Air University Review, May-June 1983
Major Steven E. Cady
Future stability of the world economy will depend heavily on the specific economic programs of the United States and other nations. To hope for economic stability, Americans need to face some fundamental economic and political issues.
What significant changes have already taken place and seem probable in the future?
What are the current challenges to the American economy and the world economy?
How do these challenges relate to foreign policy?
What role will the United States play in trying to stabilize the world economy?
These and related concerns are addressed in six recent books dealing with economic issues.
At the time of the founding of the nation, transfers* represented only a minor segment of our overall economy; now they constitute a significant portion of the gross national product. According to some authorities, Americans now live in a virtual transfer society. The consequences include decreasing productivity, the increasing devotion of resources to obtaining and maintaining transfers, and considerable social tension over the legitimacy and allocation of transfers. The development of today’s transfer society was neither sudden nor the result of a conscious decision: it has occurred incrementally over time. During the course of the nineteenth century, the national economy came increasingly to be regarded as a pie with fixed boundaries.
* Nonproductive activities increasing the wealth of individuals but decreasing the wealth of the society; a current example would be the transfer of stock or registered bond ownership from the books of an issuing corporation or its agent.
This is the view of Terry L. Anderson and Peter J. Hill in The Birth of a Transfer Society*. According to Anderson and Hill, American public philosophy, as reflected in ideas about legal-political order and constitutional concepts, became confused about a century ago. The Founding Fathers had had the wisdom to know that governments have a natural proclivity for getting out of hand. Accordingly, they sought to keep the state productive by imposing severe constitutional limits on the state.
* Terry L. Anderson and Peter J. Hill, The Birth of a Transfer Society (Standford, California: Hoover Institution Press, Stanford University, 1980, $6.95), 130 pages.
That basic concept changed dramatically late in the nineteenth century. Government’s alleged pursuit of the public interest justified the initiation of transfer activity motivated by changing legal ideologies and newly dominant political coalitions. The entire complex of institutions and agencies that Americans now call government came to be recognized as a source of transfer profits.
In the late nineteenth century, the perceived maldistribution of income, the problems of organization, the deterioration of the environment, and the closing of the frontier contributed significantly to the changing role of government in the nation’s economy. Since most citizens blamed their problems on imperfections in the market system, "not surprisingly they called on government to use its coercive power to alter the results of the market allocation of resources." (p. 59)
By 1915, the major barriers erected by the Founding Fathers against large-scale legislative transfers had been weakened dramatically and the groundwork laid for the birth of a transfer society. The transfer society was "established by 1917" and "has grown in the last sixty years," but "its essential character has not changed." (p.69) Recent Supreme Court rulings encourage the growth of a transfer society, strengthening the power of the federal government. The result, according to the authors, is that the United States is now characterized by "constitutional anarchy." (p. 92)
While William Fellner’s Contemporary Economic Problems, 1980 is less pessimistic about the nation’s future, his work recognizes that contemporary America has definite problems.* Most of the studies in this volume concern issues relating to the present inflationary environment and its damage to the American economy. Many of the studies, such as one by Fellner himself, analyze problems in which interest is reviving largely because of inflation. Fellner deals with corporate asset-liability decisions, maintaining that recent shifts are "shifts to a riskier position, since the inflationary environment that has developed no available mix of specific assets could convey the same assurance of maintaining its real value as do the safest liquid assets in a non-inflationary world." (p. 77)
* William Fellner, editor, Contemporary Economic Problems, 1980 (Washington: American Enterprise Institute for Public Policy Research, 1980, $9.25), 342 pages.
The writers represented in this volume are not only concerned with a variety of specific economic problems but also about the possible failure of present inflation-fighting programs. Many of the writers would agree that a gradualist anti-inflationary program has a good chance of currently succeeding. Such a program would gradually reduce, the inflationary increase of America’s gross national product, recently close to a 12 percent annual rate, to a noninflationary level of about 5 percent. To restore the credibility of "the pre-1965 policy posture" would take some time. However, there is still a good chance of eliminating the present inflation in roughly four years, with much less discomfort than that which would be caused by unalleviated "shock treatment." (p. 2)
What if gradualist anti-inflationary efforts should prove unsuccessful? According to Fellner, time has about "run out on gradualism. . ." (p. 3) If present gradua1ist efforts should fail, the accelerating tendency of inflation would reassert itself. Before long, the only choice would be between restoring price stability abruptly or allowing the United States economy to become chronically inefficient.
