Acrobat Distiller, Job 3

Aspen Institute Italia – Aspenia n.5 CONSEQUENCES OF THE COLD PEACE Carlo Scognamiglio (The economist and essayist Carlo Scognamiglio, former Dean of the Luiss University, is a member of the Italian Senate, of which he has been President. He was recently confirmed as Chairman of Aspen Institute Italia. In the past he has occupied leading positions in public and private corporations.) The market economy is ever closer to complete hegemony, and, due to financial globalization, the Anglo-Saxon model is winning over the Rhineland one. In order to guarantee stability in Europe’s political leadership, social systems must be reformed. Nearly 80 years have passed since John Maynard Keynes showed the world he was a genius by resigning from the British delegation at the Paris peace negotiations and publishing a slim volume entitled The economic consequences of the peace, which is still a perfect demonstration of the usefulness of economic theory. Rejecting the approach adopted by France and Britain to the economic clauses of the peace treaty with Germany, especially the indefensible clauses on "reparations". Keynes concluded that such a treaty would inevitably lead to another war, and so, twenty years later, it did. Today, following other epoch-making events, the end of the Cold War and the division of the world into military and economic blocs, we are wondering what their economic, political and social consequences will be. I dislike the Italian neologism for globalization, globalizzazione, for two reasons. The first is that it is a bad translation: in Italian, the transformation of the economy and society from many national and regional markets into a system that operates without regard to national frontiers, should be called "mondialization". By using this term, however, one would lose a nuance of the English word "globe". The Italian equivalent of the latter is orbe (mondo), or sfera, meaning a body that has the geometrical property of being equal at all its points. The world is not geometrically equal at all its points. The use of the word "globe" suggests that the process tends to make all the parts of the sphere equal, a concept which would not be implied by the term "world". The second reason is that the term globalization is ambiguous. One has to ask oneself what is being globalized. If the reply were "the market economy system", we should meet with broad consensus (though with the reservations I shall mention later). If, on the other hand, we were to refer to political or sociological phenomena we should come up against many doubts, if only because it is commonly believed that "globalization" is accompanied by an accentuation of local phenomena. Our reflections on the economic consequences of the (cold) peace should not begin with "who" won the war, because history teaches that in many cases the winners of a war become the losers in peacetime, but with what type of hegemony that peace will be established. In this connection I wish to avoid another word, "capitalism". It is a fact that in the Cold War the orders based on the capitalist economy prevailed over those based on the command or socialist economy. But the term "capitalism" has a political connotation: as Aspen Institute Italia – Aspenia n.5 the opposite of "socialism" and as the definition of a system in which one factor of production ranks higher than the others. That is why using it may be misleading. For example, the statement that the consequences of the end of the Cold War may involve the extension of capitalism to China seems very rash. Actually I believe that the hegemonic factor that will be established is the market economy. In the light of this assumption, i.e. that it is the market economy that is "going global", we may try to see the probable consequences. Two main principles, or reference values, are established by the economic science of Adam Smith: first, specialization (and hence productivity) is limited by the extent of the market; secondly, the order determined by the "invisible hand" is far better than what can be achieved by any centralized economy. From these principles stem "values": productivity is a value because it ensures the material (and moral) well-being of citizens. Competition is a value. Smith, however, does not mention the third principle or value which we consider fundamental today: stability. For him prices were the translation of economic value into money. The stability of the former was left to nature (at the most there might be inflation due to the discovery of new mines or the debasement of the metal content of coins). The stability of the latter stemmed from the concept that value depended fundamentally on the quantity of work embodied in the goods and the concept that wages were stable in real terms. Having recalled these three fundamental principles, we may now consider what effects the hegemony of the market economy is likely to have. From the point of view of the first principle, the transformation of the world economy from a group of national and regional markets into markets that transcend national frontiers must necessarily have great benefits, as broadening markets will lead to greater productivity, which will increase the value of per capita production, and greater competition, which will transform product growth into a net benefit for consumers. Although the idea of a 21 trillion dollar market without dominant positions can be described as marvelous, we are just at the beginning. The "globalized" markets involve less than a quarter of products (in value), and more than half (hard to brand local goods and services) are not "global" at all. Only 18 countries benefit from global competition; 68 more (including China and India) benefit only in part, and the rest do not benefit at all. In itself, however, the trend is clear. It becomes less clear if we consider the second principle. Although the abolition of the barriers constituted by national frontiers should broaden the range of action of the "invisible hand", in the developed countries the weight of the "visible hand" – State intervention – is actually increasing. Using the simplest measure of the role of the State in national economies, the share of national income spent by governments, we see that in the 1960s it was about 30%. In the 1980s, when the excesses of the past had been recognized, the share rose to 42.5%. Now, in the years of globalization, deregulation, computerization, etc. the State’s share has actually... increased to 45%. "Since then, the strong wind of globalization has become a gale, market forces have assumed their present overwhelming power – and the State has increased its share a bit more to 46%."6 National governments, and their weight in the economy of the industrialized countries, have done nothing but grow. Aspen Institute Italia – Aspenia n.5 The "cyclone" of globalization, or market hegemony, is proceeding quite slowly, as regards the first principle. As regards the second principle, in some respects things seem to be going backwards. But as regards the third principle, which concerns money, prices and financial activities, things seem to be quite the opposite. Here we may note that globalization has effectively taken place, and so the market economy has assumed complete hegemony, which as we said tends to have globalizing effects, among other things eliminating differences. This may have important repercussions on the balance of the world system and on stability. The threats to stability mainly affect the third and fifth points of the so-called "Washington Consensus": the balance between investment and savings and the related pension system; and the functioning of financial and banking systems. We know that the market economy is not a homogeneous whole, but has many little differences. These include the way of organizing production in enterprises. So far, reference has been made frequently to enterprises whose management is shareholder- value-oriented and enterprises that are stakeholder-value-oriented. While the former typify the American organizational model, the latter are said to be typical of the Rhineland (or continental European) model. Insofar as it makes sense to speak of "models", the latter is supposed to rest on four pillars: stakeholder-oriented management; close links between enterprises and families (the German Mitbestimmung family business and the Italian family business); the close link between enterprises and banks (the German Hausbank and the link between banks and enterprises in Italy); and the national roots of enterprises. Under the pressure of market hegemony, these elements are diminishing, if not actually dissolving. Every meeting of a big group opens with the announcement of ambitious objectives of return on capital. Even the results announced by Italian State-owned enterprises that have been or will be partly privatized, such as ENI, ENEL and STET, are welcomed with admiring satisfaction, whereas just a few years ago they would have provoked Parliamentary questions and uproar. The social character of the enterprise – that which binds together the people who work in it – is becoming weaker. The Hausbank and the link between banks and enterprises in Italy will soon be things of the past. National rooting, at least for big enterprises, is just a memory and the traditional links between State and industry are therefore becoming weaker. In other words, under the pressure of financial globalization, the Anglo-Saxon market economy model is catching on. This should bring about a radical change in the forms of leadership in continental European enterprises, as summed up in a new motto: from the Volkswagen to the Volksaktien (from the popular car to popular share ownership). If competition among enterprises on the "globalized" market for raising capital comes about mainly on the basis of profitability parameters, and if, therefore, the redistribution Aspen Institute Italia – Aspenia n.5 of income can no longer be achieved through wage increases for reasons of competitiveness, it may be done through the distribution of profits to popular shareholders.

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