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The Future of Capitalism

This book report reflects upon the writings of Lester C. Thurow in his 1996 book – “The Future of Capitalism”. Thurow is a professor of economics at M. I. T. School of Management and has been a contributing editor to the Newsweek journal. “The Future of Capitalism” is an analytical look at the state of world economics in the late Twentieth Century. Thurow predicts the future of capitalism based upon recent trends in empirical data combined with his own political/economic analysis. Central to this book is a powerful analogy that Thurow uses to communicate his ideas and thoughts to the reader.

The distribution of wealth in the world is likened to the surface of the earth – parts of the earth are characterized by high mountainous regions (areas of wealth) while others are of lesser altitude (areas of poverty). In Geology, it is understood that the earth’s surface is constantly in a state of flux, impacted by gradual movements in the tectonic plates that float upon the earth’s molten inner core. The five tectonic plates affecting the earth’s surface (distribution of wealth) are analogous to the driving forces behind changes in world economics; the molten inner core represents the flowing currents of technology and ideology.

Thurow contends that movements in the “plates” caused by ideological and/or technological changes can be gradual, having an imperceptible impact on the world’s population or they can be sudden with far greater social consequences. When tectonic plates move suddenly, they cause earthquakes on the earth’s surface; the distribution of wealth is changed over a very short period of time. In this analogy, periods of rapid change caused by sudden movements in the plates are equated to times of “punctuated equilibrium”.

Thurow describes “punctuated equilibrium” as fundamental changes in the state of world economics that redefine what it takes to be successful and thus increase one’s wealth. By their very nature, periods of “punctuated equilibrium” threaten the status quo, the Midas touch is weakened, what was successful in the past might not be so in the future. “The Future of Capitalism” asserts that we are living in a time of “punctuated equilibrium” and that successful nations will be those economies that change with the times.

The first plate in Thurow’s analysis is the end of communism. As old communist economies make the transition from planned to free economies their portion of world wealth will increase or decrease in the short term (depending on the level of communist entrenchment) but will surely increase in the long run as inefficiencies are eliminated. Thurow considers the cases of both China and the U. S. S. R. ; China will have a smoother transition because its economy had fewer large communist production units than its northern neighbor.

With fewer large communist institutions, there will be considerably less social upheaval in China than in the U. S. S. R. where many people rely on individual plants/factories for their livelihood; because of the inherent misallocation of resources prevalent in planned economies, many of these plants will cease to operate under a capitalist ideology. This, the first of Thurow’s five plates (driving forces of change) is undeniable. China’s share of world wealth has increased dramatically in recent years with annual increases averaging 10% of Gross Domestic Product; conversely, the U.

S. S. R. has been far less successful. Thurow’s logic here is undeniable. Secondly, we have the plate that represents the technological shift to brainpower industries. Thurow argues that the factors of comparative advantage in world trade are no longer determined by a country’s climate or natural resources. The only sustainable source of comparative advantage in the new world economy is (and will be) a country’s intellectual capital. In other words, successful countries will be those countries with highly skilled and knowledgeable workforces.

This conclusion is obvious; a country cannot have a great biotechnology industry without the necessary supply of biologists. While the factors of comparative advantage are undoubtedly moving from the tangible to the intangible, Thurow’s position is exaggerated. Natural resources will continue to provide a comparative advantage for the countries that have them; however, Thurow is correct to say that those comparative advantages are not sustainable – natural resources are finite.

For this reason, it is especially important for developing countries to use the wealth generated by the export of raw materials (in which they have a comparative advantage) to invest in infrastructure and education. Only these assets yield a sustainable comparative advantage. Thurow fails to make the link between old comparative advantages (natural resources/climate) and the development of new, sustainable comparative advantages. Developing human capital requires vast investments, far greater than developing countries without old comparative advantages can afford.

The third of Thurow’s plates is the ageing, moving and growing of world demographics. Thurow contends that unless the developing world is able to control their explosive population growth (in excess of 3% growth per year in the Middle East), they will never be able to escape poverty. So long as a country’s population growth is greater than its G. D. P. growth then its standard of living (G. D. P. per capita) will be decreasing. In the Middle East, the standard of living is declining even though countries are displaying significant economic growth.

These countries simply cannot afford to invest capital into their workforces at a rate that will result in economic growth superceding population growth; each newborn becomes a shackle on the feet of their country. This Malthusian concept has been acknowledged among Chinese policy makers – China has attempted to control its burgeoning population by imposing strict family planning controls on its citizens; the result has been the highest standard of living increases in the developing world. Moving demographics are said to have negative consequences for American workers.

As the cost of travel becomes affordable for third world citizens, Thurow predicts an influx of legal and illegal immigrants in to the United States. Such a large supply of immigrant labor will result in lower wages for unskilled jobs. First world workers will no longer be able to command first world wages. American workers must increase their skill levels just to maintain their current earning power. Thurow does not say what effect this will have on the wealth of the nation as a whole, only that low-skilled American workers will suffer the most.

Recent studies have shown that immigrant workers (illegal and legal) are of great benefit to the American economy that depends upon them as a supply of cheap labor. If this were not the case, hundreds of thousands of known illegal immigrants (Mexicans) living in California would have been deported a long time ago. With respect to ageing demographics, Thurow focuses in on America where this phenomenon is most prevalent. He states that the ageing population and its dependence on the welfare state is draining America’s potential for future economic development.

