The Lexus and the Olive Tree

The first era of globalization gave rise to ideologies that emphasized centrally planned, non-democratic alternatives to capitalism, such as Communism, Socialism, and Fascism. These alternatives were tested in various countries between 1917-1989 and all failed, and thus the historical debate has been definitively settled in favor of free-market capitalism. While other systems might be better at distributing or dividing income, only free-market capitalism is good at generating that income in the first place. In other words, there is no alternative to free-market capitalism, though societies can adjust by doing it slightly faster or slower.

Once countries finally realize this, they put on the “Golden Straitjacket,” which is “the defining political-economic garment of the globalization era.” (104) The original “seamstress” of this garment was Margaret Thatcher, followed by Ronald Reagan, and it became global fashion after the end of the Cold War. To fit in the golden straitjacket, countries must: drive economic growth through the private sector, shrink state bureaucracy, budget, eliminate tariffs and restrictions on foreign investment, privatize state-owned industries and utilities, and de-regulate the economy. Once a country puts on the golden straitjacket, its economy grows as its political field shrinks; there is more economic growth, but the policy choices of political parties are restricted and thus the parties become more similar to each other. The only way to create more space to maneuver politically is by enlarging the straitjacket, and the only way to do that is by keeping it on as tightly as possible. Countries can attempt to resist putting on the straitjacket, but they delude themselves if they think they won’t pay an increasingly high cost for that decision.

The three democratizations didn’t just blow away the walls protecting alternative systems but created a new power source: the Electronic Herd. The herd is made up of traders: “all the faceless stock, bond, and currency traders sitting behind computer screens all over the globe, moving their money around from mutual funds to pension funds to emerging market funds, or trading on the Internet from their basements.” (110) The herd also consists of multinational companies who move their production around the world to the most efficient and lowest-cost locations. Because countries are reliant on the electronic herd, they must put on the golden straitjacket to receive investment capital. In contrast, those that don’t put on the golden straitjacket (or try to take it off) are disciplined by the herd by having money and capital taken out of the country, stifling growth. This interaction between the electronic herd, the golden straitjacket, and nation-states is the center of the globalization system.

The defining truth of the globalization system is that there is no leadership. There is only the electronic herd, which follows the rules of the golden straitjacket. If you live by those rules, you reap the benefits. The herd is fallible and can make mistakes but will always correct them because “the herd is never stupid for too long” (113) and always responds to good economic governance. The herd is made up of two groups: 1) “Short-Horn Cattle” who move money around on a short-term basis such as traders, hedge funds, and individual investors; and 2) “Long-Horn Cattle,” multinational companies who make foreign direct investment to build factories or make production deals with overseas companies. While the public sector and government dominated capital investment until the end of the 1970s, the subsequent lifting of capital controls has meant that the electronic herd has taken over, and private capital has replaced government spending.

Short-horn cattle have become increasingly important as there are more and more financial products to invest in. Almost everything is now securitized and traded on financial markets, which has unlocked trillions of dollars in assets and given the electronic herd more to feed on than ever before. This has been a godsend to countries because they can grow faster than ever, but at the same time it becomes harder for investors to find an edge in an environment of increased competition. Because of this, there has been an increase in hedge funds and others making high-risk, high-reward bets. Similarly, because the herd is bigger, more diverse, and much faster than ever before, crises can easily be magnified and spread globally. When markets in a country become unstable or weak, “the electronic herd can transform what might have been a brutal but limited market adjustment downward into something much more painful and exaggerated.” (132)

In contrast, long-horn cattle are involved in foreign direct investment, meaning that they invest directly in projects like factories that take time to plan and build. This type of investment is not new, but thanks to globalization, these long-horn cattle invest more, and in more ways than ever before. In the Cold War system, companies would use these investments to jump over walls, such as a Japanese car manufacturer building a factory in the US to avoid tariffs, but there is now a single global market and companies slice up their production chain to locate each segment in the place that can do that task the cheapest and most efficiently.

While long-horn cattle don’t move capital in and out of countries as fast as the short-horn cattle, they do it faster than many realize. Now, instead of building their own factories, many multinationals develop alliances with local subcontractors that can easily take advantage of lower taxes or lower-cost labor elsewhere. This allows companies to play developing countries off against each other because they all need investment to grow.

Unlike the Cold War system, where smaller countries could negotiate with the two superpowers, every government is susceptible to the needs of the herd. There is no fighting with the electronic herd, and all leaders (especially those in developing countries) can do is try to be as inviting as possible. Finally, because of the internet, these forces are only going to get stronger and make the fast world, the electronic herd, and the golden straitjacket even more important.

Globalization has made countries analogous to computers. The “hardware” of a country is the shell around the economy, such as free-market, communist, or hybrid. The “operating system” of a country is its macroeconomic policies, such as central planning in communist states (DOScapital 0.0). In hybrid states, the operating system ranges from DOScapital 1.0-4.0 depending on the mix of socialism, free-markets, state-directed economics, and crony capitalism. Finally, in free-market states there are those with significant welfare states (DOScapital 5.0) and those that have fully liberalized (DOScapital 6.0). The “software” of a state is its legal and regulatory system, as well as how well it follows the rule of law.

In the Cold War system, the struggle was over which hardware would dominate the world: free-market US hardware or communist Soviet hardware. These two superpowers did not care about how well this hardware worked in other countries, only that they were on their team. With the collapse of the USSR, every country now uses free-market hardware. However, in both computers and countries, “the hardware always runs ahead of the software and the operating systems.” (153) Because of this, there are lots of countries running free-market hardware without the software and operating system to effectively use it. This is the problem of “premature globalization” where you cannot thrive without plugging into the electronic herd, but you cannot survive the herd without the right software and operating system. Instead of communists versus capitalists, this means that the defining struggle is between free-market democrats and free-market kleptocrats.

During the Cold War, it was the size of the state that mattered, but now it is the quality of the state that matters; you need a smaller, smarter, faster state that can regulate the free market without either smothering it or letting it get out of control. Those states that had high-quality software and operating systems were those that survived the economic crises of the 1990s, whereas those that copied western financial systems without the operating systems and software to match, struggled. Developing should instead copy the real source of American prosperity: “the combination of the right operating system-free markets-with the right software, political institutions, and political consensus.” (164)