Gabor Steingart

Speech at the London School of Economics, 10.6.2008

Everybody in the upcoming general election is selling big portions of change. You can buy it enriched with hope – then it comes from a former community organizer. Or it is loaded with experience – then it will be offered by a war veteran.

But real change needs more then a politician. For example you and me. It´s time now in the campaign circus to lift the curtain not for another political strategist, but for a great behavioral scientist, the Nobel laureate Ivan Petrovich Pavlov from St. Petersburg, Russia.

By experimenting with dogs he discovered a long time ago the animals have an innate reflex. He placed food in front of them. Like a push of a button – saliva begins to flow.

Pavlov combined two stimuli, food and the sound of a bell, until the dogs understood the connection. The bell rang and the dogs started salivating.

Then Pavlov shortened the reflex chain by removing the food. But the dogs continued to salivate after the bell tone, even when food no longer followed.

We learned an important lesson: that an experience, once stored in memory, becomes stronger than reality.

Unfortunately we are not doing better than our dogs. Our political reflexes are very similar. Whether we call ourselves progressives, conservatives or even independents, we have one thing in common – we are often ill-conditioned.

First:

The risk of terrorism is very real, and we must protect ourselves. But our fears have been spun out of proportion. The Taliban consists of military dwarves and political pygmies. A country like Iran, with a gross domestic product the size of Connecticut’s and a military budget only as big as Sweden’s, doesn’t deserve the attention of the entire Western public and its governments.

Nowadays, world history isn’t being written in Afghanistan, Baghdad, or Tehran, but in Shanghai, Singapore, Delphi and Beijing. The defining word confronting our generation is not terror, but globalization.

It is the rise of India and China, not the goings on in the mountains of Pakistan, that will leave their imprint on this era. The war for wealth, a bitter struggle for a share of affluence, and the related struggle over political and cultural dominance in the tomorrow’s world, are the real conflicts of our day.

The war on terror is overblown, the man in the White House has set the wrong priorities, and the public—deliberately or not—is being kept in the dark over the true extent of the global shift of power and wealth.

Neither the US President nor the British Prime Minister have spoken about it: But after two world wars, the center of the world has shifted from Europe to America, and now it is shifting once again, this time toward Asia. A new topography of power is taking shape.

By 2025, China and India will likely dominate the world market with their purchasing power. Meanwhile, the West is turning into a miniaturized version of itself. Its population is both shrinking and aging, its inventive spirit is diminishing, and its relative share of the economic pie is getting smaller. Europe’s share of the global market, three times the size of China’s and India’s combined before World War I, will shrink to only 15 percent of the economic power of these two countries within the next two decades. The U.S. share of global exports, for example, has been cut in half since 1960.

For the Asians, taking control of the low-wage labor market was only the beginning. Their attack on the middle class and modern, high-tech jobs is still in its infancy, as Asian nations invest more and more of their revenues in research and education. Their goal is dominance, not being part of a silent partnership. They want to lead instead of follow. And, be clear about that: I understand their goal. It’s the right one – for them.

Second: We believe, free trade is good for everybody in every country at any time. Somebody cries „free trade“and both of your major political partieshalf starts dreaming of peace and prosperity. Gordon Brown and David Cameron are sharing this dream.

And indeed: The unrestricted exchange of goods had delivered peace and prosperity for decades. The rise of the Western world was strongly connected to the free trade philosophy.

It worked well also in the early days of globalization, nearly 500 million employees in the West, including the United States, Canada, and Europe, were all working under similar conditions.

It was a competition between companies, not a competition between nations. Experts referred to this as a “level playing field.” The terms of trade were fair.

This world was indeed a flat world. Those times were the glory days for ordinary workers. You remember, that was the time when Great Britain meant also building Great cars, when „Made in America“ was written on nearly every product. That was the time when a new word became famous: middle class, a magic word, a huge promise for millions of people to climb up the ladder finding wealth and prosperity. That was the time when we all became free traders.

But meanwhile the unpredictable happened. The flat world was crushed. China, India, and most Communist countries, decided nearly overnight to join the world labor market. It was a great decision for them, but it had a far-reaching impact on average people.

