poorer countries, including the world's two most populous ones, will be rich.

There will also be massive wealth expansion within countries. Ordinary people in Britain will live like the rich do today. Fifty years ago only the rich could afford telephones, televisions, cars, or foreign holidays. Now ordinary people can. The same will happen in the next half century. Ordinary people will have the same spending power as today's high net worth individuals. Most will be millionaires. Think what that might do to the luxury service sector, and to financial services in particular.

There will be pauses, of course. The Twentieth Century's fabulous record of wealth accumulation included several recessions, and even the Great Depression. Despite such things, wealth will be the most single dominant economic fact of this century.

3. Longevity

Most British teenagers will live to be 100 years old, with a fit and active old age. A similar pattern will emerge in other advanced economies, which will include most countries as the century wears on. Think of the consequences.

When the Beveridge Report was implemented from 1947, the average wage earner in Britain was male, left school at 16, worked for the same (manufacturing) firm until 65, and then retired. He died 2 years later. His contributions over a working life of 49 years had to support 2 years of retirement. In fact those contributions did not support him, but his older contemporaries. What he had was the promise that future young taxpayers would be no less generous. The government told him so.

As the demographic balance tilts to the elderly, unfunded state pensions will disappear. People will pay, probably with a compulsory minimum, into personal funds invested on their behalf. From those funds will come their pensions, far superior to any the state could deliver from taxpayers. Furthermore, they will constitute a financial pool from which major investments can be made to boost productivity.

A person on the average wage putting aside 12-14 percent annually into such a pool can expect to be a millionaire at some point in a working life. And the fund is property. Unlike pension rights, it does not die with the holder, but can be bequeathed and inherited; the wealth explosion again.

Retirement, as we know it, will not last. The idea of doing nothing for several decades after a short working life will seem a shocking waste of human talent and potential. People will trade down to easier, less demanding, jobs as they age, including some part-time and charitable work, but the notion of retirement as idleness will be a forgotten curiosity.

4. Technical advance

The first quarter of the Twentieth Century saw that great impact from the application of electricity to industry. It enabled huge gains in productivity as the new efficient form of energy was applied to mass production. Towards the end of that century the application of computers and information technology held the promise of further such gains.

The economics of the Twenty-first Century will also be affected by technical advances. While some of these can be seen already, there will be other, utterly unpredictable, developments which will have critical effect on the world's economy.

The hydrogen economy is widely predicted to replace that based on fossil fuel energy. The fuel cell may well undergo the kind of engineering refinement which made the petrol and Diesel engines progressively more efficient. It will have a rapid affect on pollution, in that water is the chief by-product of its combustion.

There is, in addition, an ongoing revolution in bio-technology. Within the early years of the new century will come crops which are salt water tolerant, those which can thrive in marginal conditions and extremes of climate, those which produce their own fertilizer, and those which produce their own pesticides. These will have major economic effect on the agriculture of poor and developing countries, and on the world's food supply.

The revolution in bio-technology will also consign to extinction the malarial parasite and many of mankind's other ancient enemies, and will develop new treatments to save and prolong life. All of this will register as a major influence on the economics of the unfolding century.

Nano-technology will be another significant influence on engineering and medical development. These are a few of the ones we can already see. There will be others, and all of the indicators suggest that technical advance will be a greater influence on the economics of this century than it was on the last.

5. Geo-politics

The end of the Cold War is already causing economic shifts and changes. The world which develops from it is already significantly different than that which dominated the second half of last century.

One early development will be the decline and demise of the Organization of Oil-Exporting Countries (OPEC). It now controls only about one quarter of the world's oil supply. Its influence will diminish rapidly as Russia bids to replace it as Europe's, and then the West's, leading supplier. The rapid development of the hydrogen economy will cut the demand for fossil fuels, and further reduce the cartel's ability to manipulate prices. One of the economic facts of the Twenty-first Century will be cheap energy, available in whatever quantity required.

A further fact will be the rise of India and China. The two most populous countries in the world will join the ranks of the developed economies. They will become major and influential economic powers, as Japan did in the decades following the Second World War. The G8 countries, which are already G8 + 1 when Russia is included, will become G11.

The consolidation and expansion of the European single market will be a further influential event, particularly as it will be the bridge by which the economies of Central and Eastern Europe take their place on the world stage. Shifting patterns such as these influenced the economics of the Twentieth Century, and there is every reason to suppose that they will continue to do so.

Postscript

It is interesting to speculate which country's economy might typify the Twenty-first Century, as Britain's did in the Nineteenth Century, and America's did in the Twentieth. Some commentators point to Europe as the new economic super-power. It might have been one of the aims behind closer economic unity, but it shows little sign of coming about. Europe represents a paradigm which is not particularly progressive. It might be comfortable, but it is slow to respond.

Russia, finally emerging from the psychopathology of socialism and its messy aftermath, might achieve the potential of its vast population and resources. India or China, stepping into the ranks of the modern economies, also have a huge upside potential.

No-one can tell, of course. One quite possible outcome, though, is that it will be the economy best able to adapt and change, and with a consistent ability to embrace new developments and seize new opportunities. The lead economy might be the most vibrant, dynamic and responsive. It could well be that the economy which typifies the Twenty-first Century will be America again, just as it was in the Twentieth.



© Adam Smith Institute 2000
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