[Marxism] Interesting Peter Drucker article on the world economy

Louis Proyect lnp3 at panix.com
Thu Mar 24 07:11:56 MST 2005


The National Interest, Spring 2005
Trading Places
by Peter F. Drucker

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 consumer.

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 competencies?"

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.

Louis Proyect
Marxism list: www.marxmail.org 





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