How the West Was Lost: Fifty Years of Economic Folly—and the Stark Choices Ahead
By Dambisa Moyo. Douglas & McIntyre, 226 pp, hardcover

There are several reasons one might feel trepidation when picking up How the West Was Lost.

The author, Zambian-born economist Dambisa Moyo, became the darling of the right-wing jet set with her last book, Dead Aid, which condemned giving foreign aid to Africa. It’s not a stretch to imagine that this has influenced the Harper government to cut back on assistance to this part of the world.

And as a former investment banker who specialized in emerging markets at the notorious Goldman Sachs, Moyo preaches the virtues of free markets in the developing world, notwithstanding the disturbing inequalities that have resulted from this philosophy.

Moyo’s new book posits that the U.S. is on the verge of becoming a socialist welfare state because of a gross misallocation of financial resources to the real-estate sector, wasted investments in technology, unfunded pension liabilities, too many government guarantees to the financial-services sector, and a steep decline in the quantity and quality of the labour force.

Rather than seeing increasing diversity in the U.S. as a strength, she suggests that it will hamper economic output over the longer term, a claim that will likely raise hackles.

For much of the last century, America produced goods and services for the world. Moyo points out that the U.S.’s economic rise coincided with the Second World War, when the Roosevelt administration began encouraging foreign purchases of supplies through the Lend-Lease Act.

“Thanks to the global need for US production, America’s sluggish economy was transformed into a manufacturing powerhouse,” Moyo writes.

Now, she emphasizes, China is doing most of the selling, and it’s financing these purchases by buying U.S. government debt, while America is caught in a relentless economic decline.

In some respects, How the West Was Lost echoes U.S. trade expert Clyde Prestowitz’s 2005 book Three Billion New Capitalists: The Great Shift of Wealth and Power to the East, which highlighted the hollowing out of the U.S. economy and its poor educational system.

But Moyo’s book contains some surprises. Unlike Prestowitz, she identifies problems arising from unfettered free trade with China.

Economists have long touted 19th-century British economist David Ricardo’s maxim of comparative advantage to explain why trading nations generate more economic output than those that embrace self-sufficiency. According to Ricardo, two countries will gain if they focus on what they do “most best” and “least worst”, and then trade their goods and services.

In How the West Was Lost, Moyo notes that the theory of comparative advantage only works when all countries follow the same rules. China doesn’t do this.

Instead, Moyo writes, it’s a “volume maximizer” that tries to produce all goods and services at a lower absolute cost than its competitors. According to the author, this focus on cornering the market on everything (sort of sounds like Walmart, doesn’t it?) is necessary to maintain employment and social stability in China.

“On the whole, volume-maximizers tend to pursue absolute advantage, not the competitive advantage posited by Western countries,” Moyo states in her book. “The US needs to realize this fact and adjust international and trade relations to address it.”

She also raises startling concerns about the public’s zeal for homeownership—and western governments’ propensity to backstop this with financial guarantees.

She argues that lenders impose discipline on borrowers, but this vanishes when there are no risks to those who underwrite all those mortgages. That leads to financial bubbles.

The book ends with four different scenarios, including one she calls “murder-suicide”, in which the U.S. defaults on its government debt.

With China possibly holding more than US$1.6 trillion in its foreign reserves (according to Standard Chartered Bank), the economic carnage would devastate both countries.

It’s one of many provocative points to be found in Moyo’s book, as long as you can get past some of the right-wing ideology you would expect to hear from a former investment banker at Goldman Sachs.

Follow Charlie Smith on Twitter at twitter.com/csmithstraight.