Can our Economy Survive Globalization’s Complexity

Can Our Economy Survive Globalization’s Complexity?

Globalization lifts four people in China and India out of poverty into the middle class, while one American drops out. This might be a good tradeoff except that the rich are getting richer. Only 2 percent of American earn over $250,000 per year. The article The Rise of the New Global Elite (Atlantic Monthly 2011) reports, “The super-rich are less connected to the nations that granted them the opportunity - and the countrymen they are leaving behind”.

In the past 30 years, the increase in income inequality has been accompanied by increased political polarization (McCarty 2006). The number of moderate Republican and Democratic senators has decreased significantly. Historically, income inequality contributed to the French Revolution and the 1917 Communist Revolution in Russia. Could the economic imbalance between the rich and the dwindling American middle class result in the unrest and even civil war that has been sweeping Moslem countries?

Billionaires Bill Gates of Microsoft and Mark Zuckerberg of Facebook exemplify the new elite. Both derived their wealth from new global information technologies: Gates from his Windows software which runs personal computers, Zuckermann from his social networking software which connects over 500 million people via the internet. Their wealth was based on the silicon integrated circuit technology which powered the second information-distribution (ID) revolution.

The first ID revolution was the invention of the printing press which enabled Martin Luther’s Protestant Reformation in Germany. Before 1440, information had to be written by hand, an expensive process which gave secular and church leaders a monopoly. Without the printing press, Luther’s 95 theses protesting the Roman Catholic Church’s sale of Indulgences in 1517 could have been squelched by local authorities. The printing press made it a national issue. The German Princes supported Luther because they objected to the loss of German funds for the construction of St. Peter’s Cathedral in Rome, Italy.

In 1789, the unconcern of France’s rich nobility for the poor, attributed to Queen Marie Antoinette’s “let them eat cake,” helped spark the French Revolution. In the ensuing chaos, emperor Napoleon emerged, who invaded continental Europe, but was finally defeated at Waterloo. Will our present economic recession lead to a similar outcome (and the one below) in our complex global economy?

In the 19^th century, the industrial revolution, powered by labor-saving machines, created wealthy capitalists, whose exploitation of the poor prompted Carl Marx to write “Das Kapital.” It concluded with the following call to action, “Workers of the world arise; you have nothing to lose but your chains.” The poor peasants in repressive Czarist Russia responded by joining in the communist revolution of 1917. The goal was “from each according to his abilities, to each according to his needs.” Ironically, implementation led to the repressive regimes of Lenin, Stalin and those of the Cold War.

How did the free Western economies win? It was ultimately because they avoided the above extremes by balancing liberty with laws. These included anti-trust and child labor laws, which together with the labor unions, constrained the power of the rich capitalists. Industrialists like John D. Rockefeller, Andrew Carnegie, and Henry Ford also helped by creating charitable foundations.

Another dynamic contributing to the Soviet Union's collapse was the arms race in which the United States embarked on a massive expansion of its military and technological power. The Soviet Union exhausted its much smaller resources attempting to keep up. Though statistics from the Soviet era are not entirely reliable, various scholars have estimated that fully 40% of the Soviet Gross Domestic Product (GDP) was being expended on its military and military-industrial complex.

The U.S. was spending between 4% and 6% of its GDP on direct military expenditures, even during the height of the Reagan buildup. If you include the CIA, NSA, the Veterans Administration, and other military-related programs (DARPA, etc.) then the cost was still far less than 10% of GDP.

The greater freedom to exchange information between government-funded research labs, private firms and government-funded universities enabled the U.S. to outdistance the Soviets technologically. Once again a positive feedback loop can be discerned in the way that increased spending on military-related R&D in the U.S. led to increasingly networked nodes of technological advancement. This resulted in greater advances and more spending to develop those technologies.

What is the optimum survival strategy for dealing with complex global economy in which we are embedded? Long term predictions are not accurate even though we know the mechanisms and equations. MIT Prof. Edward Lorenz, founder of chaos theory, learned with his super computer that the accuracy of his weather predictions decreased with time because he did not know the initial conditions accurately enough. MIT Prof. Jay Forrester, founder of system dynamics, observed that good intentions can result in the opposite effect. For example, liberals pass rent control laws to get better housing for the poor. If landlords can’t afford to repair their property, rent controls can result in slums. We can learn from nature. Diversity offers the best chances for survival. Free economies offer more diversity than ones that are controlled.

LIBERTY VS LAW.

