Wealth-building under Feudalism concluded with an exhortation to “Take it and Tax it!”
Mercantilism with “Take it and Sell it!”
And Industrialism with “Make it and Sell it!”
You can see how the continuity flows from one to the other. There are other viable strategies I haven’t discussed in this essay that exist complementary to these 3 Core layers of the Stack (e.g. Port Cities/Nations which offer non-partisan venues with attractive tax rates for major parties to engage in trade), but it’s rare that those strategies are standalone-viable. Superpowers need a Wealth-generation machine they can compound by themselves, and that goes for Nations (China) and Companies (Amazon) alike.
When you see no investment opportunities, you’ve lost control of your growth. History tends to be unkind to those who stop growing.
So how does an Industrialist economy generate even more Wealth for itself? Industrialism made that simple: just produce & export even more product!
But what happens when there are no new customers to sell to? What happens when all your existing customers can’t afford to purchase any more product? Is that the end game of economic growth?
Enter the Mount Washington Grand Hotel, in the White Mountains of New Hampshire. Enter the Bretton Woods Conference of July 1944. If the camera turned around and pointed the other way, it’d be looking at the best ski resort in New Hampshire by the way (I’m a big fan).
Bretton Woods brought a plan for Pegged Foreign Exchange markets for all currencies (tied to gold), the International Monetary Fund (IMF), and the International Bank for Reconstruction and Development (IBRD). Big fancy dry boring sounding institutions, suitable only for high-school History tests. Did you start skim-reading yet? But don’t skim past this conference — this was about overcoming the Prisoner’s Dilemma of Industrialism:
The seminal idea behind the Bretton Woods Conference was the notion of open markets. In his closing remarks at the conference, its president, U.S. Treasury Secretary Henry Morgenthau, stated that the establishment of the IMF and the IBRD marked the end of economic nationalism. This meant countries would maintain their national interest, but trade blocs and economic spheres of influence would no longer be their means. The second idea behind the Bretton Woods Conference was joint management of the Western political-economic order, meaning that the foremost industrial democratic nations must lower barriers to trade and the movement of capital, in addition to their responsibility to govern the system.
Yeah. That paragraph could’ve been printed today in The Financial Times, The New York Times, The Wall St. Journal, The Economist, The Harvard Business Review, or any other reasonable mainstream publication. This conference established the doctrine of Geopolitical Economy, both in theory and practice, for decades to come, and if you paid attention in school or listen to the media, and you’re under 75 years old, this is the system you learned was best for the world: American Capital (carrot) and Military (stick) to keep the Western world cooperating instead of defecting.
And it worked! Like no system before it. This is the system that created the Economic Surpluses Scott Alexander described in his famous essay on Cost Disease:
If some government program found a way to give poor people good health insurance for a few hundred dollars a year, college tuition for about a thousand, and housing for only two-thirds what it costs now, that would be the greatest anti-poverty advance in history. That program is called “having things be as efficient as they were a few decades ago”.
The Stack of Globalism is the simplest of the lot (assuming you understand the prior stacks), the most powerful, the most Wealth-generating, the most morally-virtuous, and the least violent. We got here by asking, out of pure Adam Smith economic self-interest, how can an Industrialist nation increase its Revenues when its Export market is already saturated?
The Bretton Woods answer: make your customers richer.
Take a portion of the Surpluses, the Wealth, generated domestically by our powerful Industrialist system and (i) invest them internationally, (ii) turning those other nations into Industrialist powerhouses in their own right, (iii) that they might then generate Surpluses of their own, (iv) which can then be spent buying even more U.S. Exports!
Our growth becomes a result of the growth of others. Their growth a result of ours. I talk a lot in my essays about the insane power of Compounding, but this is Compounding on a Global Scale. Global companies can Compound themselves across Global Markets. Globalism unlocks Compound Nations. Compound International GDP, a magical ride which wouldn’t end until the entire world was productively producing domestic goods and exporting them back into the supply chain!
Globalism Today: Flatlining As China & Germany “Capture” Their Neighbours Exports
Alas, the system was unstable, prone to financial collapses and runaway currency issues, and had to be taken off life-support in 1971 — Fixed Foreign Exchange Rates, Free Capital Movement, and Independent Monetary Policy are sometimes collectively called the Impossible Trinity. Things didn’t work out.
My friends know I like to over use hyperbole, so I’m going to make a bold claim: this Stack of society is basically non-existent today at the International level.
The core strategy of what I call “Globalism” is generating surpluses and investing those surpluses in other nations for the express purpose of developing them as a Wealthy Trade Partner. It’s not just about sending money overseas — the intention is key, and the intention is to grant Power (Wealth leads to self-determination) to others that they might then buy more from you. I get that people use the G-word in many different ways today, often in the context of companies permanently moving whole industries to other nations in order to lower their cost base, but let me stick with my reciprocal definition for a moment and ask: which nations generate large Surpluses today?
Ranked by GDP (left) & Trade Surplus (right). Email me if you’d like the full Excel file. You can quibble with the sourcing, but I took both data sets raw from the same place (the World Bank) to make sure the numbers were treated the same, no secret adjustments, and all numbers expressed in constant 2017 US Dollars.
