�100:00:00,948 --> 00:00:06,100Hi, welcome back.In this presentation, we're going todiscuss how the world's economicsystem got to be pretty much the economicsystem we have today.So an interesting topic, but actually oneon whichit's hard to find a very good historicalliterature.The first big series of changes have to dowith the fate of China.Remember backin the last presentation, I talked aboutthe way you could think of thisphase of global history in the �70s and�80s as a kind of global election,choosing among different sets of ideas offow to solve these problems of systemiccrisis that seemed evident in the �70s.Alright.And then I invited you to think aboutwhich parts ofthe world would be the sort of swingstates, swing regionsin this global election,and I suggested that it seemed to me thatthe two really swing regions wereEurope, especially Western and CentralEurope, and East Asia, especially China.Last time we talked a lot about the wayEurope swung in the �70s and �80s.Now I want to concentrate a little bit onwhat happened in China.Mao Zedong died in 1976.One of the first issues that arose afterMao'sdeath is literally what to do with thebody.The precedent in the Soviet Union was toturn these iconic figures ofcommunist hero worship literally intoembalmed mummies on public display,objects of veneration in almost a sort ofquasi-secular worship.So the mummified bodies of both Lenin andStalin were on display.As Stalin slightly fell out of favor, hisbody was quietly put away.Lenin's is still on display.So one of the issues for the Chinese iswhether they should do the same.It's kind of a revealing issue.Because in a way, you're deciding whatrole Maoshould play in Chinese political culturein the yearsto come.

Their decision was to turn Mao into theembalmed mummy too, also suitable forpublic display.So after Mao's death, imagine that you'reone of the people influencing the Chineseleadership.You're asking yourself, what do we wantChina to become now?Think about the menu of options that youmight have considered.Among the Chinese factions,four different kinds of visions emerged.One would be more ofa revolutionary socialist visionand even more aggressivepursuit of communism, akin to thedays of the Cultural Revolution.Mao's widow and some of the people aroundher counted themselves in that camp.Others preferred more of a Soviet-stylecommunism, concentrating on buildingup heavy industry, stronger stateplanning.The third camp, Imight call national conservativeswith Chinese characteristics.I'm afraid I'm borrowing a littlebit from thephrase the Chinese leadership uses now, inwhich they saythey have socialism with Chinesecharacteristics.I've categorized a family of ideas asnational conservatives that aretop-down modernizers.Some of those national conservativeleaders can bemore autocratic, giving less scope fordemocratic processes.I think the Chinese characteristics amongthis group would be strong centralmanagement with partnerships betweenprivate entrepreneurs and thestrong central government.A fourth schoolmight be a little more liberal,might be more likethe social democracythat one encounters, say, in WesternEurope.These four different factions have it out.Thefirst loser in this battle is here.Mao's widow and the group of people aroundher were actually triedas enemies of the people and were pushedout of Chinese public life.What seemed to take their place a year ortwo later was a group led byHua Guofeng that seemed to favor this

camp,also favoring better relations with theSoviet Union.But there was a critical leadership battlein 1977 and 1978, culminating ina critical party congress at the end of1978,in which, really, this group gets theupperhand, led by a man named Deng Xiaoping.So now we're down at the end of 1978 andinto 1979 with two key visions.This sort of national conservative visionthat I've described.And then a groupof people who were advocating going stillfurther ina liberal direction, more of the socialdemocratic thrust.Okay, I've sketched out a little bit whathappened.But then you might ask, well why?Why did it narrow down to those two?Why did the camp that favored more ofthe Soviet-style approach lose out in thisstruggle?Some of the reasons have to do withpersonal and factional rivalries.But another had to do with what peoplemight haveseen if they looked around the world inthe late 1970s.So to kind of get a sense of what someonelooking around the worldin the late 1970s might have noticed,about the way different economies weredeveloping,take a look at this chart again, whichI've carried forward to 1976.Now I'm not saying that the Chineseleadership had access to this particularchart, but I think they broadly sensed thefacts that this chart is depicting.If you were to look at this chart,you might say to yourself, well, theUnited States model,that's just too remote from ourexperience, that's not interesting.And ask yourself, which would be themodelsthe Chinese government would be mostlikely to notice?And the answers, of course, would be themodels closest to them, literally.Models in places like Japan, Taiwan, SouthKorea.And take a look at what happened withJapan.By the mid-1970s, it's just evident thatthe Japanese are

