Tuesday, August 19, 2008

'The Great Illusion' Illusion

Paul Krugman is understandably concerned about Russian actions in Georgia and questions, as many have, whether this portends an end to an era of peace among the great powers:

[O]ur grandfathers lived in a world of largely self-sufficient, inward-looking national economies — but our great-great grandfathers lived, as we do, in a world of large-scale international trade and investment, a world destroyed by nationalism.

Some analysts tell us not to worry: global economic integration itself protects us against war, they argue, because successful trading economies won’t risk their prosperity by engaging in military adventurism. But this, too, raises unpleasant historical memories.

Shortly before World War I...[the] British author, Norman Angell, published a famous book titled The Great Illusion, in which he argued that war had become obsolete, that in the modern industrial era even military victors lose far more than they gain. He was right — but wars kept happening anyway.

It's that phrase, "as we do," that should stop us. As David Remnick writes in his commentary on Putin's Georgia gambit, “Every thing is what it is, and not another thing.” Georgia in 2008 is not Prague in 1968. He might have added that global integration in 2008 is not like "international trade" in 1908. Then, integration was the product of (more or less) free exchange of goods among a dozen or so great nation-states. Today, it comes from (more or less) open, cosmopolitan networks within a thousand or so great companies. Think of an intellectual power-grid, into which you plug, or don't; and if you don't, you cannot produce much of what others will want.

THERE ARE EXCEPTIONS, of course. If every company in the world looked like Exxon or Bechtel or Archer Daniels Midland then the kind of national frictions Krugman implies would be, if not inevitable, then certainly more likely. Any reasonably competent nationalist demagogue, arguing for expanded territory, would hold a terrible advantage and make terrible sense; the only thing holding us back from tearing up the global system--that is, surrendering to the selfish national ends we might satisfy immediately in war, which is, after all, an organized form of theft--would be some long-term (and rather effete) conception of our international interest in peaceful trade.

Another book written before World War I, Imperialism: A Study, by John Hobson, pretty much predicted how the international system of free trade--which Hobson's hero, Richard Cobden, had helped establish--would fall apart, because national economies, built on pyramids of monopolized raw materials and the "division of labor," would suffer crises of "underconsumption." That would propel the great powers into ruinous fights for colonies.

THE POINT IS, advanced national economies don't look much like this anymore. Maybe the Democratic Republic of the Congo does. The US, European, Asian, and major Latin American economies don't. And how could they? A computer is made of oil and minerals but is 90% made of science. The software is 100% science. Accountants are going crazy today because the market value of major companies is 70-80% intellectual capital. And the most important thing about intellectual capital--an algorithm or a management principle--is that (unlike an oil-well, silver mine, building, pipline, or wheat-field) your having it does not mean denying it to me or anyone else. You may have it first and take a premium for a while. But you actually have a long-term interest in sharing it and expanding the population of the rich and the smart.

Exxon is America's sometimes biggest and most profitable corporation. But look at our GDP. At most 5% of the US economy is attributable to the value-added of all agricultural and oil businesses combined. That's less than a fifth coming from the combination of businesses in information technology, professional services and sophisticated manufacturing. The global economy is dominated by knowledge businesses like PwC or Siemens or HP or Toyota. These are really swarms of problem-solving teams: teams that are increasingly composed of people from all over the world, whose markets are global, whose supply-chains are global, and sources of know-how are global.

"One lesson of the Soviet experience," Remnick writes, "is that isolation ends in poverty." That is a lesson Putin can try to throw out, and will, when he feels that his regime's interests in petro-dollars is compromised. (We "freed" Kuwait, remember.) But the idea that Russia can long defy or entirely withdraw from this global system of science-based production and exchange--in other words, detach Russia from the power-grid--in order to advance "nationalist" ends is to misunderstand what even Libyan managers I've taught understand. What was China's heart-stopping opening Olympics ceremony, conducted with extreme national pride, if not a paean to the globalization that has made China a power?

I need not add that Krugman is one of our indispensable voices in public policy. That he, of all people, gets something this important this wrong suggests that economists in general are suffering from a pervasive, and in this case dangerous, intellectual virus. Luckily, there are anti-bodies in garden-variety business journalism.