A few years ago, California pistachio growers asked whether I would speak at their convention near Carmel-by-the-Sea. I love pistachios, and since Magnum-toting Clint Eastwood once served as mayor, it seemed a safe assignment. The audience was friendly and many of the attendees were true farmers, wearing caps emblazoned with the name John Deere, Caterpillar, or Sunkist. In my talk I discussed globalization. I grabbed a bottle of FIJI Water resting on the lectern shelf and raised it high: “Imagine, it is economical today to import water from the South Pacific, all the way to California! That’s the miracle of new transportation technologies—containerization, advanced logistics.” As I praised the forces of globalization and the sleek design of the rectangular FIJI bottle, I noticed a rather elegant man in a fashionable suit jacket sitting in the front row nodding, smiling, and paying close attention. Then I paused and looked at the FIJI bottle the way Hamlet looks at Yorick’s skull and said, “Now, I’ve never been to Fiji. I’d love to go there. But I’m pretty sure these bottles are filled by some guy in his boxer shorts standing in his backyard, holding a garden hose.” The audience roared. I felt good. Then they kept laughing and some whistles got added to the sound mix. Finally, the master of ceremonies stepped onto the stage, put his arm around me, and pointed to the elegant man in the front row.
“Todd, let’s call up here the owner of FIJI Water!”
Gulp.
The man’s name was Stewart Resnick, and he was also the co-owner (with his wife, Lynda) of the POM Wonderful pomegranate and pistachio company. I also love the taste of pomegranate. Resnick, who has given generously to medical research, could not have been nicer. He and the rest of the audience assumed that I had the nerve to deliberately tease him from the stage.
This is a new world, where nothing on earth is far away from our grasp. No longer do we step off the treadmill at a gym and stumble to a rusty water fountain. Instead, we may depend on a guy named Stewart, who lives in Beverly Hills, to send us bottles designed by a talented graphic artist and filled with water from the tropics. Bottled water is a $12 billion industry and consumers are devoted to their favorites—even though the basic ingredient is supposed to be pretty tasteless. I intend neither to exalt nor to pick on FIJI Water, or any other brand. After all, the story of human survival is closely tied to finding sources of drinkable water.
We are evolutionarily driven to discover good water. And the more recent one-hundred-year story of modernization is closely linked to a desire for and an ability to obtain nonpolluted bottled drinks, whether Coca-Cola in Africa, Pepsi in the Soviet Union, or Pabst Blue Ribbon in Guangdong. It is easy to forget the power of Coca-Cola and Pepsi as symbols for developing nations in the twentieth century. If a government—whether dictatorial or parliamentary—could deliver American fizzy drinks to its people, that government had a better chance of clinging to power. Coca-Cola created its own foreign department in 1926, mirroring the US State Department. In 1959 at a trade exposition in Moscow, which turned into the famous “Kitchen Debate,” a Pepsi executive managed to sneak a cup of cola into the hands of Nikita Khrushchev and Richard Nixon, while photographers snapped away. With that icebreaker, Pepsi later arranged to swap soft-drink concentrate for Stolichnaya vodka to be sold in the United States. But at first communist governments despised such symbols of Western wealth and leftist critics called it “Coca-Colonization.” To compete with Coca-Cola, Khrushchev’s henchmen came up with their own bubbly dark drink based on the traditional kvass, a sour, cloudy brew made from fermented brown bread. In War and Peace soldiers call it “pig’s lemonade.” The Soviet state version probably went down well with joy-riding local commissars who cruised around town in rusty, sixty-five-horsepower Ladas. Their expectations were low. In 1959 Romania’s hard-core communists spied their national fencing champion sipping Coca-Cola while in Krakow, Poland. They threw him into jail for this sin and denounced the drink as the official “beverage of capitalist sports.” Eventually, the barriers to Eastern Europe collapsed. In Romania after protesters toppled the brutal and comically egotistical CeauŞescus in 1989 (see Conclusion), the swirl of Coca-Cola’s red-and-white stripes popped up on kiosks across the country, symbolizing freedom and access to global goods. James Cagney’s character predicted all this in Billy Wilder’s 1961 comedy One, Two, Three: “Napoleon blew it; Hitler blew it; but Coca-Cola’s gonna pull it off.”1
The old Roman motto coined by the poet Juvenal was “bread and circuses,” meaning that Caesar could stay on the throne so long as he provided entertainment and the daily necessities. In Ethiopia, Coca-Cola became the Roman bread. As recently as 1999 the BBC reported that a “Coca-Cola shortage is being treated as a national emergency,” as the East African Bottling Share Company ran out of bottle tops and laid off one thousand workers. In a national credit crunch, “[s]treet children have reportedly been collecting the much-needed bottle tops from the streets of Addis Ababa.”2 In the 1980 cult movie, The Gods Must Be Crazy, a Coca-Cola bottle falls out of an airplane and lands in the Kalahari Desert near a naïve and unworldly Bushman named Xi. Xi had never seen such a sparkling, entrancing thing. It must be holy, a gift from the gods! Eventually, the gift ruins his tribe’s harmony and Xi races across the Kalahari trying to hurl the bottle off the ends of the earth.
