Twenty five years ago, it was perfectly standard to think that the multi-millennium struggle to work out how best to run society had come to an end – witness The End of History by Francis Fukuyama, published in 1992 . The collapse of communism left the US as the world’s sole super power and, as Charles Dumas says in his book Populism and Economics, appeared to make it clear that “a blend of capitalism and democracy” was the ideal political and social system. Globalisation – a fast rise in the free flow of goods, capital and people around the world – followed, as did a stunning hi-tech revolution, and for a time all seemed well.
Then it suddenly went less well. Only a few decades later came the worst financial and economic crisis since the 1930s. Today it is perfectly clear that the struggle is no more over than it was in 1989. So what went wrong? And what next? Dumas’s answer is worth listening to. It comes down, he says, to a mix of four key elements: globalisation, technology, demography and financial imbalances, with the latter being the key to understanding the crisis itself.
The burgeoning global labour market
The better understood part of the story starts in the early 1990s as communism fell and China turned back to the world after the trauma of Tiananmen Square. This effectively “tripled or quadrupled” the global work force as three billion extra people entered the global economy, but they were almost all “prepared to work for wages far below the norm for western companies.” That in turn gave us lower overall wages, a much lower level of capital assets per worker, and a fast rise in profits as labour costs slid.