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J. Bradford DeLong
University of California at Berkeley and NBER
- The Silicon Age
- The Newest Globalization
- What Will Be Cheap, and What Will Be Dear
- Diminishing Returns to Scale in Innovation?
- The Century Past
- Ethnic Cleansing and New Tyrannies?
- Slouching Towards Utopia
The Silicon Age
The Newest Globalization
In the last thirty year of the twentieth century, the demand for lesser-skilled workers fell sharply in advanced industrial countries. In western Europe that decline in demand showed itself as a rise in unemployment. In the United States this fall in demand showed up as falling real wages for lesser-skilled men. Both the left and the right blamed increasing world trade for this fall in demand for the work of the lesser skilled--and especially increasing imports from developing economies. This was a striking turnaround from earlier positions: in the 1960s and 1970s developing countries had feared "unequal exchange" and immiserization from trade.
The argument was that the increase in income inequality had come about at the same time as a sharp rise in world trade. In the United States imports were six percent of GDP in 1970 (and exports six percent as well), but were twelve percent of GDP in 1990 (and exports were ten percent, as Americans borrowed some two percent of GDP from foreigners to finance investment). Imports from low-wage countries were, it was argued, destroying the jobs of Americans.
Never mind that if imports destroy then exports create, and foreign-financed investments create jobs--and the fact that imports must by arithmetic equal exports plus net foreign-financed investment creates a strong presumption that the net employment effect of trade is zero. But the fact on which critics of trade rested their case turned out not to be a fact at all: manufacturing imports were not increasing as a share of the American economy.
In 1975, the average non-oil import came from a country where the manufacturing wage was 60% of the U.S. level. By the early 1990s the average non-oil import came from a country where the manufacturing wage was 75% of the U.S. level.
How could this be? Consider: In 1975 Japan was a low-wage economy: its manufacturing wage was less than half of the U.S. manufacturing wage level. Think of it: Japan and Italy in as economies that had enormous labor cost advantages vis-a-vis the U.S. Today Japan is a high-wage economy: its manufacturing wage is higher than the U.S. In 1975 Taiwan, Singapore, and Korea were very low-wage economies with wage levels one-twentieth that of the United States. Today their manufacturing wage levels are about a third of the American standard. Because our trading partners are growing richer faster than new low-wage trading partners are appearing, the average wage in countries trading with the U.S. is increasing rapidly.
Doesn't this mean that international trade was placing more downward pressure on American wages in 1975 than it is today? Doesn't this mean that the changing international economy has on net exerted upward pressure on American wages over the past two decades? it would seem so.
Nor was there reason to believe that the destruction of America's blue-collar jobs was the result of expanded imports from the developing world. Blue-collar jobs as a share of total non-agricultural jobs had been falling steadily for most of the twentieth century. But the stage was finally reached in the 1980s where this decline in share began to translate into a decline in absolute numbers.
So if "globalization" did not impoverish the workers of major industrial economies, what has "globalization" done? The question is sharpened by thinking back to the pre-WWI Belle Epoque, which was as "globalized" as today. In pre-WWI Britain, in industry by industry British producers decried their losses of export share to German and American producers. My wheat-farming great grandparents in Illinois, whose prices hinged on European demand for grain would have been astonished to have been told that they were not part of an integrated economy.
So what is the difference? Are financial flows stronger and more important today? Probably not. Net capital flows as shares of world product are surely smaller than they used to be before WWI (although gross trading volumes are higher).
Is trade stronger and more important? Maybe: world trade as a share of world product is a bit larger. But the net embodied factor content of trade as a share of world product appears smaller, and the net embodied factor content is presumably what matters most for trade's effect on, say, the unskilled workers' wages.
How about labor? Is international migration more important?Certainly not: between 1850 and 1920 one in every ten people in the world moved continents. Post-WWII, post-1973, or even post-1990 world population flows are a far smaller share of world populations than in the old days.
