Hedge

by Nicolas Colin

  In that context of tension on more competitive markets, the enforcement of free trade had to become more intrusive. It was not enough for more developed countries to guarantee lesser competitors access to their domestic markets. As once laggard firms became tougher matches, suddenly it became necessary to check if their improved competitiveness could be explained by entrepreneurial prowess or rather by various forms of state support. It all called for reaffirming the principle of free trade by other means, notably trade agreements and reinforced constraints on domestic policies. Within a more competitive post-Bretton Woods global market, advocating for free trade became synonymous with constraining nation states as to what policies they were implementing at home.

  The more intrusive international approach to free trade explains the current backlash. More advanced countries are no longer allowed to enforce their long-term superiority by way of industrial policy. Less advanced ones, like China or Mexico, are under scrutiny because their efforts to catch up have been so successful. In this context of rising tension, the backlash against free trade is taking shape on both ends of the political spectrum.

  On the left, it is fueled by the fact that free trade seemingly goes directly against what is left of the Great Safety Net. It is not only about tariffs anymore, but also about labor law, taxation, public procurement, social insurance, and even public health: domestic policies in every one of these fields are constrained by international trade. In reaction, opposition to free trade is mounting. This can be seen in the US with the rise of left-wing leaders such as Bernie Sanders[312]. In Europe, a clear signal is the growth of left-wing euroscepticism: the reason why Denmark, Sweden and the Netherlands, for instance, have grown suspicious towards the European Union is partly because public opinion in those countries now see the EU as a threat to their generous welfare state[313].

  On the right, anti-free trade positions sometimes come as a surprise. Pro-business conservatives are usually considered fierce supporters of laissez-faire, and neoliberalism was about using free trade as a lever to break down the political consensus in favor of state intervention. In effect, however, curbing international trade was always consistent with right-wing positions. For old-school European conservatives, trade barriers were always a way to preserve the vestiges of an old feudal order. And in the US, George W. Bush’s 2002 steel tariff[314] showed that the Republican Party was never far from reconnecting with its anti-trade positions of the nineteenth century—even though it proved a politically risky move at the time[315]. Indeed in 2018, being against free trade has become a sure winner on the right. It flatters the rent-seeking ethos of entrenched and stagnant corporate interests. And it helps conservative politicians convince disgruntled working class voters to support them at the polls.

  All in all, a key reason for this widespread temptation for protectionism is that the two legs of free trade and the Great Safety Net have long since lost their balance. When Bill Clinton was elected president in 1992, he signed the North American Free Trade Agreement (NAFTA), but he failed to put in place a system of universal healthcare. More recently, Barack Obama held to the free trade principles of his party, but his social projects were blocked or seriously damaged by resistance from Congress[316]. In Europe, leaders have complied with the demands made in the name of free trade through international institutions such as the European Union and the World Trade Organization. Yet they also contributed to weakening what was left of the Great Safety Net through self-imposed austerity measures[317].

  Without social progress at home, the pro-free trade stand is no longer associated with prosperity and economic security. Rather, it is perceived as exposing workers to instability, lowered purchasing power and accelerating unemployment in sectors of the economy that are no longer competitive on the global stage. Thus the image of most politicians is burned to a crisp. Instead of being the supporters of a prosperous and secure economy, they’re seen as inextricably linked to a laissez-faire attitude, lower taxes for the rich and powerful, and resignation to a further widening of inequalities. By promoting free trade without reinforcing the Great Safety Net, today’s leaders ignore their voters’ quest for greater economic security[318].

  In reality, the social fabric depends less on open borders than on the combination of free trade and economy security. Some countries, like Hong Kong, Chile or (to a certain extent) the post-Thatcher United Kingdom, combine a knack for free trade with a very thin safety net for workers. This usually makes for an open and prosperous economy, with many opportunities to be seized by those who embrace an entrepreneurial attitude. Yet it also brings about a high level of economic insecurity and market instability that occasionally fuels a deep and violent crisis.

  The conservative anti-trade vision, one that would close borders and further dismantle the Great Safety Net, is even worse: as can now be seen in Trump’s America, it favors an economy driven by the powerful, who will increase their rent-seeking activities through tariffs and predatory behavior, all at the expense of the non-wealthy.

  The third option, proposed by left-wing opponents to free trade, is a world of both protectionism and a preserved Great Safety Net. But this is also not ideal as it is difficult to finance the related policies (notably social insurance) in a country that closes itself off from the rest of the world and becomes the victim of scarcity, as has been recently seen in Venezuela[319].

  The best option, indeed, is the combination that links an openness to free trade with covering individuals against the adverse consequences of exposure to the violent winds of the global market. As Dani Rodrik remarked in 1998, “government spending plays a risk-reducing role in economies exposed to significant amount of external risk”, which explains the “positive correlation between an economy’s exposure to international trade and the size of its government”[320].