If gradualism failed, the questions that would have to be given first consideration concern methods of absorbing the shock that would be caused by sudden stabilization. Any solution involving a legal adjustment of past contractual obligations "would be apt to hit and miss a good deal that it would be desirable not to hit or to miss." (p. 7) According to Fellner, this is all the more reason to consider the advantages of developing a policy of gradualism with "clearly perceptible speed." (p. 8)
In addition to the inflation problem, Robert L. Heilbroner and Lester C. Thurow’s Five Economic Challenges deals with other significant contemporary problems.* The authors point out that, like "great threatening clouds," five economic challenges—inflation, recession, big government, the falling dollar, and the energy crisis—"loom over our lives." These challenges "wrack America not just because of the damage they inflict, but because of the confusion they bring." Americans do not understand where the "great storm clouds come from or what gives them their enormous power." As a result, the challenges demoralize Americans and are not only assaults on "our economic well-being but on our psychological well-being."
*Robert L. Heilbroner and Lester C. Thurow, Five Economic Challenges (Englewood Cliffs, New Jersey: Prentice-Hall, 1981, $5.95), 140 papges.
According to Heilbroner and Thurow, "the real challenge—the challenge below the economics of inflation and unemployment, government spending and taxing, international competition and the energy crunch—is political." (p. x) The challenge is to find acceptable resolutions to these difficulties; it is not the economics of the five challenges but their politics that is difficult.
The authors believe that political decisions are inextricably interwoven with such problems and that every economic solution to the challenges is political because it will favor one group, region, or constituency more than another. There are numerous economic proposals that might be adopted to deal with the challenges. Whether they will be adopted "depends almost entirely on the political consensus we have achieved." (p. 131) Even a goal as seemingly bland and universally approved as raising American productivity depends on the political capacities of Americans. For example, the ability to shift resources from failing to promising regions and industries depends on the political determinations of Americans, for these resources include voting, perhaps protesting, men and women. In a word, therefore, "it is politics that sets the limits of economics." (p. 132)
There has been a conspicuous absence of effort by foreign policy specialists to focus their research on the relationship between political and economic factors influencing the foreign policy behavior of states. Stressing the predominance of political factors over economics, foreign policy researchers have come close to treating political factors as if they could be disentangled from economic factors. Rising global interdependence invites consideration of how foreign policies are formulated in response to this development.
Charles W. Kegley, Jr., and Patrick J. McGowan in The Political Economy of Foreign Policy Behavior, argue that "defense policy and foreign policy are two sides of the same coin, each aiming to adapt national societies to their own changing environments.* Their volume examines the relationships between defense and foreign policy. The global environment is characterized by "unprecedented change." Of all the many changes now taking place, none is more profound than the emergence of new levels of complex global interdependence among various states. As relationships among nations have become more closely intertwined, "the interplay of political and economic conditions has assumed increasing importance." (p.7) According to the editors, the growth of international trade and the increasingly interlocking nature of the world’s economy compel paying attention to the conduct of both political and economic transactions.
* Charles W. Kegley, Jr., and Patrick J. McGowan, editors, The Political Economy of Foreign Policy Behavior, Volume 6 of the Sage International Yearbook of Foreign Policy Studies (Beverly Hills, California: Sage 1981, $25.00 cloth, $12.50 paper), 312 pages.
The many topics covered in this volume fall into several logical categories, which tend to delineate a clear relationship between the political-economic perspectives and the foreign policy postures of the nations of the North and those of the South and between the many issues associated with them. Widely varying degrees of congruence in foreign policy behavior between nations of the North and the South are discerned. This exercise leads to the conclusion that diverse world-system effects are to be expected and that these effects depend on levels of global growth and development, reflecting reorientation in foreign policy behavior. The concluding chapter uses Albert O. Hirschman’s theoretical constructs of "exit" and "voice" options to conceptualize foreign policy options. Writer Kuniko Y. Inoguchi concludes that the "key to the game lies in the ability of developing countries to raise their voice option to a super-effective level, as well as in their efforts for partial exit policies." (p. 273)
In two final volumes, Walt W. Rostow, tries to analyze contemporary economic problems from a broad perspective and calls for cooperative ventures to resolve these problems. Rostow’s The World Economy traces economic history since the eighteenth century and ends with the problems facing the world economy today.* The most critical period for industrial civilization according to Rostow will be the next 25 years.
