Lester Thurow on The Future of Capitalism

Speech at the World Affairs Council of Northern California

In the next hour, I would like to have persuaded you that we don't live in a world of change, we live in something much more profound than that. When I was starting out to write this book, The Future of Capitalism, I was trying to find the right metaphor for what I think is going on the world at the moment.

The thing I found that I think most aptly describes the situation you and I are in is the concept that comes from evolutionary biology. It's called "punctuated equilibrium" Because most of the time we're the top of the food-chain species. As the dominant species on the face of the earth, you have nothing to worry about evolution, because you'll simply become bigger, meaner, tougher, stronger, longer-toothed, and more dominant. But every once in a while, something comes along which is called "punctuated equilibrium" that changes that equation.

Of course, the best example is the dinosaurs. For 130 million years, they dominated the surface of the earth. Every single dinosaur generation was bigger, meaner, tougher, and more dominant than the previous. Then all of a sudden this period of punctuated equilibrium comes along, which probably was as short as ten thousand years. In that ten-thousand-year period of time, every single dinosaur died or became a small bird and out the other side was the dominant species on the face of the earth came the mammal. Something quite different. I want to be very clear here because I'm sometimes accused of being a pessimist. A period of punctuated equilibrium is not a period of pessimism versus optimism. It's both simultaneously.

If you're a dinosaur it's very bad news. If you're a mammal it's the chance of a lifetime. You and I wouldn't be here today if it weren't for the fact that those ancient dinosaurs had died, because they would have eaten our ancient relatives and we never would have had a chance to make it.

Of course, the same thing happens in human affairs. Think about Napoleon and Julius Caesar. Napoleon ran armies around Europe approximately 2,000 years after Julius Caesar, but Julius Caesar could actually move an army from point A to point B slightly faster than Napoleon, because they both used horses and carts, and roads were slightly better in Roman times than they were in Napoleonic times. Two thousand years of human history and not a single improvement in human land transportation. But fifty years after Napoleon dies, steam trains are going 112 miles an hour. A revolution has occurred, eight thousand years of agriculture is over, one country (Great Britain) already has more than half its workforce out of agriculture and into industry, and it's a brand-new world.

Now, I think in the 21st century you and I are going to live in a brand-new world. You and I, at the moment, are in a period of punctuated equilibrium. Because we're not in an environment where the world is changing, we're in an environment where we are, at the same time, simultaneously having five fundamental, structural transformations. Any one of these five, would be seen as a major, structural change, but when five occur at the same time and interact with each other, I think they cause something much more profound than just a period of rapid change. So let me mention each of the five, talk a little bit about some of them and some of the consequences. Then we can come back and have a half-hour of discussion.

The first, of course, is the end of communism. One billion, nine million people—one-third of humanity—who used to live in the old communist world have decided to join the capitalist world and that's going to change them in some very profound ways but it's going to change us in some very profound ways. Because you can't digest a meal that big without becoming something very different. Of course, what's going to change is economic geography. Who does what where on the face of the earth is going to be radically different now that this one-third of humanity decides to play the ballgame with everybody else.

The second fundamental transformation is a shift from natural resource-based industries into man-made, brainpower industries and there's just a beautiful example of this that occurred in the last three months. For more than a hundred years, the wealthiest person in the world has been associated with oil. Starting with John D. Rockefeller in the late 19th century, and as late as three months ago, it was the Sultan of Brunei, also associated with oil. But today it's Bill Gates. For the first time in human history, a knowledge worker rather than someone who owns natural resources has become the wealthiest person in the world. That is a very good symbol of a very profound transformation.

The third structural transformation is demography with the world population growing, moving, and getting older. All of these are important. But think for a minute about getting older. By 2025, the United States and every other major industrial democracy and some developing countries like China, will have a voting majority of people over the age of 65. We're going to be the first human societies ever seen on the face of the earth numerically dominated by the elderly. That's going to change sociology, psychology, government, and business in ways so profound that it's almost impossible to exaggerate.

Fourth, and this wasn't even true twenty years ago, for the first time in human history, we have all the transportation and communication technologies necessary to have a genuinely global economy. We're not expanding world trade. The American economy and the German economy and the Japanese economy are slowly dissolving to be replaced by a global economy. Of course, the problem is we don't have global governments we have national governments that are going to have to cope with this global economy. It's very much what happened a hundred years ago when we replaced local economies with national economies, and now we're replacing national economies with a global economy.

