Money on the Move

The Work of Nations, by Robert B. Reich, New York: Knopf, 331 pages, $24.00

Quicksilver Capital, by Richard B. McKenzie and Dwight R. Lee, New York: Free Press, 315 pages, $24.95

Decent liberals should rejoice as prosperity moves toward the huddled masses of China, India, and the poor southern half of the world. In large degree this is about to happen. But the decent liberal who wrote The Work of Nations is very cross about it. Robert B. Reich puts a lot of blame on what he calls "laissez-faire cosmopolitans," which appears to be his newspeak for decent, international, free-trading liberals. Reich is on the faculty of (you've guessed it) Harvard's John E. Kennedy School of Government, and he has discovered a change that happened 30 years ago.

The essence of the change is that employers can move jobs—especially manufacturing jobs—wherever they can be performed most efficiently and cheaply. Once a developing country adopts the one essential policy—namely, keeping politicians out of business people's way—a virtuous circle can develop at extraordinary pace.

As a British journalist, I was struck by this on my first visit to Japan in 1962. At that time—crazy as this now sounds—Japan had less than half the gross domestic product per head of Great Britain and was importing machinery from it. On about my third day in Japan I met a British engineer who had accompanied some machinery from Tees-side (in smoky northeast England) to Osaka. He wore red suspenders and a worried frown. He said young Japanese workers were swarming all over his machines and getting three times more output from them than did the trade-unionized British workers back home in Tees-side. Those young Japanese workers received about a third the pay of Tees-side workers.

Our reactions to these facts were rather different. Red Suspenders thought that Britain should ban the export of modern machinery to Japan forthwith. He belonged to what might be called the Dick Gephardt school of political economy. I, by contrast, wrote a book saying that since anybody putting new machines in front of workers in Osaka temporarily got nine times more per dollar spent than if he put those machines in front of workers in Tees-side, one fairly clear conclusion followed: People in the 25 years from 1962 to 1987 were likely to build up manufacturing industry considerably faster in Osaka than in Tees-side, reversing previous relationships.

This simple arithmetic caused grave offense in Europe and America, but, since approximately what I had said happened, I temporarily became rather popular in Japan. I am no longer popular there, because I think mainland Asia is now going to undercut Japan. By the late 1980s Japanese-managed factories in Thailand were reporting productivity—and, more important, quality checks—equal to those of Japanese-managed factories back in Osaka. Thais get perhaps one-fifth of Osaka's wages. Thailand, in turn, will soon be undercut by vast India and vaster China. Much of manufacturing will move there.

U.S. firms such as The Limited have been good at recognizing this. Each evening The Limited gathers from its shops the computer printout of the clothes sold that day. That computer printout becomes the cutting order for its workshops in Asia the next day. Four days later, a Boeing leaves Hong Kong, carrying the replenishment for The Limited's inventories just in time. This will be the pattern of tomorrow's manufacturing.

Reich understands this internationalization and maybe even exaggerates it. In the coming century, he says, there will "be no national corporations, no national industries. There will no longer be national economies, at least as we have come to understand that concept." Peculiarly, he then uses his book to advocate a soak-the-rich policy for what he instinctively assumes can remain America's isolated national economy. He is decently concerned that, by his arithmetic, the average real income of the poorest fifth of Americans dropped by about 5 percent in 1977–90, while the richest fifth became about 9 percent wealthier. He says this is because Americans go into three sorts of jobs, of which two are in trouble. One troubled group is the "routine production" workers: for example, the semiskilled factory worker who in the 1950s in big U.S. corporations seemed to be entering the happy middle class. That chap's trade-unionized job disappeared to Taiwan yesterday and will go to India tomorrow.

This is why politicians with a protectionist bent call for industrial policies to subsidize "research and development" in the most efficient parts of American and European manufacturing industry. The best section of Reich's book—which needs to be read by social democrats everywhere—explains why this doesn't work. If an efficient American "manufacturing" company researches into and designs a new electronic product or forklift truck, it efficiently transfers routine production of it to 40 cheaper-labor countries forthwith—especially countries where employers don't have to pay the insurance for their employees' expensive American health care.

When an American buys a "domestic" Pontiac Le Mans for $20,000, about $6,000 of it goes to South Korea for routine labor operations, $3,500 to Japan for advanced components, nearly $3,000 to advertising agents or data processors from Britain to Barbados. Less than $8,000 of the original $20,000 goes to Americans, and not much of that to horny-handed toilers: Mainly it goes to "strategists in Detroit, lawyers and bankers in New York, lobbyists in Washington, insurance and health-care workers all over the country, and General Motors shareholders—most of whom live in the United States, but an increasing number of whom are foreign nationals."

The only unskilled jobs now expanding for Americans are therefore what Reich calls "in-person service jobs." During the 1980s more than 3 million of these were created in fast-food outlets, bars, and restaurants alone. This was more than the total routine production jobs still left in the combined American automobile, steel, and textile industries. Junk-food hamburger joints pay junk wages. Reich considers means whereby a liberal administration might raise them. Most are fearfully illiberal, such as persecuting illegal immigrants.

