[Marxism] Interesting Peter Drucker article on the world economy
lnp3 at panix.com
Thu Mar 24 07:11:56 MST 2005
The National Interest, Spring 2005
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
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
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
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
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
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