Fifth, this is something that I don't think we think about enough, for the first time in 200 years, we won't have a dominant economic power, like the British Empire in the 19th century and we Americans in the 20th century, that says, "This is the way you play the game. I write the rules, I enforce the rules, you'll play the game my way." We're all going to be capitalists, but what it means in the 21st century is we're going to play some different varieties of capitalism in different parts of the world. The game will be somewhat amorphous, somewhat doesn't have a referee, and is going to be quite a different game than the game we played since World War II.

Let me start and first talk and illustrate the problem about the end of communism. About two months ago, I was at the World Oil Congress in Houston. Thirty-six thousand people from the world's oil industry. All of the geologists of all the big oil companies in the world now think they have found the biggest pools of oil ever discovered by human beings. These pools of oil will prove to be bigger than the pools of oil in and around the Persian Gulf. They're in and around the Caspian Sea. There may be even bigger pools of oil off the north coast of Siberia and Norway. Where you want to drill your wells, where you want to build your pipelines, who you negotiate with, what you think about the future price of oil is just radically different. Within a relatively short period of time, mainland China will become the biggest buyer of oil. So on both the supply and demand sides of the oil business, this is a brand-new business.

That's true of lots of other industries. There are probably golfers in this room. Everybody in golf these days is swinging a titanium "Big Bertha." Where do you think that titanium came from? Or the titanium in your eyeglasses, or the titanium in your watchband? The answer, of course, is the Russians had the world's biggest facility for making titanium at Miligivosk[??]. They were making three nuclear titanium submarines a year. Each one of these submarines had in it, at the time, more titanium than the United States was using in a calendar year. They don't make nuclear submarines anymore. What used to be an exotic, expensive military metal is now an everyday commodity.

Or a little bit of history: In the 19th century, who was the world's biggest producer and exporter of grain products? It was not the United States, it was not the United States plus Canada, it was not Australia, it was not Argentina, it was Imperial Russia! Because, technologically, the Ukraine and the area around it is the best place for growing grain on the face of the globe. Good soil, good rainfall, but what it's really got is a perfect transportation system with rivers flowing south into the Black Sea so it all can go out on cheap water transportation and none of it has to take lengthy, expensive rail journeys.

Now, the Ukraine doesn't have its act together today, but sooner or later it will. When it does, what am I going to do with John Deere and Fiat, the two biggest makers of farm machinery in the world. Well, I'm going to set up the equivalent of the General Motors Acceptance Corporation. The credit corporation will lend them money to buy farm machinery, barter grain back in return, sell it on world grain markets, and I'm going to drive grain farmers in the rest of the world out of business. In the United States, we know exactly who they are. If you go to the 98th meridian, and about a third of Kansas is east of the 98th meridian, two thirds is west, draw the 98th meridian from the Canadian border to the Gulf of Mexico, swing west to the Rocky Mountains, and every farmer in that part of America goes out of business. Soil's worse, rainfall's worse, transportation is much, much worse. So I guess if I have a bit of personal financial advice today, it is "don't buy a western North Dakota wheat ranch." You are very unlikely to make money on that investment.

But, you know, every social system has some things it does well, and some things it does badly. What communism did badly, of course, is you just couldn't cater to individual wants. Just couldn't. The example I like is if you went to Goom[?], the biggest department store in the middle of Moscow before communism died, the longest lines were always for female lingerie. Out the door, down the steps, across the courtyard, down the street, they were kilometers long! There were never any lines for male underwear. Why? The answer, of course, is the central planners made exactly the same number of units of both. But in every society in the world where women have choice, they buy three times as much underwear as men. Perhaps they don't need it, but they want it. In eighty years, the central planners in Moscow couldn't get the idea in their heads, "Make more female underwear than you make male underwear." If it lasted for a thousand years, those lines for female lingerie would still have been there.

