2009/12/11

Globalisation and military history lessons learned

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The basic problems (and the basic advantages) of globalisation are widely known; more countries industrialise, compete with lower wages with established companies in industrialised countries and certain industries pretty much move from rich to newly rich countries.
The old Caucasian-Japanese oligopoly on wealth and the exploitation of most of this planet's natural resources is eroding.

That's in principle a good thing; wealth for everyone is a really old dream and this is obviously a part of the path to wealth for everyone. The problem is that the basis for the wealth of established rich countries is being eroded, and these countries need to find new sources for their wealth at a quite fast pace.
This pace needs to be that fast because every knowledge advance is short-lived nowadays. The newly industrialising countries build their economies on the basis of good education (and health) systems. This enables them to catch up with state-of-the-art in a few years and even to overtake in some areas of expertise.

Japan (late 19th century), Korea (late 20th) and the recoveries of Germany, Italy and Japan after WW2 show how quickly such a rise from poor to rich can happen with a good educational base; two generations for a newcomer and one generation for a comeback.


Several efforts can help industrialised countries to keep their absolute and even relative wealth:

(1) Containment: Slow down the transfer of technology and reduce the sale of investment goods.

(2) Provoke greater inefficiencies in newcomers (occupy their nation's potential with prestige projects, civil war or arms races).

(3) "more R&D"; invest yourself enough in R&D to stay ahead

(The list is longer, but these are in my opinion major strategies.)

The third effort is the conventional wisdom answer to the problem, but it's got its flaws (we wouldn't be bothered by globalisation if it wasn't flawed):
It's very difficult to stay ahead for a long time, as that's quite the same as a win series. You have bad luck sometimes, and you can't avoid that. The other problem is that it's a strategy with limited potential.

The maximum* useful R&D spending increase would be achieved at

+ additional pioneer advantages
- additional pioneer disadvantages
- additional R&D costs
= 0

"pioneer advantages"; this is related to a term from the economic innovation theory and means basically the oligopoly advantages of the technologically advanced few in this case.

"pioneer disadvantages"; well, not every innovation is only a blessing. Much goes wrong if you push hard for innovation!

There are diminishing returns of R&D investments (you don't multiply the outcome as much as you multiply your input). Pushing hard for additional technological advance means to reach beyond the low-hanging fruits. You put more effort into it and get less for it. The relation of advantages to disadvantages and obvious costs becomes worse.
At some point you reach the aforementioned equation; and further pressing for technological progress would only hurt you beyond that state. That's quite related to the famous (and equally misunderstood) Laffer curve, by the way.

You may have noticed that I treat R&D costs as a disadvantage. The mass media sounds differently if globalisation and research are being discussed; they equate more research with "better". Well, they simply assume that we didn't reach the equation yet. Their (probably correct) assumption is that the equation is none, that the calculation still leads to a positive value result.

R&D costs are nevertheless costs, and their use as synonym for their output does not change that costs are disadvantageous and you can have too many costs. A nation can invest too much in R&D!

I think the point is clear by now; the "more R&D" strategy has a limited potential - and it will likely yield only unsatisfactory results the more nations have become industrialised and attempt to lead the race by spending heavily on R&D.

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Why did I write this in a "Defence and Freedom" blog?

I did so because the similarities to the military technology and art of war "races" are quite striking. The major strategies for preserving extraordinary national wealth in face of the globalisation are equivalents to strategies that were used for centuries (and especially in the 20th) in the military sector. The military sector may actually have lessons learned that may benefit the nation's grand strategy re: globalisation.


This is an extra example for the great value of military (history) research. The wealth of our nation(s) could depend on insights that were accumulated for war & peace.

War, the mother of all things: It's probably having an unexpected comeback - at least in the field of national strategy.


Oh, and let's not forget that strategy (1) and especially (2) are rather "not really nice" strategies that could lead to militarily relevant events!

Sven Ortmann

P.S.: This is just a quick look, far from complete. Nothing is truly complete if it's about globalisation, after all.

*: This omits the competition for resources with other promising effort. The real maximum useful R&D spending depends on the efficiency of the alternative efforts as well (and be lower). There are many more complicating factors to take into account that would exceed the format of a mere blog post!
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7 comments:

  1. Chinese know about these measures, as suggested by you. Hence, they have enticed and forced Western business to build factories in China. They will take over them, if they feel they need these.

    Also, now they are actively buying hi-tech firms in Europe.

    Europeans lack the guts to say 'NO" to China while the Americans are greedy for money and have no vision.