Now we ask ourselves, how does globalization impact the harmony of a nation? Be careful here, for even if we answer that globalization harms the harmony, we must also ask, can a nation live without globalization? Which brings us to the paradox of this chapter: Nations cannot grow and stay rich without trading with others. But trading with others eventually shakes the customs and character of the nation. At some point, we all feel like the early Xi who marvels at the bottle of Coca-Cola. Maybe we are not bedazzled by a soft-drink bottle. Maybe for us it is the supersharp photos of a Samsung Galaxy phone or the painted, colored dots that emerge from Damien Hirst’s art factory in London. Still, we marvel. But at some later point, we also feel like the older, disenchanted Xi and ask ourselves, “Have these global marvels interrupted our lives and disrupted our relationships with our neighbors?” Those Galaxy photos are sharp, but maybe we miss the guy who used to run the photo shop down the street before he was put out of business.
Nostalgic feelings are not new. In Proust’s Remembrance of Things Past (1913), the middle-aged narrator (Marcel) shudders with a flood of feelings when he tastes a baked madeleine dipped in tea. He yearns for the memories of his youth: “after the people are dead, after the things are broken and scattered, taste and smell alone . . . remain poised a long time, like souls, remembering, waiting, hoping amid the ruins of all the rest.”3
Sounds sentimental and dreary. But it is worse for us today. Unlike Marcel, we miss the cookie because Nabisco has displaced the baker! We miss the taste of an earlier time—and the very neighbors and artisans who created those tastes! Most of us occasionally feel a nostalgic twinge at the costs of modernization. I call the feeling “melancholia madeleine,” for we were all like Marcel or a Kalahari Bushman at some point in our personal history. Melancholia madeleine is a syndrome that makes it very difficult to keep a country together.
It is true that nowadays “artisanal” bakers, “craft” olive oil bottlers, and “local” kale growers do crop up to command premium prices from affluent consumers. Often, however, the most skilled and successful artisans quickly sell their businesses to bigger brands desperate to show their cutting edges to the public. There’s nothing wrong with brave and noble artisans selling their shops, but it is tough to conjure misty-eyed nostalgia for a company like 10 Barrel Brewing that had been brewing beer in Bend, Oregon, “since 2009” and in 2014 snuck the whole operation under the sign of its acquirer, Budweiser.
Let us, like the Proust narrator holding his madeleine, go back in time again. In this chapter, I will show you old nations like Ragusa and Venice that grew rich by trading and then fell apart. We will see one of the most powerful empires of the nineteenth century, the Habsburg Dynasty that ruled Austria-Hungary, crumble like a stale linzer torte. We will also see how a globalized economy can sap patriotism. It’s not all bad, though. These very same forces that ripped apart nations brought us longer, healthier lives and so many good things from lifesaving penicillin to the lowly pencil.
IT’S HARD TO GET RICH WITHOUT TRADE
I have spent much of my career extolling the virtues of trade. I am proud to say that Milton Friedman endorsed my first book, a history of economic thought entitled New Ideas from Dead Economists, and when I served in the White House I debated opponents of the North American Free Trade Agreement, including one boisterous union leader who literally took off his shoe and pounded the lectern, eliciting cheers and whistles from the crowd gathered at a massive, dingy hotel in Chicago. On the book jacket of his classic Free to Choose, Friedman holds up a pencil as a symbol of the wonders of free trade. No single person, Friedman insisted, knows how to make a pencil.4 To construct a pencil you need to be able to get to a place like Oregon and learn how to chop down a big tree. But first you would need steel for the saw. So you would need to fly to an iron mine in Brazil and strap on a miner’s helmet. Then make your way to Pittsburgh to figure out how to turn iron ore into steel. Do not forget the pencil’s metal tip, graphite center, and rubber eraser. They require trips to Sri Lanka and Indonesia. After all that traveling and learning all the chemistry, engineering, and foreign languages necessary for the transactions, do you think you could churn out a single pencil for the thirteen cents that Dixon Ticonderoga charges—a pencil which also comes in a handy cardboard box with attractive graphic printing and which attracts faithful fans? (George Lucas wielded a Dixon Ticonderoga before he gave Luke Skywalker a lightsaber and Willie Wonka’s creator, writer Roald Dahl, would sharpen half a dozen each morning before his first morning scribble.)5 Remarkably, not the iron miner, the tree chopper, the rubber farmer, nor the graphic artist ever has to gather together in a conference room to conjure up the miracle of the pencil. No central planning bureaucrat needs to direct the operation. The price system and the “invisible hand” of the market coordinate all of this. And in your lifetime, have you ever heard of a shortage of pencils? Or price-gouging by pencil makers? Pencils are, of course, a trivial matter (unless you show up without one on the morning of your SAT test). But far more sophisticated examples, from an aspirin pill (one penny for each pill) to an airline jet engine ($11 million) come to us through the same mechanism. Over time, markets deliver to consumers better products and better prices.
