Continuing each Monday another excerpt — this one a very long one — from my 2001 book, which can be purchased as a PDF for $10 here: www.scribd.com/doc/25085990/The-Art-of-Enterprise-by-Gary-Hoover-January-2010.
So the world is becoming wealthier and wealthier, led by the US and other nations. Why is this happening? What factors are most important in the world’s continuing rise? In the answers to these questions, we find both the factors that got us here and the factors that will carry us forward—the trends we should promote and the trends we should worry about if we see them fading. There are many factors at work, but I will group them into seven master headings.
Note that these are both causes and “co-trends,” highly correlated with increasing wealth. They come part and parcel with our wealth, sometimes a little before, sometimes a little after. Consider education as an example – does our rise from illiteracy bring prosperity, or does our new-found wealth finance our increased investment in education? Of course, both are true: education is cause and effect. But that makes it no less important when considering the factors that have fed the growing prosperity around the world.
1. The rise of democratic government and the democratic peace.
Over the last twenty years, there has been a remarkable global spread of the practice of democracy. From the first real elections in years in Cambodia through the end of military rule in dozens of nations to the victory of the opposition party in Mexico, millions of people around the world are enjoying the right to vote for the first time.
One little-recognized long-term benefit of this trend is likely to be a reduction in international tensions. There has never been a major war between two democracies. When people have a real say in their government, they are not quick to lift arms. Warfare has historically been one of the great destroyers of wealth. Global peace is perhaps the most important pre-requisite to global economic growth.
2. The victory of capitalism over communism.
In conjunction with the rise of democracy, we have seen the fall of communism in many nations. More such shifts can be expected.
As recently as 1977, many observers still decried capitalism. Typical was this quote from academic author M. P. Todaro: “…capitalism, which postulates that if each individual consumer, producer, and supplier of resources pursues his or her own self-interest, they will, ‘as if by an invisible hand,’ be promoting the overall interests of society as a whole. Unfortunately, the facts of economic life in both the developed and the less developed world are such as to render much of this theory of negligible importance … Consumers as a whole are rarely sovereign about anything, let alone with regard to what goods and services are to be produced, in what quantities and for whom…. Producers have great power … in determining market prices and quantities sold.”
At the time, giant businesses like IBM, Sears, and AT&T were run by executives who seemed to believe this writer and others like him. They thought they had power. And now those supposedly powerless consumers have transferred the power they actually controlled to companies like Dell, Wal-Mart, and MCI. I wish that more students in 1977 had been reading Forbes and Fortune and the Wall Street Journal instead of theorists like Todaro.
If you walk the streets of Bangkok and Buenos Aires, as I have – if you walk the streets of Shanghai and Bombay, as I have – you can feel the energy in the air. And that energy is not the energy of generals or central planning committees or think tanks. It is the energy of street vendors, booksellers, website designers, free business people of every stripe and color. They’re allowed to flourish unshackled by governments that have come to recognize the power, importance, and generosity of the entrepreneurial spirit.
To quote historian William H. McNeill – another academic, but with a clearer-eyed vision than the likes of Todaro: “Whenever rulers and military classes tolerated merchants and refrained from taxing them so heavily or robbing them so often as to inhibit trade and commerce, new potentialities of economic production arising from regional specialization and economies of scale in manufacture could begin to show their capacity to increase human wealth.”
Today, the historical book is nearly closed on Communism. It lasted (in its homeland of Russia) for less than eighty years – not a big blip in the historical ledger. GE and Coca-Cola have been in existence longer than the USSR was. When I visit Thailand and see the rise of their people, I can only be saddened by what their neighbors in Cambodia went through, and what their neighbors in Myanmar, one of the world’s few remaining Communist countries, continue to live with (and without).
The contrast between North and South Korea could not be more dramatic. It is like those studies of twins separated at birth, illustrating the powerful effects of environment. The North and South Koreans are the same people, with the same ancient cultural history, the same pride, the same blood. In 1970, every twentieth baby in North Korea died at birth, and in South Korea the rate was the same. By 1998, South Korea had reduced the rate to 1 in 100, while in North Korea the rate had actually risen. In the 90s, North Korean women died in childbirth at almost six times the rate of South Korea.