* Walt W. Rostow, The World Economy: History and Prospect (Austin: University of Texas Press, 1978, $40.00 cloth, $20.00 paper), 877 pages.
The world economy has followed a path determined by the interaction among the forces operating within the international economic, political, and military arena, and the "national histories of modernization and failure to modernize. (p. 365) The world economy now includes nations at quite different points in the unfolding process of absorbing efficiently the pool of modern technology.
The Organization for Economic Cooperation and Development (i.e., the industrial world), according to Rostow, enjoyed one of its strongest surges during the boom which peaked in 1973-1974. However, certain significant economic sectors were struck hard by the "price revolution of 1972-1977." (p. 567) That price revolution and its causes dramatized the fact that for a period the input required to sustain industrialized societies would have to be expanded. This expansion would constitute not merely the basis for necessary structural adjustments in the world economy but also the foundation for a return to high levels of employment and resumed steady growth.
As nearly as he can perceive "through the mists of the future, with imperfect data and imperfect understanding," Rostow believes that the hardest part of the transition facing Americans and the inhabitants of other nations is the one "on which we are now embarked." (p. 581) During the next 25 years, the people of the world will make or fail to make major changes in technology, public policy, and attitudes that will significantly determine the character of the next century.
Rostow therefore concludes that the political agenda required by this view poses a challenge to nations—to their domestic dispositions and to their capacity for cooperation. In the final analysis, the change required most is the gradual acceptance of the reality of common experiences, common dangers, and common goals. Gradually, the common goal of preserving industrial civilization may "come increasingly to suffuse the minds of men as well as the policies of governments." (p. 658)
Rostow’s "Why the Poor Get Richer and the Rich Slow Down" elaborates on themes enunciated in Rostow’s earlier work.* The essays in this volume are unified by Rostow’s insistence that neo-Keynesian and neoclassical theory are an inadequate basis for economic analysis and policy prescription. Rostow concedes that the Keynesian revolution demonstrated that unemployment is an act of man, not of God. It proved that man has the power to prevent depression and recession. However, "what Keynes did not teach us was how in a democracy you maintain full employment without inflation." (p. 323)
* Walt W. Rostow, Why the Poor Get Richer and the Rich Slow Down (Austin: University of Texas Press, 1980, $22.50), 394 pages.
Rostow presents a program designed to halt inflation. Evoking the image of Rousseau, Rostow insists that a "social compact must be sought." (p. 330) What is the substance of this compact? Labor must be confident that its real wages will be protected and that it will obtain a fair share of society’s increases in productivity. At the same time, industry must be assured that the level of wages will not rise beyond productivity increases. Also, industry must be confident that wage guidelines will be maintained and that it will be able to operate in a stable environment.
The role of government must be to lead the way. Where government is involved in negotiations with labor, it must demonstrate that the link between wages and increased productivity will be maintained. Above all, government must set an example of efficiency where it has production responsibilities and in government expenditures, "so as to demonstrate at the heart of national life that the objective of the economy is to use resources efficiently." (p. 331)
Rostow’s calls for international and domestic cooperation are thought-provoking. He offers some profound insights into America’s economic problems and the world economy. Whether his observations prove to be realistic in the light of future events only time can demonstrate. Meanwhile, Americans must keep their options open regarding economic changes. The United States must stand ready to deal with events in the world economy as well as in its own. Even if events in the next quarter of a century do not prove to be as critical as Rostow believes they will be, global involvement will certainly be necessary, and new economic problems will surely develop. Therefore, Americans must remain alert for the emergence of new problems and be prepared to respond to them, regardless of whether the problems are in the domestic or in the world economy.
Air Command and Staff College
Maxwell AFB, Alabama
Contributor
Major Steven E. Cady
(BA., Texas Lutheran College; M.S., University of Southern California) is a student at Air Command and Staff College. His previous assignments include duty in General Officer Matters, Hq USAF, and Plans and Policy, Organization of the Joint Chiefs of Staff. He also served as an executive officer and electronic warfare officer at Loring AFB, Maine. Major Cady is a Distinguished Graduate of the Industrial College of the Armed Forces and a previous contributor to the Review.Disclaimer
The conclusions and opinions expressed in this document are those of the author cultivated in the freedom of expression, academic environment of Air University. They do not reflect the official position of the U.S. Government, Department of Defense, the United States Air Force or the Air University.
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