THE AGE OF TURBULENCE phasize personal initiative: "The natural effort of every individual to better his own condition, when suffered to exert itself with freedom and security is so powerful a principle, that it is alone, and without any assistance ca- pable of carrying on the society to wealth and prosperity" He concluded that to enhance the wealth of a nation, every man, consistent with the law, should be "free to pursue his own interest his own way" Competition was a key factor because it motivated each person to become more productive, often through specialization and division of labor. And the greater the pro- ductivity, the greater the prosperity This led Smith to his most famous turn of phrase: individuals who compete for private gain, he wrote, act as if "led by an invisible hand" to promote the public good. The metaphor of the invisible hand, of course, captured the world's imagination—possibly because it seems to impute a godlike benevolence and omniscience to the market, whose workings are in reality as impersonal as natural selection, which Darwin came along and described more than half a century later. The expression "invisible hand" does not seem to have been very important to Smith; in all his writings, he used it only three times. The effect it describes, however, is something he discerns at every level of society, from the great flows of goods and com- modities between nations to everyday neighborhood transactions: "It is not from the benevolence of the butcher, the brewer, or the baker, that we ex- pect our dinner, but from their regard to their own interest." Smith's insight into the importance of self-interest was all the more revolutionary in that, throughout history in many cultures, acting in one's self-interest—indeed, seeking to accumulate wealth—had been perceived as unseemly and even illegal. Yet in Smith's view, if government simply provides stability and freedom and otherwise stays out of the way, personal initiative will see to the common good. Or as he put it in a 1755 lecture: "Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes and a tolerable administra- tion of justice: all the rest being brought about by the natural course of things." Smith succeeded in drawing broad inferences about the nature of com- mercial organization and institutions based on remarkably little empirical 262 This file was collected by ccebook.cn form the internet, the author keeps the copyright. More ebooks visit: http://www.ccebook.cn ccebook-orginal english ebooks THE UNIVERSALS OF ECONOMIC GROWTH evidence—unlike economists today he didn't have access to reams of gov- ernment and industrial data. Yet over time, the numbers would bear him out. Throughout much of the civilized world, free-market activity first cre- ated levels of sustenance adequate to enable the population to grow and later—much later—created enough prosperity to foster a general rise in living standards and an increase in life expectancy The latter developments opened the possibility for individuals in developed countries to establish long-term personal goals. Such a luxury had been remote to all but a sliver of earlier generations. Capitalism also made change a way of life. For most of recorded his- tory people lived in societies that were static and predictable. A young twelfth-century peasant could look forward to tilling the same plot of his landlord's soil until disease, famine, natural disaster, or violence ended his life. And that end often came quickly. Life expectancy at birth was, on aver- age, twenty-five years, about the same as it had been for the previous mil- lennium. Moreover, the peasant could expect that his children and their children would till the same plot. Perhaps such a rigidly programmed life conferred the sense of security that comes from utter predictability, but it left little to individual enterprise. To be sure, improved agricultural techniques and the expansion of trade beyond the largely self-sufficient feudal manor increased the division of labor, raised living standards, and allowed populations to expand in the sixteenth and seventeenth centuries. But the pace of growth was glacial. In the seventeenth century, the great mass of people still were engaged in the same productive practices as their forebears many generations earlier. Smith held that working smarter, not merely harder, was the way to wealth. In the opening paragraphs of The Wealth of Nations, he underscored the crucial role played by the expansion of labor productivity. An essential determinant of a nation's standard of living, he said, was "the skill, dexter- ity, and judgment with which labor is generally applied." This flew in the face of earlier theories, such as the mercantilist precept that a nation's wealth was measured in troves of gold bullion, or the Physiocrat tenet that value derived from the land. "Whatever be the soil, climate, or extent of territory of any particular nation," Smith wrote, "the abundance or scanti- 263 This file was collected by ccebook.cn form the internet, the author keeps the copyright. More ebooks visit: http://www.ccebook.cn ccebook-orginal english ebooks THE AGE OF TURBULENCE ness of its annual supply" must depend upon "the productive powers of labor." Two centuries of economic thought later, little has been added to those insights. With the help of Smith and his immediate successors, mercantilism was gradually dismantled and economic freedom spread widely In Britain, this process reached its finale with the 1846 repeal of the Corn Laws, a set of tariffs that for many years had blocked imports of grain, keeping grain