Global Economy: A Look on the Past and a Perspective for the Future

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There are two basic economic problems: the creation of wealth and the distribution of wealth.

In his classic work on the wealth of nations, Adam Smith said the wealth of a nation was the product of the number of its people who were gainfully employed and the skill they brought to their labor.

His was a long term approach that rejected the mercantilism then prevalent, and it was a rejection of war—or plunder—as a means for a nation to acquire wealth. The wealth of a nation was measured not by its gold reserves or possession of other commodities, but by the ability of its workers to produce goods and services that other people desired and would pay for.

This was the system of free trade, which has expanded over time as the cost of shipping has declined. The expansion of trade generates greater wealth, but it also is disruptive, since goods that previously were produced domestically are now available from other suppliers. In democracies, it is only natural for people who see their traditional livelihoods at risk to put pressure on political representatives to protect them.

But the economy is like geology: the earth’s plates are always moving, and so long as they do not encounter resistance, we do not notice the change. But if the movement is blocked for some reason, the tension does not go away; it simply accumulates until it is released violently.

The same is true of economies. If political leaders resist rather than adjust to change, they risk a catastrophe. Non-democratic systems, even more than democracies, can be victims of this bias. For decades, the Soviet system was compared favorably to the Western democracies because it escaped the Great Depression. But the Soviet leaders could not make the adjustment to post-industrial production: the very symbols of the USSR were they hammer and sickle, manufacturing and agriculture. The failure to adjust to changing newsletter circumstances contributed to its collapse.                                                                                                                                      

The global economy is now undergoing a transition not unlike the one the world witnessed  a century ago. Then, too, globalization sparked a nationalist reaction. Ultimately, the |here and download it nationalist trend prevailed, and the world was engulfed in world wars. Even so, the global economy managed to grow, and with the end of the Cold War, the dominance of globalization seemed unchallenged as China ended centuries of isolation to participate actively in the world economy.

Now, however, that has all come again into question. In contradiction to Adam Smith, the balance of trade dominates economic discourse. But the flip side of a current account deficit is a capital account surplus. In an innovation economy, which requires growing amounts of capital for each worker, the argument that a current account deficit means fewer jobs is the equivalent of arguing that investment is job destroying. To be sure, it can be if the capital surplus is directed toward questionable investments. But if the investments have a high return, they can be beneficial for all parties.

The tragedy the world endured a century ago should chasten those who are now, presumably unwittingly, following the path that led Europe, and the world, to disaster. One of the extraordinary developments of the post- Cold War world has been the growing movement of people, especially students. In a world witnessing horrific incidents of terrorism, the desire of parents around the world to see their children educated in foreign universities should be seen as a blessing, not a threat. The skill these young people bring to their labor will benefit all of us.

A civilized world is one in which difference is embraced in the spirit of the American credo, e pluribus unum: out of many, one. It is an example the United States should set for the world, and we repudiate the legacy of those who went before us if we reject it.

About The Author: Dr . Stanley Kober is US-ltaly Global Affairs Forum’s Advisory Board Member. Dr. Stanley Kober is a former Research Fellow in Foreign Policy Studies. He is a graduate of Georgetown University’s School of Foreign Service and received his Ph.D. from the Fletcher School of Law and Diplomacy at Tufts University. His areas of expertise include the relationship between democracy and peace, with a focus on control over the war power, and American grand strategy. He has lectured in the United States and abroad, and his work has appeared in Foreign Policy, International Affairs (London), the New York Times, Washington Post, and Wall Street Journal. Kober previously worked on Soviet and defense issues at SRI International (where he was managing editor of the journal, Comparative Strategy), the Center for Naval Analyses, and the Hudson Institute. To contact the author for comment and critics:

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