  Alas most governments are now trapped in what Rodrik has otherwise called the “political trilemma of the world economy”[321]: they have to trade off between the domestic safety net and their principled support of free trade as the main source of economic growth. If they choose free trade, they must be resigned to more economic insecurity. If they choose protectionism to restore the possibility of state intervention, they have to pay the price of scarcity and the inevitable tensions, rent-seeking and inequalities that it brings with it[322].

  An open world is a more prosperous world, but it is also a world in which both individuals and businesses must be better protected against critical risks. In the thalassocratic paradigm, instead of folding in on themselves, countries must continue to defend free trade but with its complement: a Great Safety Net 2.0 that is in sync with today’s economy. This calls for a better understanding of globalization in the Entrepreneurial Age and of how we can make the most of it while providing individuals with economic security. If we aim at pursuing individual empowerment in a more open world, we have to account for how value is created in the Entrepreneurial Age, what new jobs it will bring about, and what critical risks businesses and individuals are now exposed to.

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  Key takeaways

  ● The Entrepreneurial Age calls for lowering trade barriers. The economy cannot prosper if tech companies are unable to generate increasing returns at the largest scale possible.

  ● A historical parallel can be drawn with the old thalassocracies, tiny states such as Venice or Portugal that prospered not by controlling land but by mastering trade routes through the sea.

  ● The absence of trade barriers exposes national economies to even more pressure and instability. Thus the necessary corollary to software opening the world is a broader safety net for all.

  Chapter 8

  From the Old to the New Working Class

  “When the working class shifted from ‘making stuff’ to ‘serving people’, it brought with it lots of historical baggage. The long-standing ‘others’ in our society — women and people of color — became a much larger share of the non-college-educated workforce. And their marginalised
status in our society carried over into the working class, making it easier to overlook and devalue their work.”

  —Tamara Draut[323]

  The old working class has been left behind

  I was as stunned as anyone when Donald Trump won the 2016 US presidential election. Not that I hadn’t seen that something strange was happening. During the entire Republican primary I was convinced that Trump had a real shot at becoming the nominee: he was the only one with a direct, powerful connection with enthusiastic voters. I was also well aware of the weaknesses of Hillary Clinton, a candidate who I saw as belonging to a bygone era of Democratic politics, that of centrist moderation and reverence for wealthy donors[324].

  What I didn’t expect was that Trump would owe his victory to a few industrial states in the Rust Belt that all used to be Democratic strongholds. He won Pennsylvania, the historic steel capital of the country, as well as manufacturing-rich Ohio and Wisconsin. He even narrowly took Michigan, home of the Union of Automobile Workers and the automobile industry centered around Detroit. That was all on top of crushing Hillary Clinton in coal-mining West Virginia—a state that was reliably Democratic until the 2000 presidential election, but that has turned conservative ever since[325].

  This impressive string of victories sounds like a summary of our entire industrial history: the coal mines of the age of steam and railways; the large mills of the age of steel and heavy engineering; the assembly lines of the age of the automobile and mass production. It is also a testament to the sad political shape of the Democratic Party. Democrats used to own those states because their values were all about defending and empowering their residents. That these voters have turned their back on them is a clear signal, among others, of the deep and painful transitional crisis that the economy entered decades ago.

  Indeed it’s hard to deny the crisis and its impact in those states. While people are still there, most of their jobs have disappeared. The exhaustion of industrial activities has impoverished those regions and demoralized their inhabitants. Having lost their jobs and with their purchasing power eroded, workers end up rejecting immigration and free trade. Their politics change as they’re attracted to populism rather than issue-oriented ideologies. As Alan Greenspan declared in 2016, “populism is not a philosophy or a concept, like socialism or capitalism, for example. Rather it is a cry of pain, where people are saying: Do something. Help!”[326].

  In the nineteenth century, most industrial activity and factories were located in large cities. One reason was the proximity to essential infrastructures. The point of factories was to produce goods, and those goods had to be transported and distributed through the rudimentary logistics systems of the time. For factory owners, access to those depended on being located close to rivers and canals, train stations, port facilities. The further you were from those infrastructures, the costlier it was to distribute goods to customers.

  Cities were also where workers lived. Back then it was difficult to move around due to the lack of adequate transportation. Laborers didn’t have their own cars, so there were few options. Either both the factory and the workers had to be located in urban areas where they could rely on the public transportation system, or workers had to live near the factory, and so some factory owners built homes for their employees away from the city. In any case, with factories came clustering: it was easier to operate a factory in a populated area; in turn, the factory attracted even more population. Once it was up and running, the surrounding area would only become more urban.