prices and therefore landowners' rents artificially high—and elevating, of course, the price paid by industrial wage earners for a loaf of bread. The ac- ceptance of Smith's economics was, by then, prompting the reorganization of commercial life in much of the "civilized" world. Yet Smith's reputation and influence eroded as industrialization spread. He was no hero to many who struggled during the nineteenth and twentieth centuries against what they saw as the barbarism and injustice that accom- panied laissez-faire market economies. Robert Owen, a successful British factory owner, believed that laissez-faire capitalism by its very nature could lead only to poverty and disease. He founded the Utopian movement, which advocated, in Owen's phrase, "villages of cooperation." In 1826, his adher- ents set up New Harmony, Indiana. Ironically, strife among the residents brought New Harmony to collapse within two years. But Owen's charisma continued to draw large followings among those struggling to eke out a liv- ing in appalling working environments. Karl Marx was dismissive of Owen and his Utopians but was no devotee of Smith's. While Smith's intellectual rigor attracted him—in Marx's view, Smith and other so-called classical economists had accurately described the origins and workings of capitalism—Marx thought Smith had missed the main point, that capitalism was but a step. Marx saw it as a historical stage in an inevitable progression to the revolution of the proletariat and the tri- umph of communism. His followers eventually took a substantial segment of the world's population out of capitalism's way—for a while. Unlike Marx, the Fabian socialists of the late nineteenth century were not looking for revolution. The group named itself after the ancient Roman general Fabius, who held off Hannibal's invading army with a military strat- egy of attrition rather than all-out confrontation. Similarly, the Fabians aimed not to destroy capitalism but to constrain it. Government, they be- 264 This file was collected by ccebook.cn form the internet, the author keeps the copyright. More ebooks visit: http://www.ccebook.cn ccebook-orginal english ebooks THE UNIVERSALS OF ECONOMIC GROWTH lieved, should actively safeguard public welfare from the harsh competi- tiveness of the marketplace. They advocated protectionism in trade and the nationalization of land ; and counted among their ranks such luminaries as George Bernard Shaw ; H. G. Wells, and Bertrand Russell. The Fabians laid the groundwork for modern social democracy and their influence on the world would end up being at least as powerful as that of Marx. While capitalism succeeded brilliantly in delivering higher and higher standards of living for workers throughout the nineteenth and twen- tieth centuries, it was the tempering effect of Fabian socialism that many argued would make market economies politically palatable and keep com- munism from spreading. Fabians took part in founding Britain's Labour Party. They also had a profound influence on British colonies as the colonies gained independence: in India in 1947, Jawaharlal Nehru drew on Fabian principles to set economic policy for one-fifth of the world's population. When I first read Adam Smith after World War II ; regard for his theo- ries was at a low ebb. And for much of the cold war, economies on both sides of the iron curtain remained either heavily regulated or centrally planned. "Laissez-faire" was practically a term of opprobrium; the most prominent advocates of free-market capitalism were iconoclasts like Ayn Rand and Milton Friedman. The pendulum of economic thinking began to swing in Smith's favor in the late sixties, just as I began my public career. The comeback has been long and slow, particularly in his native land. A U.S. economist looking for Smith's grave in an Edinburgh churchyard in 2000 reported having to clear away beer cans and debris to read the worn inscription on the stone: HERE ARE DEPOSITED THE REMAINS OF ADAM SMITH. AUTHOR OF THE THEORY OF MORAL SENTIMENTS AND WEALTH OF NATIONS. Yet Scotland, too, has come around to according Smith the kind of honor he deserves. The way to the grave is now marked by a newly installed stone that quotes from The Wealth of Nations, and a college near Kirkcaldy has been renamed after Smith. A ten-foot-tall bronze statue of him is planned for Edinburgh's Royal Mile. Appropriately it is being paid for with 265 This file was collected by ccebook.cn form the internet, the author keeps the copyright. More ebooks visit: http://www.ccebook.cn ccebook-orginal english ebooks THE AGE OF TURBULENCE private funding. And, on a personal note, in late 2004 I was delighted to ac- cept a request from my good friend Gordon Brown, Britain's longtime chancellor of the exchequer and now prime minister, to deliver the first Adam Smith Memorial Lecture in Kirkcaldy. That a leader of Britain's La- bour Party, whose roots in Fabian socialism are such a far cry from the te- nets espoused by Smith, would sponsor such an occasion is indeed a measure of change. As I will discuss, Britain has endeavored to join some of the tenets of the Fabians with market capitalism—a pattern that repeats it- self to a greater or lesser extent throughout the trading world. 