doing something pretty potent in the waythey're organizing their economy.Taiwan, by the way, is following arelativelysimilar trajectory by the middle of the1970s.And take a look at South Korea.The 1960s begins to see a takeoff of theSouth Korean economy thathadn't fully ripened yet, but was alreadyevident by the middle of the 1970s.So that faction of Chinese leaders, thatmight have seemed appealing to them.By the way, they would have looked atJapan, Taiwan, South Korea in the middleof the 1970s, and would have seen anominal democracy in Japan, in which oneparty had won all the elections,a nominal democracy in Taiwan that reallylooked like an authoritarian state, as ofthe mid-�70s, anda nominal democracy in South Korea thatalso masked kind of an authoritarianstate,again, as you would've looked at this inthe mid-1970s.So from their perspective, those models inthosecountries might have been pretty temptingto them.As became increasingly evident by theearly 1980s, China was takinga new direction,actually formally normalizing relationswith the United States in 1978 and 1979.You see, here's Time Magazine letting theAmerican peopleknow that this man, Deng Xiaoping, isbanishing Mao's ghost.Deng Xiaoping was famous for hispragmatism.The saying universally attributed to himamong Chinese is that:I don't care if the cat is black or white,as long as it catches mice.But another aspect of Deng's pragmatismwas to preservethe firm, clear, dictatorial authority ofthe central government.So he pushes the liberals aside, and hebegins what historians think of as aFang-Shou cycle: Fang, loosening; Shou,tightening.You loosen things up, they then seem to begetting a littlebit out of hand,then the conservatives react, you tightenthem up again,and then, no, you don't want to go too farthat way.

Loosen some more.So this constant experimentation of tryingoutthis, trying out this, and then steppingback.And that cycle continues all through the1980s.But what's clear to the whole world isthat China is making a fundamental changein direction.To understand the way global capitalismchanged in the 1970sand 1980s, I think it's helpful tounderstand an impossibility theorem.This is an idea I'm adapting and borrowinga littlefrom the Canadian economist, a Nobel Prizewinner, named Robert Mundell.Mundell posited a kind of trilemma, inwhich you can havethree goals that you can posit, but youcan actually onlyachieve two of these three goals in anyfinancial system you design.For example, the three goals are: 1) capitalmobility, that means the ability to easilymovelarge sums of money across borders,billions,maybe even trillions of dollars movingbetween banks.That's capital mobility, easy movement ofprivate investment.Second, stable exchange rates betweencurrencies.Third, monetary independence, financialindependence.So for example, in the old gold standardsystem of thelate 1800s and early 1900s, the goldexchangestandard, capital mobility was great,exchange ratesextremely stable, monetary independencevery little,because the hydraulics of the goldstandard meant that ifa lot of gold effectively moved to onecountry from anothercountry, if you didn't have enough gold,you were forced tochange your interest rates to attract someof that gold back.That meant that you were highlyinterdependent on what other people weredoing.If other people were attracting gold, youhad to change your policies.You were not entirelyindependent in guiding your own economy.

So now let's contrast that old goldexchange standard systemwith the Bretton Woods solution that wascreated atthe end of World War II.Remember, under the gold exchange standard,from the 1870s to the early 1900s, capitalmobility high, exchangerates very stable, monetary independence,national independence, low.This is one of the reasons peoplecomplained about, kind of, the bankersreally being in charge.Instead, after the Great Depression, andunder the Bretton Woods System, capitalmobility low, very much controlled bygovernments.Exchange rates, pretty stable.National independence, nationalautonomy to run their own economies theway the governments wanted, high.So that's the Bretton Woods System.But by the early 1970s, the Bretton WoodsSystem had collapsed.All right then, what could take its place?One idea being put forward in the early1970s and getting increasing strength allthrough thedecade, it's actually to go back tosomethingthat looked more like the gold exchangestandard.That is, you could try to go back to asystemin which money could move freely, lots offoreign investment, but alsomoney could easily leave countries, inwhich money felt it wasn't popular.Relatively stable exchange rates.But what do you give up there?Just as under the old gold standardsystem, you give up national independence.That is the money was free to leave,the governments couldn't hold that moneythere, therefore, governmentshad to change their policies in order toattractthe money and the people who had themoney.You can see then,these are veryimportant political choices you're making.They're not just driven by immutableeconomic forces.And by the way, another problem if youwantedto do that is: If you don't want to gobackto a gold exchange standard in a world ofpaper money, in other words, a world of