So what is different? Why has "globalization" become such a powerful banner in the past decade? One possibility: back before the Belle Epoque, what you could transfer across national boundaries was limited--pretty much limited to the commodity, or the security. As long as you could pack it in a crate or an envelope, and send it across the sea (or over the telegraph lines), you could transfer it. If not, not. Call this "low bandwidth" trade. International transactions and linkages that required more in the form of cross-border linkage were very hard to accomplish.
Think of Ford's early post-WWI attempts to transfer its assembly-line productivity to Britain; of British and Japanese attempts to use Lancashire-manufactured textile machinery to achieve high productivity in factories in India or China; or of the frantic attempts of British investors--who had never imagined how easily Jay Gould would be able to buy the courts of New York--to extract bond coupons and dividends from the Erie Railroad that they "owned".
Today we have "high-bandwidth" trade and investment. The breadth of cross-national links has vastly increased. Back then you could not exercise corporate control across national borders. Now you can. Back then you could not transfer forms of organization to achieve home-country productivity in foreign production operations. Now you can. Back then you could not integrate design and specification in one country with production in another. Now you can.
There are counterforces: trans- or multi-national corporations are going to be a good candidate for someone to blame. We are beginning to see denunciations of "rootless cosmopolitans", of "Goldman-Sachsonomics", that somehow seem to me reminiscent of the old-style European contrast between good engineers and bad financiers. Where that will end up I do not know...
And this shift to "higher bandwidth" in international economic links is still hard to see in its impact on the aggregate numbers--yet. The modal service export from the United States in the 1990s was not a computer program written by a symbolic analyst in an office tower to program NC machine tools oiled by someone in Malaysia, but was in travel and tourism--the modal service export was someone making a bed for a Japanese tourist outside of Yellowstone.
But perhaps all that critics of those who trace first-world income distribution to third-world exports are saying was not yet. That the vision found in, say, Robert Reich's Work of Nations--one in which the division of labor becomes global at a very finely-grained level, and God help those citizens of rich countries who find themselves among the unskilled--was not yet a powerful force, at least as far as the U.S. economy was concerned. Think back to 1700, and note that then the "rich" countries had perhaps twice the material standard of living of the "poor", and that this relative gap has been widening since. By 1900 the industrialized "rich" had perhaps six times the material standard of living of the world's "poor" countries. And today? 20 times?
In the long run our descendants will probably not live in a world in which relative international differences in material standards of living are as large as today. And if by 2050 the gap between "rich" and "poor" has shrunk back to a factor of 6, I pray that it will have been by levelling up--by granting software programmers in Bangalore three-bedroom houses like those in Los Gatos, and by giving auto workers in Hermosillos high enough purchasing power to buy the cars that they make.
What Will Be Cheap, and What Will Be Dear
Diminishing Returns to Scale in Innovation?
The Century Past
The twentieth century has seen the pace of accumulation and productivity growth in the industrial core ratchet up by a few notches. The nineteenth century saw material wealth within rich countries more or less double. The twentieth century has seen material wealth multiply more than tenfoldby so much that it is doubtful that the rate of total productivity growth over the century has a meaning. This multiplication of wealth has goven many of the relatively poor in modern industrial economies standards of living comparable to, and in some dimensions far exceeding, those that the rich of a century ago experienced.
The twentieth century has seen the substantial reduction of racism as an official ideology, and has seen an enormous transformation of the gender division of labor, at least within the industrial core of the world economy. The extreme reduction in fertility, the expectation that women will spend considerable portions of their adult life in the paid labor force, and the opening of educational and employment opportunities to women have worked at least half of a profound transformation of the economic roles of the sexes.
The twentieth century has seen the decline of agriculture. Agriculture used to absorb half or more of a nation's household. In advanced industrial economies, agriculture is the activity of only a tiny minority. For most of the twentieth century the decline of agriculture was matched by the rise of industry. Manufacturing became the largest single sector measured either in terms of production or in terms of employment. Now manufacturing employmentespecially assembly-line and craftwork manufacturing employmentis declining, while the various sub-components of the service sector grow larger and larger.
