[Paleopsych] National Interest: Peter F. Drucker: Trading Places
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Mon Mar 28 22:46:08 UTC 2005
Peter F. Drucker: Trading Places
Issue Date: Spring 2005, Posted On: 3/17/2005
The New world economy is fundamentally different from that of the
fifty years following World War II. The United States may well remain
the political and military leader for decades to come. It is likely
also to remain the world's richest and most productive national
economy for a long time (though the European Union as a whole is both
larger and more productive). But the U.S. economy is no longer the
single dominant economy.
The emerging world economy is a pluralist one, with a substantial
number of economic "blocs." Eventually there may be six or seven
blocs, of which the U.S.-dominated NAFTA is likely to be only one,
coexisting and competing with the European Union (EU), MERCOSUR in
Latin America, ASEAN in the Far East, and nation-states that are blocs
by themselves, China and India. These blocs are neither "free trade"
nor "protectionist", but both at the same time.
Even more novel is that what is emerging is not one but four world
economies: a world economy of information; of money; of multinationals
(one no longer dominated by American enterprises); and a mercantilist
world economy of goods, services and trade. These world economies
overlap and interact with one another. But each is distinct with
different members, a different scope, different values and different
institutions. Let us examine each in turn.
The World Economy of Information
Information as a concept and a distinct category is an invention of
the 18th century--of the newspaper in England and the encyclopedia in
France. Within a century, information became global with the
development of the modern postal system in the 1830s, followed almost
immediately by the electric telegraph and the first computer language,
the Morse Code. But unlike the newspaper and the encyclopedia, neither
the postal service nor the telegraph made information public. On the
contrary, they made it "privileged communication." "Public
information" by contrast--newspapers, radio, television--ran one way
only, from the publisher to the recipient. The editor rather than the
reader decided what was "fit to print."
The Internet, in sharp contrast, makes information both universal and
multi-directional rather than keeping it private or one-way. Everyone
with a telephone and a personal computer has direct access to every
other human being with a phone and a PC. It gives everyone practically
limitless access to information. And it gives everyone the ability to
create information at minimal cost, that is, to create his own website
and become a "publisher."
In the long run, the most important implication is probably the impact
of information on mentality and awareness. It creates new affinities
and new communities. The woman student in Shanghai who taps into the
Internet remains Chinese, but she sees herself at the same time as a
member of a worldwide, non-national "information society."
Businesses and professional groups such as lawyers and doctors have,
of course, had access all along to worldwide information in their own
field. But the Internet gives such access to the ultimate customer. In
the United States at least (but apparently also in Japan and Europe),
the ultimate customer now gets his information about plane schedules
and airfares from the Internet rather than from a traditional travel
agent. And while a good many book buyers in the United States still
pick up and pay for the book of their choice at a bookstore in their
neighborhood, an increasing number of them decide what books to buy by
reading about them online first. An automobile still has to be
serviced by a local dealer. But increasingly, buyers first study both
their choice for the new car and their options for trading in their
old car online before visiting a dealer.
What is already discernible is that, like all new distribution
channels, this new information economy will change not only how
customers buy, but what they buy. It will change customers' values and
expectations, and with them how to promote goods and services, how to
market and sell them, and how to service them online. In other words,
Internet customers are becoming a new and distinct market. In the
early years of the 21st century, power is shifting to the ultimate
There is no distance in this world economy. Everything is "local." The
potential customers searching for a product do not know--and do not
care--where the products come from. This does not eliminate or even
curtail protectionism. But it changes it. Tariffs can still determine
where a product or service has to be bought. But they are increasingly
unable to protect the domestic producers' price.
One example: To get the industrial Midwest with its 140,000 steel
workers to vote Republican in congressional elections, President Bush
slapped a prohibitive tariff on imports of steel from Europe and Japan
in 2001. He got what he wanted: a (bare) Republican majority in the
Congress. But while the large steel users (such as automobile makers,
railroads and building contractors) were forced by the tariff to buy
domestic, they immediately set about cutting their use of steel so as
not to spend more on it than they would have had to spend had they
been able to buy the imports. Bush's tariff action thus only
accelerated the long-term decline of the traditional midwestern steel
producers and the jobs they generate. Tariffs, in other words, can
still force users to buy domestic, but they are no longer capable of
protecting the domestic producers' prices. Those are set through
information and on the world-market level.
