Third World History Book Report Due Friday, 12th April 2002 Professor Glazier . This book report reflects upon the writings of Lester C. Thurow in his 1996 book – ‘The Future of Capitalism’. Thurow is a professor of economics at M.I.T. School of Management and has been a contributing editor to the Newsweek journal. ‘The Future of Capitalism’ is an analytical look at the state of world economics in the late Twentieth Century.
Thurow predicts the future of capitalism based upon recent trends in empirical data combined with his own political/economic analysis. Central to this book is a powerful analogy that Thurow uses to communicate his ideas and thoughts to the reader. The distribution of wealth in the world is likened to the surface of the earth – parts of the earth are characterized by high mountainous regions (areas of wealth) while others are of lesser altitude (areas of poverty).
In Geology, it is understood that the earth’s surface is constantly in a state of flux, impacted by gradual movements in the tectonic plates that float upon the earth’s molten inner core. The five tectonic plates affecting the earth’s surface (distribution of wealth) are analogous to the driving forces behind changes in world economics; the molten inner core represents the flowing currents of technology and ideology. Thurow contends that movements in the ‘plates’ caused by ideological and/or technological changes can be gradual, having an imperceptible impact on the world’s population or they can be sudden with far greater social consequences. When tectonic plates move suddenly, they cause earthquakes on the earth’s surface; the distribution of wealth is changed over a very short period of time.
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In this analogy, periods of rapid change caused by sudden movements in the plates are equated to times of ‘punctuated equilibrium’. Thurow describes ‘punctuated equilibrium’ as fundamental changes in the state of world economics that redefine what it takes to be successful and thus increase one’s wealth. By their very nature, periods of ‘punctuated equilibrium’ threaten the status quo, the Midas touch is weakened, what was successful in the past might not be so in the future. ‘The Future of Capitalism’ asserts that we are living in a time of ‘punctuated equilibrium’ and that successful nations will be those economies that change with the times. The first plate in Thurow’s analysis is the end of communism. As old communist economies make the transition from planned to free economies their portion of world wealth will increase or decrease in the short term (depending on the level of communist entrenchment) but will surely increase in the long run as inefficiencies are eliminated.
Thurow considers the cases of both China and the U.S.S.R.; China will have a smoother transition because its economy had fewer large communist production units than its northern neighbor. With fewer large communist institutions, there will be considerably less social upheaval in China than in the U.S.S.R. where many people rely on individual plants/factories for their livelihood; because of the inherent misallocation of resources prevalent in planned economies, many of these plants will cease to operate under a capitalist ideology. This, the first of Thurow’s five plates (driving forces of change) is undeniable. China’s share of world wealth has increased dramatically in recent years with annual increases averaging 10% of Gross Domestic Product; conversely, the U.S.S.R. has been far less successful.
Thurow’s logic here is undeniable. Secondly, we have the plate that represents the technological shift to brainpower industries. Thurow argues that the factors of comparative advantage in world trade are no longer determined by a country’s climate or natural resources. The only sustainable source of comparative advantage in the new world economy is (and will be) a country’s intellectual capital. In other words, successful countries will be those countries with highly skilled and knowledgeable workforces. This conclusion is obvious; a country cannot have a great biotechnology industry without the necessary supply of biologists. While the factors of comparative advantage are undoubtedly moving from the tangible to the intangible, Thurow’s position is exaggerated. Natural resources will continue to provide a comparative advantage for the countries that have them; however, Thurow is correct to say that those comparative advantages are not sustainable – natural resources are finite.
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For this reason, it is especially important for developing countries to use the wealth generated by the export of raw materials (in which they have a comparative advantage) to invest in infrastructure and education. Only these assets yield a sustainable comparative advantage. Thurow fails to make the link between old comparative advantages (natural resources/climate) and the development of new, sustainable comparative advantages. Developing human capital requires vast investments, far greater than developing countries without old comparative advantages can afford. The third of Thurow’s plates is the ageing, moving and growing of world demographics. Thurow contends that unless the developing world is able to control their explosive population growth (in excess of 3% growth per year in the Middle East), they will never be able to escape poverty.
So long as a country’s population growth is greater than its G.D.P. growth then its standard of living (G.D.P. per capita) will be decreasing. In the Middle East, the standard of living is declining even though countries are displaying significant economic growth. These countries simply cannot afford to invest capital into their workforces at a rate that will result in economic growth superceding population growth; each newborn becomes a shackle on the feet of their country. This Malthusian concept has been acknowledged among Chinese policy makers – China has attempted to control its burgeoning population by imposing strict family planning controls on its citizens; the result has been the highest standard of living increases in the developing world. Moving demographics are said to have negative consequences for American workers.
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Abstract When it comes to Global Business, Strategic/International Trade, among other forms of doing business domestic and internationally, it is crucial to follow on of the most important principles in all economics; comparative advantage. This theory was developed by David Ricardo in 1817. “On the basis of a simple model with just two countries and two goods, he showed that every country—even ...
As the cost of travel becomes affordable for third world citizens, Thurow predicts an influx of legal and illegal immigrants in to the United States. Such a large supply of immigrant labor will result in lower wages for unskilled jobs. First world workers will no longer be able to command first world wages. American workers must increase their skill levels just to maintain their current earning power. Thurow does not say what effect this will have on the wealth of the nation as a whole, only that low-skilled American workers will suffer the most. Recent studies have shown that immigrant workers (illegal and legal) are of great benefit to the American economy that depends upon them as a supply of cheap labor.
If this were not the case, hundreds of thousands of known illegal immigrants (Mexicans) living in California would have been deported a long time ago. ….