One can be sure that Thurow is not an advocate of the American welfare system. The aged extract six times more funds from social security during their retirement than they contributed during their working lives. This places an unfair burden on the young who must contribute more to make-up the deficiency. Since the young are the poorest in society and the old are the wealthiest, social security amounts to a tax on the poor. An aging population also has the effect of lowering an already low savings rate. Naturally, the aged are disinclined to save for the future and so actually dis-save the older they get.

This increased propensity to consume leads to a lack of investment in future generations who will be needed to maintain the system of cross-generational transfers envisaged in social security. Thurow asserts that the lack of investment caused by an ageing population will have adverse effects on the standard of living and productivity of future generations. This problem will only get worse as the baby boomer generation reaches retirement and medical costs continue to spiral upwards out of control. The penultimate analogous plate is that of the global economy.

With the advent of truly global corporations, a disconnect has occurred between industry (with global interests) and national governments (that focus on their home voters). Thurow declares that this difference in interests will be a catalyst for change in world economics; he cites the European Union and N. A. F. T. A. as examples of nations catering to the interests of the multinational corporations. Such unions/agreements will increase the wealth of those in the club but be extremely detrimental to those countries left out in the cold. With regard to the E. U.

Thurow takes the case of Britain (presently on the periphery of E. U. integration) and says that Britain has no economic future outside the E. U. If Britain were to adopt the Euro and forfeit monetary controls to Brussels, it would be at the mercy of a European central bank that has its own agenda. The fact is, Europe will never work like the United States because it does not share the same cultural homogeneity. Europe’s cultural diversity will prevent it from acting as a cohesive economic block for many years to come; there is insufficient labor mobility to justify a central bank for the whole of Europe.

Labor will not move from depressed regions to booming regions because cultural differences (e. g. language) prohibit it. The result will be fiscal policies that are good for some member states but disastrous for others. Thurow takes a simplistic view of Britain’s E. U. policy. He fails to note that the majority of British exports (capital and trade) are to American markets and not European; Europe needs Britain (currently the world’s 4th largest economy) a lot more than Britain needs Europe. For this reason, Britain has an economic future with or without E. U. currency convergence.

The final plate represents the increasing world multipolarity and subsequent lack of a dominant global force. Here Thurow argues the world needs a dominant ideology or nation to maintain the current geopolitical system. It is said that without a common bonding force such as anticommunism in the 1980’s there is no motivation for a nation to develop a leadership role. In the late 1990’s America was the only nation with the military, economic and political strength to assume such a role; but with the end of communism and no new (perceivable) outside threat, it was not willing to do so.

America’s foreign policy was becoming increasingly isolationist; George W. Bush received almost 50% of the electoral vote while touting such a policy. Thurow compares the situation in the late 1990’s to that between World War I and World War II: the British Empire had come to an end and there was no one to fill its shoes as “world policeman” – chaos pursued. With the benefit of hindsight, one can see that Thurow was correct to surmise that a missing dominant force leads to chaos but false to say that America is not willing to fulfill this role.

Recent history tells us quite the contrary – America is very willing to police the world, for her own security if nothing else; George W. Bush’s foreign policy took a 180o about turn. By this logic, America’s search for world stability (resulting in increased security) will lead to stronger nationalism and less division along ethnic lines only time will tell. “The Future of Capitalism” concludes with chapters discussing the outcomes of plate interactions. In general, Thurow identifies two main results: the spreading out of wages and a rise in religious fundamentalism.

The spreading out of wages are caused by plates one, three, and four. The rich get richer because they are able to make the poor poorer. Increasing wage inequality is facilitated by the globalization of business where companies can relocate production to regions with low labor costs. Unskilled American workers cannot command the old wages because there are millions of others who will do the work just as well and for a lot less. Capitalism has no nationalism; it chases the greatest profits wherever they may be.

One cannot disagree with Thurow’s analysis; his arguments are supported with empirical data that match his strong intuitive reasoning. Thurow says that religious fundamentalism is predominantly a result of plates three and four. A proponent of Huntingdon, Thurow makes the connection between cultural identity crises and globalization. Through the proliferation of technology and the globalization of business western culture is permeating the world, changing cultures that have remained unchanged for millennia.

For these countries, the “western way” is a formidable threat that must be thwarted at all costs. When a country’s culture is synonymous with its religion, a threat to that culture leads to a rise in religious fundamentalism with often-violent consequences. Sadly, Thurow’s prediction of rising religious fundamentalism rings true today. Thurow’s book is a rational, well-communicated analysis of world economics. His arguments are based upon sound intuitive reasoning supported with the appropriate empirical analysis.

Thurow’s use of analogy to communicate his subject is the most impressive aspect of his book. The use of “plate tectonics” accurately reflects the inner workings of world economics; the drivers of change are not obvious to the average bystander. Thurow’s book should be mandatory reading for those politicians with an adversity to looking beneath the surface; too many policies target the effect and not the cause. “The Future of Capitalism” stands out because it motivates the reader to look beneath the surface; it provokes a new way of thinking about the world in which we live.

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