Free economies need some regulation, however. Thaler & Sunstein (2008) argue that totally free markets can lead to disasters precisely because autonomous individuals are not good decision-makers. Too much liberty can degenerate into unaccountable chaos that followed the French Revolution. Too little liberty contributed to USSR’s economic stagnation. What is an optimum balance between autonomy and heteronomy (law)?

Peters (2001) and Shermer (2009) built on Adam Smith's invisible hand and chaos/complexity theory to show how free markets and banking systems are by their nature continually evolving, emerging systems that require uncertainty to operate successfully. Let us apply this to the GDP. Counties with too much regulation, control, and law (such as the USSR and China before 1989) had a low GDP. At this time, Europe and the US had a high GDP, indicating an optimum mix of law and liberty to innovate. In countries without enough law, i.e. anarchy, like Zimbabawe, the GDP was again low. Trust and the Matthew Effect (Shermer) contribute to maximizing the GDP. (See my PowerPoint Presentation “Liberty without Law: Financial Chaos,” March 2009, download in 15 seconds from http://mirrorofnature.org/LibertyLaw.pdf )

Alan Greenspan, when asked about the financial crisis of 2008, said he had “overestimated the correcting power of free markets.” The delicate balance between law and liberty had been tilted too much toward the latter. The financial collapse of 2008 contributed to the election of Brack Obama and his Democratic Congress, which have passed legislation regulating financial institutions. Has the economic balance shifted towards too much regulation, as claimed by the Republican and the Tea Party

Only one percent of Americans own more than the combined wealth of the bottom 90 percent of American families (Sandel 2009). Paradoxically, 98 percent of Americans, who would have benefited economically, did not support proportionally President Obama’s proposal to repeal the tax cuts for the rich two percent, who earn more than $250,000. Instead of responding to Karl Marx’s appeal, “workers of all lands arise, you have nothing to lose but your chains,” they voted for the libertarian policies of the Republican Tea Party in the November 2010 elections. The Tea Party wants to cut government regulation spending. If too severe, this could lead to a second recessionary dip. On the other hand, unless government spending is reduced, our increasing national debt could become unmanageable. Recently, however, in Wisconsin, Ohio, and Indiana the Tea Party’s attempt to limit the union’s legal right to collective bargaining is being challenged.

“The lesson of history is that, in the long run, rich super-elites have two ways to survive: by suppressing dissent or by sharing their wealth. It is obvious which of these would be the better outcome for America, and the world. Let us hope the plutocrats aren’t already too isolated to recognize this.” (Atlantic Monthly, 2011).

We urgently need to make compassion a clear, luminous and dynamic force in our polarized world. Rooted in a principled determination to transcend selfishness, compassion can break down political, dogmatic, ideological and religious boundaries. Born of our deep interdependence, compassion is essential to human relationships and to a fulfilled humanity. It is the path to enlightenment, and indispensable to the creation of a just economy and a peaceful global community. www.CharterForCompassion.org

REFERENCES

Freeland, Chrystinia, Jan/Feb 2011 The Rise of the New Global Elite http://www.theatlantic.com/magazine/archive/2011/01/the-rise-of-the-new-global-elite/8343/

Economist. January 20, 2011. The Rise and Rise of the Cognitive Elite http://www.economist.com/node/17929013?story_id=17929013

Lieberman, Robert C. 2011 Why the Rich are Getting Richer. http://www.foreignaffairs.com/articles/67046/robert-c-lieberman/why-the-rich-are-getting-richer?page=show

McCarty, Nolan et al. 2006 Polarized America: The Dance of Ideology & Unequal Riches. MIT Press. http://polarizedamerica.com/

Peters, Edgar, E. 2001, Complexity, Risk, and Financial Markets, Wiley

Sandel, Michel L. 2009 Justice: What’s the Right Thing to Do? Farrar, Straus and Giroux, New York, NY. Pg 58.

Shermer, Michael, 2009. The Mind of the Market: How Biology and Psychology Shape Our Economic Lives, Holt Paperbacks.

Thaler, Richard, Sunstein, Cass. 2008. Nudge:Improving Decisions about Health, Wealth, Happiness.

APPENDIX

Presently, the value of many Florida homes purchased before a decade before 2008 is only 30% of the value of the mortgage. Many owners were not required to make a down payment and therefore have virtually no equity in their homes. This gives them two reasonable options.

(1) They stop repaying their loan. It takes years for the banks to foreclose and write off the loss. During this time, the residents save money for their next rental residence. It may take 8 to 10 years for the residents to regain enough credit to purchase their own home.

(2) “Short Sale” The residents sell their homes at the market value and the bank or mortgage company writes off the loss, typically $100,000. The residents rent until their credit is restored, typically, one to two years.

When will this cycle end?