266 This file was collected by ccebook.cn form the internet, the author keeps the copyright. More ebooks visit: http://www.ccebook.cn ccebook-orginal english ebooks THIRTEEN THE MODES OF CAPITALISM A mid the remarks of the speakers in the large, crowded meeting room at IMF headquarters, I could hear the chanting and shouts of the antiglobalization dissidents on the street. It was April 2000, and somewhere between ten thousand and thirty thousand students, church group members, unionists, and environmentalists had converged on Washington to protest the spring meeting of the World Bank and the Inter- national Monetary Fund. While we finance ministers and central bankers in the room couldn't make out the words of the chants, it wasn't hard to un- derstand the gist. They were protesting what they viewed as the depreda- tions of increased global trade, particularly the oppression and exploitation of the poor in developing countries. I was, and am, saddened by such events, since were the protesters to succeed in destroying global trade, those most harmed would be hundreds of millions of the world's poor, the very people in whose name the protesters had chosen to speak. While central planning may no longer be a credible form of economic organization, it is clear that the intellectual battle for its rival—free-market capitalism and globalization—is far from won. For twelve generations, capi- This file was collected by ccebook.cn form the internet, the author keeps the copyright. More ebooks visit: http://www.ccebook.cn ccebook-orginal english ebooks THE AGE OF TURBULENCE talism has achieved one advance after another, as standards and quality of living have risen at an unprecedented rate over large parts of the globe. Poverty has been dramatically reduced and life expectancy has more than doubled. The rise in material well-being—a tenfold increase in real per capita income over two centuries—has enabled the earth to support a six- fold increase in population. Yet, for many capitalism still seems difficult to accept, much less fully embrace. The problem is that the dynamic that defines capitalism, that of unfor- giving market competition, clashes with the human desire for stability and certainty. Even more important, a large segment of society feels a growing sense of injustice about the allocation of capitalism's rewards. Competi- tion, capitalism's greatest force, creates anxiety in all of us. One major source of it is the chronic fear of job loss. Another, more deeply felt angst stems from competition's perpetual disturbance of the status quo and style of living, good or bad, from which most people derive comfort. I am sure the American steel manufacturers I advised in the 1950s would have been quite happy if Japanese steelmakers hadn't improved their quality and pro- ductivity so markedly. Conversely, I doubt that IBM was thrilled to see computerized word processors upstage the venerable Selectric typewriter. Capitalism creates a tug-of-war within each of us. We are alternately the aggressive entrepreneur and the couch potato, who subliminally prefers the lessened competitive stress of an economy where all participants have equal incomes. While competition is essential to economic progress, I can't say I always personally enjoy the process. I never thought kindly of rival firms seeking to lure clients from Townsend-Greenspan. But to compete, I had to improve. I had to offer a better service. I had to become more pro- ductive. In the end, of course, I was better off for it. So were my clients, and I suspect so were my competitors as well. Down deep that is probably the message of capitalism: "creative destruction"—the scrapping of old tech- nologies and old ways of doing things for the new—is the only way to in- crease productivity and therefore the only way to raise average living standards on a sustained basis. Finding gold or oil or other natural wealth, history tells us, does not do that. There is no denying capitalism's record. Market economies have suc- ceeded over the centuries by thoroughly weeding out the inefficient and 268 This file was collected by ccebook.cn form the internet, the author keeps the copyright. More ebooks visit: http://www.ccebook.cn ccebook-orginal english ebooks THE MODES OF CAPITALISM poorly equipped, and by granting rewards to those who anticipate con- sumer demand and meet it with the most efficient use of labor and capital resources. Newer technologies increasingly drive this unforgiving capitalist process on a global scale. To the extent that governments "protect" portions of their populations from what they perceive as harsh competitive pres- sures, they achieve a lower overall material standard of living for their people. Regrettably, economic growth cannot produce lasting contentment or happiness. Were that the case, the tenfold increase in world real per capita GDP over the past two centuries would have fostered a euphoric rise in human contentment. The evidence suggests that rising incomes do raise happiness, but only up to a point and only for a time. Beyond the point at which basic needs are met, happiness is a relative state that, over the long run, is largely detached from economic growth. The evidence shows it is determined mainly by how we view our lives and accomplishments rela- tive to those of our peers. As prosperity spreads, or perhaps even as a result of its spread, many people fear competition and change that threaten their sense of status, which is critical to their self-esteem. Happiness de- pends far more on how people's incomes compare with those of their per- ceived peers, or even those of their role models, than on how they are doing in any absolute material sense. When graduate students at Harvard were asked a while back whether they would be happier with $50,000 a year if their peers earned half that, or $100,000 if their peers earned double that, the majority chose the lower salary. When I first saw the story, I chuck- led and