New Face of American Capitalism and its Impact on the World
Robert Skidelsky
Oxford Symposium | Saturday, May 05, 2007

All contributors to the NYRB have their Bob Silvers anecdote. For me Bob is indirectly responsible for a great piece of good fortune. Om 2000 I wrote a long review of a book on Karl Marx –all reviews in the NYRB are long. Much to my surprise I received a letter from an Americfriend telling me that a chief executive officer of a leading US financial company had seen my article, liked it, and would I be willing to meet him. Soon after this I had breakfast with the said financial tycoon in London, as a result of which he asked me to join the Board of his company. They are both here in Oxford today.
I couldn’t help thinking how ironic it was for me to be clambering into the citadel of American finance on Karl Marx’s shoulders. Marx himself would have enjoyed the joke. At any rate, Bob Silvers was the midwife of this strange birth and I owe him a great debt of gratitude.
Such strange things can happen in America. Not least of the many virtues of American life is the existence of a class of intellectual businessmen. In my experience it is almost completely lacking in Britain, where thinking and money making are kept in separate compartments. Indeed any capacity for thought is considered to be highly detrimental to business success. In short, there is very little encouragement to that migration of interests of which Simon Head talked on Friday night, and of which the NYRB of books is such a splendid catalyst.
Let me now try to give my own answer to the question we have been discussing –namely, the impact on the world of the new face of American capitalism. I will weave into it the main contributions from our exceptionally rich weekend symposium. What I say will draw heavily on discussions I have been having with Vijay Joshi of Meton College, with whom I’m writing a book on how to govern the world in the age of globalization.
It is globalization, rather than IT, which most distinctively displays the new face of American capitalism. Globalization is an American driven process-driven by distinctively American ideas, pressures, and policies. It is routinely and pallidly defined as ‘economic integration across frontiers’.But its central concrete feature has been the massive transfer of manufacturing capacity from high wage to low wage countries. A new global division of labour is emerging in which developed countries concentrate on increasingly on services, and developing countries like China act as manufacturing assembly plants at fraction of western wages.
But there has also been an upsurge of off-shoring services, especially to India-: call centres, medical tourism.
The trend is clear. In the last 7 years the US has lost 3 million manufacturing jobs. The economist Alan Blinder has estimated that 14 million current American jobs in manufacturing and between 38 and 42 m in the service sector could be moved abroad in the next decade or two, that is up to 50m jobs from a working population of 150 million.
This scale of job transfer is a genuinely new phenomenon. In the past TNCs located production abroad to gain entry into protected foreign markets by jumping over tariff barriers. Today allocation of production is driven by competitive cost pressures in an environment of free trade and free capital mobility –one brought about by the market fundamentalism in 1980s. TNCs locate production abroad in order to flood the world (including their own countries) with cheap imports. Developing countries like China accept the role of assembly plant as part of their strategy of export-led growth. This is what we mean by the global market.
The rich countries can’t hope to retain direction of this development: since and technology won’t stay at home while production goes abroad. Brains will follow brawn. The migration has already started. China graduates four times as many engineers as the US; it has established its first semi conductor foundry; it has started to manufacture motor cars and commercial aeroplanes; it has a presence in space. The Chinese now write technology transfers into their joint venture contracts.
To what economic problems does this ‘new face’ give rise?
The clearest short term consequence is the ballooning balance of payments deficit of USA. The USA exports only just over half of what it imports. Its current account defict at almost $1 trillion is about 5% of GDP. With East Asian and Arab countries financing most of this there is no apparent limit to US consumption. Would this problem be cured by floating exchange rates? Yes, US consumption would have to go down because real wages would fall. Chinese real wages would rise. But this would destroy the financing of heavily leveraged American households (think of housing market), and is contrary to export-led growth strategy of China, India, etc..The question is can imbalances of this size be adjusted without plunging America –and therefore the rest of the world –into a severe economic depression? If we live,as I think we do, in George Soros’s world of ‘reflexivity’, boom and slump is an ever-present possibility, made more probable by the buld-up of giant global imbalances.
The medium-term problem is that of ‘super-competitivity’. There are two issues here. The entry of an extra billion or so workers into world market is bound to depress unskilled wages in rich countries. But the problem is made far worse by the transfer of western technology. Paul Samuelson has recently argued that if technology is cheaply transferable, free trade can inflict overall loss on rich countries, and not just losses to unskilled workers.
