Pax Sinica: How will economics respond to the 'new global order'?

Economics will find a way to include protectionism but building a theoretical case for budget deficits will be much harder

A few days ago, a well-known columnist who likes to ruminate in this newspaper wrote about the uncertainties looming ahead. These mostly arise from the emergence of China as a wannabe rule-maker.

I have been wondering since reading that column how economics will respond to the so-called new world order. This is because after 1950 economics was pressed into service to serve America’s economic objectives — exports of goods and capital.

China has been asserting the right of China to make its own rules, as the US had done after 1945. This is what has led to talk of a new global order.

After Russia invaded Ukraine, the talk about a new global order has become quite insistent. Though no one quite knows what it means, two things seem certain.

One, that China will play a key role in devising new global economic arrangements. Two, that even if India is a part of the rule making, it will have to accept whatever emerges just as it had to during 1945-50.

It is quite certain that China will also try to shape economics. This is not a cause for worry. That’s how it has always been because much of British economic thought and theory between 1800 and 1920 had British interests in mind.

Free trade became the guiding principles underlying all branches of economics. Welfare maximisation, it was postulated, would be in direct proportion to economic openness.

So, if you look at Britain then, the US between 1950 and 2016 when Donald Trump became president, and China now you will find absolutely no difference in their overall economic approaches. Economic openness they all say is the key virtue of all policy. Of course, this doesn’t apply to them.

The economics of the time — David Ricardo onwards — supported these policies as being beneficial to all participants, just as China’s economics talks of a global prosperity sphere these days. But there is a difference now.

Thanks to empires, there were very few sovereign countries then. Now there are 193 or so. So, unless the sovereignty of several of them is abridged or eliminated, economics will have to move to include protectionism.

This will be a new game for it because until now it has been strenuously trying to show how bad protectionism is. In fact, after the collapse of the USSR, openness became an article of faith which China cleverly exploited!

I am sure economics will find a way of inducting protectionism into its fold. That will be relatively easy. There is a lot of algebra already available for it.

What will not be so easy is to build a theoretical case for budget deficits that goes beyond the idea that their father, John Maynard Keynes, had for them, namely, manageable deficits.

Economists over the next two decades will have to work hard to show either that there is no such thing as an unmanageable deficit or that — haha — just as more trade leads to more welfare, higher deficits lead to greater welfare.

Keynes, it must be recalled, had to rely on logic and rhetoric — gold as a barbaric relic for example. Economics now will rely on proving a simple correlation between the Chinese experience of massive welfare gains from a combination of huge budget deficits and huge protectionism. Ironically, this will suit the Americans.

And here’s another delicious irony: Indian economics, as it happens, has already been there and done it— large deficits and high protectionism. The world of economics goes around the circle and comes back to the point from which we never moved.