Perhaps the best way to look at the benefits of trade comes from asking, how many hours does an average person have to work in order to earn enough money to live and buy the stuff he wants? By this standard, over the past 150 years life just got grander and grander. In 1870 children were expected to start working at age thirteen. The retirement age was death, and in addition to three thousand annual hours “on the job,” Americans performed eighteen hundred hours of home chores. They spent 61 percent of their waking hours working. By 1950 young people joined the workforce at 17.6 years and adults spent only 45 percent of their waking hours working. Today, we start working at twenty, can expect to live sixteen years in retirement, and spend only 28 percent of our waking hours working.6
Look now at how purchasing power has soared. When I was a kid, I loved to flip through the Sears Christmas “Wish Book” catalog. I don’t know if Santa caressed the same catalog, but it seemed pretty magical. When I was thirteen years old (and no longer believed in Santa) and wanted to learn how to develop and enlarge film photographs, I discovered in the Sears catalog a Kodak package that sold for roughly one hundred dollars. That seemed expensive to me. So I wrote a letter to the president of GAF (Kodak’s competitor) describing the Kodak system and asking whether it seemed like a good starter kit for a kid like me. Sure enough, a few days later, a brown UPS truck drove up to my house and the driver handed my mom a red box. Inside was a free GAF kit and a very nice note from the president wishing me good luck in my budding photography career (I did not have much luck. When you are growing through the awkward “wonder years,” it’s easy to trip and spill toxic chemicals in a makeshift darkroom that is actually your parents’ laundry room.) Economist Mark Perry has done us the favor of flipping through old Sears catalogs to compare prices over time. In 1959, for example, an average worker would labor for over a hundred hours to afford a washing machine. Today, it takes less than one-fourth as many hours. A vacuum cleaner would require over a week of labor; today it takes less than one day.7 And despite the recent debates about inequality, note how poor households have benefited. In 1971 only about 20 percent of American homes owned a dishwasher and about 40 percent watched television in color. By 2005 about 40 percent of poor families had a dishwasher and nearly all had at least one color television. Other countries enjoyed similar wonders. As recently as 1965 one-third of British families lacked a refrigerator, which explains a lingering tolerance for room-temperature beer.8
Countries that shun trade end up stagnating or sinking. After the Soviet Union splintered in 1991, I took a few days off from my job at the White House and visited Saint Petersburg, Russia. Strolling through the flaking halls of the Hermitage, I realized that communism’s problem was not failing to keep up with the rising standards of 1980s America but failing to keep up with the standards of 1917 Russia. Before Fidel Castro’s 1959 revolution, Cuba’s GDP per capita was near the top of Latin America’s rankings. In the decades that followed, as Cuba’s leaders banned or confiscated private property and entrepreneurial profits, Cuba slipped to the bottom. Castro’s supporters might blame the plunge on the US embargo, but that makes my point: countries that are cut off from trade (whether voluntarily or not) at best stagnate. On average, since 1959 the standard of living in Latin America has doubled. Cuba’s per capita GDP has hardly budged.9 And when you see photos of skinny peasants pushing their vintage 1956 Chevy Bel Airs, you see who has to do the budging. Now that the United States is beginning to lift the trade embargo, we might expect a more prosperous Cuba, provided Raul Castro permits a more active entrepreneurial class.
We will see in chapter 8 that in the 1800s Japan’s fearsome Tokugawa shogun rulers were shocked, awed, and panicked when they saw English and Portuguese traders steam into their harbors under a black cloud of coal-fired power. The leaders had cordoned off Japan for hundreds of years, but instantly realized their country was economically and militarily retarded.
We can compare pairs of countries that chose starkly divergent paths in the 1980s and 1990s. The first of the following pairs opted to globalize; the other stayed within its own bubble: Vietnam versus Burma; Bangladesh versus Pakistan; and Costa Rica versus Honduras. On average those countries that opened up grew at a 3.5 percent annual pace in the 1980s and 5 percent in the 1990s. The insulated economies grew by merely 0.8 percent in the 1980s and 1.4 percent in the 1990s.10 Over time, when a country folds itself into a self-contained bubble, the economy grows stale and fetid, much like a badly aerated terrarium. Or a dank prison, which pretty much describes North Korea. In 1953, after fighting subsided in the Korean War, the north was slightly wealthier than the south. The Japanese had built factories north of the thirty-eighth parallel and in the 1950s and 1960s the USSR, China, Poland, and even Albania delivered massive aid to rebuild North Korea. Despite such kind communist assistance, today the south is seventeen times wealthier and South Koreans live ten years longer and stand several inches taller. The Koreans call it “the Miracle on the Han River.”11 North Korea does lead in a few categories, for example, executions without trial and infant mortality rate (six times higher). South Korea produces supersharp Samsung flatscreen televisions, supersmart LG refrigerators, fine Hyundai and Kia cars, and charismatic K-pop singers that elicit raving standing ovations around the world. What does the North produce? Death threats against Hollywood actors who star in stupid movies (like The Interview). And, presumably, those silly jumpsuits worn by Kim Jong Il.
Free trade brings vast benefits to most people. Since the time of the Phoenicians, trading nations have prospered most. Commentators, including some economists, make a big mistake when they think that a country’s wealth rests on its natural resources (or in fancier words, its “factor endowment.”) Look around the world. Hong Kong is a pile of rocks. And now a very rich pile of rocks. The Netherlands was a swamp. Israel was a desert without a sprig of parsley, much less oil. Now it hatches more NASDAQ technology companies than countries ten times its size and its coastline is dotted with research buildings bearing all the familiar names from Silicon Valley, including Google, Apple, Cisco, Microsoft, and Facebook. These countries believe in trade, not just in trinkets and electronic devices that you can hold in your hand, but in the free exchange of ideas.
