When thinking of `the' economy, the salient territory is the planet, not your country. Moreover, `the' economy is developing, not developed. In addition, most of the people and money involved are outside the law.
Put another way, `the' relevant economy is global, developing, and extralegal. It is an old habit, but misleading to think of the entity as national, developed, and legal.
For me, the first part of this insight comes from Edward Hugh, who described
... the economics meme of the decade: stop thinking about the global economy as a series of slightly inter-connected national economies, and think of it as one global developing economy with nation state based market imperfections.
Hugh is right. In more detail, he said
... instead of seeing the global economy as a collection of individual ... economies with a limited degree of global opening ... we should be seeing the economy as one entity, with a whole series of market imperfections where we find the nation states.
(Hugh attributes this notion to Andy Xie of Morgan Stanley, who wrote of "a global economy". Although Xie did not write of "a global developing economy", at least not as far as I could find, Xie does write of the world economy as global. Since most of the world is developing, the implication is that the economy is both global and developing.)
The second part of the insight comes from Hernando de Soto, who noted 1 that
... it is legality that is marginal; extralegality has become the norm.
Put together, these notions tell us that we should look at `the economy' as global, developing, and extralegal. This means that the central bank of the United States, the Federal Reserve, is wrong to focus only on US problems. It means that those who seek the rule of a single law fail when they focus on the (relatively speaking, for businesses) reliable, quick, and honest legal systems of countries like the United States.
Instead, the Federal Reserve should consider how its actions have planetary influence: if you follow this reasoning, then recent economic volatility comes as a consequence of actions made for local reasons that have global effect.
For example, in the early 1990s, the Federal Reserve kept US interest rates low to help American recover more readily from governmental mismanagement of Savings and Loan institutions. Consequently, large funds traveled to China, where investors hoped for a higher rate of return. That money inspired a Chinese inflation, which the Chinese government eventually crushed. For several years, this wiped out prospects of high rates of return in China. Therefore, funds traveled back to the United States, where they were invested in stocks and property, helping fuel the asset price `bubble' of the late 1990s.
Moreover, rather than expect businessmen to be able to borrow money from and settle disputes with strangers (the great benefit of a reliable, quick, and honest legal system), investors should remember that most entrepreneurs depend on family, clan, friends, or crooks. Their businesses must remain small.
On the one hand, this limitation means that local businesses will lose when competing with existing, large `Western' companies. They can never raise enough money to do otherwise.
On the other hand, this also means that the overall market, and the potential for investor's profits, will be smaller than hoped.
If you take this view seriously, the conclusion is two-fold: first, within developed countries such as the United States, people who work directly or indirectly for the nation, such as those on the Federal Reserve, should focus on the impact of their actions on the planet, as well as on the country. Since the global impacts may echo back upon them, this focus is in their own long term interest.
Second, investors should figure how to support de Soto and his programs for adapting formal law to existing social contracts rather than the reverse. This way, the investors will be able to make a higher return, in the long run.
In the short run, investors should note that only an empire provides a mechanism for settling disputes among strangers, as was done for so many millennia among the Chinese. The problem with empire is that its decision makers have no incentive towards fairness. They are not paid and permanent judges, or randomly chosen juries, but managers who will help themselves, their families, and their friends by finding and accepting the largest bribes possible. Such a system favors the already rich, which is another way of saying it harms most businessmen, since most are not rich as those at the top.
It goes without saying that some will lose from advances; they will oppose progress whether directly or indirectly, for example, by advancing misleading metaphors. That is to be expected.
The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else,
by Hernando de Soto,
2000, Basic Books, New York,
ISBN 0-465-01614-6
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