It is widely believed that the Chinese are eating our lunch. Their factories hum and belch smoke, while ours go silent and send up weeds in the parking lot. This phenomenon is commonly called "globalization." But it is also commonly misunderstood.
In the reverie of modern Americans, globalization means the rest of the world sends you things you don't have to pay for. The burden of today's little essay is two-fold. The first part is easy; we point out that anyone who thinks such a thing is a fool. The second point is harder - and more important.
The world has been globalized for a long time. An Englishman in 1910 could sit in his parlor off St. James Park and drink tea that came all the way from Ceylon in cups that came all the way from China. Then, putting down his drink, he could pick up a Cuban cigar, put it to his lips...and perhaps sprinkle a few ashes on the carpet that he had bought in Egypt...or the leather boots he had ordered from a shop down the street that sold Italian goods. He could buy stocks in New York as easily as he could pick up oranges from Spain or the latest French novels to make their way across the channel.
But as Niall Ferguson points out in the current issue of Foreign Affairs magazine, globalization is not without its disappointments. In 1910, England had been a great world power...and one of the world's greatest economies...for two centuries. But global competition had recently edged the British out of the top spot. American GDP surpassed it at the turn of the century. Germany marched by a few years later. Relatively, England, that "weary Titan," was in decline.
Still, why would the English complain? They lived well - perhaps better than anyone else. Even if they didn't, they thought they did. The rest of the world was content too. People liked buying and selling. People in Europe liked globalization, because it brought them oranges in the wintertime. People in the warm latitudes liked it - now they had someone to sell their oranges to. Even then, people spoke of the "annihilation of distance," and assumed that more miles would be destroyed in the years to come.
Globalization is nothing more than the extension of the division of labor across international boundaries. Our little village in France has the vestiges of a self-contained community. As recently as the end of WWII, almost everything people needed was produced right there. The farms grew wheat. Farmers raised vegetables...and cows...pigs...chickens. There was a machine shop...a forge...a woodworking atelier. There still remain the 'Versailles' boxes, in which lemon trees were planted. The boxes allowed the trees to be moved into heated space in the winter. Otherwise, they would freeze and die.
But as distance was annihilated, commerce in lemons was born. There was no longer any need to plant lemon trees in transportable wooden boxes when the lemons themselves could be shipped, quickly and cheaply, by the millions. One country can produce lemons. Another can produce machine gun cartridges.
Individuals...towns...enterprises...regions...can divide up the labor, work more efficiently, and produce more things at lower cost. Everyone involved gets a little richer.
There are really only two ways to get what you want in life, dear reader. You can do so honestly...or dishonestly. You can get it by working for it...or by stealing it. You can get it by trade and commerce...or by force and fraud. You can get it by civilized methods...or by barbaric ones. You can get rich by "economic means" or by "political means," as the great German sociologist, Franz Oppenheimer put it. Globalization is merely an elaboration of the economic means of getting things. It requires civilized relationships to make it work; people have to get along with each other in order to trade. They must rely on others - even other people in strange, faraway places - for their daily bread. They must also be able to count on the medium of exchange that they trade goods and services in. If they can't trust the money, they are not likely to want to do business.
The end of history has been announced several times. But it never seems to arrive. People always tend to think that what is will remain...that trends in place right now will continue at least indefinitely, and perhaps forever. The odds of anything going wrong, they tell themselves when the going is good, are like the extreme edges of a bell curve - vanishingly small. But people badly "underestimate the persistence of history's traditional side, the rise and fall of empires, the rivalry of regimes, and the disastrous exploits of great men," wrote French historian Raymond Aron. That is to say, they tend to ignore the political means that tend to mess things up...and the rare, fat tail events that make history interesting.
Such a fat tail event happened in 1914. A European war disturbed nearly 100 years of peace and progress. People thought the war could not happen. And if it did happen, they said, it would be short and sweet. They were wrong on both points. Globalization had entered a shrinking phase.
Then, on April 2, 1917, Woodrow Wilson stood before Congress and announced that the world's biggest economy was about to shift to "political means" to get what it wanted. Instead of merely doing business with the Entente powers, America, too, was going to get involved in killing people. This day marked not only another big setback for globalization...it also establishes a frontier for where one empire ended and another began. Britain ceased being the world's hegemonic imperial power. Henceforth, the United States was the cock of the walk...the Alpha nation...the biggest damned bull in the field.
There are times when civilization goes forward. And there are times when it goes in the other direction. Woodrow Wilson slammed the United States into reverse in 1917. It has been backing up ever since, in the sense that Americans rely more on force and fraud to get what they want. Gun-toting soldiers now defend America's many supposed interests all over the world - even in places where America seems to have no interests. The U.S. government takes far more of its citizens' money than it did in 1917...and provides detailed instructions to Americans on such a wide variety of matters that one can scarcely toss a chicken out the window or blow up an outhouse without asking permission of the authorities.
But we're not complaining. For while the U.S. Empire was growing, so was world trade. In the free world until 1989...and now almost everywhere...a "pax dollarum" greatly aided the cause of globalization throughout the second half of the 20th century. But this new globalized commerce has a fraudulent side to it. The hegemonic power is using political means, even while it shops. During the last big boost in the division of labor, in the 19th century up until 1914, the money in which transactions were calibrated was backed by gold. No country - not even an imperial one - could cheat.
If a country consumed more than it produced, other countries found themselves with surpluses of the laggard nation's currency. They then could ask for gold in settlement. Gold was real, the ultimate money. When a nation's gold horde was in danger, it quickly adjusted its policies to correct the imbalance. The dollar, on the other hand, is merely a piece of paper, backed by nothing more than the full faith and credit of the United States treasury. How good a promise is that? No one knows for sure. Niall Ferguson explains why it may be worth less than many think:
"A rising proportion of Americans may consider themselves to have been 'saved' in the Evangelical sense, but they are less good at saving in the economic sense. The personal savings rate among Americans stood at jut 0.2 percent of disposable personal income in September 2004, compared with 7.7 percent less than 15 years ago. Whether to finance domestic investment (in the late 1990s) or government borrowing (after 2000), the United States has come to rely increasingly on foreign lending. As the current account deficit has widened (it is not approaching 6% of GDP), U.S. net overseas liabilities have risen steeply to around 25% of GDP. Half of the publicly held federal debt is now in foreign hands; at the end of August 2004, the combined U.S. Treasury holdings of China, Hong Kong, Japan, Singapore, South Korea, and Taiwan were $1.1 trillion, up by 22% from the end of 2003."
The odd thing about the spurt of globalization in the last five years is that it's so lopsided. The U.S. takes...but it doesn't give. It borrows...but it doesn't pay back. It buys...but it doesn't sell. It imports...but it doesn't export. The only reason foreigners put up with those shenanigans is because they receive paper currency in payment. They assume their dollars will be as valuable in the future as they are now. They assume the trends of the last 50 years will continue unchanged. They assume that no terrorists will knock off an archduke...and no fat tail will plop itself down in the currency markets. They assume that someone, somewhere, had the situation under control. And yet..."If the private market - which knows that with high probability the dollar is going down someday - decides that that someday has come and that the dollar is going down now," writes Brad DeLong, "then all the Asian central banks in the world cannot stop it."
What will happen when the world figures out that the United States is pulling a fast one? We don't know. But like the period following the sinking of the Lusitania, we're sure it will make the history books.