The good news in this is that change is finally coming. Everywhere.
3. The spread of universal education.
Once you have a capitalist democracy in place, I believe nothing is more important than education. Research indicates that education is the source of better health practices, of demands for cleaner water, of better organizational practices, of more demanding and aware consumers, of thoughtful population growth, of intelligent voting, and of the desire for more education itself. Education sets in motion a virtuous loop, a snowball racing downhill, a host of self-feeding beneficial trends. Education both fuels a people’s rise to prosperity and is fed by it. Where people cannot read, lifespans are more likely to be short and governments more likely to be evil.
The rise in education is never fast enough for those who don’t have it. But it is coming. On a worldwide basis, the percent of the relevant age group enrolled in secondary school rose from 49% in 1980 to 64% in 1997. Even in troubled sub-Saharan Africa, literacy among young men (ages 15 to 24) rose from 75% in 1990 to 82% in 1999, and the rate jumped from 60% to 73% among their sisters in the same time period.
4. The rise of technology and science.
In some ways, American society today seems obsessed with technology. Some investors and career-seekers look nowhere else. We love our gadgets, and their makers love us. Thousands wait in line in the wee hours to be the earliest adopters. Our obsession with technology sometimes causes us to ignore those other things – the aging of the baby boom, the Latinization of the United States, and the rise of Asia – that may be more important in charting our future and the future of our enterprises.
Nonetheless, new technology is indeed a major trend shaping our world. In fact, it’s so important and complex a topic that I will treat it in a separate chapter following this one.
5. Increasing urbanization.
A significant corollary of the increase in world wealth is the rise of cities. Cities are where more and more of the world lives and where most of our transactions take place. The study of cities is so important to enterprise success that I devote another chapter to it a few pages ahead.
6. The end of the farm and factory.
The single most significant trend in the history of the world’s economies is our long, slow progress away from spending most of our time growing things and making things. It is one of the great ironies of the world economy that those nations with the highest percentage of people working in agriculture are also those countries with the worst nutrition and the most people starving. Nations where everyone is still working to feed themselves are nations where everyone is not yet well fed. Once a nation can feed itself or produce enough other goods to trade for food, then agriculture becomes less and less important.
Anthropologists will tell you that the family unit must first feed, shelter, and clothe itself. The same is true of a national economy. But once that is accomplished, we go on to the next level, first making more and more diverse goods, then developing creative ways to serve each other.
Of course, agriculture remains a significant industry in countries like the US, and technological advances will continue to increase the productivity of American food producers. But the relative fall of agriculture, followed by the fall of manufacturing in conjunction with the rise of services, is an inescapable and powerful trend.
What’s more, it is not a new thing, even though the phrase “the service economy” has risen to prominence only in recent decades. According to economic historian Angus Maddison, services were a bigger fraction of the economy than industry (including mining and most utilities) in the United States and the Netherlands by as early as 1890:
Share of Total Employment, Netherlands and US
Agriculture Industry Services
1700 40% 33% 27%
1890 33 31 36
1989 5 26 69
1890 39 27 34
1989 3 26 71
Sometimes you hear skepticism expressed about the notion of a service-based economy. “The world can’t just provide services to each other,” people say. “We have to make things.” While we do have to make things, that activity need not require a very large share of the world’s time and energy. In fact, since sometime well before 1980, most of the world’s efforts have gone into serving each other.
Value Added as Percent of Gross Domestic Product (GDP)
Part of the World 1980 1998
LOW INCOME NATIONS
Agriculture 31% 23%
Industry 38 39
Services 30 38
MIDDLE INCOME NATIONS
Agriculture 12 9
Industry 42 33
Services 46 58
HIGH INCOME NATIONS
Agriculture 3 2
Industry 37 30
Services 59 65
Agriculture 7 4
Industry 38 32
Services 55 62
As services continue to rise as a share of world economic activity, especially in the poorer countries, it is important to realize how diverse “services” are. Services include everything from the cop on your block to the ATM on the corner. Services include teaching, legislating, entertaining, thinking, trading, gambling, insuring, speculating, communicating, and curing. Services are at work when we watch professional baseball and when we call UPS, when we visit the supermarket, eat at Chili’s, or click onto Amazon.com. Over time, we will think about our economy less in terms of the tradition triad of agriculture/industry/services and more in terms of the major emerging sectors of our economy. Already, retailing in the US employs more people than the entire manufacturing sector. In the future, travel alone will be bigger than all manufacturing, and health services, education services, and financial services will each be many times bigger than world agriculture.