started to brush it off. But it struck a chord that unearthed a long- dormant memory of a fascinating 1947 study by Dorothy Brady and Rose Friedman. Brady and Friedman presented data showing that the share of income that an American family spent on consumer goods and services was largely determined not by the level of family income but by its level relative to the nation's average family income. Thus, their study suggests that a family with the nation's average income in 2000 would be expected to spend the same proportion of its income as a family with average family income in 1900, even though in inflation-adjusted terms the 1900 income was only a small fraction of that of 2000.1 reproduced and updated their calculations 269 This file was collected by ccebook.cn form the internet, the author keeps the copyright. More ebooks visit: http://www.ccebook.cn ccebook-orginal english ebooks THE AGE OF TURBULENCE and confirmed their conclusion.* Consumer behavior has not changed much over the last century and a quarter. The data made clear that how much people spent or saved was deter- mined not by the level of their real purchasing power, but by their pecking order on the income scale, their income relative to that of others. + What is all the more remarkable about this finding is that it held even in the latter part of the nineteenth century, when households spent much more of their income on food than they did in 2004.* None of this would have surprised Thorstein Veblen, the American economist who in his book The Theory of the Leisure Class, written in 1899, famously gave the world the expression "conspicuous consumption." He noted that an individual's purchase of goods and services is tied to what used to be called "keeping up with the Joneses." If Katie had an iPod, Lisa had to have one too. I always thought Veblen carried his analysis to an ex- treme, but there is little doubt that he identified a very important element of the way people behave. As the data show, we are all competitively sensi- tive to what our peers earn and spend. They may be friends, but they are also seen as rivals in the pecking order. Individuals are demonstrably hap- pier and less stressed as their incomes rise with a rising national economy, and rich people, surveys show, are generally happier than those lower down the income scale. But human psychology being what it is, the initial eupho- *Sample surveys of U.S. consumer income and outlays have been published periodically by the U.S. Department of Labor and its predecessors since 1888.1 collected data from seven surveys from 1888 to 2004. The raw survey data appeared to have no consistent pattern until I exhib- ited each income bracket's ratio of spending to income against each particular year's average family income. Then, as in Brady and Friedman, for all seven surveys, the ratio of spending to income for those households with a third of the nation's average income concentrates around 1.3 (their spending exceeds income by 30 percent). The spending/income ratio then falls even- tually to about 0.8 at double the average income level. tAn alternate way to reach the same conclusion is to observe that there is no discernible long- term trend in the nation's household saving rate. Yet all surveys show the saving rate is higher for upper-income households than for lower-income households. For both statements to be true (and if the distribution of incomes does not veer outside its historical range), households at any given dollar income level must be saving less as the aggregate incomes rise with time. The extent of the downward creep in saving must be directly related to the growth rate of aver- age household income. tFood, of course, is a very useful proxy for the subsistence level, which shouldn't be tied to where a family stood in the income pecking order. 2 70 This file was collected by ccebook.cn form the internet, the author keeps the copyright. More ebooks visit: http://www.ccebook.cn ccebook-orginal english ebooks THE MODES OF CAPITALISM ria of a higher standard of living soon wears off as the newly affluent adjust to their better status in life. The new level is quickly perceived as "normal." Any gain in human contentment is transitory* People's conflicted reactions to capitalism have spawned a variety of modes of capitalist practice in the postwar years, from highly regulated to lightly constrained. While each individual has an opinion, there is a visible tendency for much of a society to coalesce around a common point of view, which often differs measurably from the choices of other societies. This, I sense, results from the need of people to belong to groups defined by reli- gion, culture, and history, which, in turn, is fostered by an innate need of people for leaders: of the family, the tribe, the village, the nation. It is a uni- versal trait that probably reflects the imperative for people to make choices to govern their day-by-day behavior. Most people, much of the time, feel in- adequate to the task and seek guidance from religious direction, the recom- mendations of family members, and the pronouncements of presidents. Almost all human organizations reflect this need for hierarchy. The shared views of any society, in practice, are views embraced by its leadership. If happiness were tied solely to material well-being, I suspect, all forms of capitalism would converge to the American model, which has been the most dynamic and productive. But it is also the one that creates the most stress, especially in the job market. As noted in chapter 8, some four hun- dred thousand people in the United States lose their jobs every week, and another six hundred thousand change or leave jobs voluntarily. Average job tenure for Americans is 6.6 years, well short of the 10.6 years for Germans and 12.2 years for Japanese. Market-based societies, which today means virtually all, have had to choose where on the spectrum they wish to reside between two extremes that could be symbolized by two points on the map: frenetic but highly productive Silicon Valley at the one end and un- changing Venice at the other. For each society, the choice, in effect the trade-off between material *Fortunately, this psychology also works in reverse. Sharp financial adversity brings deep de- pression. But people not otherwise psychologically incapacitated rebound with time. Their smile returns. 