In 1945 at Yalta, President Franklin D. Roosevelt allowed Joseph Stalin to take nearly half of Europe as his near property. Stalin had never expected to get such a deal, but he made the best of it once he got it. He erected the Iron Curtain to make everybody understand that to the East of it, the Soviet Union is the one who commands. Three years after Yalta, George C. Marshall, the war time Chief of Staff who then served as Secretary of State, launched the plan that bore his name. It was a master stroke of how to help a stricken continent, so that both the beneficiaries and the donors reaped a great deal of mutual benefit. The countries that received loans via the Marshall Plan made relatively fast recoveries from the effects of the War, and became very welcome partners in trade with each other and of course with the United States. The Plan was certainly one of the greatest works of statesmanship from which all included could only benefit and none lose. The Soviet Union prohibited the states it received from the generosity of Roosevelt at Yalta from participating in the Marshall Plan. Instead, they had to participate in a plan in which the Soviet Union was the chief beneficiary of economic cooperation among communist countries.
"By the end of the twentieth century, it was no exaggeration to say that America had won the Cold War, the Soviet Union had lost, and the world order settled down with the Washington Consensus with beneficial world trade, decreasing poverty, and mostly stable institutions."
What Roosevelt, Stalin, and Marshall, the three most powerful statesmen of the early post-war years, arranged was to some extent made good, if that is the right word, by Ronald Reagan during his presidency, surrendering the U.S. budget to military purposes and investing almost without regard to cost in the Air Force, the Navy, and above all in nuclear armaments. Reagan set a pace in the accumulation of power that the Soviet Union tried to match, but could not. Soviet armaments were left behind in the race because Soviet industry was much too weak to satisfy both the military requirements and the minimum civilian needs that the population required. The Soviet leadership tried to arrange matters by perestroika and glasnost, but the sole result was less discipline and more disorder. By the end of the twentieth century, it was no exaggeration to say that America had won the Cold War, the Soviet Union had lost, and the world order settled down with the Washington Consensus with beneficial world trade, decreasing poverty, and mostly stable institutions. However, by the end of this century, there seems to have been an alteration to this order. While the chapter of history already ended was mainly directed by the foursome of Roosevelt, Stalin, Marshall, and Reagan, the present époque has not yet shown who the greatest leaders will be. Nevertheless, the foursome of Donald Trump, Xi Jinping, Vladimir Putin and Angela Merkel seem to be the most likely candidates.
In interactions between actors, the division of labour is one among many possible interactions. It is the obvious means for them to obtain scarce values by agreement between one another, and this without the use of force. The actors, in each taking the best action to find himself in equilibrium, has a maximum in the interaction, which we can consider as the equilibrium of the interaction itself. In a probabilistic sense, this is the ideal position of a peaceful society where everybody is placed in his best position if and when everybody else is placed in his own best position.
Alas, this is not the way President Trump understands such interaction. As far as one can judge from various more or less clear declarations, an interaction for him consists of one actor who is winning and one who is losing. The interaction itself has no obvious end, only a means by which the winners win and the losers lose. There is no other and obvious object that the interaction would serve. It is understood that for President Trump, the winner is "America First;" there is no obvious reason why he would expect this to be a result of his policies.
Some elementary economics would show how a particular result could be expected. We will take it that there is an interaction, for example making high-tech instruments that carry a market value and have a cost which may vary with the quantity produced. Lest it not be forgotten, there will be some other product which will not participate in this interaction. The combined labour and capital costs of the high-tech product is a productivity, called "total factor productivity" (TFP). As its name shows, it is a combination of labour and capital and is not to be confused with "productivity" in the ordinary statistical sense, which is the product divided by the labour employed producing it (i.e., productivity as if all of it was produced by labour and none by capital). The high-tech products and the infrastructure investment will each constitute a "play sum". America is importing some of the Mercedes cars produced by Germany. The counterparty is taken care of by capital transfers. This is the position at what we will call "ante Trump." In the "post Trump" position, America produces Ford cars and ceases to buy Mercedes cars from Germany. This will be the post Trump "play sum" for each of America and Germany.
