A. Michael Spence: Fragments of the new world

m&k Werbewoche.ch: A. Michael Spence, the story behind your new book "Permacrisis: A Plan to Fix a Fractured World" could begin like a popular joke: "Three people walk into a bar ..." - and these three people are a Nobel Prize winner, a British Prime Minister and a world-class economist.

Prof. A. Michael Spence: Well, if you want to use a bar as a metaphor, it would have to be a digital bar (laughs). Gordon Brown, Mohamed A. El-Erian and I had the conversations that eventually became the book virtually - during the Covid pandemic. Mohamed played a central role: we've known each other for more than 15 years, I've learned a lot from him, and he in turn has known Gordon forever. During the pandemic, the two of them were often on the phone or zooming in on each other and exchanging ideas, first about the British economy, then about the global economy. Mohamed was interested in my perspectives on certain topics, so he invited me to join the conversations. This turned into a discourse lasting twelve or 13 months ...

... which you then decided to record in book form?

Yes, although Mohamed asked a pertinent question immediately after this decision: "Did anyone actually take notes?" (laughs) Of course, nobody had done that. So we divided up the terrain and formulated guidelines: What new growth models and forecasts are there? What implications do political changes have for the global economy? What challenges, but also opportunities, do we face? What mistakes are we currently making? Is there a way to strengthen positive trends and mitigate negative trends? Of course, we didn't want it to sound to readers as if three authors with very different "sounds" had written individual essays that were then compiled into a book. So we brought Reid Lidow on board - an incredibly talented author who Gordon knows from previous projects. He turned our "expert speak" into elegant and, above all, comprehensible formulations, and then it only took eight months for the publisher to start distributing the work.

"We live in a world in which global shocks are overlapping."

This is remarkable, especially because the book is dedicated to an interweaving of enormously complex problems - which is why you refer to a "permacrisis", a permanent crisis, on the title page. Why did you choose this term?

Because we live in a world in which not only are local crises occurring more and more frequently, but there is also a superimposition of global shocks. Take the economy alone: the Asian financial crisis was followed by the bursting of the "dot-com bubble", "9/11", then the global financial crisis, then the sovereign debt crisis in Europe - and finally the Covid pandemic, which not only cost many people their lives, but also cost many companies their economic foundation. Or look at climate change: There are so many natural disasters occurring in such quick succession that we no longer need to make plans for the next 30 or 40 years, we need to act now! And then there's the war in Ukraine ... When our book is published in paperback, we will probably have to include a new war in the Middle East in our analyses. So the first dimension of a perma-crisis is a shift in the event structure from "A is followed by B is followed by C" to "A and B and C happen simultaneously, everywhere, and interfere with each other".

And the second dimension?

That would be a fundamental, structural change - which is often overlooked as a component of perma-crises. However, it is not only the overlapping shocks that constitute a perma-crisis, but also changes in the global economy and the institutions that have shaped and regulated it to date. The transformation of supply chains, the trade in energy, the accumulation of economic power in territories that were previously labeled - and treated - as emerging markets ... all of these are arguably irreversible developments, partly evoked by the external events mentioned, partly motivated by history or political strategy. The fundamental question of our book lies in the combination of both dimensions: How do we find our way in a world that is only just emerging? And how do we - as politicians, bankers or business leaders - make the best of it? You know, we can either look depressed at the erosion of the order we know or try to see the good in what is coming. The decision is up to us.

In your book, you do the latter - it therefore has a thoroughly optimistic undertone.

The growth of new markets is not a negative thing per se, just like the scientific and technological innovations that can emerge from crises. Just think of the hyperboost that the pandemic has given to the development of a new class of vaccines - we could benefit enormously from this in the future. However, we first have to make the mental shift towards a "crisis as a resource", because it is not exactly in the human nature (laughs).

Because you are talking about new markets in emerging countries: Has the time when "the West" sets the pace and the rules come to an end? And if that were the case, was globalization never really inclusive?

