Google vs. China, and America vs. Itself

Google’s confrontation with China over the freedom of access to information may evoke feelings of both moral and commercial satisfaction for residents of the free market West: Google simultaneously stands in for our disdain for Chinese political repression and for that country’s shortsighted understanding of the economic value of free information flows.

Tom Friedman suggests that a Chinese internal struggle, between “Network China” and “Command China” defines this dispute and may indicate something about the future of that country.

However we may frame it, the conflict should evoke for us as much introspection as satisfaction: We, too, currently struggle themselves to come to terms with the concept of “economy as network”: “a world in which the focus of value creation is effective participation in knowledge flows, which are constantly being renewed.”

Those who stand at the margins of this transformation call forth libertarian slogans in order to evoke a feeling of defiant individualism. They do not understand the dynamic of an economic system that demands the nurturing of relationships and the renewal of knowledge and that suggests that individualism does not flourish in a social vacuum. The more pragmatic brand of economic individualism favored by Wall Street lost all credibility in late 2008, of course, when financiers acknowledged their own dependence on the broader American social network.

Misunderstandings about the changing nature of our economy clearly extend beyond the right-wing: Democrats evince characteristic eagerness to conflate moral and economic arguments as they address needed health and energy reform. They thereby demonstrate a lack of seriousness with regard to the limited role the American state can play in correcting an economy newly susceptible to international capital flows and increasing foreign competition: America must enhance its ability to compete internationally if it is to address its social challenges sustainably.

We, just like the Chinese, require a new relationship to government for 21st century success. The old metaphor of government as a command center, whether encouraged by old guard communist leaders or well-meaning American reformers, or whether opposed by libertarians, no longer suffices. Government at its best will act as a node that has the potential either to complement or to hinder the flourishing of both domestic and international relationships. Understanding this reality, rather than adhering to old nostrums, will give us the greater measure of moral and commercial clarity.

Economics, Morality, and Individualism

Max Weber explored how individualism and economic growth can be mutually supportive in a climate of public morality. That morality, I would argue, can shift with the times but must remain personally comprehensible and economically productive if it is to endure.

Changing economic circumstances, in fact, demand that we reexamine the public morality that, by its very normative nature, we tend not to consider in an active and persistent manner. Such re-examination necessarily bring turmoil, for the reason, just implied, that unexamined mores proliferate best.

Rapid information flows and globalized financial networks are among the factors that most destabilize our public morality today. That nation-state is both less relevant and more vital to our economic life: Its control over a particular economic environment is less absolute, but the necessity for its support of the growing international business of its people is increasingly essential.

It will not be easy to assimilate dynamics that implicitly undermine traditional political orthodoxies and that, accordingly, act as intellectual irritants. Such is the source of the appeal of ideological entrenchment.

Our concerns for individual liberty and social welfare are valid and valuable. The success (or failure) of the task of re-imagining our politics depends on our patience and intellectual courage.

The True Story of the GOP's Dissipation

Rapid global development and economic/financial change undermine the relevance of strict rightists and leftists: The need to adapt quickly to new technologies and new economic realities will reward adaptable, rather than orthodox, parties and regimes.

Edward Golberg of Baruch College, in today's Friedman column diagnoses the malaise of the Republican Party accordingly:

Globalization has neutered the Republican Party, leaving it to represent not the have-nots of the recession but the have-nots of globalized America, the people who have been left behind either in reality or in their fears . . . The need to compete in a globalized world has forced the meritocracy, the multinational corporate manager, the eastern financier and the technology entrepreneur to reconsider what the Republican Party has to offer.

Health care is one example of an area where government can play a productive role in supporting economic growth and human capital development.

Government intervention is only justified in the Right's worldview when the capitalist system is under threat (e.g. during ideological struggles with the Soviets, radical Islamists, etc.). They have no ideological context for coming to terms with the pressing national-economic needs of globalization.

Some on the left have a similar problem coming to terms with globalization but the left's solutions happen to be more pertinent at the moment. And, the anti-WTO, anti-trade wing of the Democratic party has receded, for the time being.

Why is the Health Care Debate Happening Now?

Because a Democrat is in the White House?

Because health care costs have skyrocketed?

Because free marketed ideologies have been discredited by the financial crisis?

Because Obama is especially charming?