271 This file was collected by ccebook.cn form the internet, the author keeps the copyright. More ebooks visit: http://www.ccebook.cn ccebook-orginal english ebooks [...]... through the eye of a needle than for a rich man to enter the kingdom of God." The ambivalence toward accumulation of material wealth has a long cultural history that pervades society to this day It has had a profound influence on the development of the welfare state and the social safety net that is at its core It is argued that unconstrained risk taking increases the concentration of income and wealth The. .. can't say the greater the risk taking, the greater the rate of growth Obviously, reckless gambling rarely pays off in the end The risk taking I have in mind is the rationally calculated kind of most business judgments It has to be the case that restraint on freedom of action, the essence of government regulation of business, or heavy taxation of successful ventures must suppress the willingness of market... was at our founding, though it remains rooted in the values of our Founding Fathers As unfettered as today's American capitalism may appear, it is a pale image of the capitalism of our earlier years We probably came as close as we will ever come to pure capitalism in the decades before our Civil War Following a largely, but not wholly, laissez-faire policy toward business and business practice, the. .. deal, at the expense of a valuable U.S asset: our reputation for nondiscriminatory international fair dealing, particularly our pledge to treat foreign corporations the same as domestic ones for regulatory purposes Just three months later, an Arab corporation named Dubai Ports World bought a company that managed container terminals on the U.S East and Gulf coasts The deal touched off more protest in Congress,... GDP forward In economies not broadly subject to international trade, competition was not as punishing to the less efficient as it is today, and there is clearly a significant segment of society that looks back at such circumstances with nostalgia In today's global competitive markets, maintaining the kind of safety net that evolved in an earlier day is proving increasingly problematic, notably in most... H E AGE OF T U R B U L E N C E wealth and lack of stress, appears to rest on its history and the culture it has spawned By culture, I mean the shared values of members of a society that are inculcated at an early age and that pervade all aspects of living Some aspects of a nation's culture end up visibly affecting the GDP Positive attitudes toward business success, for example, a deeply cultural response,... index for 2007 lists the United States as the most "free" of the larger economies; ironically Hong Kong, now a part of undemocratic China, is also at the top of the list It is perhaps not a coincidence that the top seven economies (Hong Kong, Singapore, Australia, the United States, the United Kingdom, New Zealand, and Ireland) all have roots in Britain the home of Adam Smith and the British Enlightenment... (3) vastly improved conditions of work; and (4) the ability to enhance our environment by setting aside natural resources in national parks rather than having to employ them to sustain a minimum level of subsistence.* At a fundamental level, Americans have used the substantial increases in wealth generated by our marketdriven economy to purchase what many would view as greater civility Clearly, not all... of the poor The pursuit of wealth has been deemed unethical, if not immoral, since long before the emergence of the welfare state This antimaterialist ethic has always been a low-intensity suppressant to the acceptance of dynamic competition and the unfettered institutions of capitalism Many of the business titans of nineteenth-century American industry were conflicted about the morality of holding... market participants to act To me, the degree of willingness to take risks is, in the end, the major defining characteristic that separates countries into the various modes of capitalism Whether different degrees of risk aversion stem from an ethical antipathy toward wealth accumulation or the stress of competitive battle does not affect the consequences They are both captured in the choice of legal inhibitions . spreading. Fabians took part in founding Britain's Labour Party. They also had a profound influence on British colonies as the colonies gained independence: in India in 1947, Jawaharlal. ccebook-orginal english ebooks THE AGE OF TURBULENCE talism has achieved one advance after another, as standards and quality of living have risen at an unprecedented rate over large parts of the. unfettered as today's American capitalism may appear, it is a pale image of the capitalism of our earlier years. We probably came as close as we will ever come to pure capitalism in the decades