The twentieth century has seen a rising tide lift most boats, at least within the industrial core. There are still homeless, beggars, and hungry. But the widening of the distribution of income and wealth feared by Marx has not taken place within industrial economies. However, the "convergence" of nations toward approximately equal levels of productivity has not yet begun. John Stuart Mill's optimism was as misplaced as Karl Marx's pessimism. While there is substantial reason to believe that all, or almost all, nations will be richer at the end of the twenty-first century than they are now at the end of the twentieth, there is little reason to believe that the distribution of incomes and wealth across nations will be any tighter in relative terms.
The twentieth century has seen governments that rank among the worst in human history. It has seen wars that have killed soldiers and civilians in numbers that previous centuries could not have imagined. Democracy and representative governments did not flourish for most of the twentieth century. The interwar period saw more than twenty nations try and then abandon parliamentary institutions. The post-World War II period has seen many more do the same. Today democracies are at a high point, with the fall of most Latin American dictatorships and juntas in the past half decade. But democracy is not secure.
The most destructive government of the twentieth century was the aggressive, highly nationalistic régime that ruled Germany from 1933-1945. Hitler's National Socialism inflicted extraordinary slaughter on its own and its neighbors' populations. Perhaps fifty million were killed by the Nazis and in the European portion of World War II. Barely behind--within an order of magnitude of the slaughter brought about by Hitler--were the governments of Stalin and Mao. Other Communist governments--from the bureaucratic despotisms of eastern Europe to the famine-inducing régimes of Ethiopia and Cambodia to the unholy cross between Leninism and absolute hereditary monarchy found in North Korea--have been tolerable only by comparison with Stalin and Mao.
Many other governments have, to a lesser degree, consciously or unconsciously sacrificed economic growth to the perceived necessities of state building and to the task of maintaining the current régime. The result has been disappointment in development: in spite of the openness of the storehouse of industrial technology to all and the extraordinary returns to be gained from borrowing from this storehouse, the poor countries of the world show no sign of having begun to catch up to the richer in the twentieth century. This would have come as no surprise to Karl Marx. Social formations in which the dominant powers have a strong interest in rapid growth and development are rare: only the merchant and business-dominated societies of western Europe had such a tendency before the industrial revolution. And so it is not surprising that bureaucracy and army-dominated régimes do not have such a dynamic of rapid growth and development.
The twentieth century has also seen, in some countries, some of the best governments known to world history. The social democratic mixed economies and welfare states of the industrial core have laid the foundations for human happiness to a greater degree than any previous régimes. The mixed economies are far from being utopias. It is sobering and yet gratifying to know that they are as close as any segment of humanity has yet come.
The twentieth century has seen the United States gain and lose its position as the standard-bearer of the new age. For most of this century, Europeans, Asians, South Americans, Africans, and Australians wanting to see what the future is like have travelled to the United States. They will not do so in the future. The features that gave America its industrial predominance relative to other advanced industrial economies--its extraordinary land, its well-educated and skilled labor force, the enormous extent of its market in a world hedged by trade barriers and tariffs, its concentration on the "American system" of mass production through interchangeable parts (which turned out to be the principal locus of technological advance in the twentieth century), and its high quantity of investment in the machines that embody modern industrial technologies--have passed or are passing. Europe today has as large a tariff and trade barrier-free market. Germany has a superior educational system. Japan invests more--invests twice as much per capita--in machinery and equipment. The next century will probably see no country play the role of pathfinder to the future that the U.S. played in the twentieth and that Britain played in the nineteenth century.
Will America fall far behind other countries? It is doubtful: too much of the basic research and development that underlies new technologies is still done in America. It is still too large a market. Its economy is still open to new entrepreneurs and innovations, and this seems unlikely to change.
The distribution of income within America, however, is likely to move in an unfavorable direction. The unskilled have done very well in America in the twentieth century because their labor was essential to the productivity of the land, capital, and skills owned by those at and near the top of the income distribution. As communications improve and the effective size of the world shrinks, the advantage of unskilled workers in New York vis-a-vis unskilled workers in Mexico City or Bombay is likely to decline. Just as firms have learned to weave their webs of production across continents and countries in the twentieth centuryreducing differentials in wealth between regions of the United States and countries of the EEC by an order of magnitude--so firms will learn to weave their webs of production across oceans in the next century.
