The War of the World
Introduction
Economic volatility
Why has extreme violence occurred only at certain times? The answer is that ethnic conflict is correlated with economic volatility.
It is not enough simply to look for times of economic crisis when trying to explain social and political instability. A rapid growth in output and incomes can be just as destabilising as a rapid contraction. A useful measure of economic conditions, too seldom referred to by historians, is volatility, by which is meant the standard deviation of the change in a given indicator over a particular period of time.
Stresses and strains
A straightforward and testable proposition is that times of high volatility were associated with socio-political stresses and strains. It is certainly suggestive that, for the seven major industrialised economies (Canada, France, Germany, Italy, Japan, the United Kingdom and the United States), the volatility of both growth and prices reached its highest point between 1919 and 1939 and declined steadily in the post-Second World War period.
Economic historians for a long time were preoccupied with the identification of economic cycles and waves of various amplitudes. They tended to overlook changes in the frequency and amplitude of booms and busts. But it was precisely the unpredictability of 20th-century economic life that produced such strong shifts in what John Maynard Keynes called the ‘animal spirits’ of employers, lenders, investors, consumers and, indeed, government officials.
Unintended consequences
Over the past 100 years, there have been profound changes in the structure of economic institutions and the philosophies of those who run them. Prior to 1914, the degree of freedom in the international mobility of goods, capital and labour was unprecedented. Governments were only just beginning to extend the scope of their operations beyond the provision of security, justice and elementary public goods. Central banks were at least to some extent constrained in their operations by self-imposed rules fixing the values of national currencies in terms of gold; this made for relative price stability, though also higher volatility in growth than we are now accustomed to.
These things changed radically during and after the First World War, which saw a significant expansion in the role of government and a breakdown of the system of fixed exchange rates known as the gold standard. The interwar experiments with protective tariffs, deficit finance, confiscatory taxation and floating exchange rates generally had the unintended consequence of magnifying economic fluctuations. Planned economies did better, but at a considerable cost in both efficiency and freedom.
Burdens of adjustment
Economic volatility matters because it tends to exacerbate social conflict. It seems intuitively obvious that periods of economic crisis create incentives for politically dominant groups to pass the burdens of adjustment on to others. With the growth of state intervention in economic life, the opportunities for such discriminatory redistribution clearly proliferated. What could be easier in a time of general hardship than to exclude a particular group from the system of public benefits?
What is perhaps less obvious is that social dislocation may also follow from periods of rapid growth, since the benefits of growth are very seldom evenly distributed. Indeed, it may be precisely the minority of winners in an upswing who are targeted for retribution in a subsequent downswing.