Good question. Globalization was inclusive as long as we benefited more from it than others. As long as our "suppliers" didn't show too much desire, we didn't mind that there was a transfer of know-how and technology, that they got a slice of the cake and that this reduced inequality on the planet. But did we want true, perfect equality? No. We wanted the lion's share of the profits for ourselves and we wanted to rule. This is not a moral judgment, but simply an observation I have made as an economist. On the one hand, this makes our suppliers more and more self-confident because we are becoming more and more dependent on them, and on the other hand it has serious domestic political consequences if we relocate production jobs to low-cost foreign countries. Countries become bolder, more aggressive when they are no longer dependent on us as "customers", but the situation is reversed; and people become frustrated when they lose their jobs. "Why aren't we invited to the party you're having at our expense?" - this is the question that nations and individuals alike are asking themselves, and in this question - whether it sounds like populism or not - lies explosive power.

"Globalization was inclusive as long as we benefited more from it than others."

You and your co-authors speak of the emergence of a "multipolar world" in which the blocs and alliances of the past are becoming obsolete. Can this term still be used at all in academic discourse - or have autocrats like Vladimir Putin and Xi Jinping not long since turned it into a political battle cry?

We can simply remove the term from our vocabulary - problem solved (laughs)! But joking aside: when we say multipolar, we mean a permanently moving variance of political and economic centers of interest that cooperate with each other in area X, but can have absolutely contrary views in area Y. People like Putin and Xi are more likely to mean new, but definitely consolidated centers of power - China and its supposed sphere of influence as a pole, Russia and its supposed sphere of influence as a pole, etc. But this is not a development, not an adequate representation of our world - in this idea, a few blocs simply become many blocs that are either allied with each other or see themselves as opponents. We, on the other hand, think that the BRICS states may be interested in cooperating closely with the USA on climate change, but are bothered by the dominance of the US dollar. Global politics will thus become ... well, at least it won't become any clearer (laughs). But in future, we will have to continually balance out where we can find common ground instead of speaking in absolutes.

However, this has not only economic but also security policy aspects.

Absolutely. We no longer trust each other. Numerous heads of state and government are working hard to ensure that the situation does not get out of control, but the influence that the West had after the end of the Cold War has also declined drastically in security policy issues. And - even if there may be other voices - I believe that this influence has actually been good for the planet. The powers that were trying to control the destiny of the world were largely benevolent. The G7 - for a while, with a much more moderate Russia, the G8 -, the UN Security Council, the IMF or the World Bank ... wanted to protect the global community from harm. However, they could only function as long as there was a minimum level of international consensus. This gave them power and a mandate. Today, it would no longer work for a European country to outvote China on currency issues; today, the UN can hardly pass any resolutions because someone is always blocking something. The major institutions have become paper tigers.

Can we reform the institutions - or is it more realistic, as you said earlier, that we only negotiate on specific issues when it is convenient for several players?

In the short to medium term, the term alliance will be synonymous with "equal interest at the same moment". I know that's not nice - and Gordon would argue that pragmatism is no excuse for not working hard to re-establish multilateral institutions. I agree with him, but it will take time. And until then, we have to keep in mind that nobody wants to run their national economy into the ground, so trade could open the door to broader cooperation when the time is right. But maybe we'll do better this time with trade and make it truly inclusive, otherwise someone is guaranteed to end up feeling left behind again ... and we'll have new problems.

Trade between Russia and Europe has not been able to prevent the war in Ukraine.

That's right. But in principle, I would say that if you have close economic ties with other countries, you should at least think twice about doing anything that could jeopardize these ties. They are ... better than nothing.

One of the guiding ideas of Fukuyama's "End of History" at the beginning of the 1990s was that capitalism as an export model inherently includes democracy as a model for success ... and that all countries will adapt the latter. Now we realize: Capitalism and democracy can do without each other.

We hoped that countries that develop their economies would also reform their government systems as they become more prosperous - that they would "do business like us" and thus "become like us". It turned out differently.

Why?

Because we initially neglected the diversity - the spectrum - of capitalist models in the hope that "everything would finally be fine" after the Cold War. There is no "one" capitalism that you can impose on any country. The only certainty is that extremes do not work anywhere - radical liberalism, which allows the economy to operate without regulation, is just as doomed to failure as a planned economy. This is because the latter lacks incentives for individual commitment: you can rely on Adam Smith's writings or delve into the disastrous political experiments of recent Chinese history. Do you know how the Chinese economy experienced its first "boom"? By motivating farmers to produce more than their quotas and promising them that they would be allowed to sell the overproduction on the free market. So much for a planned economy. Anyway, back to my point from the beginning: we have long assumed that there is a kind of "median capitalism" where all nations will gradually come together. We have also believed that there is a "median democracy". Both are wrong. Apart from the extreme models we have mentioned - which are doomed to failure a priori - the controls and spectrums are constantly being shifted everywhere, the boundaries are being explored, the parameters are being re-evaluated. We have to come to terms with this.

