Last week, the football team I support played against our local rivals. I followed the game on a live-text website using my mobile phone, checking on the score every few minutes for the first hour or so, until the result became foregone, which is the next best thing to watching the game live on television. One of the great joys of sport is experiencing the changing fortunes of your team, or the individual for whom you are cheering, in ‘real time’: this is true for the ten seconds of the Olympic 100m final, the hour and a half of a Premiership game in North London, the five days of an Ashes Test match, or the three weeks of the Tour de France. There is, no doubt, some pleasure to be taken from a long period of sporting success for a team or an individual, but this is not quite the same as the thrill of the live game or race, and as anyone who has played sport seriously knows, you are only as good as your most recent result. It’s the short term – the present moment – that matters most.
In this respect, sport is quite dissimilar from the rest of our lives. Most of the time, it’s the long term that counts and our pleasures, benefits, and advantages are accumulated slowly and steadily; likewise, pains, costs, and disadvantages pile up incrementally, often unnoticed, until the task of dealing with them becomes overwhelming. Compounding is not just one of the wonders of the world, it is also one of its fundamental operating principles. For which reason, if we want to know what is going on around us, to understand the deep causes that determine the way the world works, rather than look at day-to-day fluctuations and momentary variations, we need to study the forces at work over the long run; we need to attend to la longue durée. I would rather watch a race between hares, but to comprehend the world we need to keep track of the tortoises.
I have recently read three books each of which emphasises the importance of long-term factors in their explanatory frameworks: a book about macroeconomics that considers the forces driving economic performance over decades; a book by the historian Fernand Braudel -– from whom the phrase la longue durée is borrowed — that considers changes to the structures of everyday material life and culture over centuries; and a book about Charles Darwin which draws attention to the way his theory of natural selection explains the diversity of lifeforms on earth and the propensity of some to survival over millennia. The scale of explanation in macroeconomics, social history, and evolutionary biology is different, but in each case the factors that determine outcomes in these fields of study are those that operate persistently, over whatever counts as the relevant measure of the long run in that field. If all we attend to is the immediate – today’s news — then we will fail to understand what is going on around us because we end up explaining one symptom by reference to another symptom, rather than the underlying causes.
This point is perhaps easiest to explain in terms of economics, since our lifespans are measured in decades and, therefore, from our own lived experience we can trace the way in which material forces operate on the world around us. History and biology require us to step outside of our own experience and to make inferences from the examination of evidence from long before we were born. In this text, I am going to describe the economic story of my lifetime; but first, a cautionary tale
When I worked at the Bank of England in the mid-1990s, each evening one of the fund managers was supposed to produce a one-page report explaining what had happened in the financial markets that day, which was printed out and left on the desks of the Bank’s directors, for them to consult the next morning. (In those days, smart phones with access to Reuters and Bloomberg did not exist.) Some of this report consisted of the prices or levels of key financial indicators, such as the US 10-year Treasury Bond, the S&P 500, Brent Crude Oil, the spread between German and UK government debt, and so forth, but there was also a short commentary section that covered any market events or movements worthy of note. I remember the first time I was asked to produce this report, I consulted with a colleague about what I should say if one of the markets had moved significantly for no apparent reason. Presumably, I said, I should not write that, markets have risen/fallen significantly, but we don’t know why. Agreed, he replied, you should say, rumours of unusual buying/selling from the Middle East. This explanation is never evidential, but always plausible to those who do not follow markets closely.
What are the forces that drive markets and prices? In the classic Western economic tradition, attention was drawn to three main factors of production: land, labour, and capital. For productive activity to occur, land was required for growing food, pasturing animals, and the exploitation of minerals below the ground or vegetation above the ground. But wheat, sheep, coal, and timber also require workers to plant and harvest, to feed and slaughter, to dig and chop; and money is needed to pay those workers, to finance the transport of products to markets, perhaps by road or sea, to purchase new stock, and to improve the infrastructure of the farm, mine, or forest. The relative supply of land, labour, and capital would help determine the quantity and quality of goods produced, which would also be impacted by changes in demand for these goods. It was a helpful model, although in the modern global economy, where services are as important as physical goods, land is much less important and innovation (or some other measure of improvement in productivity) much more so. Labour and capital retain their central role.