THE FREE MARKET IS NOT A PAIN-FREE MARKET
But the free market is not a pain-free market. And we should admit that some people lose when a country opens its markets. It is hard to find a shoe that is made in America. In 2015 President Obama visited Nike’s headquarters in Oregon to explain why a new global trade agreement would help Americans. If Obama looked at his wristwatch in order to time his speech, he probably would not have seen “MADE IN USA.” The United States does not have a booming wristwatch industry anymore, having fallen first to the Swiss, then to the Japanese, then to the Chinese, and then to the Swiss again. Maybe Detroit’s Shinola or Apple’s iWatch will bring it back (though most components come from Asia).
The paradox of this chapter squeezes tight: countries need trade but trade can crumble loyalties.
WHAT IS RAGUSA?
Even to most highly educated people, the name Ragusa means nothing today. Perhaps it sounds like a popular brand of spaghetti sauce (Ragú) that an immigrant husband and wife couple from Naples started bottling in their New York basement in the 1930s and later sold to Unilever, Lipton, and Best Foods. During Renaissance times, the Republic of Ragusa was a glorious place of riches, tucked behind beautiful rocks that drop sheer down to the sea, boasting a calm harbor, marble streets, and the most pleasant weather this side of San Diego. In Twelfth Night, Viola may be speaking of romantic Ragusa when she washes up along the shimmering Adriatic Sea and asks with wonder, “What country, friends, is this?” Today, Ragusa has a different name, Dubrovnik, and each year 15 million tourists trample each other and hold out selfie sticks to photograph themselves leaning against baroque buildings and pointing to the blood-orange-colored terra-cotta roofs.12 A sixteenth-century Dominican monk named Serafino Razzi described Ragusa’s tasty wines, sweet pears, fat watermelons, and fresh fish leaping atop the Adriatic. Before most of Europe, Ragusa built sewer and drainage systems and it suffered fewer plagues and famines. From 1358 to 1806 Ragusa displayed the word LIBERTAS on its flag and was virtually the only town along the Dalmatian coast not governed by Venice. Ragusa was run by a confident magistrate who, when traveling abroad, donned red stockings and red shoes, a symbol the Greeks had used to show supreme power. The Ragusa magistrate would stroll through foreign ports to the drumbeat of martial music, though he was “protected” by a dozen unarmed guards.
Ragusa was not entirely a paradise, though. The country was plunked down in a rough neighborhood, frequently threatened by Turks, Venetians, and brigands of all sorts. (In chapter 9, we will read of Costa Rica’s leadership in a similarly rough neighborhood from the 1950s to the 1990s.) Ragusa built walls to protect itself not just from the navies of princes and sultans, but also from neighboring feudal lords and pirates. To keep its independence the Ragusa republic relied on bribes, spying, trickery, and feigning. Here is a sample of obsequious and somewhat devious missives sent to foreign chieftains:
The Ragusa Senate delivered a dispatch to the ruler of Austria: “We the sworn servants of your majesty are bound by duty to inform you of everything we learn that the Venetians are doing against your lands.”
To the Holy Roman Emperor Charles V: “We are always devoted to you.”
To the sultan of Turkey: “Twelve galleys of the Pope have united with 49 of the King of Spain . . . to unite with the Venetian fleet.”13
The Ragusans explained to the Habsburg emperor Ferdinand that they pay tribute to the sultan not to preserve “our private goods, but in the name of the whole Christian Republic . . . under the banner of Christ.” By paying money to the sultan, we “keep alive the religion of Jesus Christ in these parts.” But then Ragusa’s ambassador turns to the sultan and declares, “We care more for the lowest of the servants and slaves of your Highness than for all the Christians.”14
Ragusa instructed its ambassadors to Constantinople: “When the pasha tells you that the Sultan wants to increase our tribute, fall on your knees, pour tears, and with most humble words beg him to desist.” The ambassador was then instructed to offer a bribe of five thousand ducats to back up the tearful plea.15
This duplicitous yet understandable strategy worked quite well as Ragusa navigated among threats from the Turks, Venetians, Spaniards, et al. But in 1806 Ragusa collapsed before Napoleon, and the Republic had to take down the flag on its fortress that proclaimed “NON BENE PRO TOTO LIBERTAS VENDITUR AURO” (Liberty is not well sold for all the gold). Ragusa did not fall because it was too poor. Ragusa fell because it was too rich to stay a free republic. First, following the same tendency we saw in the prior chapter, Ragusa’s surging standard of living pushed down the birthrate, especially among the bickering and intermarried aristocracy. Starting in 1500—during the “Golden Years” when Ragusa erected more buildings than it would ever construct again—Ragusa’s population began to drop, from almost ninety thousand to just twenty-six thousand in the late 1600s. The average number of persons per household plunged from ten to five.16 In a sign of upward mobility, commoners received 42 percent of bank loans and owned an overwhelming proportion of ships compared with the nobles. Ragusa’s historical record does not show a national debt default crisis, as we see in Greece today.17 The culprit was not poverty.
