[ Silence ]
>> Professor Richard D'Aveni:
Well, this is a, a, a unique day
for me to have to follow
a slam poet [laughter],
especially coming
from the Tuck School,
but most of the time I
speak with economists
who are basically
engaged in equations
and barely know how
to speak at all.
So [laughter].
So the, so, so what I'd like to
do from the beginning apologize
for my lack of poetry, and
I'd also like to let you know
that I've, I've done many,
many, many speeches about topics
in my books, but today, I'm
going to do the very first talk
about a book that I'm writing
right now and I've been working
on for the last couple of weeks.
And I think I was invited
to come and talk to you
about something that you may
not realize is going on today,
and that is what I call
the capitalist cold war.
We've all heard of
the Communist Cold War
in which capitalism defeated
communism, but today,
we see a new kind
of world happening
in which there are
varieties of capitalism
that are competing
with each other.
We're watching capitalism
evolve at a rate of speed
that we've never seen before,
and we are watching forms
of capitalism rise and fall.
We're so used to thinking
about competition as being
between corporations and other
corporations around the world
that we don't think
about what's behind it,
which is how the
system of capitalism
in one country better
than in another.
So, for example, the
American tradition
for centuries has been
laissez faire capitalism.
It was the form of capitalism
that involved free markets
and deregulation and, and open
trade and small government.
It was the form of capitalism
that made America great
during the 19th century
and defeated capitalism,
excuse me,
defeated communism
in the 20th century.
But today, we're
facing two other kinds
of capitalism as competitors.
The rise of the European cap,
form of capitalism
called social capitalism.
This is a, a bit like
American capitalism
but with socialism laid on top.
Suddenly, people had
Christian values and decided
to take money away from
the rich, give to the poor.
We started adopting that
form over, over a number
of years starting with FDR and
moving all the way to Obama
with his current
health care plans.
The, the third type
of capitalism, though,
that is producing
the most disruption
in the world is managed
capitalism.
Former communists and
heavy socialist countries
that have manage to found a
way to decentralize markets
and human behavior
in the business realm
but keep central control
over industrial policy
and other kinds of policies
that are undermining the
laissez faire politics
and the social market
politics of the East,
excuse me, of the West.
So, and the process of the
evolution and competition
between these different types
of capitalism are,
is speeding up at.
So to give you an example, the,
the lifestyle of ancient Romans
around the time of Augustus
in the first century
A.D. wasn't replicated
against until the
mid-1800's by the British,
who worked with mercantile
capitalism
and the first industrial
revolution.
Now the, the first industrial
revolution produced a 250
percent increase in
the per capita income
of the world in 100 years.
The second industrial
revolution,
a 350 percent increase in
approximately 60 years,
and China is on track to
create a 700 percent increase
in per capita income
in 20 years.
So the speed at which forms
of capitalism are supplanting
each other has now become light
speed compared to the historical
world that we're used to.
That makes a big difference
to us because it means
that within our own lifetimes,
we can see a major shift
in the capitalist cold
war towards nations
that are not necessarily
democratically elected.
Imagine when American
corporations become so big
in China that they
are ten times the size
of their operations
in the United States.
Who will they represent
in front of Congress?
Who's interest will
they represent?
Who will tell them what
they have to represent?
Otherwise they will lose 90
percent of their business
in the world because most
of it will be in China.
Today we think in the
automobile industry
that if we make 150,000 units of
a car that that's a big deal in,
in the U.S., and
that's a major hit.
In the future in
China, 150,000 units
of a car will not satisfy
the demand of even one
of their mega cities and
statistical population areas
around that, around that
city, which will contain
in some places in cities that
we don't even recognize are,
are going to be, have 250
million people in them.
So each one of their major
cities will become the,
and is the size of
the United States.
Today, the middle class
in China is already larger
than the entire population of
the United States if you adjust
for purchasing power parity
because things are much cheaper
in China than they are
in the United States.
