The fallacy of equating economic power with clout


Dominance of an industry or activity is not the same as scale. International trade is conducted by individuals and businesses, not governments, and it is them, who negotiate the division of the value added trade creates.

The analogy drawn between economic power and political or military power is a persistent example of a popular fallacy. People talk of the Group of Seven or G8 or G20 as the great economic powers, and they discuss the balance between them.

That language draws directly on the rhetoric used by statesmen and historians to describe the politics of the 19th century. Such language leads to talk of how China might “overtake” the US as the world’s leading economy, and how the European Union might enable Europe to stand up to the economic strength of the US and Asia. Many people in both the developed and developing worlds believe that trade between north and south is necessarily unfair because of the inequality of economic power.

Insofar as such statements have any meaning, the people who make them seem to be comparing implicitly or explicitly the aggregate gross domestic product of countries or blocs. GDP is what makes military expenditure possible, but such people are talking about economic advantage rather than military force and that raises quite different issues.

The US is the world’s pre-eminent military power, but the economic benefit of that is hard to see. The US spends a larger proportion of its national budget on weapons than most other advanced countries. That leaves less to spend on other public infrastructure. And if the objective of America’s interventions in the Middle East was to obtain privileged access to cheap oil, then they have been signally unsuccessful.

In the modern world, there is no observable relationship between size of country and its standard of living. Small and large countries are found among the rich and among the poor. India, China and Nigeria are countries whose economic performance has long underperformed their potential. The chaotic politics that emerges when competing interests contest control of a diverse whole is part of the explanation. The homogenous societies of Scandinavia, by contrast, are among the richest countries in the world. Their prosperity derives from the ability to exploit narrow competitive advantages on a global basis. It no longer matters that these countries do not produce many of the goods they consume. Empires are now costly burdens rather than economic opportunities and there is global free trade in most goods and services.

Economic power is based on monopoly derived from being the only seller of a particular good or service, or on monopsony derived from being the only buyer. Such power is held by individuals and businesses, not by states. Dominance of an industry or activity is not the same as scale, though scale and dominance are loosely related. International trade is conducted by individuals and businesses, not governments, and it is individuals and businesses, not governments, that negotiate the division of the value added trade creates. The principal economic role of states is not to get in the way. They can impede the process of adding value through trade, protectionism or disruptive currency interventions. These actions damage their own businesses even more than they damage the businesses of other countries.

It was important to be represented at the Congress of Vienna in 1815 to divide the spoils of war and to impose the costs of defeat. But there is no similar surplus or burden to share in international economic negotiations. That is why economic summits normally deliver so much less than their architects or attenders promise.

Who now remembers the London Conference of 1933, called at US President Herbert Hoover’s instance to co-ordinate global responses to the Great Depression? (Hoover was voted out in the meantime.) The footnotes the conference now occupies in the history book relate mainly to Franklin Roosevelt’s petulance. He sent Cordell Hull, his secretary of state, as an almost silent emissary and declined to co-operate in currency stabilisation.

It matters a great deal to global leaders who is, and is not, given a photo opportunity at next week’s economic summit. It does not matter to the citizens of the small countries, which will not be represented. Perhaps they are better off. Their leaders will not even have to pretend to commit themselves to action.

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