But every social system has some things it does well. What did the communists do best? The answer is they ran the best school systems on the face of the globe. You take any communist country and it's better educated than its neighbors. Cuba is the best educated country in Latin America. The worst educated province in China is better educated than the best educated province in India. Eastern Europe has better schooling skills than Western Europe. The old Soviet Union has 800,000 world class engineers and scientists. Why should I pay $75,000 for an American engineer when I could get someone in Russia just as good for $200 a month? We've already got American construction companies open up engineering groups in St. Petersburg where they do get a manager electronically world-class engineering for $200 a month!

I don't know if you saw it, but about a month ago there was an article on the front page of the New York Times. "What group of Americans have an unemployment rate of 20% and wages are falling at 10% a year?" The answer is Ph.D.s in Math and Physics. Because the bottom has fallen out of their market with the cutbacks in defense, the Russians are full of these kind of people, the last three hires in the MIT Math Department have all come from Russia. These are world class people. They're going to have an enormous impact. You go to Israel, there's been an economic boom for the last five years. I'll tell you very simply why. All the universities in Israel in all the history of Israel had graduated about 100,000 engineers. Among those 600,000 Russians there were 200,000 engineers! They more than tripled their supply of engineers overnight. That allowed them to create high-tech industry in Israel, which they couldn't have done otherwise because they didn't have the human skills to do it in the right numbers.

You go to the electronic plants of Bangkok, typically in those factories half the engineers will come from the old Soviet Union. This is the greatest influx of educated manpower/womanpower in the developed world that it has ever seen. It's going to have some enormous consequences. Now, if you think about this shift in the man-made, brainpower industries, I'm not going to spend a lot of time talking about it, but it has some enormous impacts on the system.

Let me give you the list of what the Japanese think will be the seven most rapidly growing industries in the early 21st century, the ones that will pay the highest wages, highest profits, and are the most exciting, i.e., the ones the Japanese want to conquer. They write down a list and they publish it once a decade. It's called, "The Vision for the Decade." In the vision for the 1990s, the Japanese said that the following seven industries were key: microelectronics; biotechnology; the new designer materials industries; telecommunications; civilian aircraft manufacturing; machine tools plus robotics; and computers, software plus hardware. What's the common denominator of those industries? The answer, of course, is they're man-made, brainpower industries. They have no natural home. They could be anywhere on the face of the globe. They're location-free.

Of course, if you want to think about that, think about the two high-grade, high-tech areas in America: Silicon Valley and Route 128. What do they have in common? One has good weather, and one has lousy weather. [Laughter.] One's laid back and one's uptight. One's on the East Coast and one's on the West Coast. The answer is they have nothing in common. Except this is where the brainpower happens to be. What it means, of course, in the 21st century, is there is only one way you can be competitive as an individual, a company, or a country. Based on your skills and knowledge. Raw materials are buyable. Capital is borrowable. If you don't have the knowledge, technology, and skills, you don't play the game. We can come back and talk about it, but these industries are radically changing everything.

For example, take the oil business, once again. When I was a high school student, I was growing up in eastern Montana during what was supposed to be a major oil boom that proved to be a minor oil boom. In the 1950s, wildcat wells had somewhere between a 5% and 10% probability of hitting. It was luck. The people that worked as roustabouts on the oil rig were the most illiterate people in our community. You go to ARAMCO in Saudi Arabia, you'll see two supercomputers side-by-side. They're doing three-dimensional and now four-dimensional acoustical sounding. Drilling in water two miles deep. Horizontal drilling. This is a brand-new industry. If you go to the oil rigs in the North Sea, I guarantee you won't find anybody illiterate on them. This is now a brainpower industry. It's been transformed by these other industries.

Or, think about what telecommunication is going to do to retailing. Within five to ten years, it is absolutely clear that we will have all the technology to close every retail store in the world. I don't think we will because shopping is partly a social experience. We like to be on top of each other. If the issue is just buying good things cheap, it will always be cheaper electronically because you don't have to have expensive real estate. But if you want to see the shopping of the future, you will probably go to the Mall of America in Minneapolis-St. Paul, where shopping is integrated with the entertainment. You willingly pay 20% more because it's fun to pay the 20% more and be entertained at the same time you're buying. If you look at what's coming along in the laboratories, what you've seen so far is nothing.