The principal reason these debates are happening now is none of these things. The sea change in public opinion on health care over the past few decades is a result of the international predominance of capitalism and democracy.

Sound crazy?

During the Cold War, for instance, Americans were much more sensitive about socialist reforms. Now, a minority of Americans expresses such concerns.

At the same time, the idea of taking a huge economic risk in the midst of a focus on international political competition with, say, the Soviet Union or Islamic fundamentalists, was extremely frightening.

Finally, of course, the focus on human development has grown with the increase in the value of human capital in the global economy.

So, the global triumph of capitalism and democracy has (1) reduced ideological sensitivity, (2) shifted our focus away from international political competition, and (3) created the conditions for international economic competition, based on human capital investment, to take on increasing importance.

Letter to NYT: A Theoretical Basis for Moderate Political Thought

Dear Editor:

David Brooks (“A Moderate Manifesto,” 3/3/09) offers an appealing vision of a capitalism aware of its social underpinnings, and of a humanism aware of the decentralization required for economic growth. He could go further by explaining the global context that justifies his thinking.

Increasing global competition belies the idea that government can desist from making the social investments necessary to build new generations of engineers, entrepreneurs, and technicians. It also, however, reminds us of the perils of chasing capital away from our shores. The central challenge that faces us today is that of balancing these two aims.

Many Democrats and Republicans prefer to live in a simpler world in which, respectively, state action is the fundamental palliative, or the fundamental poison. The requisite wake-up call can come from a cold-eyed gaze at the growing power of international markets. A depression might make us do just that.


Sincerely,
Barak Epstein

Letter to WSJ: Protectionism, Globalization, and the Recession

To Whom It May Concern:

New economic realities demand new agreements and regulatory regimes and Jeffrey E. Garten (“The Dangers of Turning Inward, 3/1/09) is correct to identify the source of our current economic woes in an unbalanced global financial system that included an Asian savings glut, distorted currency exchange rates and, consequently, as we know well, inflated asset prices in developed countries.

Professor Garten proposes some lucid solutions to these problems but cannot do much to identify the political force that will call for careful international regulation and social investment. This is no fault of his own. Republican nativist and Democratic labor protectionist sentiment are well-entrenched and a sufficient reorganization of international institutions would necessitate compromises in national sovereignty that neither political party could support.

Garten hopes that “short-lived recession” would teach the body politic enough about the new global order to make possible needed reforms. Count me among those who think that the learning curve will be too steep for that.

Sincerely,
Barak Epstein

The Nation-State and Global Integration

A few questions about strains on the power and efficacy of the nation-state:

(a) Does the global financial crisis call for international management of, say, currency exchange rates?

(b) Do globalization and the near-global triumph of capitalism undermine the greatest incentive (namely, international competition, respectively, among capitalist powers and between capitalist and non-capitalist powers) for leading capitalists to attend to the well-being of those who are not succeeding?

(c) Do global warming and other environmental strains demand an internationally-coordinated response that cannot entirely be managed by one nation-state?

My answer to all of these questions is 'yes' and points to the growing importance of international cooperation to solve many of our most pressing problems. I am not arguing that states are not strong. Neither am I am arguing necessarily for inter-governmental cooperation to solve these problems (although, such will sometimes be vital). Rather, I am arguing that a global perspective is becoming of greater importance. In due time, I believe that such a perspective will become the dominant paradigm, superseding the nation-state paradigm.

It is no coincidence that this pattern of integration presents itself as we find ourselves in a world in which everyone can be lifted out of poverty and in which universal education can be imagined. These goals can be achieved because (a) the global economy is sufficiently integrated to distribute basic goods, services, and skills to those in need of them, (b) globalization and the near-triumph of capitalism have led to a global economy in which human capital is of ever-greater economic value, and (c) environmental challenges force us to focus on how we can develop wealth without solely relying on materials. The best answers to this question are the development of technology and of human capital.

GEOPOLITICS, FINANCE, AND EDUCATION

In the upcoming weeks, world leaders will meet to begin to consider a new financial architecture for the world.

If they fail to found a cooperative framework, the threat of protectionism, economic decline, and the associated political challenges (which would not be small, and could be frightening) will be our biggest challenges.