The regions of the United States are much more equal, although New York City is no more equal, today than it was at the turn of the century. Gaps in wealth between nations are much, much larger than gaps in wealth within nations have ever been. So the increasing span of control exercised by firms over the next century is likely to see a reduction in wealth inequality between nations, and an increase in wealth inequality within industrial nations, in the next century. Either educational systems in the industrial core will become much better and essentially all work in the industrial core will either be skilled work or untraded services, or the relatively unskilled will find themselves under extremely heavy pressure in the labor market and their wages will drop in relative terms.
The only edge that unskilled workers in the United States in the next century will have over unskilled workers elsewhere will be their knowledge of the English language. This will give them a powerful edge, but it may well not be enough. America's image of itself as an egalitarian country, where "making it" is easy for those with industry and enterprise, may not survive long into the twenty-first century. The economic prospects of our grandchildren who will be in America are bright, but their prospects are much much brighter if they make sure to be counted among the educated and the skilled.
New Tyrannies and Other Dangers
Does the twenty-first century inevitably hold a continuation of the trends of the twentieth? No. At least three things could stop the wave of increasing wealth: wars, governments, and environmental catastrophes. War today could annihilate human civilizations and severely reduce human populations in a week or less. It is unlikely that anyone will start a war certain to end in the mutual destruction of the contending parties. It is much more likely that someone who believes they have a sound grasp of situations and psychologies will find out, too late, that it is not so. A large war is not likely in the next century, but there seems to be no reason to run the risk. A far-sighted political strategy in the post-World War II period would have long since taken many more steps to reduce the possibility of even limited nuclear war than have been taken to date.
More likely than a single, civilization-destroying, worldwide nuclear war are a series of small wars, each affecting a relatively small part of the world. The destructiveness even of modern conventional weapons is such that little industrial infrastructure will survive. Civilian populations may well not survive as other than refugees either. Such wars may well impoverish those who survive them for a generation. But they are unlikely to reach into the industrial heart of the world economy. The rich nations are too well defended, and know that they have too much to lose.
There is one major caveat: writing a century ago, in the late nineteenth century, I would have said the same thing. I would have said that the industrial world had outgrown war, that wars had been fought for dynastic monarchs and conquerers but now representative governments were in the saddle and would fight defensive but not offensive wars, and that modern wars were too expensive and destructive to be contemplated. They were too expensive: civilization in Europe was nearly destroyed by World Wars I and II. But the rise of militant nationalism meant that offensive wars to avenge imagined insults against the nation were conceivable, and were in fact fought with deadly skill and extraordinary enthusiasm. Just as the cautious, limited war politics of Bismarck was followed by the rash, total war politics of Hitler, so the cautious politics of Clinton and Jiang may be followed by something else, that fights destructive wars for causes we can barely imagine, in the next century.
Governments will, in many corners of the world, continue to impoverish their peoples in the interest of securing the short-run power of the current régime. The number of such governments will with luck diminish. But they will not disappear. The anomaly in historical perspective is not rule by bureaucrats and soldiers interested in power and luxury, and not in economic growth. The anomaly in historical perspective is rule by merchants, industrialists, and workers who do have a primary interest in rapid economic growth. But governments will not stop economic growth altogether. There are too many countries with too many governments. Some of them will play the role of Britain in the nineteenth century or Holland in the 17 th , and become first homes for entrepreneurship and innovation and second objects of emulation by other nations.
Environmental degradation is the most likely problem to halt, or severely retard, economic growth in the twenty-first century. Market economies are excellent tools for finding resources, superb incentive mechanisms for organizing production, but they are unlikely to be successful at preserving environmental quality. Industrial civilization now has reached the stage where its activities may well significantly alter the world's climate in poorly understood ways. The market will be excellent at finding scarce resources and at responding to demands generated by environmental change. But it will have no mechanism to balance off prosperity and sustainability.
Governments are unlikely to do much better. There are too many governments divided into too many factions with too many grievances against one another. Each government will benefit only marginally from its own restraints on its people's pollution. Yet few governments will yield up enough of their sovereignty to allow for significant sanctions to be applied to reduce pollution. The poor periphery will demand the right to use the dirty technologies the rich core used when it industrialized. The rich core will plead for cooperation on the grounds that sustaining the environment is a precondition for anyone's success. Mutually agreeable bargains are far from assured.
