Hi, welcome back. In this presentation, we're going to discuss how the world's economic system got to be pretty much the economic system we have today. So an interesting topic, but actually one on which it's hard to find a very good historical literature. The first big series of changes have to do with the fate of China. Remember back in the last presentation, I talked about the way you could think of this phase of global history in the �70s and �80s as a kind of global election, choosing among different sets of ideas of fow to solve these problems of systemic crisis that seemed evident in the �70s. Alright. And then I invited you to think about which parts of the world would be the sort of swing states, swing regions in this global election, and I suggested that it seemed to me that the two really swing regions were Europe, especially Western and Central Europe, and East Asia, especially China. Last time we talked a lot about the way Europe swung in the �70s and �80s. Now I want to concentrate a little bit on what happened in China. Mao Zedong died in 1976. One of the first issues that arose after Mao's death is literally what to do with the body. The precedent in the Soviet Union was to turn these iconic figures of communist hero worship literally into embalmed mummies on public display, objects of veneration in almost a sort of quasi-secular worship. So the mummified bodies of both Lenin and Stalin were on display. As Stalin slightly fell out of favor, his body was quietly put away. Lenin's is still on display. So one of the issues for the Chinese is whether they should do the same. It's kind of a revealing issue. Because in a way, you're deciding what role Mao should play in Chinese political culture in the years to come. Their decision was to turn Mao into the embalmed mummy too, also suitable for public display. So after Mao's death, imagine that you're one of the people influencing the Chinese leadership. You're asking yourself, what do we want China to become now? Think about the menu of options that you might have considered. Among the Chinese factions, four different kinds of visions emerged. One would be more of a revolutionary socialist vision and even more aggressive pursuit of communism, akin to the days of the Cultural Revolution. Mao's widow and some of the people around her counted themselves in that camp. Others preferred more of a Soviet-style communism, concentrating on building up heavy industry, stronger state planning. The third camp, I might call national conservatives with Chinese characteristics. I'm afraid I'm borrowing a little bit from the phrase the Chinese leadership uses now, in which they say they have socialism with Chinese characteristics. I've categorized a family of ideas as national conservatives that are top-down modernizers. Some of those national conservative leaders can be more autocratic, giving less scope for democratic processes. I think the Chinese characteristics among this group would be strong central management with partnerships between private entrepreneurs and the strong central government. A fourth school might be a little more liberal, might be more like the social democracy that one encounters, say, in Western Europe. These four different factions have it out. The first loser in this battle is here. Mao's widow and the group of people around her were actually tried as enemies of the people and were pushed out of Chinese public life. What seemed to take their place a year or two later was a group led by Hua Guofeng that seemed to favor this camp, also favoring better relations with the Soviet Union. But there was a critical leadership battle in 1977 and 1978, culminating in a critical party congress at the end of 1978, in which, really, this group gets the upper hand, led by a man named Deng Xiaoping. So now we're down at the end of 1978 and into 1979 with two key visions. This sort of national conservative vision that I've described. And then a group of people who were advocating going still further in a liberal direction, more of the social democratic thrust. Okay, I've sketched out a little bit what happened. But then you might ask, well why? Why did it narrow down to those two? Why did the camp that favored more of the Soviet-style approach lose out in this struggle? Some of the reasons have to do with personal and factional rivalries. But another had to do with what people might have seen if they looked around the world in the late 1970s. So to kind of get a sense of what someone looking around the world in the late 1970s might have noticed, about the way different economies were developing, take a look at this chart again, which I've carried forward to 1976. Now I'm not saying that the Chinese leadership had access to this particular chart, but I think they broadly sensed the facts that this chart is depicting. If you were to look at this chart, you might say to yourself, well, the United States model, that's just too remote from our experience, that's not interesting. And ask yourself, which would be the models the Chinese government would be most likely to notice? And the answers, of course, would be the models closest to them, literally. Models in places like Japan, Taiwan, South Korea. And take a look at what happened with Japan. By the mid-1970s, it's just evident that the Japanese are doing something pretty potent in the way they're organizing their economy. Taiwan, by the way, is following a relatively similar trajectory by the middle of the 1970s. And take a look at South Korea. The 1960s begins to see a takeoff of the South Korean economy that hadn't fully ripened yet, but was already evident by the middle of the 1970s. So that faction of Chinese leaders, that might have seemed appealing to them. By the way, they would have looked at Japan, Taiwan, South