Sunday, June 14, 2009

The global economic order needs a dominant economy to function well. The U.S. is abandoning that role and there is no other economy to replace us.

Dani Rodrik posted a very interesting blog at TPM Cafe today that included this line: economic order is difficult to establish and maintain in the absence of a dominant economic power.
That statement crystallized a number of ideas I have been playing with.

The idea that for a stable and effective global economic order to exist it demands a dominant economic power explains a great deal. It would suggest that the long period of global stability and economic order in the 19th century was brought about by the dominance of Great Britain (at first with its contra-Napoleonic allies) as it underwent industrialization, and that the rapid industrial growth of Germany in the late '80's and '90's and years prior to WW I was a major contributor to the outbreak of WW I itself. A war, I might add, that effectively destroyed the economy and global dominance of the British Empire.

After that there was no single dominating economy following WW I although Britain, France, and the distant, reticent and isolationist U.S. were all duking it out for dominance. (The economic power of the U.S. was already obvious, but it was not applied to international politics. The German nationalists, of course, greatly resented that they were excluded from the club they knew they belonged in. The resulting economic and political turbulence combined with militant nationalism that saw all international power as based in the military led almost inevitably into resuming the Great War on a much wider scale. The German dominant social and political class had never matured (the British upper class were no better.) That same immaturity also was a key factor in starting WW II. In both cases they "knew" they could assert their national power (by military means) and regain the status they demanded. It was a reaction from weakness.

WW II then proceeded to destroy every industrialized economy of any size in the world outside the U.S., leaving the U.S. as dominant by default - as much by the accident of isolation more than any other single factor. Since the 60's the rebuilding of most of the rest of the world has placed the continuation of that U.S. dominance in severe doubt. So has the overvaluing of the dollar and the resulting shift of the American economy from predominantly production to predominantly banking. Essentially America has abandoned much of its basis of economic dominance other than geography. It doesn't help at all that we have long outstripped our oil resources, the single most important basis for an industrial economy after coal. We have joined Japan and Europe in our need for imported oil to fuel our industrial economy.

The U.S. power is now maintained by super aggressive spending on the military(with its associated industrial complex), but it also is maintained by having the dollar as the world's reserve currency and the oil trading currency. Unfortunately the previous relative dominance of our educational and university systems and our willingness to take in students from anywhere in the world has been allowed to decline badly. That and the economic innovation it caused was one of the pillars of our dominance of the world economy, but in the name of "fiscal restraint" we have abandoned it. Such expenditures do not present a predictable short-term gain the markets can recognize to justify those such investments, you see. But innovation is inherently unpredictable and depends on smart, motivated and well-educated individuals free to apply their ideas. So it is necessary to find, educate and motivate such individuals and permit them the relative freedom to put their insights into effect.

Couple those international factors with the effective monopoly control of oil resources by the middle east (Saudi Arabia still the dominant nation) as well as Russia along with the rise of the European Union, Japan. China and India, and there's not much left to support American global economic dominance beyond a set of international banking institutions badly infected with the idiocy of the absolute Free Market- small government ideology which operates efficiently only by abandoning large swaths of poor populations.

Only governments can modify the structures of the economy that keep those populations unable to participate in the economy to their fullest extent, but government actions to bring those populations into the economy and society costs the entrenched powers big time. The biggest price the entrenched power pay is dealing with problems and the innovations by those segments of the population as they become more integrated into the economy. That rocks the stability the the financial markets strive for, no matter how many people are benefited. They'd much rather lock in the existing social and economic system in which they dominate and never let it change.

Since banking is the last major element of American dominance (other than the ability to rapidly extend military power to anywhere in the world), I'd guess that we really stepped in it by profligate and ignorant banking processes that created the current severe Recession that may be the beginnings of Depression. Worse, we rapidly spread both the failed management of banking and the associated economic woes to the rest of the world. That gives the rest of the world a really strong motivation to kick us off our privileged economic perch. America's attempt to spread the often unworkable "Free Market" ideology gives them good reason. (Free Markets work for the winners, but abandon the losers. That creates both social and political problems. that makes the absolute free market unworkable.)

Unfortunately, as was true after WW I, there is no replacement in the wings for U.S. dominance. That puts the world back into the lack of a dominant economy that uses its power to control the global economy that preceded both WW I and WW II.

Those are the implications that I drew from the line quoted above. Mind you, I am not a historian. I am a retiree with an academic background in economics and business (an MBA with extensive study after that in Management, Economics and Finance) as well as having retired as an Army Reserve Logistics Officer. (That means I operated or planned for maintenance, supply and transportation systems for Corps and Field Armies in the field. That's a hell of a lot of people and equipment operating in places where there is no outside economic or legal or civil government support at all.) When I retired from work a few years ago I started reading all the history I never had time to read while I was working. I soon developed a focus on the question of how Europe took 400 years and somehow came to dominate the world by the late 19th century. Interestingly the whole process of slavery in America, the Caribbean and northern South America is included. It was firsts and foremost an economic thing as world commodity markets developed, but it warped the societies where it was practiced in way still very recognizable - as well as socially dysfunctional. I'm also still looking for the basic causes of WW I, because it destroyed that domination and its aftermath set up the international game as it is played today.

My question is whether I have this analysis above right. It seems reasonable to me, but how do I know? I'm no historian, so I am looking for feedback and criticism.

So I just thought I would throw this out for consideration. Comments from readers would be greatly appreciated.

1 comment:

xCapoOGx said...

Good post, it helped me get my brain started with an essay im doing ;-D