For example, there's a group at MIT, you have to wear little hats so the computer can see which way your head's looking. You drive your grocery store cart down your computer screen, you look to the left to see what's on the left, you look to the right to see what's on the right, you're on the cereal aisle, you don't like raisins, you type "no raisins," the raisin boxes disappear, you click what you want, Kroeger's is already experimenting with it and delivers it to you in the afternoon. There's another group in mechanical engineering, they have a device a little bit like a glove, you put your hand in it and you can feel what's in the TV set. It's uncanny. You can feel a difference between cotton and velvet, oil and butter. Now, at the moment, those devices cost millions of dollars, but like lots of other consumer electronics, they'll soon be in your household for $250. But I don't think any of these things are going to be remembered.

One of the things that you can speculate about, and I think you know the answer, is suppose I'm alive in 3,000 as a historian. I'm writing a book about people who were alive in the year 2,000. What do you think they are going to say about us? What did we do important enough to be remembered? We don't remember anything about the people alive in the year 1,000. Right? They didn't do anything that was significant to our lives. Well, I think I know the answer. The answer is not going to be microelectronics. It's going to be biotechnology. Because, for the first time in human history, plants, animals and people are going to be partly man-made. Don't think it isn't going to happen. It's already happening. Genentech has a hormone for making dwarfs into normal people. We already have families with normal sons lined up to make basketball players. If you don't allow it in the United States, there's going to be someplace like the Grand Cayman Islands where they do allow it. It's going to happen.

Demography. World population growing, moving, getting older. Let me mention something about moving. National boundaries are simply collapsing. They're becoming semi-permeable membranes. I'll give you the numbers for the eighties. In the decade of the eighties, 7.9 million people legally moved into the United States, 7.3 million people legally moved into the rest of the wealthy industrial world, another 5-6 million people came illegally, for a total of about 20 [million]. Eighty million people moved across the national boundaries within the third world, like Filipina maids going to Hong Kong or the six million guest workers in Saudi Arabia. And we created 20 million refugees in places like Afghanistan. In one decade, 120 million people move across national boundaries. The world has never seen anything like it both in terms of magnitude and direction of movement, which is from poor countries to rich countries. In the 19th century, people moved from rich countries (England, Germany, Italy) to empty countries (the United States, Australia, Argentina). The reason, of course, is for the first time in human history everybody knows there's some place in the world you can have a higher standard of living. Why wouldn't you walk there?

I had this driven home to me in a dramatic way after I quit being Dean at the Business School at MIT—took a two-year leave of absence—and part of the time I did some adventures I always wanted to do. One of the adventures I did is I did a safari across the empty quarter in Saudi Arabia, which is the world's greatest desert from the Red Sea to the Persian Gulf. There was one day when we were at least 300-400 miles to the nearest road, telephone line or electrical line, we came across an encampment of Bedouins—10-15 tents and herding 500-600 camels—and right in the middle of the tents was a satellite dish and Honda generator and they were watching TV! Now, I joke that they were watching "The Lifestyles of the Rich and Famous." I don't know that, but they were watching. There are no villages in China, in India, too poor to have a village TV set.

Why would you stay some place where the per capita income is $500 in a Mexican village when you can come to California where the per capita income is $40,000? You'd be nuts to stay in Mexico! If you've got any ambition at all, you're going to get up and move. Because, what's the worst thing that can happen to you? They put you on a bus and take you home. You don't get sore feet on the way home. You're not going to throw them in jail because it costs you $35,000 a year to keep a person in a California jail. As the Los Angeles Times recently pointed out, if you look at the space per person, TV, recreational equipment, food, the standard of living in a California jail is higher than it is in a Mexican village. You're not going to scare me with a California jail. I'm coming. If you won't shoot me—and you won't—I'm coming.

I'm going to leave the elderly out for the moment and we can come back and talk about them if you like. Let's think for a minute about the global economy. Now this is something that we all, intellectually, know but we don't yet know in the pit of our stomach. Let me give you an example. If you bought a car recently, the airbags in those cars are now controlled by a computer chip called micromachining called an "accelerometer." That $50 device replaces about $650 worth of mechanical sensors in an airbag system. That particular device was invented in Boston, a lot of them are still made in Boston. Accelerometers are made in Boston, shipped to the Philippines to be tested, re-exported to Taiwan to be packaged, re-exported to Germany to be put in a BMW, to be re-exported back to San Francisco where you just gave it to your son or daughter for a graduation present. One $50 device hits six countries. That's a global economy. A skilled worker in Boston working with an unskilled worker in the Philippines, working with a middle-skilled worker in the Taiwan, working with the highest paid labor in the world at BMW Works in Bavaria. All for one $50 part.

