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Does The Pendulum Swing Back?

Does The Pendulum Swing Back?

Around the time we entered the new millennium, humanity moved from information intensification into a new economic age: the age of creation intensification. In the innovation economy, the key competitive advantage of individuals, companies and countries alike is creation — the ability to use existing and newly emerging theories, know-how and technologies to create novel, original and meaningful value.

In the coming two to three decades, creativity and innovation rule will be the key drivers of business success and economic prosperity. That is, provided the innovation pendulum that drives or impairs the free flow of goods, people, ideas and capital isn’t swinging back.

The pendulum: Swinging back and forth between two extreme poles

Some time ago, we discussed the timing, direction and impact of change. We learned that change typically unfolds in one of four direction movements: linear change, cyclical change (or the wave), the spiral, and finally the pendulum.

The pendulum describes a directional movement where forces of change swing back and forth between two extreme poles in fairly regular time intervals. In many countries, political change follows the movement of a pendulum. For example, in the United States, political power regularly swings back and forth between two parties promoting more liberal (Democrats) and conservative (Republicans) policies, with occupying the presidency and control of both Congressional chambers representing the extreme pinnacle of power.

But how about economic change?

Economic change seems to follow a pendulum movement, too. Here, the international movements of ideas, goods, people and capital is the decisive factor as the pendulum swings back and forth between the poles of ‘free movement and international trade’ versus ‘protectionism and nationalistic trade policies’. How has the pendulum swung back and forth between these two poles over the past two centuries?

  • The time period was an era of modern globalization, with international trade playing a major role in economic activities of the leading European countries. It also featured outstanding intellectual activity and groundbreaking scientific discoveries (such as Einstein’s theory of relativity in 1905) that inspired new business ventures in new industries based on the likes of chemistry or electricity.
  • This period of economic, intellectual and technological progress and prosperity ended with the outbreak of World War I, a major discontinuity that made the pendulum swing back: The period between 1914-1945 was one of deglobalization. Nationalistic parties and autocratic leaders took power in many countries and protected their local economies by regulating and limiting the free movement of goods, people, ideas and capital. Protectionism and the cold-hearted pursuit of national interests led to the Great Depression and culminated in World War II.
  • After the deglobalized period of two world wars had destroyed millions of people and crippled some nations, the pendulum swung back again: The period 1945-2008 saw a fresh phase of globalization, driven by trade and foreign direct investments by thousands of multinational companies, supported by multilateral trade agreements (the GATT rounds and regional free-trade agreements such as the EU, NAFTA, ASEAN) that reduced tariffs and non-tariff trade barriers. Meanwhile, technological innovations (such as computerization and the Internet) and transportation advances (such as container ships) significantly reduced costs and time intervals of international trade and communication. This new flood of prosperity and technologic progress also doubled the number of countries that embraced the concepts of human rights and democracy.
  • The financial crisis of 2008, some experts argue, has made the pendulum swing back to usher a new phase of deglobalization. Many countries have seen (again) the rise of reactionary leaders who won elections based on protectionist, populist policies or took power by military force. So, is the pendulum swinging back? And will this lead to a new outbreak of trade wars —or even real wars— that will limit prosperity and competition?

What are consequences of inhibiting or promoting free (international) movements of goods, people and ideas?

Protectionist and nationalistic policies temporarily secure the interests of the old establishment and secure jobs in old industries through tariffs, non-tariff trade barriers, and unfavorable investment regulations or immigration policies. They temporarily prolong the life of corporate dinosaurs and some old jobs, but at a high cost: Such policies cut off local markets and consumers from access to superior goods, cutting-edge technologies, revolutionary ideas, foreign direct and capital investments, and the brightest global talents. But eventually, the pendulum will swing back again, markets will open again, and corporate dinosaurs will face the fate of creative destruction.

In contrast, policies promoting the free international flow of goods, people, ideas and capital lead to new waves of technological innovation, new ventures, new investments and new prosperity. They create new jobs in new industries that will drive economies and create prosperity for future decades. They attract some of the smartest minds and think the boldest ideas and have the energy and talent to turn them into reality. Innovation and economic growth flourish in times and environments where ideas, goods, people, and capital flow freely.

But does economic development really follow a pendulum movement?

It can be argued that movements of ‘globalization versus deglobalization’ and ‘economic freedom versus protectionism’ follow a more hopeful pattern: the spiral.

That is, while moving back and forth, we also make regular upward leaps as we learn from past mistakes, and we also produce new waves of innovations and technologies that create more prosperity and progress for ever more people. So, we may temporarily move back in the coming years, but let’s hope that in the long run, humanity will continue to move up on the global prosperity spiral.

How is the “tug of war” of opposing economic directions going to turn out?

Well, it’s too early to tell. On the one hand, political forces promoting protectionism and nationalism have gained momentum or even power in many countries in the aftermath of the financial crisis 2008. It seems we’ve began moving backwards on the pendulum (or spiral) towards more deglobalization, protectionism and preservation.

At the same time, innovation will continue to drive economic prosperity in the coming decades, with digitization only further amplifying this meta-trend. This offers major opportunities for those countries and creative cities that decide to boldly go forward and create the free environments that attract international capital and the brightest scientific and creative minds to become an innovation hotbed and drive the sixth long wave that will start around 2020.

Today’s articles is one of 64 sections of a new book that I plan to finish writing by the end of this year. The Beginner’s Guide to Innovation is targeted for publication in 2Q.2018 by Motivational Press. Contact us if you’re interested in learning more about our trainings or my upcoming book.

© Dr. Detlef Reis 2017

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