When American resources are transferred from high-tech products to Ford cars, TFP will be the same at the margin for high-tech products and for Ford cars. Ford cars are produced with a lower TFP than high-tech products; the equality of the TFP for each product will have the result that the total value of new Ford cars will be less than the high-tech products they replaced. The same transformation for a high TFP for Mercedes cars to low TFP for infrastructure investment will likewise produce a lower value of infrastructure investment than of Mercedes cars in Germany. The result for the "post Trump" arrangements will in both cases be that the "play sum" values will diminish. This satisfies the Trump requirement that there will be gainers and losers, but unfortunately both of them will be lower after Trump than before him. Nor will it be evident that the gainer was America First and the loser the rest of humanity. The Trump requirement that there will be losers and gainers turns out to be above all a requirement that everybody will be a bit poorer than before.
In politics and the economy, each country is different. If we are allowed a joke, China is more different than all the others. It has widespread private property combined with a dictatorship of a tiny minority of Communist Party functionaries who succeed in governing the rest by maintaining civil peace. There is nothing much of communism in their government, but a good deal of self-preservation, which is probably a good recipe. The two elements, in particular those who have a certain independence that they derive from their however modest property combined with a dictatorial government, do not seem to provide a natural mixture. China would seem to be predestined to failure. In fact, it seems to be succeeding remarkably well. The present head of state, Xi Jinping, is responsible for part of this success.
After the terrible suffering of Maoism, a totally reversed period initiated by Deng Xiaoping in the 1970s introduced private property and the legitimation of the profit motive. In about two decades, abject poverty was largely gone, much of the village population was absorbed in industrial labour, and wages had risen to a level when Chinese manufactures were no longer excessively cheap. China became an integral member of the world economy. The Shanghai stock exchange became second only to Wall Street, and China was more and more able to play a role in world finance. After another decade or so, it became obvious that the Chinese economy was no longer predominantly industrial, but had become a service provider with a market for the domestic public rather than the world market. Instead of the coal mine and the factory, the characteristic construction has become the supermarket and the clinic. There was also a shift from the state to the private sector, with small businesses predominating. While the state sector was still dominant in mining and heavy industry, the private sector of the entire economy was estimated to be three fourths of the total, which is about the level in European and American countries.
One would expect the transformation of the Chinese economy from industry to services to be a weakening of the state with an ever stronger civil society wanting to be self-governing and "democratic." At this point the Communist Party, perhaps suspecting the danger to its dictatorship, elected as its leader Xi Jinping in 2013. He will be elected in all likelihood in 2018 for another 5 years. It is not a caricature to say that his policy is the opposite of perestroika and glasnost, and the near future of China promises to be the exact opposite of what the Soviet Union experienced in 1990- i.e., disorder and turmoil. Despite the greater growth of services compared to industry in the last few years, where services are generally less statistically weighty than industry, the Chinese economy is still proceeding at an overall growth of 7.5 per cent compared to the American growth which promises to be about 2.0 - 2.5 per cent. If this gap between them is more or less maintained, it will only be a brief question of patience before China and America reach the same level.
There is one reason for suspecting that China will not continue to go from success to success. This is only a question of foreign policy, which is inspired by an arrogance which seems to be needless and expensive. The protection of the impossibly dangerous North Korea regime, the problem of Taiwan, the treatment of the South China Sea as a domestic swimming pool, and the ambition to be the godfather of Africa are all possibly dangerous points. Subject to these danger points, China promises to be the success story of this century.
Since he entered as prime minister in 1999 and then as president in the Russian government, Vladimir Putin started as "Putin I," the modernizer, then continued as Putin II, the conqueror, and is now Putin III, the Christian moralist. Putin I had the central ambition to modernise Russia and lift it to the European level by concentrating on industry and technology. As a by-product of his programme, he permitted a fair number of oligarchs who became very rich while the industries they were supposed to develop failed to reach a European model. Nuclear armaments and rocketry were perhaps the sole major example of modernity. The industrial privatisation and development was also accompanied by a culture of corruption which eventually reached African proportions and is still a feature of Russian society.
Perhaps because he has sensed the dissatisfaction of the people with the modernisation that has mostly failed, in 2014 Putin II embarked on a programme of external expansion. That year saw the annexation of the Crimea and also the Eastern part of the Ukraine, where the mostly Russian speaking population was organised by Moscow to segregate themselves from the rest of the Ukraine by a Russian sponsored civil war. The rest of the mainly Ukrainian speaking country to the west, was allowed to exist as an independent state. Putin II periodically warned it that it can never survive without Russian help, but refrained from acting against it by following his policy of usual caution. Further away, he entered the civil war in Syria by giving sufficient military aid to Bashar al-Assad to maintain his power. This was, in fact, a Russian intervention designed to help establish a Shiite power structure from Iran, the Hezbollah in Lebanon, and Syria to have a counter power to the Sunnis which, with Saudi Arabia at their centre, are considered as allies of America. This conquest was perhaps not enough to satisfy the ordinary Russian whose great ambition has always been to inspire admiration and, and specially on the part of America which has for a long time figured as his world rival. Even Stalin was admired by many or most Russians because he put fear in the West and was therefore a satisfaction to the Russian ego.
