THE LIBERALIZATION OF TRADE AND FINANCE

 

ECONOMIC DEVELOPMENT AND THE ENVIRONMENT

The introduction of the computer21 and the mathematics on which high-speed computation is based played a decisive role in defeating fascism and communism in the Long War. No history of the Second World War can give anything like an accurate account if it was written before the revelations about Allied code breaking that began to appear in the 1970s. Nor can any political history of the Cold War omit the phenomenal growth of the developed economies, especially Japan and the United States, that occurred as a result of the introduction of microchip technology. Although, as observed above, the percentage of the American workforce devoted to manufacturing has dropped with the precipitousness that earlier occurred with respect to agricultural workers, the percentage of U.S. GDP contributed by manufacturing has not changed in a significant way. The enormous growth in productivity that accounts for this fact can be largely attributed to the products of the computer revolution. It is not that computer operators have replaced clerk-typists, or even that new computer-based products have given a shot of adrenaline to consumer demand comparable to that of the automobile in an earlier period. Rather it is that a new source of wealth has been discovered: the application of vast amounts of information rapidly applied to the tasks of work. Not only did this greatly enrich the United States and Japan, but it created explosive markets for the products of an entirely new list of economic players on the world scene—Korea and Taiwan, among others—as well as enabling the renovation of the Western European infrastructure that had begun the Industrial Age.

The introduction of the computer was a strategic innovation* that was productively married to the American doctrine of containment. This doctrine proposed that communism would collapse of its own steadily increasing deterioration if it could be prevented from actually seizing other states (by invasion or subversion). This required that the noncommunist states be made strong through increasing prosperity and effective alliances. It proved to be an effective strategy for the noncommunist society of nation-states, and yet some of the innovations that made it succeed were ultimately destructive of the power of the nation-state itself. But for the development of the computer, George Orwell might well have been right about the power of communications technology to observe and control national populations. Instead, this technology decentralized the power of institutions, including the State, so that the objects of control slipped out of the hands of governments altogether. George Gilder gives this example:

A steel mill, the exemplary industry of the industrial age, lends itself to control by governments. Its massive output is easily measured and regulated at every point by government. By contrast, the typical means of production in the new epoch is a man at a computer work station, designing microchips comparable in complexity to the entire steel facility, to be manufactured from software programs comprising a coded sequence of electronic pulses that can elude every export control and run a production line anywhere in the world.22

 

Regulation by law—the characteristic method of the nation-state—is both losing its effectiveness because of this technology and becoming more costly because the technology of computers has conferred greater value on intellectual capital, which flees from regulation wherever possible.

Indeed some of the core concepts that enabled the nation-state to attempt to manipulate its economy through regulation have become vacuous under the pressure of the mobility made possible by computing technology. The notion of the trade balance that has long been held to be crucial to the nation-state depends upon our being able to value the goods and services exchanged in international trade and to assign these values to a particular state. Where the most valuable good is information, which is highly mobile and cannot be measured in these terms, however, it is fruitless to measure trade balances precisely because they are limited to the measurable. One example is the printed book: for a publisher in one nation-state, “foreign earnings” from such a book in another state may account for a large share of total revenue, even though no actual books are exported. This is because it is more profitable for the publisher to sell derivative copyright licenses than to ship books abroad. As Peter Drucker points out, “the most profitable computer ‘export sales' may actually show up in trade statistics as an ‘import.’ This is the fee some of the world's leading banks, multinationals and Japanese trading companies get for processing in their home office data arriving electronically from their branches and customers around the world.”23

Moreover, computing technologies have made possible the complex logistics of transnational value-adding production.

The dress a customer purchases at a smart store in San Francisco may have originated with cloth woven in Korea, finished in Taiwan, and cut and sewed in India according to an American design. Of course a brief stop in Milan, to pick up a “Made in Italy” label, and leave off a substantial licensing fee is de rigueur before the final journey to New York.24

 

In such circumstances, what sense does it really make to consider this an Italian export? We accept, conventionally, that it matters if the company exporting from Milan is U.S.-owned; the company earnings will be repatriated and can be measured. But suppose it simply can't be determined what country's investors own the exporting company, and to what degree the country that finally exports a product to the United States is the source of value? This casts doubt on the very notion that the world can be subdivided into national economies. And if this is so, then monitoring one of the key functions of the nation-state is erased to nothingness.

Walter Wriston asks:

How does a national government measure capital formation, when much new capital is intellectual? How does it measure the productivity of knowledge workers whose product cannot be counted on our fingers? If it cannot do that, how can it track productivity growth? How does it track or control the money supply when the financial markets create new financial instruments faster than the regulators can keep track of them? And if it cannot do any of these things with the relative precision of simpler times, what becomes of the great mission of modern governments: controlling and manipulating the national economy?25

 

Monetary and fiscal policy are the two great levers available to the State to manage its national economy. By manipulating the value of its currency, a state can raise or lower interest rates, stimulate or suppress growth, increase exports or imports. In a world of floating exchange rates, however, states do not set the value of their currencies with respect to an external standard—such as the gold standard, or a basket of values related to interstate economic comparisons like the European Monetary Standard— but rather are judged by the market as if currency were any other commodity, like soybeans or petroleum.* In such an environment, the computer has made possible the instantaneous judgment by the market as to the value of any particular currency because it allows hundreds of thousands of investors to voice their demand decisions through computer-assisted transactions vastly in excess of the demand for money required by purchases of goods and services. As Wriston, the former head of one of the world's largest banks, noted, “[u]nlike all prior arrangements, the new system was not built by politicians, economists, central bankers or finance ministers. No high level international conference produced a master plan. The new system was built by technology.”26 As of this writing, the amount of dollars trading per day exceeds the total GDP of the American economy annually; only a tiny fraction of this is available to central banks trying to manipulate this trading.

Wriston asked, “What becomes of the great mission of modern governments?” The reply must be: the mission changes. The market-state ceases to base its legitimacy on improving the welfare of its people, and begins instead to attempt to enable individuals to maximize the value of their talents by providing them with the most opportunity to do so. “Be everything you can be” replaces “A chicken in every pot.”27

The market-state has shifted its mission to respond to the new circumstances in which the nation-state found itself. Market-states composing a society of such states reflect the consequences of the strategic changes that won the Long War; with respect to rapid computation, two kinds of challenges arising from this history are paramount: (a) the possibility of a trade war among the developed northern-tier states and/or a trade collapse between North and South, and (b) the transnational problems of protecting the environment. Both of these challenges to the society of market-states are attributable to the revolution in information technology—North-South discrepancies in wealth resulting from a dramatic change in the terms of trade have been further accentuated by it—and yet both problems can benefit from this technology.