Let me draw your attention to the unrealistic assumptions of free trade theory. Theory of comparative advantage states that country specialization benefits every participant But this assumes full employment. All the retraining and unemployment costs associated with transition to free trade have already been absorbed. Of course, a cost-benefit analysis with no costs is wonderfully attractive. On this let me Keynes at his most mordant: ‘Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the sorn is long past the ocean is flat again’.
So globalization is bound to produce : winners and losers, across nations, and within nations. Real wage stagnation is already apparent in the west, and notably in the USA, as both Paul Krugman and Robin Wells and Bill Bradely have pointed out. This pinpoints an important point: globalization offers more to (some) poor than to rich countries, and more to capital than labour.
Yesterday a very interesting discussion took place about the causes of the growth of inequality in the United States. Krugman and Bradley both argued that it had more to do with ideological shifts within the USA than with globalization. Amartya Sen, in his discussion of the effects of American capitalism on China and India, pointed to the distinctive features of American capitalist philosophy which led them to disregard to the problem of inequality. .Krugman pointed out that as far as growth in inequality went the United States was in a league of its own. But the USA is also in a league of its own in the relative size of its current account deficit –which is a product of globalization.
This led to Peter Jay’s question: if the relative position of middle and lower income groups in the US has declined as drastically as Krugman and Bradley argued, why the Republican dominance –why not an upsurge of support for a radicalised Democratic Party programme?
Let me try to give my own answer by way of a remark I remember from an Italian film of the 1970s, made at the time of the Red Brigades. The wise old Communist Party leaders says to the young hothead: ‘Remember, history is not necessarily left-wing’. Ever since the French Revolution, Right and Left have been identified with Reaction and Progress. The first looked backwards, the second forwards. From this perspective it has always been obvious to the modernising intelligentsia that history’s momentum was leftwatds: the right could hold up progress for a time, but not for long. This was the master-narrative of Western civilization.
The Right first emerged as a source of radicalism in the late 19th c. era of imperialism, by playing the racial card, and this reached its destructive apogee in Fascism. These developments mark the entry of the politics of racial and religious identity as a rival to the class politics of the left, and they have been a feature of our politics ever since, despite the destruction of fascism as a world force. One consequence of globalization, mass immigration into the west, has only reinforced it.
The role of capitalism in this Right-Left division has always been ambiguous. On the one hand capitalism was undoubtedly progressive in terms of wealth creation and liberation from traditional restraints –no one was more eloquent on the subject that Karl Marx. On the other hand it was reactionary in the sense that it was an engine of class oppression.
After the war you had the great compromise which underlies the various models of capitalism we have been discussing: ‘welfare state capitalism’ or in David Marquand’s words ‘Keynesian social democracy’.In order to understand why there has not been a stronger political response to the current growth in inequality one needs to explain why this compromise broke down, why the master narrative of modernity was ruptured and why it was ruptured, moreover, at exactly the same time as the Communist system imploded.
Now we all have our own parochial national explanations: Alan Ryan took us through the British history of the 1970s –the stagflation, industrial ungovernability, decline in public services, etrc –which which led to the rise of Thatcher. Long ago Seymour Lipset explained how the USA has always been an outlier among developed democracies, with respect to its policies and institutions, whether in regard to welfare, crime regulation, education, or foreign policy.
But the trend to the Right was world wide, and was reinforced by globalization. You can’t separate it from the intellectual power of the right-wing disgnosis of the malaise of mixed economies; from the changing patterns of work discussed by Richard Sennett, leading to the decline of organized labour; from the diffusion of mass affluence, and so on. I think the Marxists had an important part of the explanation when they argued that the shift to globalization internationally and the Right domestically in the 1980s was capitalism’s response to the collapse of profitability. Since then the revolt of Islam against the west has seemed to vindicate Samuel Huntington’s prognosis of a ‘clash of civilisations’ and this has fed the combination of evangelical religion, free market ideology, and aggressive nationalism of contemporary US neo-conservatism.
Vijay Joshi asked Ronald Dworkin what duty of equalisation we owe to other countries. He raises an important question for the establishment of e global norms.
Contemporary Western political philosophy starts from the assumption that equality is desirable, that it is inequality which requires to be justified. This approach is familiar from Rawls, and is rooted in Christianity. But for much of history and in other civilizations this was not true: inequality was natural and legitimate, it was equality which needed to be justified. This is true of Aristotle, and also underlies Chinese and Indian thinking. So it’s not just a question of how far we have a duty to pursue equality beyond the boundaries of our own states, but whether there is any close connection between egalitarianism and legitimacy outside western civilization. If we are looking to a world bound together by universal norms, this is a huge problem.