And when the power of
that middle class begins
to show itself, we will see a
number of changes in the world
in which we are all going to
be working for the Chinese,
and that is not to
mention the fact that they,
that the Chinese have loaned us
so much money in the last decade
that they essentially own
11 percent of our debt.
I, I don't know if you
realize what that means.
It sounds like paper
money to me,
or when people talk about that.
It sounds like, well,
who cares how much we owe
to a foreign country,
but, historically,
there's been two ways in which
debts are collected over time
when countries default, and
the first example is what I'd
like to talk about
is with Mexico.
During their revolution against
Spain, they borrowed millions
and millions of dollars
from France, who,
which was very happy
to provide the, the,
the cash to undermine one
of its key rivals in Europe.
About 15 to 20 years
after the Spanish revo,
the Mexican Revolution,
there was a default, and the,
and you may not realize this,
but the way the French decided
to collect their money
was to invade Mexico
and establish Emperor
Maxmillian, who acted as trustee
to the nation on
behalf of the debtors,
or rather the lenders in France.
He milked the country
for what he could get
to get the money back
and then disappeared
in another revolution after
he milked it too badly.
So that's the first way we
solve problems like that.
Thank God in the modern
world that's not the way we
collect debts.
The way we collect debts today
when somebody can't play,
can't pay is usually
through a significant crisis
which leads other countries to
have to refinance that country.
So think of Greece.
Think of the International
Monetary Fund
with third world
nations, refinancing them,
and in the process,
the new lenders
who refinance the debt
determine the domestic policy
of the country.
It was once considered normal
to have 30 percent of your GDP
as debt and acceptable.
With the, with the debt that
we are accumulating this year
of 1.5 trillion, and I, and
I mean the word trillion,
dollars of 2011, we
will now have debt equal
to the size of our economy.
And if that continues
into the future,
as we are expecting it to,
it will very quickly become
twice the size of our economy.
The national budget will be
dedicated to only two things:
a small military and paying the
interest and principal on our,
on our national debts.
There will be no money for
any of the alphabet soups
that you have come to, to
know and expect and rely on.
The FBI, the SEC, OSHA, NASA.
You name it, it's gone, and
that's predicted to happen
by 2020 by the Congressional
Budget Office.
So for those of you
who are still thinking
that it's the old world, that we
are the richest nation on Earth,
that if we can put
a man on the moon,
we can do anything we want,
that we are the leader
of the free world, you are
living in an American dream.
Not a good one, but a nightmare,
and a different expectation
has to take place.
And yet Washington
and most of the people
in this country are
not dealing with that.
We are weakening ourselves with
respect to the global world,
and we are making ourselves
vulnerable to being dictated
to by foreign nations.
A complete subversion of our
democracy will take place
within my lifetime unless
we get our act together.
And what I'd like to give you
is a, a kind of an example
of the capitalist
cold war that's going
on so you can understand
what happened.
Post-World War, World War
II, we had engaged in a type
of traditional American
capitalism.
This was set up by FDR.
Lots of government transfers.
We had to the elderly
and to the poor.
It was increased by LBJ
and now by President Obama.
In some ways, he's a
throwback to that time period.
We had trade barriers.
We had national [inaudible] that
didn't serve the public well.
Think of steel in Pittsburgh,
automobiles in Detroit.
Think about the regulation
of [inaudible]
that kept prices high in
airlines and so forth,
the other kinds of
transportation.
We were very conservative,
conservative
about balancing our budget,
and we only used monetary
policy to fight inflation.
So the Fed's role
was to keep inflation
from getting out of control.
About 1980, the Japanese arrive
with a different
kind of capitalism.
Formed around [inaudible]
and [inaudible]
which were not managed
for the benefit
of individual corporations.
They were benefited,
they were based
on benefiting collectively
the group
of corporations that
worked together.
The country had industrial
policy.
It built national champions.
It created one leader
in ship building.
One leader in automobiles
and so forth to launch
and become export oriented.
They broke down the
[inaudible] in the United States
by offering better
quality and better prices
than the [inaudible] did
with their planned obsolesce
and their cars that were
supposed to only last three
or four years to force
you to buy another one
at the end of that time period.
