Customer Reviews

The Creation and Destruction of Value: The Globalization Cycle

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3 star:		(1)
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In 1979, a friend invited me to join her as a guest at a party on Central Park East at the home of a fund manager, a friend of her publisher boss. Back then, fund managers living on CPE didn't get there by having an MBA, but by being the Right Sort of Person who didn't need to run a fund for a living. Certainly we were the the only guests who weren't on a first-name basis with at least one former or current British prime minister. I hadn't thought about that party in years, but this book's clubby tone revived the memory quite vividly.

The author (HJ) is a scholar of modern German banking history. He makes good use of this background to describe how the global Great Depression was triggered by a series of European bank failures in 1931, rather than by the US stock market crash of 1929. I found this aspect of the book to be genuinely enlightening.

I wish I could say the same for the book as a whole. It's written from the sort of "great man" perspective in which history used to be written before the 1970s, in which no one below a ministerial or Cabinet level is worthy of being identified by name (billionaires excepted). Inevitably for a book of this type, even the Habsburgs make an appearance (@209). Though whereas in the older version of this genre an artist might merit a mention if he's as top-drawer as Michelangelo, HJ devotes a few pages to Damien Hirst (@247-249) (the second time as farce, as someone said).

It's clear that HJ thinks globalization is a Good Thing (see Sellar & Yeatman 1930), and takes it for granted that his audience does, too. Nonetheless, he is sympathetic that people get discouraged about it, and tries to reassure us that it, and we, will bounce back. The result amounts to a merging of the macroeconomics and self-help genres, kind of "Men Are From The Fed, Women Are From The European Central Bank." The globalization cycle is characterized by a "confident upswing," followed by "the stagnation and anger of the downward movement of the cycle," when "people feel there has been too much interaction; they draw back from the global setting and look instead for protected areas in which they can be safe from global threats and global devastation .... A break in the upward trend thus produces profound disorientation and disillusionment" (@11-12). (Note the normativity in this description: when globalization isn't increasing, you're *dis*oriented.) "Some of the hardest obstacles to globalization are not economic, but rather lie in the domain of social psychology. It is here that a sense of helplessness is so profoundly pervasive" (@22). And again at the end of the book: "Globalization depends on being able to achieve and maintain trust over long distances, between strangers, and in situations that are full of legal uncertainty. ... When there is deep distress, as in the case of Oedipus, there is no easy answer. Regaining trust is a long and arduous process. That is why when globalization is broken, it is not easy to put together again. We will look for communities of virtue, but inevitably we will not find them at once. And the globalization cycle will resume, but not immediately." (@276-277). Chin up, neolibs.

HJ doesn't bother to explain his attachment to globalization. The closest he comes to making an argument for it is that "opening to the world market is a way not only of producing growth but also of alleviating poverty" (@15), a proposition many development economists might qualify, or even contradict: see, e.g., _What Works in Development_, W. Easterly, ed. (Brookings Institution 2009), particularly the essays by Dani Rodrik and Abhijit Banerjee. Dominique Strauss-Kahn, the current head of the IMF, also recently noted that growth generally does not diminish poverty (at a press conference in Tokyo that I attended, 2010/01/18).

Despite offering only this perfunctory defense, throughout the book HJ subtly yet smugly dismisses any contrary view. He remarks that some reviewers had mistakenly thought his 2001 book, The End of Globalization, might be "an antiglobalization screed" (@15). After attributing some views about a "ratchet effect" for luxuries to "some proponents of the antiglobalization case," of whom only Robert Frank is named, he says "Depending on your sensibilities, [their] observations will amuse or shock you" (@31-32). Criticisms of US dominance in the international monetary system "usually come from people who have doubts about the value of the Good Life as practiced in its modern epicenters. For them, the Good Life is associated with the projection of power, the instigation of inequality, and the canonization of consumption and cupidity" (@206).

"For them," but not for us, as the wicked son might say on Passover. It is those in the trading class, living that Good Life, who 'get it': "The recent era of global finance ... was playful, allusive, edgy -- in short postmodern. It treated tradition and history not as a constraint, but as a source of ironic reference" (@250). Thanks to this book, I realized I'd never understood the usual securities prospectus disclaimer, "past results do not guarantee future performance" -- now I see that it was meant *ironically.*

I don't have room to dwell on HJ's counterintuitive, "Star Wars" (à la Reagan, not the movie) approach to rebuilding trust: by entirely removing the human element from trading, and relying instead on automation and software (@168-173). And it would be so infra dig to comment on HJ's warning for those who took some other lesson from the crisis: "The increased emphasis on the state and its role in regulating business activity is likely to produce new conflicts and clashes, and to heighten the level of uncertainty," @277. This is a book about the spiritual crisis of capitalists, not of capitalism. If you ever had any doubts about whether financial globalization might be a form of class warfare, the tone of this book could settle them, while unsettling you.

The author is a historian.He presents a very good analysis of the impact that highly speculative international capital flows can have on the world economy.Such highly speculative behavior can only occur if the world's private banking industry decides to deliberately ignore and evade their own standard creditworthiness criteria used to evaluate to which borrowers they will extend loans/lines of credit .The watering down of these standards is the direct result of the world's banking industries accepting a nonsense " theory ",called the Efficient Market Hypothesis (EMH).This theory was created by Milton Friedman , Eugene Fama,Robert Lucas,Jr.,F Kydland,Edward Prescott,and many other neoclassical economists, who were desperately trying to find a way to avoid coming to grips with a very fundamental point made by J M Keynes ,F Knight,D Ellsberg,B. Mandelbrot and N.N. Taleb.This point can be illustrated by using either the uncertainty versus risk differentiation of Keynes,Knight,and Ellsberg,which was that decision making under uncertainty/ignorance/ambiguity is of a fundamentally different and much more dangerous character than decision making under risk ,or the equally powerful " wild risk " versus " mild risk " distinction of Mandelbrot and Taleb.The EMH states that the " wild " risk of the Cauchy distribution is a mathematical and statistical impossibility that can be simply ignored.This pseudo theory is still being actively taught as the only scientific approach in every university and college course in finance,financial economics,monetary theory and macroeconomics in the world.