Let me briefly go down the list and ask again: where are these nations primarily s(p)ending their Surpluses?
In a familiar story for my international readers, the US is most preoccupied with itself. Only 6 countries in the World have a lower [Trade as % of GDP] number. Namely: Occupied Palestinian Territories, Cuba, Ethiopia, Rwanda, Burundi, and Chad.
If I narrow my filter to [Exports as % of GDP], my US readers will be pleased to know they rise from 7th lowest to 28th. The nations which run lower [Exports as % of GDP] include the global superpowers: Macao, Nepal, Grenada, Lebanon, Sao Tome, Central African Republic, Andorra, Tonga, Samoa, Afghanistan, Yemen, Djibouti, Cape Verde, Mali, Kenya, Uganda, Barbados, Benin, St. Lucia, Maldivas, Pakistan, and Tanzania. That’s it.
“But the US is a massive Importer, surely!” I hear you say. Which is why when you compare [Imports as % of GDP] a whopping 9 countries have a smaller ratio than the US: Angola, Nigeria, Turkmenistan, Argentina, Japan, Brazil, Cuba, Occupied Palestinian Territories, and Chad.
No offense intended to citizens of those nations, many of which are currently plagued by war or trade sanctions or have a total-land-size of under 15 square miles, but that’s hardly fitting company for the Global Hegemon.
Whichever way you cut the data, any way you pull apart the GDP calculation and slice up Imports and Exports and International Trade and Domestic Production, it becomes abundantly clear that the US just does not Trade that much with the outside World relative to its Domestic Productivity.
Certainly, the US spends some of its domestic Surpluses Importing goods from & Investing in the industrial development of China & Mexico/Canada., and the fact that domestic productivity dwarfs the US’s international trade does not by itself prove that the US is not pursuing a Globalism strategy, but as far as I can see the core reciprocally-compounding nature of Globalism is absent from today’s US Trade & Investment flows with the rest of the World
The new cohort of rising economic powerhouses sit outside the Bretton Woods powerbloc, openly playing Mercantilist/Industrialist games, apparently not much interested in mutual-enrichment
US Dollars work like gold — everyone wants ‘em, nobody wants to spend ‘em. Which means there’s no expectation on our part that China will spend their $3 Trillion in US Dollar reserves buying our exports, which means it’s not compounding, which means that Growth trajectory will be rather more linear
I already covered China in too much detail in the Industrialism section, but suffice it to re-state that they have no intention of making other nations independently Wealthy (i.e. Powerful). They “tried” that (involuntarily) for ~150 years and it wasn’t fun. Which means investment is kept domestic, factories are kept domestic, companies are owned by Chinese nationals, supply chains are pinned to Chinese waters, and Surpluses are spent domestically.
To the extent that they do invest internationally, it has been and will continue to be in nations which can offer strategic Mercantilist resources to fuel their Industrialist powerhouse, with no expectation of reciprocal Compounding.
Much has been made of China’s investments in Africa, with many hoping that the continent will finally be able to Industrialize properly and “leapfrog” the Western world. Of course, the idea of President Xi Jinping allowing non-Chinese to build Wealth stikes cynical-old-me as deeply incongruent, so I took a look through the list of African countries he’s invested in and the list of African countries by proven-oil-reserves and can’t help but notice certain similarities.
US productivity is such a monster that China is still far from confronting the question of how to grow when your customers cannot afford to buy more of your product. They’ve room to keep their own Exports growing: as always, the American consumer can afford more — per the above, only a tiny fraction of domestic US productivity is actually spent on Imports.
Japan is too busy trying to stay solvent and keep its GDP growth above 0. Japan has an aging population, a massive welfare state, an unwilling almost-post-industrial economy that was considered the most technologically-advanced in the world when I was born…but basically missed the post-2000s Software Boom and the post-Steve Jobs Smartphone Boom due to odd quirks of national culture & policy…
…and their nearest neighbour is playing Zero-Sum Capture games on the scale of: “everything Industrial ever made anywhere”
Japan can barely keep Industrialism going domestically, how can we expect them to try and share it?
The rest of the world continues to miss just how powerful the German Industrial machine is. Which is rather odd — you’d think they’d have learned to pay attention by now. It’s impossible to understand the mess that keeps happening in the EU without understanding the degree to which German Industrialism absolutely dominates the continent. Only China runs a larger trade surplus today. And unlike China, Germany has no customer concentration risk!
They export about the same amount to the US, France, China, the UK, the Netherlands, Italy, Austria, Poland, and Switzerland.
The major risk to Germany is their customers going bankrupt and not paying their bills…which is why Germany is so focused on the short-term financial wellbeing of their neighbours.
They’re not interested in Exporting German Industrialism to the rest of Europe — just in keeping the EU solvent enough to continue consuming German Exports, even if that means financing that consumption with debt
On the face of it, Germany is the one nation that could save Globalism, or at least run some modern version of it. They’ve got the surpluses, the trade partners, the raw materials, the knowledge, & the industrial culture!
