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Productive and unproductive crises

To many observers, the globalised world seems to be coming apart, with scarcity fuelling deglobalisation and conflict. But to economic historians, concerns about global supply and security look surprisingly familiar. This column takes the long view of global upheavals, from the 1840s to the Great Depression, the Global Financial Crisis, and the Covid pandemic. When fundamental items such as food or fuel become scarce, prices rise, requiring new channels of production and distribution. Supply crises generate new institutions and market innovations, showing the way to productive adaptation.

Today it appears to many observers that the connected or globalised world is breaking apart, that deglobalisation is a consequence of a profound political push for de-risking. Shortages are driving ubiquitous anxiety about supply and security. Acute food shortages produce famine, infectious diseases spread among undernourished populations, social unrest flares up, political systems are challenged and destroyed. The attention of the world focuses on particular geographic hotspots that dominate the geopolitical imagination. The Dardanelles – the passage between the Black Sea and the Mediterranean – assumes global significance, a thin needle connecting the grain producing areas of autocratically controlled central Eurasia to hungry or starving consumers. 

To the economic historian, the current angst that supply scarcities are fuelling deglobalisation and conflict is familiar. The shortage scenario has replayed regularly over the past two centuries: at the end of the 1840s, during WWI, and of course in 2022. In the 1970s, the Middle East became the focus of an intense global debate about energy security. The traumas engendered by inadequate food or energy supplies, fears that they are controlled by hostile or malign or simply alien powers, the challenges that the coordination of effective domestic and foreign policies pose to governments: these constitute the fundamental drivers that make humans more willing to reimagine how human ingenuity and new techniques might be used to solve problems and connect peoples across the world. Crises which at first sight look purely devastating – bringing only death and destruction – prove to be transformative.

It is a well-known fact that the globalisation process has ups and downs, and that different waves of globalisation have unique characteristics (O’Rourke and Williamson 1999, Baldwin 2019). Policymakers and economists try to learn from past crises: both the Global Financial Crisis of 2008 and the Great Depression produced an extensive literature on the impact of past experience (Eichengreen 2015). One of the most difficult exercises involves choosing the right analogies. The aftermath of the outbreak of the Covid pandemic in 2020, for example, was characterised by an application of the monetary and fiscal lessons of the Global Financial Crisis. Was that the right analogy? 

We should distinguish, first, between supply and demand shocks. Economists analyse the influences on key indicators – output and prices – by differentiating between influences that affect aggregate supply and factors that shape demand. A supply shock changes the ability of producers to make goods that add to overall output, and directly affects prices, quantity inputs, or production technology. A negative supply shock reduces inputs and increases prices. A positive shock increases inputs and lowers prices. The supply shocks thus move the equilibrium price level and equilibrium output in opposite directions.

By contrast, a demand shock affects spending by buyers, whether individuals, businesses, or governments. It might be expected to affect output and production: a positive shock leads to more economic activity, while a negative one diminishes activity. But in this case, equilibrium prices and output move in the same direction: up when the demand shock is positive, down when it is negative. Financial crises that emerge out of a malfunctioning or ill-constructed or badly regulated financial system are simply negative demand shocks, destroying the ability of individuals and businesses to buy products, and pushing down both prices and production. These are unproductive crises.

The course of globalisation was interrupted by two serious and very negative demand crises, in each case brought about and amplified by financial turbulence: the Great Depression of 1929–1933, and the Great Recession after the 2007–2008 financial crisis. Each brought some measure of deglobalisation, which was much more extreme in the case of the Great Depression.

On the other hand, the two largest globalisation surges, measured in a conventional way by the increasing share of production that was traded internationally (Figure 1), followed major supply shocks: in the mid-19th century after the severe food shortage of the 1840s, and in the 1970s after the oil shock.

Figure 1 Ratio of global exports to GDP (percent)

Figure 1 Ratio of global exports to GDP

Notes: Catão and Obstfeld (2019).

Negative supply shocks may just be temporary, in which case we can expect a short surge in inflation, then a deflationary interlude, and a relative return to normalcy or the pre-shock pattern of price behaviour. Negative supply shocks may also be persistent, with expectations that the price of the scarce good will remain permanently high: modelling of that scenario suggests that the long-term effect on underlying or core inflation, after an initial spike, would be a small augmentation. Finally, the shock may be the beginning of a long-term upward movement in the price of the scarce good; in this case, modelling suggests that the core rates of inflation would continue to rise (Blinder and Rudd 2013). All modelling efforts of this sort assume that there is a clearly discernible pattern. However, the big historical shocks that shifted the course of globalisation were quite different. They were not normal or predictable events. They brought substantial dislocations. Their outcomes were uncertain. They caused profound political trauma.

In these circumstances, the responses by intelligent people struggling to see what the future might hold actually transformed the structure of production and distribution. The radical character of the shock spurred a search for alternatives: new products, but also new mechanisms to move goods.

When fundamental items such as food or fuel become scarce, prices rise, requiring new channels of production and distribution. A central question for politics is how to respond to the challenge of dramatic price movements. The yoyo moves lead to revolutions in government as well as in business organisation. The supply crises thus generate new institutions and market innovations, but also states that are stronger and extend their capacities. Such institutions change the way people conceive of interactions or of the economic process.

Some systems are so rigid that they are completely destroyed by the economies of shortage: the brilliant Hungarian economist Janos Kornai strikingly captured the mechanism by which scarcities, and the hoarding and dysfunctionality they prompt, undermined and finally destroyed centrally planned (communist) economies (Kornai 1980).