This development underlies the steady shift in protectionism: from
tariffs--the traditional way--to protection through rules, regulations
and especially export subsidies. World trade has grown spectacularly
in the last fifty years. The largest growth has been in subsidized
farm exports from the developed world: western and central Europe,
Australia, Canada and the United States. Farm subsidies are now the
only net income of French farmers, as their crops produce nothing but
net losses and are grown only as the entitlement for the subsidies.
These subsidies are in fact a major--perhaps the major--cement of the
Franco-German alliance, and with it, of the European Union.
The international organization designed to set world economic policy
is the World Trade Organization (WTO). But its meetings and agreements
deal less and less with trade and tariffs, and instead with rules,
regulations and subsidies. The discipline of international economics
still, in large measure, concerns itself with international
trade--that is, with the flow of money, goods and services. But the
essence of the new world economy is that it is, above all, an economy
of information and truly a global economy.
The Global Oligopoly of Money
The next major economic crisis will most probably be a crisis of the
U.S. dollar in the world economy. It will put to a severe test the
oligopoly of the central banks of the developed countries that now
rules over the world financial economy.
Sixty years ago, in the Bretton Woods meetings of 1944, which tried to
refashion a world economy that had been devastated by depression and
war, John Maynard Keynes, the 20th century's greatest economist,
proposed a supra-national central bank. It was vetoed by the United
States. The two institutions that Bretton Woods established instead,
the Bank for International Development (World Bank) and the
International Monetary Fund (IMF), are, despite their impressive
names, auxiliary rather than central--the former mainly financing
development projects, the latter providing financial first aid to
governments in distress.
The Bretton Woods system was never the stable, "non-political" system
Keynes wanted. It could not and did not prevent currencies from being
overvalued or undervalued. Still, although it limped from one crisis
to the next, the Bretton Woods system worked for most of the
half-century after World War II. And there was only one reason why it
worked (however poorly): the commitment to it of the United States and
the strength of the U.S. dollar as the world's key currency.
The dollar is still the world's key currency. But the Bretton Woods
system is being killed by the U.S. government deficit, which is fast
becoming the sinkhole of the world financial economy. The persistent
U.S. deficit creates a persistent deficit in the U.S. balance of
payments, which make both the U.S. economy and the government
increasingly dependent on massive injections of short-term and
panic-prone money from abroad. The U.S. savings rate is barely high
enough to finance the minimum capital needs of industry. It could, in
all likelihood, be raised considerably by raising interest rates. But
that is not only politically almost impossible; it would also require
that a larger share of incomes go into savings rather than into
consumption, with an inevitable collapse of an economy based on
consumer spending and low interest rates, as for instance, the U.S.
The government deficit is therefore being financed almost in its
entirety by foreign investments in the United States, mostly in
government securities like short-term treasury notes and medium-term
bonds. The Japanese are converting most, if not all, of their trade
surplus with the United States into dollar-denominated U.S. government
securities and have thus become the largest U.S. creditor.
It is often argued, especially in Washington, that the deficit is
mostly an accounting mirage. Defense spending--the main cause of the
deficit--enables other free countries to keep their own defense
spending low, which then generates the surpluses these countries
invest in U.S. government securities. But this is a political
argument. The economic fact is that the United States increasingly
borrows short term (U.S. securities can be sold overnight) to invest
long term and with very limited liquidity. This, needless to say, is
an unstable and volatile system. It would collapse if the foreign
holders of U.S. government securities (above all, the Japanese) were
for whatever reason (such as a crash in their own economy) to dump
their holdings of U.S. government securities. It certainly cannot be
extended indefinitely, which, among other serious drawbacks, calls
into question the long-term viability of the Bush Doctrine's goal of
defending and extending the "zone of freedom" around the world.
The World Economy of the Multinationals
There were 7,258 multinational companies worldwide in 1969. Thirty-one
years later, in 2000, the number had increased ninefold to more than
63,000. By that year, multinationals accounted for 80 percent of the
world's industrial production.
But what is a multinational? Most Americans would answer: a big
American manufacturer with foreign subsidiaries. That is wrong in
almost every particular.
American-based multinationals are only a fraction--and a diminishing
one--of all multinationals. Only 185 of the world's 500 largest
multinationals--fewer than 40 percent--are headquartered in the United
States (the European Union has 126, Japan 108). And multinationals are
growing much faster outside the United States, especially in Japan,
Mexico, and lately, Brazil.