What they don’t have is security. 2,000 years of European Feudalism, Mercantilism, and Industrialism have left a lot of distrust, bitterness, and beggar-thy-neighbour in the hearts and minds of Europe & its leaders. And now they’re all locked into a single shared currency with the unbeatable German Industrial Machine, with deficit nations unable to devalue their way into attractive exports and forced to pay for their cars and their mortgages in hard 1:1 German Euros, loaned to them by German Banks.
“Unfortunately, the domestic German debate assumes, wrongly, that the answer is for every member to become like Germany itself. But Germany can be Germany – an economy with fiscal discipline, feeble domestic demand and a huge export surplus – only because others are not.” - That’s a good essay describing the conflict between Industrialism & Globalism in the Economist. They’re still good folks.
I’ll stop there and leave the other nations as a thought experiment for the reader. I’m sure there’s a country somewhere that proves an exception to my hyperbole. But as far as my eyes can see, this is not our Grandparents’ Globalism, nobody who’s in charge is secure enough in their own position to enrich their neighbours, no rising would-be-superpower is interested in re-investing back into the productive capacity of those above them on the totem pole, and no current superpower feels comfortable sitting down with their peers and “enforcing” some ground rules to overcome the Prisoner’s Dilemma (see the EU’s tax rate debacle I mentioned in the Industrialism section).
I’m not saying Germany & France SHOULD sit down with Ireland and the rest of the EU and explain exactly why they’re unhappy (Sovereign tax rate competition uses the institutions and systems Germany & France have created to benefit one nation’s citizens over another) and propose a solution — that would be a quick way to have to pronounce more awkward-sounding words ending in “-exit”.
But we now live in a world where these grievances go unspoken, where Google and Facebook take their daily media floggings as emblems of American Imperial Influence and nationalistic distractions from the underlying issue, where no superpower is secure enough to stand up publicly and say “Look, this is our position, this is why we’re unhappy, and this is what we propose to do about it: [Carrot] and [Stick].” — however bad that might make them look on the 24/7 News.
Thus the animosity has no outlet except via quietly playing the exact Wealth-Capturing games that caused it in the first place.
Most of my fellow Europeans still have sore memories of Germany’s [Stick], but what [Carrot] does Germany even have today? They haven’t been industrializing the rest of Europe, so nobody believes their Capital serves any purpose except as a vehicle to purchase German goods on credit…
Ah! And that’s the mud-covered dollar-bill buried at the heart of the matter.
The use and purpose of the Capital as it flows across borders.
Globalism as I’ve pitched it in this essay is an attempt to build more Wealth for yourself by investing in your customers. That investment unlocks 10,000x Surplus Wealth Generation for them (see: Industrialism), some of which can be reciprocally spent buying more of your Exports.
But what if instead of all that complex bullshit you just loaned your customers the cash? Why wait for them to Industrialize and generate massive Surpluses and then become potential competitors? Why not just loan them the money upfront and have them spend THAT, plus the interest you can charge them?
Of course you’d have to make sure they were good for it. Their currency would have to be solid, you couldn’t have a Sovereign customer just printing money and inflating his way out of Debts he can’t repay. In the very worst case, you’d want to be able to repossess their banks and have what’s left in the coffers be As Good As Gold.
Thank God Cyprus’ citizens kept their savings deposits in Euros!
Negotiations got under way on Sunday amid a hardening of stance by the IMF and Germany, which insisted that depositors must take the hit for bailing out the eurozone's latest crisis economy.
Spoiler alert, tell me if you’ve heard this one before: they took the hit and the bankers who gave them the loans which went bad got to repossess Euros As Good As
This isn’t Globalism, not anymore. It’s something else. Domestic Industrialism coupled with…something new. Something unlocked by access to Capital, an ultra efficient Financial system, free movement of money, multi-national Reserve Currencies, and diffuse personal risk:
Export the Knowledge & Capital necessary to Industrialize friendly trading partners, and then mutually profit from the increased Trade and Compound Wealth-generation from running Industrialism on both sides of the table, under the softly-(un)spoken umbrella of a Hegemon’s protection
Today this means:
While nobody appears to operate this way today, many who grew up & were educated by teachers who experienced the powerful Wealth-generation of Globalism believe that it’s still dominant today and that all domestic policies should move towards this system, for the rather obvious reason that it led to the largest Surpluses seen ever…
And did so (relatively) peacefully and increased the total wellbeing of the Industrialized World in a way that, for the first time, everyone could feel morally good about
You could make a strong argument, at least within the US, that many private corporations have adopted the “Globalism” worldview of mutually-compounding-Wealth-generation, with the “national border” instead set to a “corporate border”
Honestly I think this is a really good argument and could be its own essay, and you can see the moral-virtue of “jobs created” cited in defensive of private Wealth-creation & capture (see those links above), but all private corporations are still bounded by the International framework of competing Feudal, Mercantilist, and Industrialist laws & incentives, and without an enforced Globalist framework, it’s unclear who really holds the cards: the Mutually-beneficial Globalist Corporation or the Personally-enriching Industrialist Nation. China certainly seems to think they come out on top.