  But then factories left the larger cities. With the strengthening of the Great Safety Net 1.0, the new age provided workers with the possibility of buying their own house, which led to the massive relocation of the urban industrial workforce into less expensive suburban areas. Individual cars powered by cheap oil facilitated traveling from home to factory and back without the need for public transportation. Cheap land previously priced for agricultural use was converted to residential use. All of this could only happen once, but it facilitated a smooth transition to the emerging middle class way of life.

  Transportation of goods also underwent a revolution. Early in the twentieth century, cheap oil already made it possible to rely on trucking to transport whatever came out of factories, thus facilitating their relocation to less urban areas. Later in the 1950s, the invention of the shipping container radically changed the logistics system on which manufacturers depended to distribute their products[327]. With less dependence on the large workforce needed to handle goods in traditional logistics facilities, it became possible to redraw trade routes away from the cities.

  Getting rid of urban factories was also a matter of clean air. As happened with the London smog of 1952[328], the concentration of factories in dense areas inflicted hazardous pollution on urban populations. As city inhabitants rose in sophistication and purchasing power, they started to exert pressure on their elected officials to obtain the removal of factories for reasons of public health. Indeed today factories are still the main reason why there's such pollution in large Chinese cities, whose density makes it harder to disperse toxic emissions. But as China is undergoing rapid economic development, it’s only a matter of time before industrial facilities leave the cities to be relocated further from where people live.

  Finally, the constant flow of new inhabitants into cities led to ever more expensive real estate. Thus the factories relocated simply to escape the higher fixed costs that came with having an industrial facility occupying prime urban real estate. At first, industrial ventures had clustered in Chicago, Pittsburgh, and Detroit because only such large cities could provide the necessary labor, financial capital, infrastructures, and managerial talent. But later in the twentieth century, factories were disseminated across vaster territories to increase the scale of their operations and reduce the unit costs of production.

  With factories relocating away from large cities, attracting them became a new game in which smaller cities had an opportunity to compete. As observed by Paul Krugman, the prosperity of smaller cities can be seen as an enigma in today’s world. After all, their traditional function was to serve “as central places serving a mainly rural population engaged in agriculture and other natural resource-based activities”[329]. But when agriculture ceased to be a massive job provider, some of those cities managed to rebound by welcoming industrial activities in search of a new home.

  In some cases, it was through random events that smaller cities were put on a path to becoming industrial clusters. In others, there was determined action by local officials to woo factory owners and convince them to settle there. Prompted by anti-labor business leaders opposing the New Deal[330], certain US states enacted so-called ‘right-to-work’ laws to prevent workers from organizing and then attracted factories using this argument. It was a setback as far as workers’ rights were concerned, and a direct consequence of the Taft-Hartley Act of 1948. But it also meant opening factories in less industrial regions, thus spreading the wealth that came with the techno-economic paradigm of the day. As we are reminded by Emily Badger, that was a time when the largest industrial firms, with their headquarters still located in large cities, drew on raw materials and manufactured goods from all around the country[331].

  Factories created quite a lot of value for local communities. In the age of the automobile and mass production, they were the dominant link of industrial value chains, capturing a large chunk of the total value added in any given industry. And at a time when large corporations were not yet restructured into over-optimized global value chains, having a factory in town meant much of that value spilled over locally: lots of local jobs, both qualified and less qualified; indirect wealth creation through the massive development of adjacent businesses that served both workers and the factory itself; additional tax revenue that made it possible to invest in local infrastructures and better public services.

  The model was so successful in fact that we’re not used to the idea of a clustered economy anymore. We grew up in a world in
which it was assumed that every city, however small, would have its factories, and then its retail shops, and many other service businesses.

  But now not only have most factories been lost due to globalization and the techno-economic transition; those that remain (or are coming back due a trend known as “reshoring”[332]) do not generate as much local value. They’re part of global value chains in which factories are not the dominant link anymore, as most assets, functions, and risks are located elsewhere. And the jobs those new factories provide are of a lesser quality than in the past—if they provide jobs at all. As Ben Casselman, of FiveThirtyEight, wrote on the eve of Donald Trump’s election, “today’s manufacturing jobs aren’t necessarily the high-paying, stable jobs that we tend to remember”[333].

  With suburban factories now a shadow of their former selves, we’re not even sure that there’s another way of spreading wealth geographically. The Entrepreneurial Age seems to reward large cities and nothing else, and old jobs have been radically displaced as a result. As factories are now empty, the occupied working class is now employed primarily in services—services that are more and more concentrated in cities. Hence, as Richard Florida puts it, the city has become the “new factory floor"[334].

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  The new factory floor

  I’ve spent most of my life in large European cities—except for a few years in my childhood when we lived in a residential suburb (but not for long, because my mother hated it), and then when I was a computer science student on a campus near the sea. Only recently did I realize how different these European cities are from those in the US.