And, of course, one of the other things that's happening—and I think it's interesting that until the most recent issue of Foreign Affairs nobody was talking about it—is the Euro on January 1, 1999. Because we talk about what it's going to do in Europe, but we haven't thought very much about what it's going to do in America. Of course, what it's going to do in America is make the dollar into "just another currency." It's going to have some enormous impacts on Americans. For example, suppose you go back two years ago when the dollar was falling from •114 to about •78. People out there in the world have five thousand billion dollars held in dollar reserves. Why would I sit there losing a third of my purchasing power and do nothing? The answer is if you're talking about those kinds of money, is there's no place to go. You can't go into European currencies because they're too small and you can't go into Japanese yen because it's still a regulated market and nobody wants Japanese yen-denominated debt until you can run a trade surplus with Japan, which nobody manages to do. So you sit there being "banged" in terms of purchasing power, because you can't go anywhere else. But as of January 1, 1999, there will be another place to go called the Euro. It will look very good, because here's an economy slightly bigger than the American economy. Instead of being the American economy with a net international debt of a thousand billion dollars, it's an economy with a plus-surplus position of about two thousand billion dollars and instead of running a trade deficit of two hundred billion dollars a year, it's running a trade surplus for the rest of the world. In June, I was at ARAMCO in Saudi Arabia, one of the things we were talking about is how much of their dollar reserves they should move into Euros and how much oil they should price in Euros as opposed to pricing in dollars. If you go to France and say, "Why do you want to do the Euro?" One of the reasons they will give you is it makes the dollar into another currency. And those "crazy Americans" can't get by with things that we can't get by with. It does make the dollar just into another currency. That doesn't mean there's going to be a dollar crisis in year one or day one, but it does mean that it fundamentally changes the world financial system. And whatever degree of instability you think is in the world financial system, it becomes one notch higher after January 1, 1999. No dominant power.

It's easy to illustrate this change in the world very simply: You often read in the newspaper about something called a trade dispute between mainland China and the United States about intellectual property rights. This is not a trade dispute. This is a dispute about the rules of the game for the 21st century. If I go to Beijing at the moment, I can buy $100,000 worth of American computer software on Chinese CD-ROM for about $100. The Chinese were selling and exporting "The Lion King" and "The Toy Story" on video before Disney issued it. At the Chicago Machine Show you could buy exact replicas of German machine tools made by the Chinese for half the price. How do you sell something if somebody else is selling your product below your cost because they have no cost? The answer, of course, is you don't. Ninety-six percent of all the software in China has been pirated. Ninety-six percent. The other four percent is American companies operating in China.

Nobody in China pays for software. But the Chinese aren't violating any treaty they've ever signed. Or anybody else has ever signed. Because when we set up the GATT Breton Wood system in 1944, intellectual property rights weren't important. We've just been kind of de facto exporting the American system. It isn't so simple to say they're cheating. First of all, they aren't cheating in the sense they haven't violated any treaty, but secondly, different cultures have very different views about what intellectual property rights ought to be. The idea of a Creator god, human beings made in his or her image, and human beings paid to be creative, is a very Middle Eastern-Jewish-Moslem-Christian point of view. It has no analog in Hinduism, no analog in Buddhism, and no analog in the Confucian societies.

I remember the first time I went to Korea, which was probably about 1970, the Koreans happily wheeled out all my books published in Korea. They never paid me, they never asked me, and they thought I ought to be proud. Because, of course, a Korean professor is very different than an American professor. In Korea, professors are paid for being wise people. Writing books is even a slight negative in that context. To me, I get paid on a piece-work basis. What's very important to me is not at all important to them.