There has been a strong and steady growth in the availability of investment capital in recent decades, both from private and public sources: modern financial markets are designed to create credit ex nihilo, by borrowing indefinitely from the future. Whether this generates long-term vulnerabilities to the global economy is, for sure, a matter of lively debate, so too the way in which capital is distributed. There is plenty of capital for new investment in luxury goods and services, while funding for basic education and health services is lacking in many places in the world. This seems not just immoral, but extraordinarily short-sighted: as millions of people become wealthier so too the demand for luxury goods will rise. Thoughtful long-term investors should want to support the creation of a much larger consumer marketplace. That said, in this post I intend to focus on labour rather than capital.
Labour mostly means people who are integrated into the global system of traded goods and services. In times past it would also have included horses, mules, and camels; and today it also includes robots. But, for someone or something to count as labour, it must not just exist, it must also be available for use. Mules are no help in moving food to market if the food is in Africa and the mules are in South America. Robots are no help making electric cars if they are not connected to a power supply. Not all people are available for work -– very small children and very old adults, for example -– and not all able-bodied adults of normal working age live in places where they are available to participate in the global workforce: physical, educational, and cultural constraints might restrict them to local activity only, which limits their impact on the marginal global supply of labour. Changes in the size of the global workforce are therefore connected not just to demography, but also to social and political norms and regulations.
For the first half of my life, there was a shortage of workers in the global economy; for the second half, there has been a glut; now, we are heading into a period of shortage once again. Other things equal (which they never are) this should mean that on average the price of labour will rise and returns on capital will fall. This is good for workers and bad for investors. However, if we succeed in building robots with a wide range of service sector skills, that might all change.
Back in the early 1990s there were four factors that increased the supply of labour in the global marketplace. First, in many Western countries, the numbers of women who worked for money (as opposed to staying at home and working without pay) grew such that male and female employment participation rates are now roughly equal. In some (culturally conservative) countries this trend has been slower to take hold but, overall, it had a significant impact on the labour supply in the West, and in those service industries – healthcare, teaching, and restaurant staff – that are place dependent. At the same time, the opening-up of the economies of many central and eastern European countries following the collapse of the Soviet Union, created a significant pool of low-cost skilled workers who were available to European companies, causing an eastwards shift in manufacturing. This process recurred, but on a much larger scale, when China joined the World Trading Organisation in 2001, having spent the previous decade gradually increasing its participation in global markets. Finally, in many countries, but especially China, the working age population was growing and the levels of education and training within this population was also increasing, so that there were many more skilled workers than ever before. The cost of making and distributing goods and services fell, leading to low inflation and interest rates, while returns to capital rose as global consumption increased. These were golden decades for consumers, central bankers, and equity-owners, less so for workers.
Today, the size of the global working population has started to fall. In many countries – not just in Western Europe and Japan, but in Eastern Europe and China too – the birth rate is well below 2.1 (the replacement rate) and in some places is only just above 1.0. The percentage of the population that has retired is growing, as are the costs of maintaining them: we are living longer, with increasingly expensive mental and physical health needs. There are fewer young workers coming into the global labour supply, and those countries that do have large numbers of young people – many sub-Saharan African nations, parts of India, parts of Latin America – are not always well-integrated into the global economy. It is much harder to outsource manufacturing or services to places with poor transport and communications infrastructure, and where levels of education and skills training are relatively low. Some work can be delegated to machines, but plenty cannot. In a retirement home, if someone wants to play chess, they can play against a computer; if they want to play table tennis, well …
This suggests that the cost of making and distributing goods and services is likely to rise, leading to higher inflation and interest rates, and that returns on capital might fall. Tough times are ahead for consumers, central bankers, and equity-owners, but the news is better for workers.
What interests me about this explanation – some of which I have drawn from this book – is that most of it could have been forecast ten years ago or more. Demographic trends operate over decades not days, and we have known for many years that life expectancy is rising, birth rates are falling, and that the rate of increase of the global labour supply would peak around 2020 and then start to decline. Why then have policy makers in the West been so slow to: (i) delay the retirement age and reform pension provision; (ii) improve financial incentives for having children and increase provision of low-cost childcare services for working parents; (iii) increase spending on infrastructure, healthcare and education in India and Africa, to maintain the supply of new workers in the global workforce; and (iv) make immigration to Western countries easier for skilled workers from countries where outsourcing is not possible, such as Syria, Sudan, Afghanistan, and Mali. Each of these policies makes sense on its own, together the constitute a long-term plan economic plan to avoid a cost-of-living crisis.
Perhaps the problem is that we tend to elect politicians who behave more like hares than tortoises, and that we employ central bankers who are easily distracted by the thought of unusual buying/selling from the Middle East. The better news is that my team won 3-0.