If they succeed (as I suspect that they will), we will have taken a noticeable step to a more integrated world in which conflict between large nations becomes somewhat less likely. Challenges would still remain in that regard, to be sure, not least the endurance of petrodictatorships. Still, new issues will, after such a success, begin to come to the fore. I believe that one of the boldest dividing lines in a more stable (I take small group terrorism into account here.), integrated world will be the divide between the information technologically-able and the informational technologically-challenged. The would increase the importance of education, relative to international relations, as a defining issue for geopolitical stability.

What do you think?

Iceland and China

. . . the government of Iceland is presiding over a massive default by all the country's major banks. This troubling development points not only to an even more painful recession than anticipated, but also to the urgent need for international coordination to avoid something worse: all-out financial warfare.

. . . Iceland's promise to guarantee domestic depositors while reneging on guarantees to foreigners may be just a first step. British Prime Minister Gordon Brown's decision last week to sue Iceland over this issue may escalate the crisis. The use of counterterrorist legislation to take over Icelandic bank assets and operations in the United Kingdom also has a potentially dramatic symbolic effect. (Peter Boone and Simon Johnson, "The Next World War? It Could Be Financial." The Washington Post, 10/12/08.)

There's a reason that the gestures by the US government have not sufficed to reassure financial markets: the US is no longer the unquestioned command and control center of the global economy. We have to take the imaginative leap that integrates rising developing nations into our paradigm of economic management.

Peter Boone and Simon Johnson, in today's Washington Post, point to the depth of the financial crisis in bracing detail but, unsurprisingly, fall back on nostrums about the power of the "the world's leading financial powers -- at a minimum, the United States, the United Kingdom, France and Germany" to reassure markets. Am I naive, or does US to China (between $1.5 and $2 trillion, I believe) qualify China as an important financier? How can anyone be sure that the Chinese, given their own fragile politics, will support any plan that comes from the West in a time of financial crisis?

"Crisis Marks Out a New Political Order" -- by Phillip Stevens

. . . from the Financial Times.

A Broader Perspective on the Financial Crisis

The response to this financial crisis will be both economic and geopolitical. The Great Depression called into question the stark laissez-faire approach of the industrial revolution and its aftermath. The US stepped into global leadership after World War II by leading the construction of a global financial system that has done a very good job at promoting stability and growth.

The change that we are facing now is not essentially about investment banks, mortgage lenders, or homebuyers. Rather, it reflects the transition of the global economy to an era in which the US cannot be the only hub at the center of the wheel.

C. Fred Bergsten and Arvind Subramanian, in today's Washington Post, help to explain how this process underlies the more obvious signs of crisis.

Beyond the short term, countries will need to develop a cooperative framework to prevent and resolve such crises, most urgently within Europe. There is inherent tension as finance becomes global but its regulation remains national. The current crisis originated in the United States but was importantly affected by massive savings surpluses in some countries and the resulting surfeit of liquidity, which drove down interest rates and encouraged irresponsible lending here. Those international imbalances were in turn partly caused by misaligned exchange rates. Global oversight of both financial regulation and currencies can no longer be neglected.

One way to understand this is that China, most importantly, has artificially increased its capital reserves by preventing its currency from appreciating to its correct market value. China sells more exports than it otherwise would, and buys fewer imports than it otherwise would. Ultimately, the Chinese money does make it back to the US, but in the form of payments for Treasury Bills (This is due to a Chinese concern about inflation as well as a concern that excess capital would lead to social unrest and/or uncontrollable wealth flows that could weaken Communist Party control.).

Simply put, it seems to me that the net consequence is that cash comes to the US Treasury rather than to, among others, US producers. The cash in the Treasury was then ultimately lent out at low interest rates, creating investment opportunities in a society in which wages were not appreciated significantly (because of, among other reasons, the fact that American products were not easily sold to countries that have maintained a high exchange rate of local currency to dollars).

The predicament in which consumers cannot afford appreciating assets in reminiscent of the pre-Depression years in which consumers could not afford proliferating production. The similar increase in consumer credit is an unsurprising result.

Essentially, a change in global financial architecture is needed, not only for the reasons mentioned by the authors, above, but also so that the US can benefit most fully from concentrating on the development of its human capital, the long-term sine qua non for economic growth and political stability.