Despite the Latin motto on the flag, Ragusa’s libertas was indeed undermined by gold. As Ragusa residents accumulated wealth, who remained loyal to the Ragusa Republic? From throughout the world, sacks of spices, crates of armaments, and legions of itinerant merchants arrived in port, each quite aware of his escape route. In the streets vendors squawked in Latin, Arabic, Russian, and a variety of African dialects. Catalans arrived with wool to sell. Egyptians showed up with wheat. From Saxony came miners. The standard of living went up, but communication grew tougher and loyalties frayed. As Charles V, the Holy Roman Emperor, once remarked, “I speak Spanish to my God, Italian to my women, French to my men, and German to my horse.” The merchants resented the aristocrats, and the aristocrats found their numbers dwindling. Ragusa was not willing to defend itself and spent (proportionally) about one-fourth to one-half as much of its budget on its defense as other nations did. As Napoleon’s soldiers stepped ashore and conquered, a contemporary witness decried the “blindness of the people and the bourgeoisie who receive the French with open arms.”18 On the night that French troops seized the palace in 1808, Ragusa’s burghers gave a ball to celebrate the end of it all.
WHERE HAVE ALL THE HABSBURGS GONE?
Like a chopped-up Magritte painting, all that is left of the Habsburgs is a homburg hat. The Habsburgs ruled much of what we now call Austria, Hungary, Poland, Romania, Czech Republic, Slovakia, Ukraine, and the Balkans. Perhaps one in ten Americans can trace his or her heritage to a town or hamlet ruled by the family. At one point the Habsburgs reigned over most of Mitteleuropa, along the Adriatic through Ragusa down to Montenegro, and as far to the east as Dracula’s castle in Transylvania. These days the Habsburgs seldom show up in popular culture, save for appearances in Peter Shaffer’s play (and later movie) Amadeus. In the movie, the Habsburg emperor Joseph II tells young Mozart that he likes the genius’s latest opera, but he’s afraid there are just “too many notes. Cut a few and it will be perfect.” A sarcastic Mozart turns on the ruler and says, “Which few did you have in mind, Majesty?” History has mostly cut out the Habsburgs. Not because they were particularly evil, greedy, or musically vulgar. The Habsburgs could not hold together an empire made up of too many peoples, too many customs, and too many lands.
Like their Ottoman rivals—we’ll explore them in chapter 7—the Habsburgs disintegrated with World War I. But they were on their way out before the war—following their strongest growth in four hundred years! The empire straddled Vienna and Budapest, and the last powerful monarch of the dynasty, Franz Joseph I, and his successor Charles were both emperors of Austria and kings of Hungary. Franz Joseph had a stoic, military bearing, a love of uniforms, and a very tough family life. Listen to this sequence of woes: although he escaped (with the help of a highly starched collar) an assassin’s knife aimed at his neck in 1853, his brother was assassinated by a firing squad during a revolt in Mexico in 1867; his son and only heir Rudolf killed himself and his seventeen-year-old mistress in a Romeo and Juliet lovers’ pact in 1889; an Italian anarchist stabbed his wife Elizabeth in the heart in Geneva in 1898; and the 1914 assassination of his heir and nephew Franz Ferdinand launched the world into the Great War. The economy of the emperor’s domain was much more promising than his family life. The economy had been growing fitfully in the late 1700s and early 1800s. Then in the early 1800s Austrian weavers began to import British machines for cotton and flax, boosting productivity. In 1851 the government lifted tariff barriers that separated Austria and Hungary. In 1859 the government abolished guilds, which then made it easier for new entrepreneurs and tradesmen to compete with established businesses. A surge in modernization, which began in the 1830s, accelerated sharply between 1850 and 1873.19 The Austrians called the period Grunderzeit (literally, the “founder epoch”), and it brought to Vienna a new opera house, town hall, and parliament building, as well as many migrants and merchants who moved into new tract housing. If you visit Vienna, you might drop by the Café Landtmann, which opened in 1873 and has served Apfelstrudel to the brooding likes of Sigmund Freud and Gustav Mahler. The opening of cafés symbolized rising disposable incomes. Between 1870 and the 1914 assassination of Archduke Franz Ferdinand in Sarajevo, per capita incomes rose much faster in the empire than in England and France. Finally, amid the galloping GDP, internal population growth slowed down, fitting the pattern we saw in the last chapter. The fertility rate decreased from 1850 to 1910 compared with the period from 1817 to 1845.20
Between 1870 and 1910 the Austrian-Hungarian economy roared, expanding by 128 percent.21 You might think that a richer country could afford to calm internal tensions. But rising incomes sparked more ethnic conflict than stagnant incomes did in prior eras. In 1897 ethnic riots broke out from Vienna to Prague to beautiful Salzburg, where Mozart had learned the violin and where Maria von Trapp later yodeled. When Prime Minister Badeni, a Polish count, proclaimed that all bureaucrats must speak German and Czech, even newspapers six thousand miles away could hear a violent rumble. The Los Angeles Herald reported that “Unrest continues in Bohemia . . . troops patrolled the streets of Prague . . . a bomb was found last Thursday evening near the royal German theater . . . the prisons are so full . . . collisions between the students and the police have occurred at Prague, Cracow and Qrats . . . thirty newspapers have been confiscated.”22
Visiting Vienna, Mark Twain wrote an entertaining (and politically incorrect) account of fights in parliament. He describes a “wild and frantic and deafening clamour as has not been heard on this planet since the last time the Comanches surprised a white settlement at night.” Twain then describes a legislator aptly named Wolf:
“Trim and handsome . . . black hair roughed up . . . hospitable with a sword and pistol; fighter of the recent duel with Count Badeni, the head of the Government. He shot Badeni through the arm, and then walked over in the politest way and inspected his game, shook hands, expressed regret, and all that.” Twain reports Wolf demanding the floor of parliament to proclaim that “we intend to find out, here and now, which is the hardest, a Pole’s skull or a German’s!” After catcalls, Wolf demands “an adjournment, because I find myself personally threatened. . . . Not that I fear for myself; I am only anxious about what will happen to the man who touches me.”23
Though an overwhelming majority of the empire was Catholic and the emperor himself was personally popular and spoke many languages, the empire could not hold. With easier trade flows across borders, the population of Vienna multiplied fourfold between 1850 and 1910 as immigrants and farmers rushed to the very civilized city of Strauss’s waltzes. Despite the prosperity, few champagne corks were popped. In fact, even before World War I, the Viennese complained of a siege—but from fellow Austrians purportedly carrying diseases and lower wages. Anyone not from Vienna (including Salzburgers, Czechs, Poles, and Hungarians) was deemed a “political unreliable.” Police reported fistfights among shoppers because newcomers “touch the merchandise, put it back, haggle over the price and then don’t buy it in the end.” No wonder that when the Great War broke out, Austrian generals protected their troops by stationing them outside the city, far from the civilian wars within!
