Monday, March 28, 2005

Drucker on the 4 Economies

I don't understand this piece by Peter Drucker on the emerging "world economies". He seems confused between what an economy is vs a soceity, but people pay a lot of money to listen to him so maybe I am missing something. Now on to details:
There is no distance in this world economy [thanks to the Internet]. Everything is "local." The potential customers searching for a product do not know--and do not care--where the products come from. This does not eliminate or even curtail protectionism. But it changes it. Tariffs can still determine where a product or service has to be bought. But they are increasingly unable to protect the domestic producers' price.

One example: To get the industrial Midwest with its 140,000 steel workers to vote Republican in congressional elections, President Bush slapped a prohibitive tariff on imports of steel from Europe and Japan in 2001. He got what he wanted: a (bare) Republican majority in the Congress. But while the large steel users (such as automobile makers, railroads and building contractors) were forced by the tariff to buy domestic, they immediately set about cutting their use of steel so as not to spend more on it than they would have had to spend had they been able to buy the imports. Bush's tariff action thus only accelerated the long-term decline of the traditional midwestern steel producers and the jobs they generate. Tariffs, in other words, can still force users to buy domestic, but they are no longer capable of protecting the domestic producers' prices. Those are set through information and on the world-market level.
I don't get this. Tarrifs raised the price domestic steel consumers had to pay for their steel, and they responded by trying to find new ways to cut steel consumption. This requires neither the "information soceity" Drucker conjures up, nor does it require the Internet to "connect people in new, tribal information based nexi" (or whatever), it just requires a spot market in steel, which has been around forever. We slog on:
Sixty years ago, in the Bretton Woods meetings of 1944... established instead, the Bank for International Development (World Bank) and the International Monetary Fund (IMF). [They are]auxiliary rather than central--the former mainly financing development projects, the latter providing financial first aid to governments in distress. [In other words there is no Global Central Bank].

...[T]he Bretton Woods system worked for most of the half-century after World War II. And there was only one reason why it worked (however poorly): the commitment to it of the United States and the strength of the U.S. dollar as the world's key currency.

The dollar is still the world's key currency. But the Bretton Woods system is being killed by the U.S. government deficit, which is fast becoming the sinkhole of the world financial economy... The U.S. savings rate is barely high enough to finance the minimum capital needs of industry. It could, in all likelihood, be raised considerably by raising interest rates. But that is not only politically almost impossible; it would also require that a larger share of incomes go into savings rather than into consumption, with an inevitable collapse of an economy based on consumer spending and low interest rates, as for instance, the U.S. housing market.

The government deficit is therefore being financed almost in its entirety by foreign investments in the United States, mostly in government securities like short-term treasury notes and medium-term bonds. The Japanese are converting most, if not all, of their trade surplus with the United States into dollar-denominated U.S. government securities and have thus become the largest U.S. creditor.

...It certainly cannot be extended indefinitely, which, among other serious drawbacks, calls into question the long-term viability of the Bush Doctrine's goal of defending and extending the "zone of freedom" around the world.
What?! Firstly, IIRC, the US has run serious deficits in the past, so why this current deficit is an issue is unclear to me. Secondly, the US Fed has been raising interest rates precisely to pop the real estate bubble -- something Drucker both claims is politically impossible and warns against. Thirdly, the US economy is largely closed, only 10% exists as trade and most of that is with Canada and Mexico. If the Japanese and Chinese stop buying dollars, the dollar will fall but this will have almost no impact on the US since it does not import very much (nor does it export very much). Finally, how any of this impacts Bush spreading democracy through the Middle East at the point of a gun is beyond me. The title of this section was the "Global Oligopoly of Money". It should be "I do not understand how Money works, or really, what it is".

The fun is not over yet
Finally, the new multinationals are increasingly not domestic companies with foreign subsidiaries, but are more likely to be domestic companies with foreign partners. They are being built through alliances, know-how agreements, marketing agreements, joint research, joint management development programs and so on. They require very different management skills; they must persuade, not command. The typical old multinational began planning with the questions: "What do we want to achieve? What are our objectives?" The first question in the new multinational is likely to be: "What do our partners value? What do they want to achieve? What are their competencies?" And in turn: "What do they need to know about our values, our goals, our competencies?"
I have a different sent of questions: Why is Drucker conflating trade between two companies as a new kind of one-companyism? Is it because otherwise he cannot find anything new to say? Or does he simply not understand what constitutes the boundries of the firm? Perhaps he know of no business beyond retail and is therefore ignorant of the fact that companies do, occassionally, buy goods and services from each other?

Let's finish here. It's too early.

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