For more on these topics, see the Library of Economics and Liberty articles by Anthony de Jasay: "America First, and What It Might Cost", July 3, 2017 and "Vladimir Putin: Victories and a Heavy Defeat", November 7, 2016; and by Paul Gregory: "China's Growth: Planning or Private Enterprise?", August 6, 2012. See also the EconTalk podcast episode Benn Steil on the Battle of Bretton Woods; and Perestroika, by Marshall I. Goldman in the Concise Encyclopedia of Economics.
Putin III may have satisfied Russians' self-esteem if he had the courage of conquering the three Baltic States that Russians consider as belonging to them. However, though militarily fully able to do it, Putin III has so far considered that this was something prudence does not permit him to do. To maintain his royal standing with his people, Putin III has lately put strong emphasis on the non-material, more and more emphasising the spiritual and the religious. He puts ever greater weight in his alliances with the Orthodox Church and with the idea of the Russian state as a moral ideal. He more than once has castigated the West as Godless and having forgotten its historical origin in Christianity. He draws the picture that ordinary Russians love to hear, namely that contrary to the materialistic West, Russians are spiritual, moral, Christian, and justly proud of it. It does perhaps no harm for us in the West that Putin III chooses to flatter his Russians by telling them how wonderfully spiritual they are. It is very likely to do less harm than, for instance, a Russian attack against the Baltic States with the help of their Russian minority population. Both the flattering and the military glory however, may have very deep consequences which we can only look forward to by hoping that the West will not suffer if either happens.
Henry Kissinger, when he was at the top of his career, complained of the European Union as something not very practical by asking who is he to telephone when he wants to talk to the European Union? He might have been instructed to call Angela Merkel.
The German chancellor would have been the right person to call and she is still the right one. However, this summer she has lived a very unpleasant period in when she no longer could believe that she was the right person for Europe. Great Britain has declared that she no longer wants to play at Europe. While in the past all great decisions could be reached by at least two out of the three countries of Germany, Great Britain, and France; with only two countries, Germany and France, unless there were unanimous decisions, there would be great difficulty when one party wanted one thing and the other its opposite. This, however, was perhaps the less important of the unpleasant choices Angela Merkel had to confront. The other and perhaps greater decision was the apparent breach of confidence in the cooperation between Germany and America that Angela Merkel had inherited from her predecessor, Chancellor Helmut Kohl, and which appeared to be a permanent and unbreakable feature of German policy, especially the external security in which Germany was counting on America and America was regarding and respecting Germany as the first defence against a hypothetical attack by Russia. After her experiences in Taormina and Hamburg this summer, where she had occasion to be snubbed by Donald Trump, and no longer felt that Germany and America were natural allies in NATO, she was sad to conclude in public that Germany and Europe as well, are now compelled to rely essentially on themselves.
If there is now a Europe that can rely on nobody else to respect its essential interests, what is Angela Merkel to do? A decision that will have to be made in the medium term has to do with the internal mechanism of the European Union. France, with its new president Emmanuel Macron, is ready to try again the idea, rejected at least once by Germany, that the European Community needs a structure with an EU minister of finance and an EU budget, and all the major and minor institutions which a French mind can devise so that the EU can look and function more like a real state. To reject this idea once again, as it was rejected during the presidency of Francois Hollande, is to be thought a bad European in Paris, but it is hardly the plan that appeals to Berlin and all others who think that more institutions with more offices, more ministers, and more secretary generals is not what Europe really needs. Whether Angela Merkel is ready to accept these complicated plans in order to have ever closer relations with France is anybody's guess, and very likely it is still a mere guess among Angela Merkel's counsellors. If this particular issue is to be decided at all, it is only so that another, and equally serious decision, will crop up in its place.
* Anthony de Jasay is an Anglo-Hungarian economist living in France. He is the author, a.o., of The State as well as other books, including Social Contract, Free Ride, Political Philosophy, Clearly, Political Economy, Concisely, Economic Sense and Nonsense, Helmut Kliemt, ed., and Justice and Its Surroundings. His books may be purchased through the Liberty Fund Book Catalog.
The State is also available online on this website.
For more articles by Anthony de Jasay, see the Archive.