Viennese who traveled elsewhere within the empire faced similar sneers and a similar siege mentality. Here is an extraordinary observation from 1902 by Karl Wittgenstein, a steel tycoon friend of Andrew Carnegie and father of the philosopher Ludwig Wittgenstein: “When Viennese musicians and singers perform in Budapest, it is a cause of public annoyance.” The Magic Flute and “The Blue Danube” so annoying that their melodies can spark a riot? Therefore, Wittgenstein points out, “the children of our country emigrate . . . to America, whose culture and language is closer to them.”24 Imagine, Austrian children in the Austria-Hungary Empire packed up their belongings to board boats and cross the stormy North Atlantic because they found they had more in common with Americans than their own “countrymen.”
SCOTLAND THE BRAVE AND CONFUSED
The two powerful paradoxes explained in this and the prior chapter—(1) rich nations have fewer babies and therefore require immigrants, and (2) to get rich and stay rich, nations must trade with foreigners—are sparking nationalist and separatist movements across the globe today: the Basques and Catalans in Spain; the Kurds in Turkey; Northern League supporters in Italy; and Walloons versus Flemish in Belgium. A few years ago while visiting Rome, I heard an angry nationalist declare himself against cultural diversity: “We don’t want your United Colors of Benetton!”
On September 18, 2014, the Scots rushed into voting booths to decide whether to declare their independence from the United Kingdom. Even Sean Connery—who served Her Majesty the Queen as the first 007—campaigned for separatism. The independence movement received about 45 percent of the vote, an impressive performance considering that the Tory and Labour parties battled on the same side to fight against a yes vote. Moreover, major Scottish banks and businesses threatened to flee their home offices if the yeses won.
You might think that poverty and despair drove many Scots toward breaking away from the English. But in fact, Scotland is far wealthier than it was in 1970 or 1950, when the blaze of independence was just an ember. Scotland’s per capita GDP stands at about $47,000, beating the average for England and Germany. Nonetheless, a large proportion of Scots believe that this wealth has come at too high a price: too many foreigners, too many English seeking to share North Sea oil revenues, too many able-bodied adults on the dole, and too many weapons on Scottish soil, ready to be deployed in the affairs of foreign countries. Scotland’s Bard, Robert Burns, wrote, “We are bought and sold for English gold.” The resentment has intensified as Scotland has grown wealthier. Many Scots no longer recognize their homeland. In Macbeth—“the Scottish play”—Macduff asks, “Stands Scotland where it did?” The worrisome answer:
Alas poor country!
Almost afraid to know itself.
The splintering forces of entropy, not economic desperation, provoked the Scots to kick up their kilts.
FROM “MADE IN USA” TO “MADE WHEREVER IT’S CHEAPER”
My father was fired. He was technologically unemployed. He worked for the same firm for 12 years. They fired him and replaced him with a tiny gadget that does everything he does. Only it does it much better. The depressing thing is my mother went out and bought one.
—WOODY ALLEN, 1968
If they fired Woody’s father today and replaced him with a smooth-talking engineer from Punjab, would his mother go out and get herself a svelte Sikh in a turban? We have grappled with the idea of machines replacing people ever since the first ancient Roman winemaker used a plank and heavy stones to crush a vat of grapes instead of asking women to stomp on the grapes with their calloused toes. In 160 BC, Cato the Elder wrote a treatise on agriculture, the oldest surviving book of Latin prose, in which he explained how rocks can replace feet in winemaking. The debate on machines and computers stealing jobs away continues today with great passion. Taxi drivers do not like Uber swiping their customers away by deploying sophisticated GPS technologies and ratings systems that leave rude drivers on the side of the road. Soon Uber drivers will resent Google’s self-driving vehicles. The man-versus-machine debate will rage on, but in the case of taxi versus Uber, both sets of drivers are wrestling in the same time zone and in the same country.
