Edwardian Summer

Crinoline and croquet are out. As yet, no political activist has thrown themselves in front of the royal horse on Derby Day. Even so, some historians can spot the parallels. It is a time of rapid technological change. It is a period when the dominance of the world's superpower is coming under threat. It is an epoch when prosperity masks underlying economic strain. And, crucially, it is a time when policy-makers are confident that all is for the best in the best of all possible worlds. Welcome to the Edwardian summer of the second age of globalization.

Spare a moment to take stock of what's been happening in the past few months. Let's start with the oil price, which has rocketed to more than $65 a barrel, more than double its level 18 months ago. The accepted wisdom is that we shouldn't worry our little heads about that, because the incentives are there for business to build new production and refining capacity, which will effortlessly bring demand and supply back into balance and bring crude prices back to $25 a barrel. As Tommy Cooper used to say, just like that.

Then there's the result of the French referendum on the European constitution, seen as thick-headed luddites railing vainly against the modern world. What the French needed to realize, the argument went, was that there was no alternative to the reforms that would make the country more flexible, more competitive, more dynamic. Just the sort of reforms that allowed Gate Gourmet to sack hundreds of its staff at Heathrow after the sort of ultimatum that used to be handed out by Victorian mill owners. An alternative way of looking at the French "non" is that our neighbours translate "flexibility" as "you're fired".

Finally, take a squint at the United States. Just like Britain a century ago, a period of unquestioned superiority is drawing to a close. China is still a long way from matching America's wealth, but it is growing at a stupendous rate and economic strength brings geo-political clout. Already, there is evidence of a new scramble for Africa as Washington and Beijing compete for oil stocks. Moreover, beneath the surface of the US economy, all is not well. Growth looks healthy enough, but the competition from China and elsewhere has meant the world's biggest economy now imports far, far more than it exports. The US is living beyond its means to the tune of $60bn a month, but in this time of studied complacency a current account deficit worth 6% of gross domestic product is seen as a sign of strength, not weakness.

And so it goes on. Iraq is not another Vietnam, the bombs in London on 7/7 had nothing to do with Tony Blair's support for George Bush, rocketing oil prices do not mean a return to the recessions of the mid-1970s and early 1980s. Relax. Don't worry. These guys know what they're doing. Here in the UK, the government boasts proudly about its stewardship of the economy, when all the evidence is that activity collapses like a punctured souffle as soon as action is taken to restrain property speculation. Britain's manufacturing sector is a hollowed-out shell, claimant-count unemployment has risen for six months in a row, the Bank of England is at war with itself over whether interest rates should be cut, and the only person who believes there is not a gaping black hole in the public finances is the chancellor of the exchequer, of whom very little has been seen or heard since the election.

In this new Edwardian summer, comfort is taken from the fact that dearer oil has not had the savage inflationary consequences of 1973-74, when a fourfold increase in the cost of crude brought an abrupt end to a postwar boom that had gone on uninterrupted for a quarter of a century. True, the cost of living has been affected by higher transport costs, but we are talking of inflation at 2.3% and not 27%. Yet the idea that higher oil prices are of little consequence is fanciful. If people are paying more to fill up their cars it leaves them with less to spend on everything else, but there is a reluctance to consume less. In the 1970s, unions were strong and able to negotiate large, compensatory pay deals that served to intensify inflationary pressure. In 2005, that avenue is pretty much closed off, but the abolition of all the controls on credit that existed in the 1970s means that households are invited to borrow more rather than consume less. The knock-on effects of higher oil prices are thus felt in different ways - through high levels of indebtedeness, in inflated asset prices and in balance of payments deficits.

Back in 1914, there was a good case for saying that peace and prosperity would go on indefinitely. There had not been a major war involving all the great powers for 100 years, and the price level in Britain was lower in the year that the first world war started than it was in the year of Waterloo. New inventions and technology that would shape the 20th century - the motor car, the aircraft, the cinema - were being developed. Yet the following three decades did not see the final flowering of the first age of globalization but its disintegration. Only after two world wars and a global slump was it accepted that warning signs had been there long before the assassination at Sarajevo but been tragically ignored.

History does not always repeat itself. It may be different this time, with the second age of globalization avoiding the pitfalls of the first. There are those who point out, rightly, that modern industrial capitalism has proved mightily resilient these past 250 years, and that a sign of the enduring strength of the system has been the way it has apparently shrugged off everything - a stock market crash, 9/11, rising oil prices - that has been thrown at it in the half decade since the millennium. Even so, there are at least three reasons for concern. First, we have been here before. In terms of political economy, the first era of globalization mirrored our own. There was a belief in unfettered capital flows, in free trade and in the power of the market. It was a time of massive income inequality and unprecedented migration. Eventually, though, there was a backlash, manifested in a struggle between free traders and protectionists, and in rising labor militancy.

Second, the world is traditionally at its most fragile at times when the global balance of power is in flux. By the end of the 19th century, Britain's role as the hegemonic power was being challenged by the rise of the United States, Germany and Japan while the Ottoman and Hapsburg empires were clearly in rapid decline. Looking ahead from 2005, it is clear that over the next two or three decades, both China and India - which together account for almost half the world's population - will flex their muscles.

Finally, there's the question of what rising oil prices tell us. The emergence of China and India means global demand for crude is likely to remain high at a time when many experts say production is about to top out. If supply constraints start to bite, any declines in the price are likely to be short-term cyclical affairs punctuating a long upward trend. In those circumstances it would be the height of folly to assume that there will be no economic consequences or that there will not be an intense - perhaps even bloody - struggle for the resource that more than any other has shaped the modern world.