What would Keynes say about today's global economy?

The global economy is navigating a turbulent period marked by volatile oil prices, persistent inflation, rising interest rates, and decelerating growth. Chief Economist Erling Røed Larsen of Swedbank Norway reflects on these challenges, drawing parallels to the stagflation of the 1970s and pondering what the influential economist John Maynard Keynes might observe today.

Larsen imagines Keynes identifying five critical factors shaping the current economic climate. First, a "hegemonic shift" is underway, where a rising power challenges the existing economic, political, and military leader, creating friction. Second, China's integration into the global economy in the 1990s, bringing hundreds of millions of workers into the fold, fundamentally altered the balance between labor and capital, making manual labor cheaper and impacting prices for decades.

Third, significant trade imbalances persist among major economies like the U.S., China, Japan, and Germany. The U.S. has long run substantial trade deficits, while the other three have maintained considerable surpluses. Fourth, the globalization process since the 1990s has created longer, more complex production lines. While this lowered costs and boosted trade, it also introduced vulnerabilities to disruptions and political manipulation.

Finally, Larsen highlights the ascendant "knowledge economy." As Western nations transitioned from industrial economies, countries like the U.S. focused on developing intellectual property, software, and entertainment, while China became the world's factory. This knowledge-based model, characterized by high development costs and low marginal costs, favors large corporations, leading to consolidation in the tech sector.