[Paleopsych] National Interest: Peter F. Drucker: Trading Places

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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.
    housing market.

    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
    subsidizing them.

    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"
    world economy.

    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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