paper money,how do you do this?The solution to that problem becomes akind of capitalist revolutionin the late 1970s andearly 1980s. Remember, think in the 1970s,there are really two great establishmentsfor national economic thinking.One I call here National Keynesianism.That meant that national government, thenation state, should be able to use eitherfiscal policy, taxing or spending, ormonetarypolicy, interest rates, the printing ofmoney,to change its macroeconomic situation.You don't like your inflation rate,you don't like your unemployment rate,the national government needs the autonomyto fix that through itspolicies, as the autonomous decisionmaker, very much a Bretton Woods model.Another establishment would be import-substitution industrialization;the export-oriented industrialists areanother branch of National Keynesianism.Import-substitution industrialization is adifferent family of ideas, but alsoagain, even more keyed to the power of thenation state.So national economic autonomy is huge forthese establishments.So the revolution then was challengingthose establishments.If you go back to an idea, in whichnational independence goes downin order to free money to move easily fromone border to another, you undermine bothof these establishments.And instead, you increase the power of thepeople who hold the movable money.In effect, you create a constant globalelection,in which countries are competing formobile capital.In other words, for the votes ofinvestors, investors wholoan the governments money in the form ofbuying their bonds,or who loan their companies money, buyingtheircorporate bonds, or buying stock in theircompanies.Or who make portfolio investments,investing in orbuilding up infrastructure, bridges, newfactories, and so on.The assault on the establishment beginsreallyin the United States in early 1970s,

with people like the then TreasurySecretaryGeorge Shultz and others, very influencedbythe liberal economic thinking of peoplelike Milton Friedman, Hayek, and others.Their argument is that the money should befree to move.It's a much more liberal approach in theclassical sense.Get the government out of the way.Let the money move.These American views do not prevail in theearly �70s, but they're influential.They're most influential with the Germanliberals in the middle of the 1970s.These ideas are picked up not onlyby Germans, but also by Frenchmen,Englishmen,who begin moving toward management oftheir currencies inways that will support this new liberaleconomic vision.And by the end of the 1970s, thoseEuropeanideas have a huge effect coming back toAmerica again.The Americans are fighting a terribleinflation and unemployment problem.And in effect, the European centralbankersare saying to the Americans, you needto follow our lead, and let's coordinatein the way we manage our money supplies.In a way, the problem they're trying tosolve is this:How do you have a gold standard likesystem but with paper money thatgovernments print?How to makepaper money hard?The way to do that is by managing how muchof the paper money you issue, and thencoordinating the management of thatbetween a few keygovernments that supply the reservecurrencies for global exchange.That means tight monetary controlscoordinated by US, European centralbankers, Japanese central bankers.And that's the system that emerges in thelate 1970s and1980s, they all agree to have firmercontrol of their money supplies.The result, then, is to create a worldemerging inthe 1980s, in which capital mobility getshigher and higher.National independence, the ability of onenation to chart its own path

as to how it's going to manage itseconomy gets less and less.And exchange rates go from being reallyerratic as Bretton Woodscollapses to not being fixed, because it'snot a true gold system,but the instability of exchange ratespersistently narrows.So here's a chart showingthe exchange rate between the dollar andthe German currency.Back then, Germany had its own currency,the deutschemark.Bretton Woods System, you see, very, verystable.Bretton Woods collapses, exchange ratesstart fluctuating all over the place.Slowly as the central banks coordinatemore and more, thatinstability just very gradually goes downfrom sort of here,just moving in that general direction,gradually narrowing.And we can see a similar phenomenon in thechangein the exchange rate of the dollar and theJapanese yen.Bretton Woods system, really stable.Bretton Woods breaks down, see thefluctuations beginning.And they stay pretty significant into the1980s and then duringthe 1980s, you can see that theinstability is getting a little better.What's happening here is that the centralbanks are moreand more harmonizing the way they handledtheir monetary policies.More and more trying to make their paperMoney,money created by government fiat, into hardmoney with very stable value thatwill then attract international investmentand facilitate a lot of movement of money.But in adopting this approach,there are some significant tradeoffs.Because, for example, to tighten the moneysupplyin effect means you've got to raiseinterest rates.You've got to raise the cost of the moneyin orderto ring a lot of that extra money out ofthe system.That's what Time Magazine is noticinghere,when the United States decisively joinsthis regime,in 1979, to curb its persistent,double-digit inflation, under the

leadership of this man, Federal ReserveChairman Paul Volker, at the end of theCarter administration.And you can see the way they'recharacterizing the problem, whichpushes the United States into a sharprecession in the early 1980s.But by the mid-1980s, the benefits of thenew system are becoming evident.Remember that Great Inflation of the1970s we talked about earlier?That's been pretty well wrung out of thesystem by the late 1980s.The new system is freeing up enormousflows of capital investment.Investment banks like Goldman Sachs, forthe first time in the late 1980s, are notonly opening up kind of branch operationsthathelp people do deals in the United States,they're becoming truly multinationalinvestment banks,where someone from Goldman Sachs can puttogether afinancial deal involving Germans on bothsides of the transaction.And someone from Deutsche Bank, in New York,might be puttingtogether financial deals with Americans onboth sides of the transaction.Billions and billions, then trillions ofdollars begins moving rapidly acrossborders, fueling economic growth.But you can see that this financialpolitics, which sounds kind of technicaland seems boringto a lot of people, involves immenselyimportant tradeoffsbecause all kinds of effects that touchevery sort of business,in the United States, Europe, Japan, andthen in the wider world.And it's rooted, as you can see, in basicpolitical choices as to,in effect, who's going to be in charge ofdriving the economic policiesof these key countries?You can see the tradeoffs that were madein the �70s and�80s, and these tradeoffs manifestthemselves in a couple of kinds of crises.First, there's a crisis for the world�sborrowers.All of a sudden, the interest rates ontheir loans are going way, way up.If you are a big debtor, like manycountries in the Third World were,borrowing money to pay for the importsbecause they don't have enough money topay