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  2. The big winner of globalization is whoever owns the Fed. The Fed unlike most central banks is privately owned and wikipedia doesn't say who the owners are because of the secrecy laws. So I would assume Wall Street firms own most of the Fed.

    The US has a $14 trillion dollar economy and in 2007 $800 billion in currency in it's economy with an average currency growth of 3% a year that works out to $24 billion a year in profits for Wall Street. Due to the economic crisis the US has doubled the amount of currency to about $1.6 trillion. So with currency growth of 3% Wall Street can earn $54 billion a year.

    That's sweet profits. But, Wall Street being Wall Street that's not enough, with globalization every country that imports oil needs to orientate it's economy to export to the US to earn US dollars to pay for oil imports and every country that exports oil accumulates US dollars.

    Now your talking real sweet profits for Wall Street. Think about how many US dollars opec countries and China, Russia Jappan and Germany have in their cental banks. To put it in pespective I think total global wealth is about $US60 trillion now and China has $5 trillion US dollars.

    So from a strategy perspective it makes sense for Iran and Venezuela to sell oil for other currencies. It makes sense for Russia to do it eventually as well. It makes sense for Osama to bankrupt America in as many long wars as possible. It makes sense for China to eventually eat the loss on it's
    $5 trillion US Dollars and win a la Sun Tzu ie win without resorting to war.

    It makes sense for the American political, economic and military elite to get it act together. But, fat chance in hell of that happening.

    Don't forget that innovation also applies to organizational culture and not just technology. ie like the WW1 German army shift from 2nd to 3rd generation army. It makes me wonder why no country has tried changing it's governmant from a bureaucracy organizational culture to a decentralized one.

    Thanks for the Good blog Swen. I've been reading your blog for over a year and your blog is my favourite blog. Probably a lot of your Canadian hits are from me.

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  3. Oops, I don't know what the total global wealth is.

    Total US wealth is roughly US$60 trillion dollars. Total global equity(stocks) wealth is roughly $60 trillion US Dollars, but that doesn't include bonds or real estate wealth.

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  4. Such statistics are of rather 'not convincing' reliability.

    See the "loss" of housing "value" in the U.S. in '08; about USD 3 trillion. Most of it was mere illusion anyway. The same goes for stock 'value'.

    Even the GNP is a more reliable stat.

    - - - - -

    U.S. public debt to the PRC is IIRC something below one trillion.

    The total national external debt (caused by the trade balance deficit that was at about USD700 bn/yr) is according to CIA World Factbook (certainly no anti-American source):
    "Debt - external: $13.75 trillion (31 December 2008)"

    We should subtract a 0.8 trillion net foreign investment for a more complete look.


    Globalisation isn't really about these things, though. It's more about the unusually fast transfer of knowledge and the migration of industries.

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  5. Globalisation isn't really about these things, though. It's more about the unusually fast transfer of knowledge and the migration of industries.


    I respectively disagree sir.

    I think that at it's core globalization is really just another big Wall Street ripoff.

    I think of globalization as free but unfair trade. No country in the long run really benefits from it. Not even Joe Sixpack American benefits from it as their manufacturing jobs disapppear and more of the economy becomes dominated by Wall Street. It also led to global imbalances that caused the economic crisis.

    So I think the logical strategy for any country is to undermine globalization and force the US government to make the Fed government owned; and the US dollar pegged and convertible to gold.

    Then we'lll have free and fair trade. Then the aspects of trade strategy that you mentioned will be more relevant.

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  6. Well, the definition of globalisation says it's about free trade, increased integration and better connections.

    The aforementioned migration of industries and rapid dispersion of knowledge are the effects that are our problems.

    Wall St. can dent the whole thing, but it's not its centre. There's not enough gold to back up the USD and the Fed doesn't much more than lending cheap money to banks - the Japanese did this with a half as big economy since about '90 as well.

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  7. Transatlantic Reader16 December 2009 at 18:28

    Rob
    What back yard school of economics did you attend? How will you "force" the gold standard on one nation and not all the others? If I knew that the yuan was pegged to gold, I'd buy it. so would others. but it is not, nor is the dollar, the pound, the euro, the ruble, etc ad infinitum. Including yours.

    i think Sven IS right - globalization is the movement of industry and knowledge. When an American company starts building washing machines in Kenya, yeah Ohio loses jobs. Kenya gets jobs. Job begets workers which generates income. Income generates prosperity which generates spending. The housewares manufacturer in Iowa gets orders from kenya. Adds more workers. Cyclic in nature, ya know? Why did BMW and Mercedes build plants in US? Lower wages, educated workers, tax benefits. Half of Honda Accords sold in japan are made in the US. THAT is globalization - like it or not.

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