Korea in the middle of the 1970s, and would have seen a nominal democracy in Japan, in which one party had won all the elections, a nominal democracy in Taiwan that really looked like an authoritarian state, as of the mid-�70s, and a nominal democracy in South Korea that also masked kind of an authoritarian state, again, as you would've looked at this in the mid-1970s. So from their perspective, those models in those countries might have been pretty tempting to them. As became increasingly evident by the early 1980s, China was taking a new direction, actually formally normalizing relations with the United States in 1978 and 1979. You see, here's Time Magazine letting the American people know that this man, Deng Xiaoping, is banishing Mao's ghost. Deng Xiaoping was famous for his pragmatism. The saying universally attributed to him among Chinese is that: I don't care if the cat is black or white, as long as it catches mice. But another aspect of Deng's pragmatism was to preserve the firm, clear, dictatorial authority of the central government. So he pushes the liberals aside, and he begins what historians think of as a Fang-Shou cycle: Fang, loosening; Shou, tightening. You loosen things up, they then seem to be getting a little bit out of hand, then the conservatives react, you tighten them up again, and then, no, you don't want to go too far that way. Loosen some more. So this constant experimentation of trying out this, trying out this, and then stepping back. And that cycle continues all through the 1980s. But what's clear to the whole world is that China is making a fundamental change in direction. To understand the way global capitalism changed in the 1970s and 1980s, I think it's helpful to understand an impossibility theorem. This is an idea I'm adapting and borrowing a little from the Canadian economist, a Nobel Prize winner, named Robert Mundell. Mundell posited a kind of trilemma, in which you can have three goals that you can posit, but you can actually only achieve two of these three goals in any financial system you design. For example, the three goals are: 1) capital mobility, that means the ability to easily move large sums of money across borders, billions, maybe even trillions of dollars moving between banks. That's capital mobility, easy movement of private investment. Second, stable exchange rates between currencies. Third, monetary independence, financial independence. So for example, in the old gold standard system of the late 1800s and early 1900s, the gold exchange standard, capital mobility was great, exchange rates extremely stable, monetary independence very little, because the hydraulics of the gold standard meant that if a lot of gold effectively moved to one country from another country, if you didn't have enough gold, you were forced to change your interest rates to attract some of that gold back. That meant that you were highly interdependent on what other people were doing. If other people were attracting gold, you had to change your policies. You were not entirely independent in guiding your own economy. So now let's contrast that old gold exchange standard system with the Bretton Woods solution that was created at the end of World War II. Remember, under the gold exchange standard, from the 1870s to the early 1900s, capital mobility high, exchange rates very stable, monetary independence, national independence, low. This is one of the reasons people complained about, kind of, the bankers really being in charge. Instead, after the Great Depression, and under the Bretton Woods System, capital mobility low, very much controlled by governments. Exchange rates, pretty stable. National independence, national autonomy to run their own economies the way the governments wanted, high. So that's the Bretton Woods System. But by the early 1970s, the Bretton Woods System had collapsed. All right then, what could take its place? One idea being put forward in the early 1970s and getting increasing strength all through the decade, it's actually to go back to something that looked more like the gold exchange standard. That is, you could try to go back to a system in which money could move freely, lots of foreign investment, but also money could easily leave countries, in which money felt it wasn't popular. Relatively stable exchange rates. But what do you give up there? Just as under the old gold standard system, you give up national independence. That is the money was free to leave, the governments couldn't hold that money there, therefore, governments had to change their policies in order to attract the money and the people who had the money. You can see then, these are very important political choices you're making. They're not just driven by immutable economic forces. And by the way, another problem if you wanted to do that is: If you don't want to go back to a gold exchange standard in a world of paper money, in other words, a world of paper money, how do you do this? The solution to that problem becomes a kind of capitalist revolution in the late 1970s and early 1980s. Remember, think in the 1970s, there are really two great establishments for national economic thinking. One I call here National Keynesianism. That meant that national government, the nation state, should be able to use either fiscal policy, taxing or spending, or monetary policy, interest rates, the printing of money, to change its macroeconomic situation. You don't like your inflation rate, you don't like your unemployment rate, the national government needs the autonomy to fix that through its policies, as the autonomous decision maker, very much a Bretton Woods model. Another establishment would be import- substitution industrialization; the export-oriented industrialists are another branch of National