Furthermore, most multinationals are not big. Rather, they are mostly
small- to medium-sized enterprises. Typical perhaps is a German
manufacturer of specialized surgical instruments who, with $20 million
in sales and with plants in eleven countries, has around 60 percent of
the world market in the field. And only a fraction of multinationals
are manufacturers. Banks are probably the largest single group of
multinationals, followed by insurance companies such as Germany's
Allianz, financial-services institutions such as GE Finance
Corporation and Merrill Lynch, wholesale distributors (especially in
pharmaceuticals), and retailers like Japan's Ito Yokado.
The traditional multinational was indeed a domestic company with
foreign subsidiaries, like Coca-Cola. But the new multinationals are
increasingly being managed as one integrated business regardless of
national boundaries, and the managers of the "foreign subsidiaries"
are seen and treated as just another group of "division managers"
rather than as top managements of semi-autonomous businesses.
Internally, new multinationals are often not even organized by
geography, but worldwide by products or services, such as one
worldwide division for cleaning products or short-term inventory
loans. They are increasingly organized by "markets": fully-developed
markets (such as western and northern Europe or Japan); "developing
markets" (eastern Europe, Latin America and parts of East Asia); and
the "underdeveloped markets" and big "blocs" (China, Russia and
India)--each with different objectives and strategies.
Finally, the new multinationals are increasingly not domestic
companies with foreign subsidiaries, but are more likely to be
domestic companies with foreign partners. They are being built through
alliances, know-how agreements, marketing agreements, joint research,
joint management development programs and so on. They require very
different management skills; they must persuade, not command. The
typical old multinational began planning with the questions: "What do
we want to achieve? What are our objectives?" The first question in
the new multinational is likely to be: "What do our partners value?
What do they want to achieve? What are their competencies?" And in
turn: "What do they need to know about our values, our goals, our
We have almost no data on the world economy of the multinationals. Our
statistics are primarily domestic. Nor do we truly understand the
multinational and how it is being managed. How, for instance, does a
multinational pharmaceutical company decide in what country first to
introduce a new drug? How does a medium-sized multinational, like the
German surgical-instrument maker mentioned earlier, decide whether to
keep importing into the United States? To buy a small American
competitor who has become available? To build its own plant in the
United States and to start manufacturing there? Our dominant economic
theories--both Keynes and Friedman's monetarism--assume that any but
the smallest national economy can be managed in isolation from world
economy and world society. With an estimated 30 percent of the U.S.
workforce affected by foreign trade (and a much higher percentage in
most European countries), this is patently absurd. But an economic
theory of the world economy exists so far only in fragments. It is
badly needed. In the meantime, however, the world economy of
multinationals has become a truly global one, rather than one
dominated by America and by U.S. companies.
The New Mercantilism
The modern state was invented by the French political philosopher Jean
Bodin in his 1576 book Six Livres de la Republique. He invented the
state for one purpose only: to generate the cash needed to pay the
soldiers defending France against a Spanish army financed by silver
from the New World--the first standing army since the Romans' more
than a thousand years earlier. Mercenaries have to be paid in cash,
and the only way to obtain a large and reliable cash income over any
period--at a time when domestic economies had not yet been fully
monetized and could therefore not yield a permanent tax--was a revenue
obtained through keeping imports low while pushing exports and
It took 300 years--the time until the unification of Germany and Italy
in the 19th century--before Bodin's political invention, the
nation-state, came to dominate Europe. But his mercantilism was
adopted almost immediately by every European government, large or
small. It remained the reigning philosophy until Adam Smith showed the
absurdity of believing (as mercantilism does) that a nation can get
rich by robbing its neighbors. Twenty-five years after Smith,
mercantilism was still the doctrine that underlay America's first and
most important work in political theory, The Report on Manufacturers
(1791) by Alexander Hamilton. And almost a century later, in the
second half of the 19th century, Bismarck based the new German Empire
on Bodin's mercantilism as adapted to Europe by Hamilton's great
German admirer, Friedrich List, in his 1841 book, The National System
of Political Economy. However discredited as economic theory,
mercantilism, not Adam Smith's free trade, thus became the policy and
practice of governments virtually everywhere (except for one century
in the UK).
But mercantilism is increasingly becoming the policy of "blocs" rather
than of individual nation-states. These blocs--with the European Union
the most structured one, and the U.S.-dominated NAFTA trying to
embrace the entire Western Hemisphere (or at least North and Central
America)--are becoming the integrating units of the new world economy.
Each bloc is trying to establish free trade internally and to abolish
within the bloc all hurdles, restrictions and impediments, first to
the movement of goods and money and ultimately to the movement of
people. The United States, for instance, has proposed extending NAFTA
to embrace all of Central America.
