Founders Perspctive

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It took a pandemic, war, and surging inflation to end the great age of globalization...105 years ago.

The first modern age of globalization was the period between the 1850s and WWI. This was an exciting period when business leaders like J.P. Morgan, Andrew Carnegie, and Cornelius Vanderbilt connected America and the world with networks of steamships, railroads, and telegraphs. See Chart 1.

Leading economists of the day proclaimed war was “obsolete” because of the interdependence between countries that these businesses developed. Those economists were wrong, WWI brought a decisive end to that era of globalization.

The foundations of globalization were set out by Adam Smith in his famous Wealth of Nations (1776). His notion that through trade, each country should provide the rest of the world with what it does best, where it had inherent advantages of natural resources, unique talent or manufacturing prowess.

His ideas upended the historical economic model known as mercantilism, the principle of a fixed total value of global wealth (i.e. pie). The only way for one country to get a bigger slice was to take it by force. Thus, the incessant wars since time began.

Adam Smith’s capitalism provided another way…grow the pie…make each country richer without war. Globalization embodies the ideals of capitalism for all participating countries. But globalization requires rules of the road that are fair and respected by all.

This did not happen between the two World Wars. Nationalism and communism took center stage, beggar thy neighbor policies took root, and ruthless dictators rose to power.

Globalization did not pick up again until the formation of the United Nations and the General Agreement on Tariffs and Trade (GATT) in the aftermath of WWII. At first, globalization was only among the non-communist nations of the West. Despots such as Mao Zedong and Joseph Stalin continued the cruel subjugation of their peoples in the East.

This began to change with Deng Xiaoping’s new direction for China (1978) and the fall of the Berlin Wall (1989). Capitalism had defeated communism as an economic model! This brought these new entrants to enjoy its benefits.

For several decades this new era of globalization blossomed. Countries like Germany fully bought in, putting international business connections well above any security concerns. They were not alone as businesses in most participating countries benefitted from the lower material and labor costs that globalization provided.

The inter dependencies of this era of globalization far exceed those of the prior one. Computers, the internet, container ships, air travel, and education have integrated businesses at countless points. Relationships such as “just in time inventories” were born. Most business elites (the Davos men) have presumed that “this time, major wars must be obsolete."

Yet one thing is clear from both the earlier period as well as the current one...in the end, political forces trump business connections. Political rivalries (hegemon) and yearning for past glories have given birth to authoritarian leaders who cast aside the former business elites in favor of their own agendas -- Vladimir Putin in Russia and Xi Jinping in China.

Such bullies often get their way until some breaking point is reached, when the rest of the world finally responds…as with Ukraine, today. “The Russian invasion of Ukraine has put an end to the globalization we have known for the past three decades,” wrote Larry Fink, the CEO of Blackrock. This is notable as he has been perhaps the best-known cheerleader of globalization.

The world is breaking up into several “blocks” -- the West (democracies, rule of law, independent judiciaries), the East (authoritarian, controlled media), and Non-Aligned (those with some features of each, trying to play both sides).

I believe strongly that the western principles will prove more resilient in the face of this new “competition” …just as capitalism won the Cold War. The people of Ukraine have demonstrated overwhelmingly that freedom, once achieved, is not something people give up lightly.

Opportunities within the West (potentially a new League of Democracies) are endless as this is where innovation thrives and people are free to make their own choices.

Disclosures