Concerns about political stability should not be minimized. The inherent tensions between communities constituting a democratic society are generously lubricated by growing wealth. The sense of chaos that can percolate through a society in the absence of such a scenario lends itself to exploitation by authoritarian-minded regimes. I do not think that the US is on the brink of such a scenario but the 20th century taught us well that farflung events can have a dramatic impact on our society.

The Financial Crisis and Isolationism

A friend today said to me, "Maybe we should be willing to spend extra money to buy American-made products. The Chinese are going to fund our new government intervention in the economy but we should be taking care of ourselves."

I think that this sentiment is exactly misleading. Our weaknesses are tied, in part, to our failure to recognize that we need to market ourselves to the world. Turning inward would be a temporary salve but would actually be the harbinger of gradual economic and political decline.

IRAQ AND GEORGIA

What do these invasions teach us about the state of our geopolitical system?

When the US invaded Iraq, it certainly contravened international legal norms that provided for aggression only when an enemy presented an immediate threat. This is a norm that the US helped to enshrine in the post-World War II legal order. We have witnessed, since the fall of the Soviet Union, a strengthening of the social and economic order promulgated by, and beneficial to, the US: democracy and free markets. The process of the US invasion of Iraq and its aftermath involves a negation of the legal order of the era of Pax Americana but an affirmation of the era’s social and economic order. In short, the US undermined the international legal system while strengthening the international social system.

Russia’s invasion of Georgia, however, represents a challenge both to the international legal order and to the socioeconomic order of US-led globalization. In Iraq, we ultimately seem to be witnessing the triumph of the liberal economic and political order. The ability, or inability, of that socioeconomic order to prevail in Georgia is of great symbolic significance over the next few years.

The US invasion of Iraq was, if you will, a wager in which the socioeconomic order of international democracy was chosen over the international norm of national sovereignty. It is not surprising that US disregard for the latter is costing us right now. Still, we would be foolish to be entranced by that fact and to overlook the greater stakes that underpinned the initial wager. The pace of the march of political and economic freedom around the world is at stake.

GEORGIA ON MY MIND, or WHY THE INVASION MATTERS SO MUCH

International aggression and ethnic separatism are important elements of this crisis but they do not lend it its singularity. Russia, an important global power, is announcing its refusal to align itself to a US-led global system that tends to support economic and political freedom.

Paul Krugman explains (though perhaps a bit too defnitively for my tastes):

[T]he war in Georgia [marks] the end of the Pax Americana — the era in which the United States more or less maintained a monopoly on the use of military force. And that raises some real questions about the future of globalization.

Some have asked, “Didn’t the American-created global order suffer a greater defeat with the invasion of Iraq?” or “How is the Russian support of South Ossetian independence different from the US support of Kosovar independence?”

The US invasion of Iraq does have consequences for the stability of the international system. It does make it harder for the US to assert the importance of respecting national sovereignty. But, it did not alter the fundamental fact that the US economy, society, and culture tend to see their interests aligned with politically and economically free societies ruled by law. No one is surprised that, following the increasing democratic stability in Iraq, the US is getting ready to leave. No one is surprised that the US is helping to support a free society in Kosovo. Russia cannot be expected to act similarly.

"DEMOCRATIC RECESSION


Tom Friedman suggests today that

There are two important recessions going on in the world today. One has gotten enormous attention. It’s the economic recession in America. But it will eventually pass, and the world will not be much worse for the wear. The other has gotten no attention. It’s called “the democratic recession,” and if it isn’t reversed, it will change the world for a long time.

It is interesting to consider that Friedman's focus on globalization may, in fact, obscure the importance of observing trends in the growth of democracy. David Brooks' recent column (discussed here) suggests that technological change is more essential than globalization as a factor driving our economic evolution. Today's Friedman column, with its focus on the importance of oil in driving corruption, makes clear the importance of the economic structure of a society in influencing its political organization.

Friedman has, in the past, suggested that globalization is one of the principal meta-narratives of our time. I think that today's column gets much closer to specifying the actual issues that influence our lives and our future.

In short, technological change and democracy are much more significant factors in global development than is globalization. It is to our intellectual detriment that we misconstrue the relative primacy of these factors.

THE COGINITIVE AGE, NOT THE AGE OF GLOBALIZATION

Brilliant, yet again. Read David Brooks' explanation of why technological change should be seen as the major driving force behind changes in our economy.