for the imports of, say, price of youroilbecause their own export industries are soweak,all of a sudden, their loans are now muchcostlier to roll over.Then what happens is they're getting readyto go bust.So there are lots of debt crises all overthe Third World in the early 1980s.That's one sort of crisis, andby the way, those debt issues turn out tobea big problem for the socialist countriesin the late 1980s.But there's another kind of crisis.What if you're living in a developedcountry, like say, France,and you don't want to be theprisoner of international bankers andinternational investors?You want national independence to driveyour economy the way you want.Indeed,even to have state ownership of the keybanks in order to handout money and credit the way you thinkyour country wants it handed out.It was just that kind of crisis thatFrance faced in the early 1980s,when Francois Mitterrand took power withhisSocialist Party, in partnership with thesommunists.And a key to understanding what happened inFrance inearly 1980s actually has a lot to do withthis man:His name is Jacques Delors.Here's a picture of Delors in the late1980s.Delors, a little later on, as a Europeanstatesman.In a way, Delors is playing the kind ofrole in the 1980s that Jean Monnetwas playing in the 1950s.He's a visionary for European economicintegration, and Delors's concept is theEuropeans need to harmonizetheir economies.But see, that means Delors very muchsupports the kind of visionthat's developed in the �70s and�80s of interdependence, of harmonizingeconomic policies,especially between the French and theGermans, who've adoptedthis liberal, hard money approach to theireconomic policy.You can't have European economic

integration unless it startswith harmonizing the French and Germaneconomic policies.So Mitterrand's government faces a choice:pursue the independent path that some ofthe socialist and communist wantor pursue the interdependent path,marching in stepwith the Germans, advocated by people likeDelors.And Delors, who's an influential figure inwithinMitterrand's government, wins that argumentand helps France leadthe way toward the new era of Europeaneconomic integration in the middle andlate 1980s.Indeed by 1990, you can see Britainresenting these new ideas for Europeanintegration.This conservative newspaper, The Sun, has apretty self-evident headline.What are they talking about here?Sun readers are urged to tell the Frenchfool where to stuff his ECU.ECU, that's an acronym for EuropeanCurrencyUnit, a step towards integrating Europeancurrencies, givingup, from the point of view of thatBritish newspaper, the nationalindependence Britain should prize.But that is part of Delors's philosophy.He believes that Europe working togetherwillhave a stronger economy, a prosperousWestern Europe.And by the way, the apparent success ofhis vision,by the end of the 1980s, will turn out tobe a huge magnet for European countries tothe East.So, let's just pause for a moment and seehowsome of these ideas we've laid on thetable come together.Big choice: Should the developed countriesretain true independencein the management of their economies orshould they accept interdependence?If you'll remember, that was also a hugeissue back in the 1920s and 1930s.And you'll remember that in 1930s,governments chose independence as the waythey wanted to go.And national rivalries and imperialrivalries deepened into dreadful things.In the �70s and �80s, they're acceptinginterdependence aswhat they see as the path to their

prosperity.But that also entails some reallyimportant sacrifices anda diminution in the central role ofthe nation state.Another big issue we've seen in thispresentation andthe last one is how to you presentyourself.Are you just the managerial state, inwhich thesocialist are just another version of themanagerial state?Are you essentially equivalent forms ofgovernment?Or is there something vitally differentabout your form of government?And in the �70s and �80s, in different ways,the United States, Western Europe, andeven to a lesser extent, China areasserting that they are vitally differentfrom the countries in the Socialist Bloc.But there's a tradeoff when you assertthat difference.Do you value conciliation between the twoblocs or are you willing to acceptconfrontation?Because the assertion of these differencesis going to exacerbate tensions,and we saw how that played out in theearly 1980s.After an intense period of polarization,confrontation, itsubsides with some domestic andinternational momentum, atleast at the time, appearing to favor theWestern European and American side in 1984and 1985.And that's the period in which the SovietUnion, and other countriesin the Socialist Bloc, are engaging in newthinking of their own.We'll learn more about that new thinkingwhen we talk again.See you then.