The twentieth century saw market economies generate immense wealth. The twenty-first century will see whether governments can agree on enough to sustain environmental quality. The odds do not appear to be as good as one would wish. Pre-industrial civilizations were for the most part unable to avoid running up against the limits of their available resources, no matter whether the most binding constraint was wood, land, or water supplies. It would be surprising if a group of governments, some governing very rich nations and others governing very poor nations, could do better and avoid running up to or over the edge of environmental catastrophe.
Slouching Towards Utopia
What else does the twenty-first century hold? Will the pace of economic growth continue? In all likelihood yes. The underlying engines of development that have forced the pace of twentieth century economic growth in the industrial west are still there. Innovation is still a key road to market dominance and profits. Research and development are still being carried out. Governments are still willing to provide the public goods of infrastructure and organization without which market economies cannot function. The most likely future sees a turn of the 22 nd century in which life in the industrial west--which will then have changed its name because it will encompass the Pacific rim as wel--lis as different from today as life today is from life a century ago at the turn of the twentieth century. Could we see it, we would be in the position of Edward Bellamy: having our technological imaginings in all likelihood outstripped by reality. Every reason that John Maynard Keynes gave, 60 years ago, for expecting economic growth to continue and compound at an exponential pace is still valid.
The twenty-first century will, if disaster is avoided, see material wealth defined as power over nature continue to increase rapidly, at least in the industrial core. Its end will be as much ahead of us in technological power as we are ahead of the end of the nineteenth century. And to the extent that this material wealththis power over natureis used to worthwhile ends, it will greatly enlarge the possibilities for human happiness just as the possibilities for human happiness today are much advanced over the late nineteenth century.
But the history of the twentieth century teaches us that material wealth, wealth understood as command over nature, is of limited use in building utopia. It is an essential prerequisite. But it is far from sufficient. Of the four freedoms that Franklin Roosevelt thought ought to be every human's birthright--freedom of speech, freedom of worship, freedom from want, and freedom from fear--only freedom from want is secured by material wealth. The others remain to be secured by other means.
John Maynard Keynes believed that increasing wealth would trigger a moral and psychological transformation: people would begin to concentrate not on producing more material wealth but on using their material wealth to attain psychological and social ends. After all: "the economic problemis not the permanent problem of the human race." Keynes thought that this would be obvious by the time society attained the levels of wealth that we have attained.
John Maynard Keynes was naive
Today, it is not obvious to us that the economic problem has been solved. The moral and psychological transformation that Keynes expected to see is not here, and there is no reason to believe that it will come.
The past century has seen the industrial core of the world economy move closer to utopia. Most people in industrial nations are richer, freer, better educated, and better able to plan their lives and accomplish their purposes than in any previous time or other place. Whether the next century will see still more progress is in our hands. Many things could stop it: war, environmental catastrophe, or the collapse of representative governments are clear possibilities. But another thing that could stop it would be if we do not use our wealth thoughtfully. Wealth, after all, is power to accomplish our goals. And goals are not always chosen wisely.
If John Maynard Keynes or Edward Bellamy could see us, they would see us as a mixture of extraordinary wealth and refinement with brutal barbarity. Although we have far outstripped the imaginings of previous utopians in technology, we have not reached the level they expected in psychology or sociology. It has turned out to be much easier than expected to make humans rich, and harder than expected to make them wise. Multiplying wealth has been straightforward. Making people happy, or ending poverty has not.
Expect the same thing to hold at the end of the twenty-first century. The wealth required to feed, clothe, and educate everyone to the standards of the relatively rich in the twentieth century would consume only a small part of the resources available to the end of the twenty-first. But of our grandchildren, some will be homeless, and those who are bankers will still step over the sleeping bodies of those who are the homeless on their way to work. Those of our grandchildren who are rulers will still find building flood shelters and levees a lower priority than subsidizing the army or accumulating foreign bank accounts against the day of their overthrow.
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