The History of Dark Matter

Posted by: Michael Mandel on June 26

I honestly don’t know whether this is good news or bad news. Here’s an excerpt from a recent book on Britain before World War I.

The average rate of return on British investments abroad was 50 to 75 percent higher than at home. The difference was even more striking in the all-important railroad sector, which accounted for nearly half of all British foreign investment: British-owned foreign railroads earned about twice as much as those in the United Kingdom. For the home countries of these great investors, the earnings on foreign endeavors could be tremendous. Britain, foremost among international investors, had by the turn of the century come to rely heavily on its overseas profits. Indeed, in the decade before 1914, Britain ran a trade deficit equal to 6 percent of gross domestic product (GDP), a formidable sum that was countered and more by net earnings on overseas investments of 7 percent of GDP”

From Jeffry A. Frieden, Global Capitalism: Its Fall and Rise in the Twentieth Century (Norton 2006) p. 50.

I think this confirms what I have repeatedly written: The biggest danger to the U.S. right now is a major war which disrupts trade. As long as the global trading system remains intact, everyone should do well together. But when war comes, it starts to matter where the factories are.

Added: Here’s a link to a commentary that I wrote a couple of years ago on the dangers of war to the global trading system:

The past does illuminate what can happen when a new economic superpower enters the scene. From 1820 to 1913, as America rose to economic preeminence, GDP per person rose at an average rate of about 1.5% per year — enough to quadruple real incomes for the average American. But that didn’t come at Europe’s expense. Over this stretch GDP per capita in Britain, France, and Germany rose at roughly a 1.1%-to-1.3% annual average pace. That was slower than in the U.S., but it was enough to triple real incomes in those countries.
But as history shows, in periods of political, economic, or military turmoil, the free flow of goods, capital, and ideas can get choked off. And some countries feel the pain more than others. Europe found that out during World War I and the Great Depression. While America was developing mass production and a domestic automobile industry, “Europe was distracted by wars and interwar economic chaos,” writes economist Robert J. Gordon of Northwestern University. The result: The U.S. grew while Europe stagnated. From 1913 to 1950, U.S. GDP per person rose 1.6% per year — as fast as in the previous 100 years — while Europe struggled with a meager 0.8% annual gain.

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Reader Comments

Lord

June 26, 2006 01:11 PM

I think the question is whether it is war that disrupts trade or trade that induces war whether as an extension of conflict or as a solution to a deteriorating economy.

Mike Mandel

June 26, 2006 01:50 PM

Good question. Part of the blame has to go to the conflict between the up-and-coming economies and the old-line economies trying to hold onto their share of the pie.

Jon B.

June 26, 2006 03:18 PM

Isn't it hard to interpret WWI, the war that disrupted global trade the last time, in these terms? That fight was mainly among old-line economies; the up-and-coming US didn't enter until late, the up-and-coming Russia left early, and the up-and-coming Argentina, Japan and Brazil didn't participate. And in WWII the Allies and Axis were not neatly divided between old-line economies and up-and-comers either.

Mike Reardon

June 26, 2006 04:19 PM

I think the most likely conflicts will be between two parties not directly related to the U.S., except as trading partners.

Other more likely conflicts North Korea, South Korea, or China involved with one of their smaller border states, an Arab neighbor against Israel. An India's conflict with Pakistan, stepped back from being, because of the obvious effect on India's growing trade.

It is not our direct involvement as much the redirection of our trading partner attention, that are now more likely as a effect of disruptive conflict.

I see our direct action in the future, as a strategic attack against a direct the threat from a rogue state, an Iran, and not because of shifting economic consequences, but as strategic attack to disrupt the further formation or radical Islam.

By the way you are stretching the covering power of today economic dark matter returns, as related to the trading power of Britain in 1914.

Mike Mandel

June 26, 2006 04:49 PM

Two rounds of World War I..first Germany flexing its new muscles against more old-guard European nations, then up-and-coming U.S joining in.

I guess the basic insight is that the rise of new economic superpowers increases the chance of war as long-standing power relationships need to be redrawn.

Thank you for your interest. This blog is no longer active.

 

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Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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