Thinking about the resilience of systems also leads gradually to reflections on the relationship of national systems to the rest of the world. Recognising that pandemics or climate change are global threats should produce coordinated global responses. Crises appear to emphasise how globalisation must be guided or managed. Sceptics will quickly point out that reality is more complex. Covid frequently prompted people to think in terms of national self-interest: America First.

The turn to trade protectionism and heightened competition between powers set the scene first for the aggressive use of energy supply as an instrument of blackmail, and then for Russia’s attack on Ukraine in

2022. Other global challenges, too, provoke new forms of nationalism and protectionism. Even climate change, like Covid-19, might be used to build strategic advantages: in particular, northern countries –Russia especially but also Canada and Norway – may be beneficiaries of warmer temperatures and easy navigation through the Arctic. In consequence, geopolitics appeared omnipresent in the wake of the pandemic and the response to the war in Ukraine. A geopolitical mindset limits the capacity to produce coordinated responses, leaving globalisation on the defensive, on the retreat. At the same time, a new reality is emerging.

The key question for governments, but also for the whole of society, is how to respond, in crises, to the possibilities offered by technical change. Technical change occurs constantly, but is not always used efficiently or productively. In practice, over the long history of globalisation, there have been extended gaps between a potentially transformative innovation and its wider useful diffusion. Matthew Boulton and James Watt produced a better steam engine in 1776. But the first railroad in Britain, the short Stockton-to-Darlington line, opened only in 1825 to connect collieries to the North Sea; the first steamship, the paddle-driven SS Great Western of Isambard Kingdom Brunel, crossed the Atlantic in 1838. Only in the middle of the 19th century did railroads open up interior spaces all over the world and steamships carry goods globally. Orville and Wilbur Wright flew a powered, heavier-than-air machine in North Carolina in 1903, but it was only in the 1960s that the jet aircraft opened the way to large-scale transportation. Aniline was isolated in 1826 by Otto Unverdorben, but only in 1854 did the reduction method developed by Antoine Béchamp allow the large-scale production of dyestuffs. Medical or pharmaceutical uses took longer: a derivative (sulfanilamide) was synthesised in 1908 with extensive antibacterial uses. Other medical discoveries required even more time to reach across the world: Edward Jenner developed the practice of vaccination against smallpox in 1796, but it was 1977 before smallpox was completely eradicated. Jenner’s son, sisters, and wife all died of tuberculosis, a disease for which a vaccine, Bacillus Calmette-Guérin (BCG), was first used in 1921.

The durations between when new innovations are developed and applied might be changed by new political constellations. One revolutionary driver, the container ship, was developed in the 1950s but only had a significant impact on shipping costs and practice in the 1970s because of changes in the regulation of carriers and their interactions with shippers. Big disruptions, notably wars, limit trade but also drive an intense search for quick solutions, such as the synthesisation of nitrate production for explosives and crop fertiliser in WWI, and the development of penicillin in WWII. It is wrong to see the dissemination of technology as a steady, evenly paced process. It is distinctly shaped by government priorities, choices as to why certain products matter: railroads, steamships, aircraft, vaccines, and so on.

Especially at moments of crisis, we feel uncertain about the future, its meaning and direction. Bankruptcy is decided not by the long-run viability of an idea or business concept, but by an ability to meet immediate financial requirements, or by the way assets and liabilities on a balance sheet are interpreted. It is precisely at moments of doubt and hesitation that individuals, governments, and markets are open to influence by persuaders: powerful analysts, interpreters, and rhetoricians who can provide some light and who claim to know the future. The responses then help to shape how the future develops. At the moment, there are multiple possibilities or trajectories. If we consider these in static terms, we will think of multiple equilibria. Keynes wrote of how “the uncontrollable and disobedient psychology of the business world” determined the marginal efficiency of capital (Keynes 1936).

The combination of technical and geographic change has always required competence, and that demanded learning: looking to a future by learning from a dismal past. In the gloom of 1919, when the globalised pre-war world seemed to have completely collapsed, Keynes feared that “All this makes it increasingly probable that things will have to get worse before they can get better” (Keynes 1978 [1920]). But a survey of historical experience suggests we learn most when – as in the 1840s and the 1970s – the present is most dismal. Globalisation is reshaped, neither destroyed nor revived in its old form, through the relearning. And supply crises show the way to productive adaptation.


Baldwin, R (2019), The Great Convergence: Information Technology and the New Globalization, Harvard University Press.

Blinder, A S and J B Rudd (2013), “The Supply-Shock Explanation of the Great Stagflation Revisited”, in The Great Inflation: The Rebirth of Modern Central Banking, University of Chicago Press, 119–175.

Catão, L and M Obstfeld (2019), Meeting Globalization's Challenges: Policies to Make Trade Work for All, Princeton University Press.

Eichengreen, B (2015), Hall of Mirrors: The Great Depression, The Great Recession, and the Uses-and Misuses-of History, Oxford University Press.

James, H (2023), Seven Crashes: The Economic Crises That Shaped Globalization, Yale University Press.

Keynes, J M (1936), The General Theory of Employment, Interest and Money, Macmillan Publishers, 317.

Keynes, J M (1978), Collected Writings Volume XVII, Cambridge University Press, 150.

Kornai, J (1980), The Economics of Shortage, Amsterdam: North-Holland Publishing Co.

O'Rourke, K H and J G Williamson (1999), Globalization and History: The Evolution of a Nineteenth-Century Atlantic Economy, MIT Press.