In conjunction with this understanding, be careful in interpreting statistics on balance of payments or imports and exports. We have a long and tenacious tradition of focusing on manufactured goods. But just as our total economy becomes more and more service-oriented, so do our exports and imports. Between 1980 and 1998, world service exports rose 262%, from $363.5 billion to $1316.7 billion, much faster than trade in goods. In particular, the United States’ service volume during this period rose from $38.1 to $240 billion, going from 10% of the world total to 18%, while in this same period US merchandise exports rose far more slowly, from $224 billion to $672 billion. You can see the trend, which will ultimately result in the US exporting more services than goods.
In this context, that American accountant sitting next to you on your next overseas flight, going to work on a project in Russia, and that European customer buying a ticket on American Airlines both represent service exports. This is where the future – and much of the present – lies for the United States and the world at large. Services have a huge impact on travel and geography. In the old days, when Japan shipped huge numbers of Toyotas to the US (rather than making many of them in the States), the transaction mainly involved moving freight on ships. A few executives crossed the Pacific in each direction, but such interaction was limited. The economic landscape was dominated by huge immovable factories.
As more and more of our international (and domestic) transactions consist of services, more and more people will move around. Lawyers, doctors, bankers, and management consultants are increasingly moving around – for a day trip, for a week, or for a three-year stint. And every time someone gets a passport to travel abroad for work, they become much more likely to occasionally travel abroad for leisure and to take their families with them.
Finally, the rise of services means that we will have more and more freelance workers, more people selling their services rather than their skills on the assembly line. This means that more and more people will have the option of living where they want. Even auto executives formerly bound to Detroit’s factories may now become independent business consultants. They’ll spend more of their time in airplanes, but they’ll spend the remainder of their time wherever they want, whether it’s a mountain village or a beach town. People will increasingly congregate near world-class shopping, great universities, natural beauties, and perhaps even great symphonies, rather than near big factories. Over the long run, the rise of services will have significant implications on the role of cities, the value of scenic properties, the importance of feeder airlines and airports, and many other aspects of our geography.
Of course, manufacturing will not disappear. Well-located container ports, deep harbors, air cargo, and efficient factories will be a part of our future. But over time, building, maintaining, and running these facilities will require fewer and fewer people, and they will become a smaller and smaller share of the total global economy.
More Readings on Capitalism as a Philosophy of Doing Good
Unfortunately, relatively few “serious” writers (such as sociologists and philosophers) understand why capitalism is so successful – its power to serve all that it touches. Here are a few books. The Spirit of Democratic Capitalism and Business as a Calling: Work and the Examined Life by Michael Novak. Capitalist Revolution: Fifty Propositions about Prosperity, Equality, and Liberty, by Peter L. Berger and The Capitalist Spirit: Toward a Religious Ethic of Wealth Creation, readings edited by Peter L. Berger. All of these are excellent. The Future and Its Enemies: The Growing Conflict over Creativity, Enterprise, and Progress, by Virginia Postrel, is a thought-provoking book by a woman not afraid to speak her mind. Conveys the importance of entrepreneurial energy in whole new ways. She calls it “dynamism.” Reputation: Studies in the Voluntary Elicitation of Good Conduct, Daniel B. Klein, editor – why doing the right thing is key to survival. A serious look by several authors of how we track trust – even including the role of Dun & Bradstreet! I expect this will become a bigger topic in coming years. A pioneering book. Capitalism, Democracy, and Ralph’s Pretty Good Grocery by John Mueller is all about why capitalism gets such a bad rap, and why it shouldn’t. Very good.