None of this means that the victory of the Right is permanent: there is a limit to the legitimacy of inequality as Richard Dworkin has said, perhaps as Garton Ash said there is an infant Karl Marx waiting in the wings. But both in the west, and in East Europe and Russia the substantial revival of the Left will have to wait for the arrival of a new generation. I tend to agree with George Soros that history is cyclical, but would only emphasise that the cycles are generational.
Let me now turn to a subject which has not been discussed, but which I believe is highly relevant to out theme: the geopolitical consequences of the new capitalism. Again I will divide this into short-run and medium-long run.
First, short-run effects on the world role of the United States. In the past, hegemony rested on trade surpluses or ability to extract tribute by force. Today US hegemony increasingly rests on China’s and Arab willingness to accumulate dollars. In Niall Ferguson:’s graphic phrase: the American carries the white man’s burden round his waist. US has an acute guns and butter problem. Got allies to finance first Gulf War. They refused to do this second time round.
Now the middle-run:: Loss of manufacturing capacity transfers military potency to new centres of technology and manufacturing. How can Bush’s ‘new strategic doctrine’ which calls for absolute US military superiority be made consistent with US de-industrialisation? No example in history of a de-industrialised hegemon. In 19th c. export of British capital raised up industrial challengers who became geopolitical challengers. Same process under way today with the USA and China.
So the new global division of labour disturbs existing balance of power. It enhances Chinese and Indian power at expense of American-European power. This ‘adjustment cost’ is never taken into account.
The contributions of Timothy Garton Ash and Tony Judt raised the issue of how Europe, and its different parts, fit into the economic and geopolitical framework of the new capitalism, the same question Amartya Sen asked about India and China. Is Europe’s relative economic stagnation a mark of its superior civilization? The point was made that ‘old’ Europe scores higher on most neasures of well being than the USA. Is old Europe Switzerland writ large? Is post-communist Europe developing its own model of capitalism more like Chicago than Brussels? Until John Gray remedied it in the last session, there was no discussion of Russia.
A key difference between Europe and America is their attitude to power, its nature, legitimacy, and exercise. Europeans are much more prone to view international organisations and legal rules and norms as custodians of the global good, the USA is much more inclined to argue the case of national sovereignty. The Europeans concluded that it was the unbridled exercise of national sovereignty that got them into trouble, and the EU was deliberately intended to prevent these sovereignties from ever spinning out of control again. Germany has constructed its postwar identity out of an anti-sovereignty project.
Robert Kagan makes the distinction this way: the Americans inhabit Venus while the Americans are from Mars. The Europeans may have constructed a higher civilisation within their own bubble, but it is actually proteced by the United States. The ‘soft power’ approach of the Europeans to international security assumes that security is not a problem, which may be a misleading assumption.
The key issue of course concerns the utility of ‘hard’ or ‘coercive’ power in today’s world. If we think, as I do, that hard power will be needed for all kinds of peace preserving and peace enforcing operations, we should be alarmed by the tendency of globalization to undermine the US position as the ‘indispensable nation’ in the security field.
Globalization is a force for disorder as much as for order. I see three possible policy responses:
(a) A revival of Protectionism. The forces driving this would be labour unions & the military-industrial complex. This is a recipe for trade wars, spilling over into arms races and possibly actual wars.
(b) The liberal solution -a combination of compensation and training..
Compensation for the losers in global exchange would imply extensive redistribution from capital to labour.This is unlikely to happen, or at least quickly, for reasons I have suggested. Hence the refocusing of social policy on ‘human capital’ development. But rising powers will also be producing millions of scientists,engineers, accountants, lawyers, etc. Also,experience, as well as happiness studies suggest, populations in already rich countries don’t want to be on a relentlessly ‘re-tooling’ treadmill’: they want jam today.
(c)slow down globalization through trying to agree ‘rules of the game’ between established and rising powers. What would the content of these rules be? Agreement on managing exchange rates is the main short-term requirement. We need to work towards international regulation of trade, and capital, and labour movements. In the political sphere try and get burden sharing in peace enforcement. Repair bridges with Europe. Make the ‘international community’ more than a western phrase by including at least China Russia, and Latin America Global cooperation will be needed to slow down climate change. The big question is; to what extent do the rising powers accept norms of international society as the west defines them.
We have to change the mindset which regards uncontrolled globalization as the supreme good. Too much associated with laissez-faire doctrines. Future of world too important to be left to FOREX traders. But also, I suspect, too important to be left to the politicians. They will both play their part in constructing the new world. Their capacity to make a success of it is questionable. Emphasise the role of ideas. I am moderately pessimistic, but not despairing.