The Frontiers of Management. Peter F. Drucker

low labor costs are likely to become less and less of an advantage in international trade, simply because in the developed countries they are going to account for less and less of total costs. But also, the total costs of automated processes are lower than even those of traditional plants with low labor costs, mainly because automation eliminates the hidden but very high costs of “not working,” such as the costs of poor quality and of rejects, and the costs of shutting down the machinery to change from one model of a product to another.

      Examples are two automated U.S. producers of television receivers, Motorola and RCA. Both were almost driven out of the market by imports from countries with much lower labor costs. Both then automated, with the result that their American-made products successfully compete with foreign imports. Similarly, some highly automated textile mills in the Carolinas can underbid imports from countries with very low labor costs, for example, Thailand. Conversely, in producing semiconductors, some American companies have low labor costs because they do the labor-intensive work offshore, for instance, in West Africa. Yet they are the high-cost producers, with the heavily automated Japanese easily underbidding them, despite much higher labor costs.

      The cost of capital will thus become increasingly important in international competition. And it is the cost in respect to which the United States has become, in the last ten years, the highest-cost country—and Japan the lowest-cost one. A reversal of the U.S. policy of high interest rates and of high cost of equity capital should thus be a priority of American policymakers, the direct opposite of what has been U.S. policy for the past five years. But this, of course, demands that cutting the government deficit rather than high interest rates becomes our defense against inflation.

      For developed countries, and especially for the United States, the steady downgrading of labor costs as a major competitive factor could be a positive development. For the Third World, and especially for the rapidly industrializing countries—Brazil, for instance, or South Korea or Mexico—it is, however, bad news. Of the rapidly industrializing countries of the nineteenth century, one, Japan, developed herself by exporting raw materials, mainly silk and tea, at steadily rising prices. One, Germany, developed by “leapfrogging” into the “high-tech” industries of its time, mainly electricity, chemicals, and optics. The third rapidly industrializing country of the nineteenth century, the United States, did both. Both ways are blocked for the present rapidly industrializing countries: the first one because of the deterioration of the terms of trade for primary products, the second one because it requires an “infrastructure” of knowledge and education far beyond the reach of a poor country (although South Korea is reaching for it!). Competition based on lower labor costs seemed to be the way out. Is this way going to be blocked too?

      From “Real” to “Symbol” Economy

      The third major change is the emergence of the symbol economy—capital movements, exchange rates and credit flow—as the flywheel of the world economy, in the place of the real economy: the flow of goods and services—and largely independent of the latter. It is both the most visible and yet the least understood of the changes.

      World trade in goods is larger, much larger, than it has ever been before. And so is the invisible trade, the trade in services. Together, the two amount to around $2.5 to $3 trillion a year. But the London Eurodollar market, in which the world's financial institutions borrow from and lend to each other, turns over $300 billion each working day, or $75 trillion a year, that is, at least twenty-five times the volume of world trade.

      In addition, there are the (largely separate) foreign-exchange transactions in the world's main money centers, in which one currency is traded against another (for example, U.S. dollars against the Japanese yen). These run around $150 billion a day, or about $35 trillion a year: twelve times the worldwide trade in goods and services.

      No matter how many of these Eurodollars, or yen, or Swiss francs are just being moved from one pocket into another and thus counted more than once, there is only one explanation for the discrepancy between the volume of international money transactions and the trade in goods and services: capital movements unconnected to, and indeed largely independent of, trade greatly exceed trade finance.

      There is no one explanation for this explosion of international—or more accurately, transnational—money flows. The shift from fixed to “floating” exchange rates in 1971 may have given the initial impetus (though, ironically, it was meant to do the exact opposite). It invited currency speculation. The surge in liquid funds flowing to Arab petroleum producers after the two “oil shocks” of 1973 and 1979 was surely a major factor. But there can be little doubt that the American government deficit also plays a big role. It sucks in liquid funds from all over into the “Black Hole” that the American budget has become* and thus has already made the United States into the world's major debtor country. Indeed, it can be argued that it is the budget deficit which underlies the American trade and payments deficit. A trade and payments deficit is, in effect, a loan from the seller of goods and services to the buyer, that is, to the United States. Without it the administration could not possibly finance its budget deficit, or at least not without the risk of explosive inflation.

      Altogether, the extent to which major countries have learned to use the international economy to avoid tackling disagreeable domestic problems is unprecedented: the United States, for example, by using high interest rates to attract foreign capital and thus avoiding facing up to its domestic deficit, or the Japanese through pushing exports to maintain employment despite a sluggish domestic economy. And this “politicization” of the international economy is surely also a factor in the extreme volatility and instability of capital flows and exchange rates.

      Whatever the causes, they have produced a basic change: In the world economy, the real economy of goods and services and the symbol economy of money, credit and capital are no longer tightly bound to each other, and are, indeed, moving further and further apart.

      Traditional international economic theory is still neoclassical and holds that trade in goods and services determines international capital flows and foreign-exchange rates. Capital flows and foreign-exchange rates these last ten or fifteen years have, however, moved quite independently of foreign trade and indeed (for instance, in the rise of the dollar in 1984/85) have run counter to it.

      But the world economy also does not fit the Keynesian model in which the symbol economy determines the real economy. And the relationship between the turbulences in the world economy and the domestic economies has become quite obscure. Despite its unprecedented trade deficit, the United States has, for instance, had no deflation and has barely been able to keep inflation in check. Despite its trade deficit, the United States also has the lowest unemployment rate of any major industrial country, next to Japan. The U.S. rate is lower, for instance, than that of West Germany, whose exports of manufactured goods and trade surpluses have been growing as fast as those of Japan. Conversely, despite the exponential growth of Japanese exports and an unprecedented Japanese trade surplus, the Japanese domestic economy is not booming but has remained remarkably sluggish and is not generating any new jobs.

      What is the outcome likely to be? Economists take it for granted that the two, the real economy and the symbol economy, must come together again. They do disagree, however—and quite sharply—about whether they will do so in a “soft landing” or in a head-on collision.

      The soft-landing scenario—the Reagan administration is committed to it, as are the governments of most of the other developed countries—expects the U.S. government deficit and the U.S. trade deficit to go down together until both attain surplus, or at least balance, sometime in the early 1990s. And then capital flows and exchange rates would both stabilize, with production and employment high and inflation low in major developed countries.

      In sharp contrast to this is the “hard-landing” scenario. With every deficit year the indebtedness of the U.S. government goes up, and with it the interest charges on the U.S. budget, which in turn raises the deficit even further. Sooner or later, the argument goes, this then must undermine foreign confidence in America and the American dollar: some authorities consider this practically