"We are unable to predict whether the AI surge will lead to an S-curve or continue."

In your new book, you also deal with the consequences of artificial intelligence for the world of work. I have to ask you the crucial question: Will AI boost our productivity - or make a lot of jobs obsolete?

I don't think we'll be able to make a final judgment for a few years yet. There are still too many variables in the equation. I have just published a paper with James Manyika from McKinsey in Foreign Affairs where we look at this very question: James understands a lot more about the technology than I do, but we agree on the potential consequences of ever wider adoption. Initially, we will see a huge surge in productivity throughout the economy, but we are not able to predict whether this surge will end in an S-curve - i.e. come to a standstill at a certain plateau - or whether it will continue.

Do you have a guess?

Now: Generative AI differs from older speech recognition or image recognition algorithms in its broad applicability and accessibility. You don't need any training to interact with Chat GPT, write simple prompts and use the AI as an assistant. I think that will be the primary function for a while at least: Assistance. Not full automation that makes human input obsolete. The computer writes the first version of software, the engineer improves it. The computer writes a draft of a patient report, the doctor adds important details. And so on.

So it's not about replacing the software engineer or the doctor. It's about relieving them of tedious work so that they have more time to use their specialist knowledge in a more targeted way.

That is correct. That is the optimistic prognosis that I advocate - and that we also advocate in the book. I am of course familiar with Erik Brynjolfsson's "Turing trap" and, applied to AI, the distorted perception of automation that CEOs or HR leaders must not fall for. First, we build a machine that, when we ask it questions, gives us the feeling that we are not talking to a machine. It therefore seems obvious to us to compare the output of AI with that of humans; there must be some kind of benchmark. But if we conclude from this: "AI is faster and better - let's get rid of humans", then we are endangering companies much more than we are doing them any good.

Why?

Because the increased productivity that AI can ensure will not generate a "surplus" of output, but will fill the gaps that could not be filled otherwise. The USA and many European countries are suffering from a blatant shortage of skilled workers and an ageing workforce - so this is an excellent time to use AI to compensate for the workforce that will be lost.

In various interviews over the past few months, you have said that your new book does not offer a panacea for the ongoing crisis of the present. It could be seen as a conversation starter or a wake-up call, but it does not contain a perfect solution. Do you sometimes ask yourself what could happen if global leaders don't heed this wake-up call?

Let me start by saying this: I have always been someone who has admired the courage of business leaders and politicians. As a scientist, I have it good: I only "have" to research, write and give lectures. But heads of government and CEOs have to operate in a system of manifold interdependencies and take dozens of factors into account in every decision. It's a veritable art - you need not only expertise, but also character and talent to do it well. Now to your question: if those who make the decisions don't adapt their actions to the facts - if they resist the new disorder of the world instead of exploring innovative opportunities in it - it could become unpleasant. I don't like to talk about catastrophes or a complete standstill of the economy, that doesn't suit me. But we would be using so little of the potential that lies hidden even in this permanent crisis that it would be a terrible waste! With all the negative news these days, we must not simply sit back and wait like rabbits in front of a snake to see if we will be eaten. We must realize that challenging circumstances can catalyze positive solutions and act accordingly with courage. We should not keep our fingers crossed that the world will become more pleasant and easier by itself. We should keep our fingers crossed that we can make it more pleasant and better.

Andrew Michael Spence is an American economist. In 2001, together with George A. Akerlof and Joseph E. Stiglitz, he was awarded the Alfred Nobel Memorial Prize in Economic Sciences for their work on the relationship between information and markets, in particular adverse selection. Spence was a professor at Harvard University (Graduate School of Business), before that he was at Stanford University.

In her book "Permacrisis: A Plan to Fix a Fractured World" Nobel Laureate in Economics A. Michael Spence, former British Prime Minister Gordon Brown and star economist Mohamed A. El-Erian paint a pragmatic picture of the present - without falling into pessimism. A refreshing plea for resilience and a spirit of innovation.