So the Japanese model of
capitalism came on in a way
that destroyed the, the
post-war American capitalism.
In addition to that, we
then saw America respond
with Reagonomics.
This new form of capitalism was
based on the idea of open trade.
We will trade with everybody,
and we will use the excuse
that we should be able to get
into the Japanese markets,
get into other markets all over
the world to grow our economy.
We will stimulate consumption
through government fiscal
policy, tax reductions,
and through low interest rates
and easy credit for everyone.
We had no industrial policy.
We let markets decide
where capital went.
Wall Street gained the
power, the power of deciding
which companies and which
industries survived or failed,
and who got jobs and
who didn't in society.
And now the Chi, and
that, excuse me, has,
was a form of capitalism
which came about by look, by,
by destroying the Japanese form.
The free markets gave more
flexibility and more innovation
than the [inaudible]
and [inaudible] systems,
which were complicated to
manage and slow to change.
And now, 1999 marks a new date,
that's the date China entered
the World Trade Organization.
And since, since then, they
have used protectionism
of their home marketplace,
cheap exports and slave labor
which undermines the
standard of living
that we have in the
United States.
They have used industrial
policies to create industries,
and they have stolen our
intellectual property
and our technological advantage.
And today we hear politicians
talking about how innovation
and education is going to solve
our problems, but can we truly
out innovate 1.2
billion Chinese,
another billion Indians
in the world?
Can we have more educated
people than they have?
It is an almost racist thought
to think that the world is going
to stay in our favor by simply
educating people and so forth.
In fact, the more we
innovate in the United States,
the more we create
jobs overseas.
The more we stimulate
our economy,
the more we create
jobs overseas.
Cash for clunkers.
One half of the money
from that went
to buy Japanese cars
exported from Japan
into the United States.
The other half went
to American cars
which are approximately 60
percent foreign content.
Who did we stimulate with this
great debt that we occurred
and incurred and saddled
our children with?
So in the last minute and a half
I just want to suggest to you
that laissez faire capitalism
is going, is, is, is the,
is an end of an American dream.
We are going to have to have
a strategy to go forward,
which means a more
managed economy.
We are not powerful enough
to impose upon the world
the American system of trade
and open markets and so forth
like we were during the
post-war period where we,
the Japanese needed us,
and we could conform Jap,
the Japanese attack on, on
America, on America's economy,
and the European form of
capitalism's influence
on the American economy.
We imposed upon all of
them American standards
because they needed us
for defense purposes.
Today, the rules of the game
are being shifted to the East,
and if we don't start
to think more
about a strategic
capitalism, then we will lose,
and by a strategic
capitalism, I mean many things
that will challenge
the fundamental values
of the United States
that go back
to our [inaudible], our roots.
The need for an in, industrial
policy and government investment
in R&D has gone way up, but it
does us no good if the benefits
of that translates
into foreign jobs.
We simply must find a way to
restrict American corporations
and make American
corporations think less
about their shareholders
and more
about the people of
the United States.
Their loyalty will
become more important
than the global mindset we
teach at business schools.
And to finish this up, we're
going to have to do things
like withdraw from
organizations that we created,
like the World Trade
Organization
because economic nationalism
and the ability to negotiate
with China, India, Japan,
and so forth for access
to their markets will become
a critical success factor
for our future.
We need that strategy.
We don't need the free market
evolution that's taking place
in a laissez faire world.
It has backed us into a corner
in terms of who gets employed
and how much profitability
this country can make.
We cannot simply migrate
to a world the services.
We are stuck with
having to fight back
in the new capitalist cold war,
and I hope that's something
that you probably didn't
realize was happening
but in your gut you
knew it was happening,
and I hope you realize
that neither the
Republicans nor the Democrats
with their laissez
faire economics
and their social market
economics will solve
our problem.
It requires a radically
different approach
to capitalism.
Thank you very much.
[ Applause ]