7. The boom in world trade.
Few human activities are more powerful than when I give you something and you give me something in return. Transactions move products, of course. But more important, they move people, they move ideas. Historically, trade is largely responsible for the spread of religion, the development and dissemination of math, astronomy, and the other sciences, and our ever-expanding awareness of the world around us. The world has been explored and united by travelers like Marco Polo who first saw “the other side of the world” while in search of new trade routes, the Muslim traders who brought Islam to Southeast Asia, and entrepreneur Isaac Singer, who internationalized the ultimate power tool, the sewing machine.
Breakthrough ideas like the number zero (the Romans didn’t have it) were invented for trade and spread by trade. The newest concepts in shipping, in paper, in printing, have always spread through trade around the world from the “haves” to the “have nots.” In the first half of the nineteenth century, the youthful United States would have never gotten off the ground without imports of English ideas, technologies, and capital. Our first railroads were financed by the British and Europeans. The products we made and the crops we grew were exported to England to support our embryonic economy.
Today, we and the other wealthy countries play the same role in the world economy that Britain played for us 150 years ago. It is up to us to continue the long tradition of wealthier nations trading ideas and products with poorer nations to help accelerate their development. China today needs our pollution-control technologies just as much as we needed British steam technologies in 1820. India needs our software techniques just as we needed the craft skills of the French and the Germans. The whole world needs our health knowledge – thousands of lives could be saved and improved through the use of our most basic antibiotics and surgical procedures. The world needs American skills at building and operating universities and hospitals. The world even needs more Rotary clubs – local associations that nurture and encourage industry, trade, and services.
Most of all, the world needs jobs. Today, many of those jobs will be in manufacturing, particularly in the poorer countries. Without the growth engine of first-world consumption, the future for the world’s poor countries would be bleak indeed. Perhaps the greatest force for world peace is the degree to which our societies are entangled in commercial relationships. The more places we have factories and customers, the fewer places we might be willing to bomb. For all these reasons, the most important single force for enriching the world is trade and communication. We need to trade as many products and services as possible as often as possible; we need transactions.
This doesn’t mean that all jobs will move from the first world to the third world, or even that all manufacturing jobs will move that way. Germany today has one of the most expensive labor markets in the world, and yet it remains one of the largest exporters of manufactured goods. I recently toured a number of very advanced jewelry manufacturing operations in Malaysia, and I found that most of the jewelers’ machines – including their cars – came from Germany. Italy is not a cheap country to do business in, particularly the northern part, and yet that is where most of the world’s eyeglasses and many of our finest fashion items are manufactured. Americans once thought we would lose all our car manufacturing jobs to Japan, but instead today all the major Japanese companies make cars in the States. When NAFTA opened up free trade between Mexico and the United States, some observers foresaw a huge loss of US jobs, but my Mexican friends report corresponding job losses in Mexico as certain categories of higher-quality US goods have flooded into the market. Japan, another expensive labor market, continues to make products that are shipped around the world.
Each nation combines a unique set of skills and talents, and there will always be some products made in some countries but not others. Most basic, low-skill manufacturing left the US many decades ago and will always seek out the lowest-cost labor. We can only hope that the factories now moving into Indonesia and India will someday move on to Zaire and Nigeria. And right behind them should come more advanced – and higher-paying – manufacturing and service industries.
The Opposing Forces
There are two great enemies to the gradual lifting of the peoples of the world through trade: isolationism and arrogance.
There have always been isolationists. When I was a boy growing up in that GM factory town in Indiana, the leaders at both GM and at the United Auto Workers, the big labor union that represented GM’s workers, would have wanted to stop Japanese auto imports if they had understood the changes to come. But if we had tried to keep out Nissan (then called Datsun) and Toyota, today GM and Ford would be dinosaurs, probably bankrupt. Without the spur of foreign competition, they would have kept on making huge cars with big appetites for gasoline. When oil prices spiked in 1973, consumers would have finally demanded more-efficient Japanese cars – or marched on the US car plants.