Since their entrance into the world labor market we began to face an inflation of workers. Now our Western workforce, 500 million people, are confronted with an additional 1.5 billion workers, competing under a completely different set of rules and regulation. The term of trade changed.

The new reality since that: Free trade brings prosperity to a lot people and others are getting hurt. Modern globalization is not a force for good or for bad, it’s both. Unfortunately it is not a unifying force, but an extremely devise one.

But it not a problem of some people, it’s an all Western problem.

The dollar is weak because the economy is weak. The economy is weak cause the growth rate during all this Bush years was driven by consumer spending, and the rise in consumer spending was not why salary was going up, salary was going down during this years. Consumer spending was driven by heavy lending. The biggest exporter, of the world become the biggest importer. The biggest lender of money became the biggest borrower of money. If we were dogs we would start wondering about our free trade beliefs. The bell is ringing, but where is the beef?

Third: A Market Economy in the Western style is the role model for everybody. The invisible hand of the market, Adam Smith, will shape the world. that’s hard for many of us to understand: If I would try to be polite I would say that’s wishful thinking. but I am not here to be polite. It’s wrong. the emerging powers are working with two hands – the invisible Hand of the market and the iron fist of the government.

Economics and morals have nothing in common. This statement is often what we are told, but it is a fallacy too. Let’s explain.

Every product is made up of only three things: First, there are raw materials such as oil, plastics, steel, rubber, glass, paper, and wood. Second, there is knowledge, the know-how to build a sports car, a computer, or a mobile phone from all this plastic, steel, rubber, and glass. Third, there is the set of conditions that enable a company to bring together the raw materials and knowledge.

These production conditions—that is, laws, regulations, and a country’s unwritten traditions—make up the real difference. It’s about rules and regulation stupid.

The Asian and Western countries buy resources from the same dealers, at similar prices. The know-how mostly comes from the Western countries, whether legally or illegally. The key difference though, is the values of each country.

The third component consists of more than just a worker’s salary. It includes not only Western values such as the worker’s benefits, coffee breaks, separate bathrooms for men and women, holiday pay, sick pay, overtime pay, a Christmas bonus, unemployment insurance, and pension benefits but also the health and safety regulations that protect the workers. Western values also include the protection of the environment, clean air, clean water, and proper housing, as well as the way children are treated: as children, not as working slaves.

We send our children to school, not down the coal mine. We try to protect our nature, not to pollute it.

Our moral standards, our values as a free western society, which are documented thousands of times over in collective wage agreements, company agreements, laws, company regulations, and, to some extent, international treaties, are what make the difference in today’s world economy.

Today we can buy a washing machine made by Whirlpool, General Electric or Miehle that includes a piece of the welfare state. Or we can buy a Chinese brand that comes directly from the Yangtze Delta and has no built-in social welfare costs. If we order a car that comes with the whole social package, it will be made by Ford in Detroit and cost an additional $1,600. It would be cheaper to buy a car from the Hyundai dealer next door.

The latest available data from the U.S. Census Bureau published in August 2007 sent a very clear message: this is the first boom period in American history where the upper classes go up while significant parts of the middle class go downhill.

Although median household income, adjusted for inflation, has not reached the pre-recession high of 1999. Income inequality is at an all-time high.

For many Americans, their country is not the shining city upon the hill. It has become a shady place down in the valley. Let’s have a brief look at what really happened. About 16 percent of the U.S. population, or 47 million people, lack health insurance. Nine million people have been added to the ranks of the uninsured during the past seven years. It is important to know that about two-thirds of those Americans who became uninsured last year were members of middle class households with pretax incomes of $75,000 or more, which raises some important questions:

What has really happened to their country? Where do these new uninsured people come from? Why have their lives developed in this direction? The answer is disturbing: they are mostly members of the middle class working for international companies. Their corporate leaders have cut back employer-provided coverage over the last decade—to improve the competitiveness of the company. I don´t want to blame their CEO´s for that. But I would like us to understand that here we see precisely the paradox of globalization: while the competitiveness of American companies is on the rise, the standard of living of the average family is shrinking.

A lot of people think either or either. But it all the time both: globalization connects people. But on the same day, and in the same country, it divides society.