Keynesianism. Import-substitution industrialization is a different family of ideas, but also again, even more keyed to the power of the nation state. So national economic autonomy is huge for these establishments. So the revolution then was challenging those establishments. If you go back to an idea, in which national independence goes down in order to free money to move easily from one border to another, you undermine both of these establishments. And instead, you increase the power of the people who hold the movable money. In effect, you create a constant global election, in which countries are competing for mobile capital. In other words, for the votes of investors, investors who loan the governments money in the form of buying their bonds, or who loan their companies money, buying their corporate bonds, or buying stock in their companies. Or who make portfolio investments, investing in or building up infrastructure, bridges, new factories, and so on. The assault on the establishment begins really in the United States in early 1970s, with people like the then Treasury Secretary George Shultz and others, very influenced by the liberal economic thinking of people like Milton Friedman, Hayek, and others. Their argument is that the money should be free to move. It's a much more liberal approach in the classical sense. Get the government out of the way. Let the money move. These American views do not prevail in the early �70s, but they're influential. They're most influential with the German liberals in the middle of the 1970s. These ideas are picked up not only by Germans, but also by Frenchmen, Englishmen, who begin moving toward management of their currencies in ways that will support this new liberal economic vision. And by the end of the 1970s, those European ideas have a huge effect coming back to America again. The Americans are fighting a terrible inflation and unemployment problem. And in effect, the European central bankers are saying to the Americans, you need to follow our lead, and let's coordinate in the way we manage our money supplies. In a way, the problem they're trying to solve is this: How do you have a gold standard like system but with paper money that governments print? How to make paper money hard? The way to do that is by managing how much of the paper money you issue, and then coordinating the management of that between a few key governments that supply the reserve currencies for global exchange. That means tight monetary controls coordinated by US, European central bankers, Japanese central bankers. And that's the system that emerges in the late 1970s and 1980s, they all agree to have firmer control of their money supplies. The result, then, is to create a world emerging in the 1980s, in which capital mobility gets higher and higher. National independence, the ability of one nation to chart its own path as to how it's going to manage its economy gets less and less. And exchange rates go from being really erratic as Bretton Woods collapses to not being fixed, because it's not a true gold system, but the instability of exchange rates persistently narrows. So here's a chart showing the exchange rate between the dollar and the German currency. Back then, Germany had its own currency, the deutschemark. Bretton Woods System, you see, very, very stable. Bretton Woods collapses, exchange rates start fluctuating all over the place. Slowly as the central banks coordinate more and more, that instability just very gradually goes down from sort of here, just moving in that general direction, gradually narrowing. And we can see a similar phenomenon in the change in the exchange rate of the dollar and the Japanese yen. Bretton Woods system, really stable. Bretton Woods breaks down, see the fluctuations beginning. And they stay pretty significant into the 1980s and then during the 1980s, you can see that the instability is getting a little better. What's happening here is that the central banks are more and more harmonizing the way they handled their monetary policies. More and more trying to make their paper Money, money created by government fiat, into hard money with very stable value that will then attract international investment and facilitate a lot of movement of money. But in adopting this approach, there are some significant tradeoffs. Because, for example, to tighten the money supply in effect means you've got to raise interest rates. You've got to raise the cost of the money in order to ring a lot of that extra money out of the system. That's what Time Magazine is noticing here, when the United States decisively joins this regime, in 1979, to curb its persistent, double-digit inflation, under the leadership of this man, Federal Reserve Chairman Paul Volker, at the end of the Carter administration. And you can see the way they're characterizing the problem, which pushes the United States into a sharp recession in the early 1980s. But by the mid-1980s, the benefits of the new system are becoming evident. Remember that Great Inflation of the 1970s we talked about earlier? That's been pretty well wrung out of the system by the late 1980s. The new system is freeing up enormous flows of capital investment. Investment banks like Goldman Sachs, for the first time in the late 1980s, are not only opening up kind of branch operations that help people do deals in the United States, they're becoming truly multinational investment banks, where someone from Goldman Sachs can put together a financial deal involving Germans on both sides of the transaction. And someone from Deutsche Bank, in New York, might be putting together financial deals with Americans on both sides of the transaction. Billions and billions, then trillions of dollars begins moving rapidly across borders, fueling economic growth. But you can see that this