Into the 21st Century: Battle for Economic (and Political) Dominance

Economic History into the 21st century

While most of the problems of capitalism are those of success, there are some failures. If one looks at the growth rate of the global economy it slowed from 4.9% per year in the 1960’s, to 3.8% in the 1970’s, and then fell again to 2.9% per year in the 1980’s.

In the 1980’s per capita growth was only 40% of what it had been in the 1960’s. All is not well in American capitalism.

Paradoxically, as Eastern Europe privatizes, America nationalizes. With the collapse of most of its banking sector, by early 1991 the American government had been forced to take over nearly 300 billion dollars in private assets with a total cost to tax payers of nearly 1 trillion dollars.

In both the banking and in the industrial sector America has just seen the tip of the iceberg of banks and corporations that have loaded up with too much debt and gone bankrupt because of bad loans, and the merger and takeover mania of the 1980’s.

Airlines and large retailing firms lead the parade into bankruptcy and there is alot of the parade yet to come. As the bankruptcies deepened there will come the need for even more government/tax payer help.

Unfettered Anglo-Saxon capitalism is finding it difficult to cope with the present and may not be the unstoppable wave of the future that cheerleaders on the political right like to suggest.

After the collapse of the USSR the U.S. was the undisputed military superpower after 1989. But military power does not lead to economic power. Quite the reverse, if a country is to be a military superpower (that is, use up alot of human and economic resources on military activities—a form of public consumption), it must be willing to cut its private consumption to levels that insure it is not cutting back on the investments needed to keep civilian productivity growing.

A country like the U.S. can be a military superpower for a long time even as it’s economic might wanes. Rome was in this position. Economic rot leads to military weakness at the periphery, but the time lags are sometimes very long.

History is clear on this. While military power can sometimes outlast economic power for centuries, eventually military power depends upon having a successful economic base. America’s success in the Gulf War proves that the U.S. will be a military superpower in the next century. But its success in the Gulf in no way guarantees that it will be an economic superpower in the 21st century.

Post WWII Economics

At the end of WWII an intense debate raged as to what should be done about the Japanese and German economies. In the end it was argued that if these countries could become rich then they could become democracies. If their richness depended on selling in the American market, they would be forced to be allies of the U.S.

These naive beliefs underlay the inception of the Marshall plan, this was also the rational for foreign aid.

There has been a mixed record of economic development since WWII, but the successes vastly outnumber the failures. With foreign aid and easy access to American markets, most Third World countries grew from 1950 to 1980 as they had never before grown in the 20th century.

The 19th century is remembered as the century of Great Britain. It was the dominant economic power. The 20th century belongs to the U.S. who was and is the dominant economic power. The 21st century has not yet begun, but for all intents an purposes it will begin on Jan. 1 ,1993. This date marks the beginning of the third millennia, at this time for the first time in a century the U.S. will become overnight the second largest economy on the planet.

This date will mark the integration of the European Common Market that will involve the federation of Europe and the creation of a market of 700 million consumers and 700 million highly skilled workers. The 21st century for the U.S. will be nothing like the 20th century.

In 1950 the US had a per capita GNP four times that of Germany and fifteen times that of Japan. The 1990’s start form a very different place. There are three equal competitors, Japan, the EEC and the US. Measured in terms of external purchasing power (how much can be bought abroad if one’s income is spent abroad) the per capita GNPs of Germany and Japan are larger than that of the US.

Germans work 10% less hours than Americans, Germans are absent ten days more per year and vastly lower numbers of German women are in the labor force.

In 1970 64 of the world’s largest 100 industrial corporations were found in the US, 26 in Europe and only 8 in Japan. By 1988 only 42 of the largest corporations were in the US, 33 in Europe and 15 in Japan. Of the 50 largest banks in 1970 19 were US, 16 European and 11 Japanese. By 1988 5 were US, 17 were European and 24 were Japanese. By 1990 there were no US banks in the top 20.

From 1945 to 1989 military realities and defense against the USSR moderated international economic competition. In the past half century military needs prevented economic competition from getting out of hand. From now on economic cooperation will have to stand or fall on its own, and economic arrangements will not be held together with international military glue.

One of the problems faced by the US is that it and Britain emphasize individualistic values such as the brilliant entrepreneur, Nobel Prize winners, large wage differences, individual responsibility for skills, easy to fire and easy to quit, profit maximization and hostile mergers and takeovers: their hero is the Lone Ranger.

In contrast, Germany and Japan stress communitarian values such as business groups, social responsibility for skills, teamwork, firm loyalty, industry strategies and active industrial policies that promote growth. Anglo-Saxon firms are profit maximizers, Japanese firms play a game called strategic conquest. Americans believe in consumer economics while the Japanese and Germans believe in producer economics.

In March 1990 the two biggest business groups in the world—the Mitsubishi Group of Japan and the Daimler-Benz-Deutsche Bank group of Germany held a secret meeting in Singapore to talk about a global alliance.

From an American perspective everything about the Singapore meeting was criminally illegal. In the US banks cannot own industrial firms and businesses cannot sit down behind closed doors to plan joint strategies.

Yet in todays world Americans cannot force the rest of the world to play the economic game as Americans think it should be played. The game will be played under international, not American rules.

Germany, the dominant European economic power see itself as having a social-market economy and not just a market economy. In such an economy codetermination is required to broaden the ranks of corporate take-overs beyond that of the traditional capitalistic owners to include workers. The German government owns more shares in more industries than in any other non-communist country on the face of the globe.

Government is believed to have an important role in ensuring that everyone has the skills necessary to participate in the market. Social welfare policies are seen as a necessary part of a market economy. Unfettered capitalism is seen to create gross inequalities that threaten the social fabric of the country.

In Japan the Ministry of International Trade and Industry directly intervenes in the Japanese economy, directing investment flows, investments in R&D and planning export and production process strategies.

These different conceptions of capitalism flow from very different histories. The Industrial Revolution began in Great Britain. In the formative years of British capitalism the British did not have to play catch-up with anyone. It was the leader. The US similarly had a quick start in the Industrial Revolution. Situated between two great oceans the US did not feel militarily threatened by Britain’s early economic lead.

By way of contrast 19th century Germany and Japan had to catch up with Britain. If they did not develop quickly they would become economic colonies and eventually political colonies of the core countries.

In both Germany and Japan economic strategies were important elements in military strategies for remaining politically independent. Government and industry had to work together to design the national economic strategies necessary for national independence. In a very real sense business firms become the front line of national defense.

In the past comparative advantage was a function of natural resource endowments. In the old days each industry had its natural location.

But consider what are commonly believed to be the seven key industries of the next few decades—microelectronics, biotechnology, the new materiels industries, civilian aviation, telecommunication, robots plus machine tools, and computers and software. All are brain power industries. Each could be located anywhere on the face of the globe. Where they will be located depends on who can organize the brainpower to capture them. In the century ahead comparative advantage will be man made.

In this light research and development becomes critical. In the past the economic winners were those who invented new products. The British in the 19th century and the Americans in the 20th century got rich doing so. But the 21st century will revolve around not new product technology, but rather new-process technologies. Reverse engineering has become an art form. All new products can be easily reproduced.