The Lexus and the Olive Tree

In the years following the collapse of the USSR, Friedman and his colleagues at the New York Times talked about the “post-Cold War world” because people knew that something was different but couldn’t yet define the new world. He later realized that this new world wasn’t indefinable, but a unique, new system called globalization. Whereas the Cold War system was dependent on division, symbolized by the Berlin Wall, integration, symbolized by the Internet defines globalization. Friedman defines globalization as multiple markets and technologies around the world reaching individuals and businesses more efficiently than they’ve ever done.

Globalization is driven by free-market capitalism, as the more you let market forces rule and open your economy to free trade and competition, the more efficient and productive your economy will be. Unlike the Cold War system, globalization has its own dominant culture that is global, rather than regional. Whereas the defining measurement of the Cold War was the throw-weight of missiles, for globalization it’s the speed of telecommunications. The defining idea of globalization is economist Joseph Schumpeter’s “creative destruction,” where the old and less efficient is destroyed and replaced with the new and efficient and that this creative destruction now happens faster and faster. Those countries most willing to let creative destruction happen will be the ones that thrive, while those that try to stop this process will fall behind.

While the Cold War system was a system of friends and enemies, globalization is a system of competitors. The Cold War system was built around states and the balance between the US and the USSR, while the globalization system has three balances: between the US and the rest of the world, between states and markets, and between individuals and states. States, particularly America as the lone superpower, are still important, but in the new system Supermarkets and Super-empowered individuals are also important. Finally, this system has come upon us faster than we can see and comprehend it, posing new challenges.

There are two key skills for the new world of globalization: the ability to do Information Arbitrage to understand the world, and the ability to tell simple stories to explain the world. Arbitrage, in the world of finance, is the buying and selling of the same thing in different markets to benefit from unequal information and prices. Friedman argues that to be able to make sense of the world, people need to be able to do the same thing with different types of information. The journalist’s job is to know how to arbitrage information from six different perspectives–politics, culture, technology, finance, security, and ecology–and weave them together to form a picture of the world. People often tend to explain the world only through one of these lenses, arguing, for example, that only geopolitics matters, or that only culture or markets matter. Friedman rejects this single-mindedness in favor of a holistic approach. Friedman describes himself as a “globalist” meaning that you can only understand the world by considering all of the six dimensions, but they may not have equal “weights” in various situations, but their overall importance shouldn’t be discounted.

Journalists, academics, and strategists need to stop divvying the world up into narrow areas of expertise and instead understand the big picture if they want to grasp the impact of globalization. The world needs to produce more generalists to thrive. Friedman states that his best sources when writing newspaper columns were not professors or diplomats, but hedge fund managers because they had to be extremely well-informed about all aspects of global affairs and not just their own area of specialty.

While this Six-Dimensional Information Arbitrage is the best way to see the system of globalization, it is too complex for grand theories, and Friedman instead argues we should seek to tell simple stories. We need to study the interaction between the pieces. The world needs not specialists, but people who can “spot the strong interactions and entanglements of the different dimensions, and then take a crude look at the whole.” (28)

Friedman argues that we can’t just rely on globalization to explain everything about the world. Instead, Friedman describes world affairs as a connection of the old world and the new: “World affairs today [are] […] the interaction between what is as new as an Internet Web site and what is as old as a gnarled olive tree on the banks of the river Jordan.” (29) He recounts returning from visiting a hyper-modern Lexus factory outside of Tokyo and reading a newspaper story about the Middle East, where conflicts were arising over who owned an olive tree. These two things, the Lexus and the Olive Tree, are the two primary symbols of the globalization era. Half of the world emerged wanting to build a better Lexus by modernizing, privatizing, and streamlining, while the other half was fighting over the ownership of ancient olive trees.

The olive tree represents that which roots us and identifies us: family, community, tribe, nation, religion, and so on. The Nation-State is the ultimate olive tree and so will never disappear because it expresses who we belong to linguistically, geographically, and historically. However, excess attachment to olive trees can lead to forging identities which exclude others and can turn into the extermination of others, such as in Nazi Germany. Conflicts over olive trees are especially poisonous because the loss of an olive tree equates to a sense of losing one’s home and identity. In contrast, the Lexus represents the drive for advancements and wealth. It stands for global markets, financial institutions, and the technologies through which we pursue higher living standards.

In the Cold War system, the threat to an olive tree was from another olive tree, as your neighbor might attack your olive tree and plant his own. Now, the threats to olive trees are from Lexuses (i.e. market forces), and there is a constant tug-of-war between the Lexus and the olive tree. The challenge in the globalization system is to find a balance between preserving a sense of identity, home, and community while doing what is necessary to thrive economically. If building a better Lexus comes at the cost of crushing the roots of the olive tree, people will rebel and sabotage the process. Therefore, both the economic prosperity of individual countries as well as the survival of the system depend upon striking this balance. 

This chapter argues that the Berlin Wall didn’t just fall in Berlin, but it fell everywhere at the same time, and it was the falling of all of these walls that made globalization possible. It was three democratizations–of technology, of finance, and of information–which blew down these walls. Many fences and walls, such as tariffs, capital controls, and the Iron Curtain, divided the Cold War era. Behind these walls were unique forms of politics, economics, and cultures. Friedman cites three changes that came together in the late-1980s that he believes are responsible for the destruction of these walls: world knowledge, communication, and investments. After which, the world became a single, integrated, open plain. There is now only the “Fast World” in this great plain, and the “Slow World” of those who artificially wall themselves off.

The first of these fundamental changes was the democratization of technology, which enables more and more people to communicate faster and cheaper than ever before in history. This ability resulted from technological innovations in the 1980s in telecommunications, miniaturization, and data storage. Firms can now import cutting-edge technology rather than having to develop it themselves, and previously-disconnected people now have the opportunity to access and apply knowledge.

The second change was the democratization of finance. Whereas previously, banks were unable to calculate creditworthiness, making them risk-averse and limiting growth in the economy. This changed in the 1980s thanks to the securitization of junk bonds, which reduced risk and allowed companies easier access to funds. Similarly, international debt markets are securitized, and countries no longer borrow directly from big banks but have thousands of individual investors. This change has coincided with the democratization of investing, where the shift of pensions from defined-benefit to defined-contribution has turned every single person into an investor looking for the best reward by moving their retirement money around.

The third of these changes was the democratization of information, which began with the globalization of cable television in the 1980s. The most important turning point came with the development of the Internet. More specifically, the development of browsers, search engines, and encryption technologies gave rise to the World Wide Web which linked together everyone in a decentralized fashion. The development of the internet means that governments can no longer propagandize and lie to their citizens because people are no longer isolated.

Citizens now have a full picture of how the world is: “Every citizen of the world will be able to comparison shop between his own country and his own government and the one next door.” (69) Before, people would compare themselves to their parents, but now they compare themselves to those in other countries.