Today competition is not driven by new technologies, or a new management style, it’s a competition about social and environment standards. So, economics and morals are more strongly connected then ever.

Fourth: The natural progression for a developed economy is to move from an industry-based to a service-based economy. Thats the way it works. That’s what we have learned, that’s what we believe.

Seen in this light, the disappearance of industrial jobs is even a good sign because it clears the way for the new economy. Happy farewell to the blue-collar worker! The new world looks like Wall Street and Silicon Valley, not like Detroit, Gary and all the other regions we call rust belt now.

Wait a minute! What we see outside may be not the end of the industrial age, but merely a shift of industrial work to Asia. All over the world there are more people doing industrial jobs than ever before. Today there are 600 million blue-collar workers worldwide. Even in India, most of the new jobs are in the industrial sector. We are living maybe at the beginning of the second industrial age. Blue Collar 2.0

Only the Western countries are losing these jobs. Germany has lost 29 percent and France 17 percent of jobs in these sectors since 1991. In the United States, the economy has lost more than a quarter of its industrial jobs since the late 1970s.

Many economists continue to defend the old theory that the Indians and the Chinese are merely going through the same industrial age Western societies have already put behind them. But this way of thinking fails to explain today’s development in India and China, because they are building their industrial and service sectors at the same time. Clearly, we are experiencing, not a postindustrial age worldwide, but a series of simultaneous developments for which we have not been prepared. What is old to build a car, a airplane, a container ship.

Perhaps the service sector economy is simply a part of the industrial society: service jobs are at the end of the production chain, not an independent unit. For example, the pilot flies an airplane, one of the most advanced industrial products. The waiter serves meals made by the food industry. The investment banker is selling pieces of a real automotive plant or pharmaceutical production facility, even if what he really sells are artificial products like high-yield or junk bonds. At the end of the chain we find all the jobs with which we are all too familiar: researchers, blue-collar workers, marketing specialists, back-office people, and sales forces.

Let’s put this in terms of the family: the service jobs are in all likelihood not the sons and daughters of the industrial father but simply his brothers and sisters. This sounds banal, but it has serious consequences for our political behavior. If the service and industrial sectors are parts of one and the same family, we cannot separate ourselves from one without destroying the family as a whole.

Families want to stay together, not be torn apart. If we don´t stop our wrong conditioning we will lose both, the old and the new jobs. Corporate outsourcing experts have a term for the phenomenon that the family goes together abroad: They call it “network outsourcing.”

A lot of experts say: Be patient. In the long run, globalization will create a flat world, all nations will become market economies with political liberty for everybody. My question is: How long is the long run? Could it be that it’s too long to have any relevance for our lives?

Let’s come to the conclusion:

1. America must search for a third way between die-hard free traders and protectionists. Trade is a question of interest and not a matter of beliefs. So I advocate to bring politics back to the table. We need trade and we need a trade policy, driven by national interest not by religious beliefs

2. Education. We should give our workforce a huge upgrade to counter he inflation of workers. the unskilled people are faced with a competition they never can win on their own. These people are rich. This society is rich too. We have a lot of oil in this country. But it is not hidden in the ground. It’s hidden in the brains of people. We should start exploiting it. That means to double the expenditure!

3. We nee a consumer revolution. If your house looks like a storage room of the asian export industry you cannot expect that your workplace looks like a American one. It will change and that’s not the change you are waiting for. So I suggest to give consumers real power, means much more information.

4. Western cooperation. I think we have to pool our interests. We work together in NATO for security reasons. We should now cooperate also on economic, environmental and social issues. we are all members in the democratic capitalistic club and we should try to educate them, to integrate the emerging powers in our system.

5. For all that we should rethink globalization. If the bitter people cling to their religion and their gun, the upper classes cling to their free trade belief and the dream that all the emerging countries want to be and will be little Americas.

Fortunately, we also have Pavlov to thank for the discovery that false reflex chains can be repaired. If a test animal hears the bell for an extended period of time without being fed, reflexive salivation disappears. Pavlov called this “deletion.”

Maybe inside our political brain we have to do the same thing. Deletion could be a premise for change. We should learn it from our dogs.