Because we let in the “enemy,” the US car companies were forced to recognize new forces at work and new approaches to the business – from marketing to manufacturing. Ultimately, Chrysler invented the minivan, GM pioneered the Saturn, Ford developed their successful world cars. The US firms began to invest in Japanese car companies. Today, GM and Ford retain their historical rankings as the largest and second largest car companies on earth – thanks to competition from across both oceans.
George W. Bush has said, “The fearful build walls, the confident tear them down.” Isolationism is a step toward bigotry, closed-mindedness, technological backwardness, intolerance, and (ultimately) war. There are few forces more evil or destructive to the ultimate success of the world and its people.
The other force that is almost equally dangerous is arrogance. And the more successful we are, the greater our capacity for arrogance.
I can make the case against arrogance most vividly by describing our history. To oversimplify just a little, we can say that America rose to greatness from about 1880 to 1920. This is the period when we went from being a secondary world power to the country that “won” World War I. This is the period when our great cities of New York and Chicago caught and passed the capitals of Europe in terms of size, wealth, and influence. This is the period in which we built our greatest museums and libraries and founded our best symphonies. This was the “Gilded Age” in which many of our great family fortunes were formed, some of which still fund philanthropy today. Our railroads reached their peak during these years, and the American West was opened for development.
And during this same period, we largely cut down our forests and polluted our rivers. Our mills were gritty with toxic chemicals and driven by dangerous machinery, our cities were crowded and dirty, and thousands of our children worked long hours in sweatshops.
Today, our kids go to college, our air and water are becoming steadily cleaner, and the overwhelming majority of our population has access to wealth and conveniences that the kings of the past could only dream of. And we turn to China and India and Indonesia and say, “We will not buy your products unless your rivers are clean, your children don’t work in factories, and you follow all the rules that we live by today.”
In this context, it is not hard to understand why poorer nations might think us a bit arrogant. And the fact that we are more likely to make these demands of the smaller and less powerful nations, but give a pass to the larger and more powerful ones, makes this one-sided dialogue even more irritating to others around the globe.
My point is this: we must have compassion in our dealings with the rest of the world. Each nation must evolve at its own pace. We can work to share our technologies, our management methods, our ethical and social ideals, and any other good ideas we have, but we must offer them in a spirit of sharing and giving, not from the viewpoint of “We know what’s best for you.” The issues I am raising here are not easy ones. A year ago, I spent a week in Shanghai, one of the most fascinating and energetic cities on earth—and the most polluted spot I have ever visited. By comparison, contemporary Americans don’t even know what pollution is. I want to see Shanghai’s air cleaned up more than anyone. But boycotting Chinese trade is not the answer. China has ambitious goals for protecting its environment, and is making progress – slowly but surely.
I am not advocating that we stop our global pressure to end child labor and other such practices worldwide. But I am saying that the best way to end it is probably to trade with as many nations as possible, to urge our companies to do business with the best local suppliers with the highest standards, and to bring our standards to bear on the plants they operate abroad or buy from.
The best example may be Cuba. As long as Cuba is kept out of the loop of global transactions, then attitudes of freedom and change will never have a chance there. Rather than demanding radical change on the part of their government (which hasn’t seemed to work in the first forty years we’ve been trying it), letting a little Mickey Mouse, Coca-Cola, Nike, and CNN into their society will do much more good for the average Cuban.
Gateways to Globalization: Further Readings
A Future Perfect: The Challenge and Hidden Promise of Globalization by John Micklethwait and Adrian Wooldridge – two writers from the Economist magazine have written what is perhaps my favorite introduction to globalization (out of a lot of great books). In The Wealth and Poverty of Nations: Why Some are So Rich and Some So Poor, David S. Landes weaves it all together with eloquence. Another book worth getting – actually a three-volume set – is The Information Age: Economy, Society, and Culture by Manuel Castells. I may not always agree with this academic sociologist, but he always makes me think. This set is worth the price for the charts, tables, and data alone. He covers every relevant subject you can think of. Globalization and the Challenges of a New Century: A Reader, edited by Patrick O’Meara, Howard D. Mehlinger, and Matthew Krain, contains the thoughts of many thinkers, often of opposing points of view. Particularly good.