The last five years have shown us how brutal are the changes that are taking place around us. The rules of the game are changing every day and a new mindset is required to understand these changes. However, our institutional memory does not permit us to accept the changes. We want different results, but we continue to do the same old things.Today, no country can think of itself in isolation. We are in an idea-based economy and we have to follow different prescriptions in this New World Order. Take the case of the happenings in the south-east Asia. International investment bankers and brokerage houses with their global research were bullish on them. The result: They have lost huge amounts of money, and their global research has failed miserably.
The answer is simple: Definition of research, finding out what is unknown and unconfirmed. The research was more on the company specifics and the old yardsticks of earnings per share and P/E ratios. On the contrary, research should have been concentrated to findout the effect the globalisation process would have on different economies, whether their governments would be able to manage the flow of such huge funds and whether the systems were in place. Today we have a transnational economy, which is faced by dynamic money flows rather than goods and services. The traditional factors of production like land, labour and money have become so mobile that they no longer give countries a competitive advantage. Today, management has become the decisive factor of production and the goal of a transnational enterprise in this changed environment is maximisation of market share rather than the traditional short-term profit maximisation.
In light of this, it is worthwhile looking at what the world-renowned management guru Peter F Drucker said way back in 1989. It is appropriate even now, and there is a lesson for India. In that interview, Drucker said, "As long as there was some reality to the nation-state, Keynes `perfect gas' theory of the economy seemed to work. He felt thatif the national government could control the temperature and pressure of the macroenvironment through money, credit and interest rates, individuals and firms would react predictably."
But this theory of how an economy works cannot explain any of the main economic events of the last 15 years. In order to promote exports and create jobs in the mid-1970s, Jimmy Carter pushed down the value of the dollar, vis-a-vis the yen, from 250 to 180. Exports boomed, but unemployment continued to rise, which should have caused deflation. Instead, inflation skyrocketed to as high as 14 per cent. When Reagan came to office, he raised interest rates to halt inflation. He succeeded, but drove the dollar back up to 250 against the yen, damaging American exports and creating an unprecedented market in the US for Japanese products. Unemployment rates under Reagan fell to the lowest level in decades, which acute labour shortages appearing in some areas by 1989.When Reagan tried to adjust the dollar "slightly" in the fall of 1985,it went unexpectedly into freefall down to 125. Instead of massive "flight from the dollar", which available theory predicted, the main holders of the dollar -- Japan, Taiwan, West Germany, and Canada -- who had placed large amounts of their dollar reserves in US debt obligations, actually increased their lending. To confound the theory further, the price of raw materials, from Danish butter to Arab petroleum, plummeted. Additionally, the devaluation of the dollar should have raised the price of Japanese goods in the US. Instead, the Japanese firms did something unprecedented: they absorbed a 50 per cent cut in profits to maintain their share of the US market. To compensate for that cut in foreign profits, Japanese companies sharply raised prices at home. But instead of triggering a recession, Japan experienced the largest consumer binge in its history. Presumably, it was the maturing baby-boomers emulating their consumer counterparts elsewhere in the West that frustrated the expectation that higher priceswould curb spending but raise savings.
What has happened? First of all, it turns out that the micro economy "the decisions of the multitude of individuals and firms" has sabotaged the supposedly controlling macroeconomy of the sovereign nation. The servants are in control of the master.For example, Keynes assumed that the "velocity of the turnover of money" how fast individuals spend their money was a social habit that remained unchanged over long periods of time. But, every time this assumption has been put to the test it has been proven wrong. Indeed, the individual's ability to control the rate of spending money explains Jimmy Carter's policy disaster. Consumers did not follow the textbook by spending and creating jobs; they hoarded instead. In a rapid reversal, American consumers then increased their spending during the Reagan years, which explains why his policies worked in expanding the economy even with a huge trade deficit. Similarly, the Japanese firms frustrated attempts to balance trade becausethey sought "market maximization" instead of "short-term profit maximization". In the world economy, economic rationality means something different than it meant in the national economy. As the Japanese have understood, "sales" in the world market are returns on long-term investment: What matters is the total return over the lifetime of the investment, and the return over time depends on monopolising market share.
Yet, entrepreneurship, invention and innovation can profoundly alter the economy in a very short time. So, both individuals and firms, especially transnational firms, sabotage the attempted macroeconomic policies of nation-states that are no longer sovereign. The new realities have turned Keynes on his head. Keynes was the last great synthesiser of economic thought. Without a new synthesis that presents a model of how the "four economies" interact to create economic reality, we may be at the end of economic theory. And without economic theory there can be no economic policy, no foundation forgovernmental action to manage the business cycle and economic conditions. We may conclude that the new reality means we can no longer control the economic "weather" of recession and boom cycles, unemployment, savings and spending rates, but only the "climate" avoiding protectionism, or educating the work force. In short, preventive medicine instead of blind attempts at short-term fixes.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