At the same time, each bloc is becoming more protectionist against the
outside. The most extreme protectionism, as already discussed,
consists of rules with respect to agriculture and the protection of
farm incomes. But similar protectionism is certain to develop for
blue-collar workers in the manufacturing industry, and for the same
reason: They are becoming an endangered species, the victims of
productivity. In the United States for instance, manufacturing
production increased in volume by at least 30 percent during the
1990s. It has at least doubled since 1960, and may even have tripled.
(We have only money figures and have to guess at volume.) But manual
workers in industrial production in the same period decreased from
some 35 percent of the work force to barely more than 13 percent--and
their numbers are still going down. Total employment in the
manufacturing industry has remained the same proportion of the work
force--it probably has even gone up. But the growth has been in
white-collar work rather than the manual kind.
A mercantilist world economy, however, faces the same problems that
led to the ultimate collapse of mercantilist national policies: It is
impossible to export unless someone imports. This means, as Adam Smith
showed 250 years ago, that the blocs must concentrate on those areas
in which they have comparative advantages. In today's technology and
world economy, that means concentrating on an area of knowledge work.
Such concentration is already beginning. India is emerging as a world
leader in applied-knowledge work--its comparative advantage is the 150
million well-educated Indians whose main language is English. China
may similarly attain leadership through its world-class competence in
manufacturing management--the legacy of the communist emphasis on
output and production.
And just as it was for the mercantilists of 17th- and 18th-century
Europe, an adequate home market (or access to one, as the Swiss and
Dutch had to the markets of Germany and central Europe in the 19th
century) is the most effective base for being competitive in the world
economy. This "home market"--small enough to be protected and big
enough to be competitive--is what the "blocs" provide.
Thus, the European Union is already in the process of creating the
institutions for its bloc to be effective in this world economy: a
European Parliament, a European Central Bank, a European Cartel Office
and so on. Even the French, reluctantly, are integrating their economy
and their industries--and even their agriculture--into the economy,
the industries and the agriculture of the EU (provided that the
Germans foot the bill). The United States, of course, has been a
genuine bloc and a nation-state all along. Its economic institutions
have been federal, at least since the creation of the Interstate
Commerce Commission and the Federal Reserve Banking System. U.S.
institutions like the Federal Reserve Bank of New York also act, in
emergencies (such as the recent collapse of the Mexican peso) as the
agent of NAFTA.
What, then, is likely to be the future relationship between these two
blocs? The United States has openly announced its policy of extending
NAFTA to all of Latin America. And while NAFTA means free trade within
the bloc, it also means high protection externally, and especially
high protection against Europe. Officially, the United States is still
committed to worldwide free trade. But the actual result of its
policies is that a zone of preferential trade agreements is gradually
emerging around the United States--not unlike the bloc that is the EU.
The world economy is thus fast coming to look far more like the
mercantilism of Alexander Hamilton than like Adam Smith's free trade.
It is fast becoming an "interzonal" rather than an "international"
But a new kind of mercantilist rivalry is emerging in this new
economy--one in which the United States suffers from little-noticed
disadvantages. For instance, the EU is seeking to export its
regulations (and to impose its high regulatory costs on the United
States) through international agreements, the reinterpretation of WTO
rules, and the growing acceptance of EU standards in third markets. It
is also promoting its new currency, the euro, as a rival and
alternative to the dollar as the world's reserve currency--a step
that, if it succeeded, would greatly reduce the U.S. government's
ability to attract foreign funds to finance its deficit and thus
maintain the Bush Doctrine. Nor can the United States be certain of
maintaining the solidarity of its own bloc in competition with the EU.
Several Latin American states are going slow on the negotiations to
extend NAFTA for political reasons. The EU is itself seeking closer
trade and economic relationships with Latin America through
partnership talks with MERCOSUR. And the recent trend of Latin
American politics has been to drift away from "neo-liberalism" and
towards a Left perennially tempted by anti-yanquí protectionism. What
is different today is that the EU offers these political forces the
ability to choose free trade while simultaneously resisting U.S.
"hegemony." The United States could therefore find itself with a
smaller "home market" than rival blocs, but with the same high-cost
regulations, in a world of intense mercantilist competition.
For thirty years after World War II, the U.S. economy dominated
practically without serious competition. For another twenty years it
was clearly the world's foremost economy and especially the undisputed
leader in technology and innovation. Though the United States today
still dominates the world economy of information, it is only one major
player in the three other world economies of money, multinationals and
trade. And it is facing rivals that, either singly or in combination,
could conceivably make America Number Two.
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