The third sort of jobs into which Americans go are what I call "brainworkers' jobs" but Reich calls "symbolic-analytic services" because he wants to be rude about them. He is right that the trebling of lawyers has not brought the United States better justice. I would say that rich countries have also not gained by the proliferation of professors in the social "sciences." But Reich and I would agree that the people now adding the most value to U.S. corporations are brainworkers, whether entrepreneurs, scientists, designers, software experts, marketers, or consultants. Reich's complaint is that only the most-fortunate and most-insightful Americans "are prospering as a huge, integrated world market rewards them handsomely," while the least-skilled Americans "are growing poorer, losing out to similarly unskilled workers worldwide."

Reich's unfashionable solution is that the United States should lay much heavier "progressive" taxation on its rich brainworkers and spend the money on providing government-decided goodies for poorer Americans: in particular, forcing on them educational services provided by well-paid people like himself. There are two problems with this suggestion. One is that educating uninterested people into being brainworkers has not been an American forte. The reason is that American education is a state-provided service that throws money at its bureaucracy rather than competition at its consumers.

The other problem is that a policy of higher taxes would create a brain drain. It would transfer most corporate headquarters abroad. It would send lots of what Reich calls the prosperous-job-providing "symbolic-analytic services" into foreign climes and deprive the United States of many of its fun people. Brainworkers operate in information or in ideas, which are weightless commodities. They can be tapped at computer stroke across the world, from very pleasant places. That is why the new age of telecommunicating mobility means that democracies no longer have the option of saying that they will impose higher taxes on the better off for ever-higher government expenditure. The people to be taxed will show their mobility. "In the future, we will vote more frequently with our feet. If politicians try to boss us, brainworkers will go away and telecommunicate from Tahiti. Countries that choose to have too high a level of government expenditure or too fussy regulations will be residually inhabited mainly by dummies."

I have been incestuous with that last quote, which opens Quicksilver Capital. Richard B. McKenzie and Dwight R. Lee say it comes from a speech I made in 1988. I have been spouting prophecies like that for at least a dozen years. The joy of Quicksilver Capital is that it shows that I have dumbly been forecasting portentously what has actually long been happening. McKenzie and Lee may be rather too full of facts from lots of countries, but each of their tables delightfully confirms all my prejudices. The authors insist that it will be folly for governments "to spend more money on manpower training and public works to attract investment." They think that governments should reduce taxes, regulations, and trade barriers.

The new masters of Quicksilver Capital's world are modern managers who "can, via satellites, send millions of bits of crucial information on design specifications, production costs, or schedules to virtually any point on the globe at almost the speed of light." They are bound to create more economic value than people sitting in one factory trying to make it more efficient. Government cannot control what quicksilver capitalists are doing, because it cannot know what the last keypunch said. McKenzie and Lee cite with approval studies that German and Japanese postwar miracles came largely because "their defeats included a breaking of the hammer locks imposed by (yesterday's) interests on their economies." The United States may now gain because its old vested interests, although still lubricated with promises from Washington, will increasingly learn that government promises can no longer usually be fulfilled.

The one dangerous exception might be control of foreign investment. The book cites Norman Glickman and Douglas Woodward's observation in The New Competitors that "an American can buy Chicken of the Sea tuna (owned by an Indonesian company) from A&P (British), or dresses from Bonwit Teller (Canadian) with a credit card from Marine Midland Bank (Hong Kong)." The silliest policy would be to try to block this incoming investment. The rich countries of tomorrow, and the ones with most of tomorrow's jobs, will be those that attract the investment of quicksilver capitalists from all over the world.

How to attract foreign investment? The evidence is overwhelming: Keep income taxes down—especially on the richer brainworkers and investors. Discriminatory tax policies drive these people out of the country. McKenzie and Lee parade figures from the 24 OECD countries to prove it. The United States is well placed to recognize this, provided it does not listen to the likes of Reich. His own book provides grounds for optimism. He says, "Today, not more than 3 percent of the price of a semiconductor chip goes to the owners of raw materials and energy, 5 percent to those who own the equipment and facilities, and 6 percent to routine labor. More than 85 percent is for specialized design and engineering services and for patents and copyrights on past discoveries made in the course of providing such services." I simply do not believe that all of that 85 percent comes from expensively educated pure brainworkers. More will come from the streetwise.

In 1904 Germany's Mercedes motor-car company warned its stockholders that there could never be more than a million automobiles on the roads worldwide. The reason was that not more than 1 million artisans worldwide would ever be trainable as chauffeurs. Today Harvard's brightest, like Germany's most earnest of yesterday, gravely underestimate the capabilities of ordinary people.

Norman Macrae was deputy editor of The Economist from 1965–1988. He is writing a biography of John von Neumann.