The Next Global Stage: a borderless world means an end to old

economics

The global economy is a reality. Yet so many of those who should know better appear to
be asleep, as if cocooned in a dream.

The old economic model tried to clarify the relationships between demand and supply,
and supply and employment. It attempted to explain how supply/production and
inventory increase as interest rates or money supply change. Because economists are
convinced that these relationships are well-established, they can recommend that
politicians and bureaucrats use one or more to influence the other, to generate
employment, to increase gross national production or to stimulate housing starts.

They have invented still another tool to borrow money from the future when none of
these levers seems to be responding sharply: minting promissory notes or bonds. Most
governments have used the money in public works to artificially inflate their economies.
This, of course, is certainly not what such towering figures as John Maynard Keyes or
Friedrich Hayek originally meant. But governments act as though they are still within the
bounds of economists' theories.

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The world has changed dramatically since these original thinkers were active in the early
1900s. An economy is no longer enclosed within a country's borders, with the world an
assembly of autonomous and independent nation-states. Instead, the world consists of
interdependent units of nations and regions. Yet economists today are developing
variations on the old masters' themes by modifying antiquated equations and building
mathematical models that explain only a part of the global economy.

No one is thinking about the global economy and its cause and effect on a national
economy. For example, a higher interest rate is good means to attract money from the rest
of the world, as Alan Greenspan (under Bill Clinton's presidency) demonstrated. The
U.S. economy from 1992 to 2000 was euphoric because the rest of the world pumped
money into the country to take advantage of high interest rates.

In fact, we can argue that high interest rates are good, period. A higher interest rate
means consumers can increase their financial asset base faster and their borrowing
capacity increases. This is why consumption--and, hence, the economy--often moves
against the preachings of the old masters who lived in societies made up of workers, not
wealthy consumers with 401(k) plans. If money comes from the rest of the world,
businesses can raise money in the capital markets and do not have to borrow money from
banks. So again, the interest rate is no longer a decisive factor in a business's decision to
make a capital investment.

In the borderless world, an excessive money supply held by the central bank can slip out
of the country if there are no attractive opportunities within the nation. In this way, a
government is constantly arbitraged, or disciplined, by its own citizens and also by
investors in the rest of the world.

There is no model to describe the global economy as such because we are dealing with so
many parameters, variables and "units of economy." Furthermore, advances in
information technology have made inventories significantly less necessary. Companies
such as Toyota and Dell have demonstrated that they can make their products "just-in-
time" and in response to orders. So, the grand theory that a government can lower interest
rates to persuade businesses to stockpile inventories is no longer as effective.

Another complication is that the cyber-economy is growing fast and the cross-border
exchange of goods, services and even financial instruments is taking place in areas
unbeknownst to the economists, let alone to the government.

Finally, there is an increase--or even explosion--of funny money. Bonds and Treasury
bills are funny money from the perspective of traditional economists because they act as
money with liabilities for taxpayers to pay later. The trouble is that the buyers of these
public liabilities are no longer the residents of an issuing country--in fact, two-thirds of
the reserves of the central banks of developed countries are in dollars.

In March 2004, the IMF published statistics revealing that Japan had foreign reserves of
$817 billion, while China had $432 billion, the European Union had $230 billion, and
Taiwan had $227 billion. So the effectiveness of any government's fiscal policy is at the
mercy of not only what businesses and consumers do at home, but also what other
governments, individual companies and consumers in the rest of the world do. Money
sitting on one side of the globe can be deployed, with huge multiples, halfway around the
world either to accelerate the prosperity of a region or to destroy a nation's economy.
There is no effective global mechanism to govern superliquidity resulting from an
individual government's political situation, even though the collective effect is serious
and sometimes destructive.

In fact, no economic model can begin to address these issues, and there may never be a
suitable mathematical methodology to describe the 21st century economy. But there may
be an approach possible through a different model, such as the theory of complexity.
Global and cyber-economies today are fundamentally different from those of 20th
century economics.