Now, I think, if you think about all of these things, they're going to make some very fundamental changes in world affairs. You get this discontinuity between economics and national governments, you get a whole set of issues that aren't resolved like intellectual property rights. One of the things that's clearly going to happen is the whole world is in flux of what "countries" are. We tend to forget, in most of human history countries are coming and going all the time. In the last fifty years was very unique because we never moved a boundary, anywhere in the world. Because the one thing the Soviets and Americans could agree on is "don't move a boundary." Because one side's on our side and one side's on their side, and whoever's losing will call on their Big Brother and missiles will start flying from Washington to Moscow and you can't move a boundary. We're going to see countries go like you can't believe in the next 50 years. We've already got 15 countries in the old Soviet Union, seven countries in the old Yugoslavia, two countries in the old Czechoslovakia, every border in Africa is going to move, they're all just for the British and French armies. Put them in the 19th century, they don't make any sense in terms of economics, ethnic groups, geography. India's going to be multiple countries. It never was a unified place except when outside invaders like the moguls or the British conquered it. You've already got three countries where in British India there was one. You've got incipient rebellions in the Sing[?], Kashmir, wherever. Think about what's happening in Western Europe. You've got the Catalans and the Basques who want independence in Spain. The Bretons and the Corsicans who want independence in France. The northern Italians want to the southern Italians out of the country. Think about what the Labor Party is going to do. They're going to give an independent parliament to Wales and Scotland!

When's the last time those guys were independent? Well, about a thousand years ago, and they've never had a parliament. Canada is clearly going to be more than one country, because if you look at the French speakers in Quebec, they voted overwhelmingly for independence. The only reason it didn't win is the 17% of the people living in Quebec who don't speak French all voted for staying in Canada. When Quebec leaves, it's highly unlikely the rest of Canada will stay as one country either. Or, suppose you took the Contract with America seriously, I don't think we do take it seriously, but suppose you did. It literally says that we're going to be 50 different countries. We're going to share a defense department but in no other dimension will we do any transfers from rich states to poor states or worry about what happens in somebody else's state. Now, I think this puts us into a very different world that we have to think about.

Let me end before the discussion period about coming back to Colombus. This issue of how do you figure out where you're going. You've got a brand-new world, you're going to sail into it, you've got to build a ship, you've got to put the right amount of water on the ship. That's our problem. The interesting thing about Columbus is if you look at the actual story, is Columbus is smart in the sense he knew the world was round, but Columbus was a very bad mathematician. We never would have let him into MIT. Columbus had two mathematical calculations to make and he badly goofed them both. The first calculation was: "What's the circumference of the Earth?" When he made that calculation, he made it 25% too small, which is why the Portuguese wouldn't finance the expedition. The Portuguese mathematicians were better and they knew Columbus had farther to go than he thought he had to go. But the second calculation he had to make was: "How far did Marco Polo walk?" And when he made that calculation he had Marco Polo walking two-and-a-half times as far as he actually walked. Now, if you subtract a number which is much too big from a number which is somewhat too small, you make what is called a major mathematical error. Columbus estimated that the distance from the Canary Isles to the Indes was 3,900 nautical miles and on a ship he put enough water to go 5,000 nautical miles. The actual distance is 13,000 nautical miles. If everything had been exact and the way Colombus thought it was going to be, he and all his men would have died of thirst less than half way to their journey. But, it just happens to be that exactly 3,900 from the Canaries, one runs into the Americas. The Americas were full of gold and they made the Spanish Empire for the next 300 years.

So I suppose one moral of the story is: It's more important to be lucky than smart. But if you took that away this afternoon, you'd be making a mistake. Because you have to remember the rest of the story. It took Columbus seven years to persuade Ferdinand and Isabella to finance the journey. The bosses are always very stubborn, they've always got it wrong, they never see the virtue of new ways, and you've got to have incredible persistence. So maybe the secret of Colombus' success is that he was persistent. Because if he hadn't have been persistent he never could have had that colossal good luck. But that's not the right moral of the story either. You've got to ask yourself the question, "Why was Colombus persistent?" Of course, the answer was he had a vision for doing it a new way. If he had not had the vision for doing it a new way, he never would have been persistent. If he hadn't have been persistent, he couldn't have had that piece of colossal good luck.

So this afternoon I won't wish you intelligence, because I know you are all intelligent. I will, however, wish you good luck. More than good luck, I wish you persistence, and most of all, I wish you a vision for doing it a new way. Thank you very much.

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