financial politics, which sounds kind of technical and seems boring to a lot of people, involves immensely important tradeoffs because all kinds of effects that touch every sort of business, in the United States, Europe, Japan, and then in the wider world. And it's rooted, as you can see, in basic political choices as to, in effect, who's going to be in charge of driving the economic policies of these key countries? You can see the tradeoffs that were made in the �70s and �80s, and these tradeoffs manifest themselves in a couple of kinds of crises. First, there's a crisis for the world�s borrowers. All of a sudden, the interest rates on their loans are going way, way up. If you are a big debtor, like many countries in the Third World were, borrowing money to pay for the imports because they don't have enough money to pay for the imports of, say, price of your oil because their own export industries are so weak, all of a sudden, their loans are now much costlier to roll over. Then what happens is they're getting ready to go bust. So there are lots of debt crises all over the Third World in the early 1980s. That's one sort of crisis, and by the way, those debt issues turn out to be a big problem for the socialist countries in the late 1980s. But there's another kind of crisis. What if you're living in a developed country, like say, France, and you don't want to be the prisoner of international bankers and international investors? You want national independence to drive your economy the way you want. Indeed, even to have state ownership of the key banks in order to hand out money and credit the way you think your country wants it handed out. It was just that kind of crisis that France faced in the early 1980s, when Francois Mitterrand took power with his Socialist Party, in partnership with the sommunists. And a key to understanding what happened in France in early 1980s actually has a lot to do with this man: His name is Jacques Delors. Here's a picture of Delors in the late 1980s. Delors, a little later on, as a European statesman. In a way, Delors is playing the kind of role in the 1980s that Jean Monnet was playing in the 1950s. He's a visionary for European economic integration, and Delors's concept is the Europeans need to harmonize their economies. But see, that means Delors very much supports the kind of vision that's developed in the �70s and �80s of interdependence, of harmonizing economic policies, especially between the French and the Germans, who've adopted this liberal, hard money approach to their economic policy. You can't have European economic integration unless it starts with harmonizing the French and German economic policies. So Mitterrand's government faces a choice: pursue the independent path that some of the socialist and communist want or pursue the interdependent path, marching in step with the Germans, advocated by people like Delors. And Delors, who's an influential figure in within Mitterrand's government, wins that argument and helps France lead the way toward the new era of European economic integration in the middle and late 1980s. Indeed by 1990, you can see Britain resenting these new ideas for European integration. This conservative newspaper, The Sun, has a pretty self-evident headline. What are they talking about here? Sun readers are urged to tell the French fool where to stuff his ECU. ECU, that's an acronym for European Currency Unit, a step towards integrating European currencies, giving up, from the point of view of that British newspaper, the national independence Britain should prize. But that is part of Delors's philosophy. He believes that Europe working together will have a stronger economy, a prosperous Western Europe. And by the way, the apparent success of his vision, by the end of the 1980s, will turn out to be a huge magnet for European countries to the East. So, let's just pause for a moment and see how some of these ideas we've laid on the table come together. Big choice: Should the developed countries retain true independence in the management of their economies or should they accept interdependence? If you'll remember, that was also a huge issue back in the 1920s and 1930s. And you'll remember that in 1930s, governments chose independence as the way they wanted to go. And national rivalries and imperial rivalries deepened into dreadful things. In the �70s and �80s, they're accepting interdependence as what they see as the path to their prosperity. But that also entails some really important sacrifices and a diminution in the central role of the nation state. Another big issue we've seen in this presentation and the last one is how to you present yourself. Are you just the managerial state, in which the socialist are just another version of the managerial state? Are you essentially equivalent forms of government? Or is there something vitally different about your form of government? And in the �70s and �80s, in different ways, the United States, Western Europe, and even to a lesser extent, China are asserting that they are vitally different from the countries in the Socialist Bloc. But there's a tradeoff when you assert that difference. Do you value conciliation between the two blocs or are you willing to accept confrontation? Because the assertion of these differences is going to exacerbate tensions, and we saw how that played out in the early 1980s. After an intense period of polarization, confrontation, it subsides with some domestic and international momentum, at least at the time, appearing to favor the Western European and American side in 1984 and 1985. And that's the period in which the Soviet Union, and other countries in the Socialist Bloc, are engaging in new thinking of their own. We'll learn more about that new thinking when we talk again. See you then.