The EMH simply claims ,without a shred of empirical,historical,or statistical support,that there is no difference between uncertainty and risk or wild risk and mild risk , where wild risk is represented by the Cauchy distribution,and mild risk is represented by the normal (log normal)distribution.The result is that the EMH claims that (a) the time series data in financial markets can be represented by a normal probability distribution,(b)financial bubbles are an impossibility,and (c)all such risks can be effectively managed by banker VAR (Value at Risk) models.The VAR models are just a different name for the EMH .The same holds for the capital asset pricing model( CAPM),the BLACK-SCHOLES put and options pricing equation,adaptive ecpectations ,rational expectations, real business cycle theory,Subjective Expected Utility (SEU)theory,etc.The author discusses this in his last chapter from pp.240 through 280.However,he is somewhat vague in his general presentation.He does not discuss the issue of how the world's banking industry ,over the last 35 years,has essentially eliminated the application of basic creditworthiness standards and substituted ,instead ,the EMH in a sufficiently rigorous manner.

THe EMH is the foundation for the claim that increased,highly speculative , international financial flows ,resulting from globalization,can be safely managed by the private banking industry in lieu of the standard safety first approach based on firm creditworthiness standards.The author is somewhat vague in explaining this in his last chapter.

I have some basic criticisms.First ,there is only a brief discussion of Keynes.Keynes understood better than anyone else the major role that financial speculation had played in the total breakdown of the globalization process of the 1920's.This has repeated itself again in the 1980's -2000's .Second ,there is no discussion of Ellsberg,Mandelbrot,or Taleb.This may be due to the fact that the author is a historian and does not feel that the technical issue needs to be completely addressed.Doing so could have improved the book.

I recommend buying the book for readers who want a good ,general overview of how financial globalization can quickly result in catastrophic financial market failure in the same way that a tsunami can quickly destroy anything in its path.

This book came highly recommended from a fellow at the CFR. (He thought I'd love it if I liked de Soto's ideas.) James has focused his academic career at Princeton on the existence of a globalization cycle. It would seem (or seem logical at least) that globalization, like sexual revolutions, become quite popular until some virulent strain of malady sends everybody scampering off to safety. (This is my simile, not James'.) It is presented as the constant struggle between public mood and Adam Smith economics. James suggests that the current crisis is a secular change (downturn) of the great globalization. He is the Thomas Friedman antidote (a much needed commodity.) James opens with a discussion of early globalizations, including their role in The Great Depression (or vice versa.) It is a more international view. He then leads up to the present crisis--Haiti on Wall Street if you will--that is reasonably generic--nothing that I would argue with, just generic. The second half of the book picks up speed with thoughtful discussions of the international implications (shedding some light to me on why Ben might have shipped palettes of money off to Europe) and where we might be headed. There were some things that I found missing. He mentions that the transitions tend to be violent, but absolutely ignores that in his description of the current transition. (Maybe predicting wars is simply a fool's game.) Everything is presented as rational and seemingly calm political economic tensions in a George Friedman (of Stratfor; no antidote needed) sort of way. Curiously, he presents ideas that I am quite sure I disagree with, but manages provoke thought rather than irritate. I am, however, in full disagreement with his summary dismissal of Austrian economics, and he gave too much latitude to modern-day inflation measurers. He implies that core inflation, for example, stems from a bunch of smart guys sincerely trying to get a better measure of inflation, whereas I believe it is fully driven by political motivations. (Michael Boskin needs a double-dose antidote.) Overall, however, it was a good read--not as good as the endorsement suggested--but a good read nonetheless. I hasten to add that I believe that the number crunching economists have no ability to predict the future and probably never will. (Sorry guys. I think you have nuked economics with your parametrizations of the unparametrizable.) Historians (and the Austrians!) might. The analysis presented by James is the kind that is sorely needed.

Edit: After completing this report, I read the other customer reviews to see how my views squared with theirs. Brady focusses entirely on James decimating the efficient market hypothesis. (Like THAT's hard or something?) I guess we all read what we want to read because I would call that an implication but not a theme. I would say I am more in Sutter's camp, although I am not qualified really to place it in the context of some genre of pre-1970 books. Both are clearly insiders of some kind. The rest of the reviews are a little more enthusiastic than I, but not wildly so.

I got the book to get up to speed on international currency ideas and I guess I was expecting more from the book.I wanted a history and it did that but it fizzled at he end and ended in a moral ending not unlike Aesop's fables but I guess economics has that aspect to it, Keynes is very moral when he asked, how much money do you really need.

It was a very provocative reading.

Mr James has done a very good job to present the current globalization and the 2008 economic crisis within a historic perspective.

The References listed at the end of the book is by itself a very good compilation of documents related to these topics.

"The Creation and Destruction of Value" is on the ROROTOKO list of cutting-edge intellectual nonfiction. Professor James's book interview ran here as cover feature on November 9, 2009.

Exellent, well-written and restrained analysis of the current global crisis. James has a sweeping command of history as well as literature. He quotes the beginning of Sophocles "Oedipus Tyrannus" with telling effect. While this book is about globalization, it has important observations for those who would be today's leaders.