Workers feel threatened by a combination of foreign machines and foreign people. Further, a more globalized, trade-based economy threatens to bleed patriotism out of nations. Let’s consider the United States today, which exports more goods and services than ever in history ($2.4 trillion), making up 13.4 percent of GDP. Boeing has a backlog of over five thousand unbuilt jets valued at $489 billion, most of them purchased by customers outside the United States. Hurray for Boeing. But the United States also exports jobs. If you look under the hood of Boeing’s new 787, you will find that 70 percent of the aircraft is “MADE OUTSIDE THE USA” (compared with 2 percent for the original 747 in the 1970s). The wingtips flew in from South Korea, Sweden shipped Boeing the cargo doors, and Japan made the toilets and those pesky lithium-ion batteries that kept catching fire a few years ago. We have moved from “MADE IN USA” to “MADE IN WHEREVER’S CHEAPER.” ABC News once asked me to visit a Best Buy store, followed by a camera crew. I flipped over radios, TVs, and DVD players like a clumsy juggler. We were hoping to find at least one gadget stamped “MADE IN USA.” We found China, Malaysia, Taiwan, and Japan. Only after buying some batteries did I find “MADE IN USA.” But it was not on the batteries. It was on the bright yellow plastic bag that the cashier handed me. I asked Best Buy shoppers whether they hesitated to buy from abroad. Of course they did not. A few even confessed that a “MADE IN USA” stamp might worry them, for fear of lower quality. How ironic! Back in the 1960s Sony got in trouble with US customs agents because it tried to hide “MADE IN JAPAN” by using the smallest possible font.25
At first the outsourcing boom of the 1990s hurt only uneducated Americans who lost factory jobs because a peasant in Guangdong could wield a screwdriver on an assembly line just as well as a Clevelander. Then call centers in India wiped out Dell Health Care clerks in Rhode Island. But the story broadens, deepens, and moves up the income ladder. It turns out that Indian radiologists can read a cancer screening just as well as an American, and a Filipino accountant can fill out a 1040 tax return without missing a decimal point. International Paper, a 117-year-old company, had roughly the same total number of employees—61,500—in 2008 as it did in 2012. But in those four years the paper company sent pink slips to eight thousand US workers and hired eight thousand outside the United States.26
In the long run, outsourcing likely helps the US economy by boosting productivity and increasing the available sources of intellectual and physical capital. McKinsey estimates that for every dollar of U.S. corporate spending in India, the United States gains $1.14.27 When Walmart opens a new store in China, it hires lots of Chinese workers, but then needs more US workers to help with logistics, international marketing, and human resources. Let’s conduct an extreme thought experiment. Let’s say that Santa Claus began delivering free toys and clothing all across the United States. Would the United States be better off? Yes, because we could spend our time making other things, while our kids enjoy the gifts. Here’s the unavoidable follow-up question: would everyone be better off? No. Employees of Mattel and Hasbro might find Santa a particularly unfair trade competitor as they are laid off and sent to stand in line at state unemployment offices.
While outsourcing may be a new word for the twenty-first century, history shows many examples. After the Civil War, for example, many New England textile factories slinked off to the South, taking jobs with them. Not every instance of outsourcing threatens a nation’s integrity. But when the outsourcing country hires another to perform its most valuable work, the outsourcer grows hollow, shaky, and vulnerable. Consider Venice at its peak, officially known as Serenissima Repubblica di Venezia. The very name boasts of serenity. And yet from the 1400s to the 1700s Venice battled the Ottomans to control the Aegean and Adriatic and occasionally skirmished with the Holy See, Austria, France, and numerous neighbors along the Dalmatian coast. Despite foreign threats, Venice managed to bring riches to its citizens through shipping, banking, the spice trade, bookbinding, and glassblowing (which can still be admired on the island of Murano). Venice was the hinge that linked Asia and Europe. Indeed, without Venice, Marco Polo might not have brought lo mein noodles from China.
So what sector did Venice outsource, plunging the republic into mortal danger? Certainly not noodles or glass. That would have been tolerable. Instead, the doges of Venice outsourced their safety, their military. The maritime republic was beholden to mercenary marines from France and Holland. And the problem with a mercenary navy is obvious: if your enemy is willing to pay more, your sailors will turn their cannons on your own forts and piazzas. And so when the Ottomans dangled more gold in front of the Venetian navy, the navy simply switched flags. The Venetian senate then hiked taxes on workers and businessmen to buy back naval loyalty, which then squashed the economy. Assaulted by pirates, in 1600 Venice’s shippers were forced to pay higher insurance premiums, which rose from around 5 percent to 35 percent of the value of the cargo. In 1615 French mercenaries plotted to seize and blow up the doge’s palace and murder the senators.
Just a few years earlier Shakespeare wrote of Venice’s mercenaries in Othello. When the play opens, the brave Moor has just repelled a Turkish attack on Cyprus. The play, of course, revolves around the lies of “honest Iago,” who enmeshes the tragically gullible, “erring barbarian” Othello in murder. But the real tragic history of Venice came from believing that military loyalty can be bought and secured, even if your well-funded foe incites a bidding war.
WHAT’S AN AMERICAN BRAND?
Outsourcing may make companies more efficient, but Americans pay a high price when an icon like Coca-Cola announces it is no longer an “American” brand, and when Kentucky Fried Chicken focuses more on selling drumsticks in Da Nang than in Louisville. Some CEOs even look at the US consumer as a “wasting asset,” whose value inevitably declines over time, like an old metal lathe gathering dust and rust. They see 31 percent of eighteen- to thirty-four-year olds living with their moms and dads, which helps explain why only 43 percent of Millennials consider themselves “very patriotic,” according to Gallup.28 No wonder the New York Times reports that only 54 percent of Americans think that the United States should have a basic “American” culture and a set of values, a percentage that slipped from 59 percent in 2004.
In some cases, US-based companies find themselves stuck in a paradox of their own. Foreigners perceive them as distinctly American companies, even as they target more and more of their business outside the United States. By placing bigger bets on foreign consumers, they become more susceptible to how foreigners view the American government and American people. Consider YUM, parent of Kentucky Fried Chicken and Pizza Hut. A few years ago, YUM was humming, with half its sales and most of its growth coming from its 4,260 restaurants in China. The share price doubled between 2009 and 2012, mostly on the Asia story. I asked a top executive why YUM triumphed. He explained that Kentucky Fried Chicken enjoyed two advantages over other chicken sellers, following its first Beijing outpost in 1987. First, Chinese consumers like eating chicken served on the bone, which McDonalds’s breasts did not provide. Second, the grandfatherly image of Colonel Sanders reminded them of revered ancestors and tapped into a collective Confucian memory. But Chinese no longer look at Colonel Sanders with such affection and the brand’s “desirability” dropped from 42 percent in 2012 to just 19 percent in 2015. In the first quarter of 2013 alone, sales fell 20 percent. The faltering colonel may be linked to trade and military tensions between the United States and China. When I first visited Beijing I was surprised to see Colonel Sanders’s beaming face looking down from a convenient perch in Tiananmen Square, sharing almost equal billing with Mao Zedong. For a long time Kentucky Fried Chicken occupied a four-story building the size of a small palace. The company did occasionally stumble, for example, when it translated “finger lickin’ good” as “we’ll eat your fingers off.”
But more serious trouble bit YUM in 2012 when the state-run media accused the company of injecting unsafe antibiotics in the chickens, even though subsequent testing showed no such additives.29 Later YUM sued three Chinese firms that claimed that KFC had genetically modified its birds to grow eight legs.30 Suddenly, with the American restaurant chain hobbling on its dubious chicken legs, Chinese-owned poultry sellers gobbled up KFC’s market share. In October 2015 YUM announced it was splitting up the company, divorcing the Chinese operation from the American so that it will be called YUM China.31 YUM tripped into its own paradox: it had grown richer by targeting China and becoming less American, but then became poorer because its new customers in China perceived it as too American.
The global economy breaks apart the concept of “Made in USA” or “Made in England” and the pride that used to accompany such logos. In a clever stunt Ralph Nader in 1996 and again in 2013 wrote to the CEOs of one hundred large corporations asking whether the CEO would stand up at the next annual meeting and on behalf of the company “pledge allegiance to the flag of the United States of America and to the Republic for which it stands . . . with liberty and justice for all.” Only one company, Federated Stores, thought it was a good idea. It is easy to picture nearly every general counsel and top tax official dissuading his or her CEO from complying with Nader. Why risk their global sales, licensing, and leasing agreements? Nader then challenged twenty top unions. None of them complied.32
The answer to our challenges is not, of course, to discourage American companies from fighting for market share in foreign markets nor to prohibit Americans from buying foreign-made goods. Either would be a disaster. But it does require us to build other institutions that can bring people together in spirit and work.
There is good news. US companies still reign in many key fields. Apple, Google, IBM, Boeing, and Facebook top the list of the world’s most admired firms. In Shanghai, police had to close down an Apple store when riots broke out over which customers would have the right to buy a new iPad model. This wasn’t looting and theft; this was violence in the pursuit of paying for American technology. Nonetheless, a smaller sliver of America is producing more and more of the wealth. The problem goes beyond the usual “99 versus 1 percent” income-inequality debates. The distribution of self-confidence and work ethic is skewing sharply and dangerously. For every Mark Zuckerberg in his dorm room, thousands of young men in hoodies are sitting on a sofa in their mom’s basement, bravely chasing avatars in World of Warcraft, but not gritty enough to climb the steps out of the basement to sign up for a training session to get a machinist’s license in the world of reality. They may rank as a Supreme Commander in the basement but a zero outside the house. The maldistribution of income and work ethic breeds resentment and selfishness at both ends of the spectrum. The rich believe they are carrying an ever-heavier load, since the top 10 percent pay over 70 percent of the taxes. Meanwhile, the bottom 90 percent fear they will never achieve the middle-class standard of living that even high school dropouts could muster in the 1950s and 1960s.
Young people and older people have lost confidence. The Pew Research Center reports that only about 50 percent of Americans believe the future will be brighter than the present. Most startlingly, even their view of the past has changed. Baby boomers are growing nostalgic, so perhaps it is understandable that only 29 percent think life has improved since the 1960s. But over 50 percent of Millennials think they would have been better off if they were adults forty years ago. These perceptions are powerful and persistent. Life expectancy has been extended by almost ten years since the 1960s but somehow that shorter life of the 1960s appears to be a better life.
Feelings of melancholia madeleine have broken out across America and across the globe. We will need more than a cup of tea and a shell-shaped, cakey cookie to feel good again.