The Day the Earth Will Stand Still

Michael Rennie was ill the day the Earth stood still, but he told us where to stand” – Richard O’Brien, Writer/Actor, aka “Riff Raff” in The Rocky Horror Picture Show

Perhaps there is no more fitting occasion to explain the difference between capitalism and Marxism than the 200th birthday of Karl Marx this month. Capitalism is an economic system whereby goods and services are produced for profit by two basic means: capital goods (aka machinery) and labor. Marxism involves the same production of goods and services using machinery and labor, but the goal is common ownership among the people rather than for profit. Now that we are all on the same page of capitalism vs. Marxism, on with the revolution!

The revolution is coming in the form of massive displacement of workers due to automation. Political scientist Ian Bremmer’s terrific new book “Us vs. Them: The Failure of Globalism” sums up this problem and how it will upend geopolitics by throwing globalization into reverse.  In short, Mr. Bremmer believes that the forces of capitalism are unleashing technology that will eventually disrupt two-thirds of all jobs on Earth. He contends that something must be done to help the “have-nots” and, more ominously, to protect the “haves” from the have-nots. Automation will become so inexpensive that cheap labor will no longer have the same relative trade value to capitalists in richer countries, who will then re-shore much of their production.

You can imagine the implications if we deprive emerging economies of their historic stepping stone (low-cost labor) up the world economic ladder. In a complete reversal of historical thinking, Mr. Bremmer suggests that a relative youth bubble in countries like India and Vietnam will become a big disadvantage with too many young people and not enough productive work. While George Bernard Shaw said that “youth is wasted on the young,” there is a risk that youth may be wasted altogether.

I share Mr. Bremmer’ s concern about the decline in globalization, as the production and shipping of goods has what I might call a “physics problem.” The cost of shipping goods has gotten cheaper for centuries and may continue to decline, particularly if we allow the use of drones. But there will always be some cost of moving goods from Point A to Point B unless we develop free transportation ala Star Trek. Regrettably, the possibility of the Star Trek option is so far off that it’s economically irrelevant (but still super cool!). In short, when local production costs approach global production plus shipping costs, local production will win (think how cheap your TV set has become, then think about really, really good 3D printers). So, with that thought in mind, here is my contribution to world of back-of-the-napkin economics in what I will call the “The Day the Earth Stood Still Curve.”

This inflection point is what I call the “SMTM” (Superman the Movie) point. Superman the Movie showed that if a super hero gets mad enough, he can reverse time and change events by flying around the Earth super-fast and reversing its rotation. In Mr. Bremmer’s opinion, many super-hero globalists want to wish this reversal-of-global-trade problem away because they are profiting too much from the current system. This reminds me a bit of the prelude to the global financial crisis of 2008 when no one in America believed that single-family home prices would fall. That single underwriting error caused the financial world to implode, and wishing away a material slowdown in global goods trade could have similar implications. The canary in the coal mine of a trade reversal is already chirping in the halls of large world-shipping companies, including Hanjin (bankrupt), the plunging cost of container-cargo shipping and the weakening global growth in trade as a percentage of GDP.

Despite its potentially catastrophic effects, I am not too worried about the impact of a global trade slowdown on the average American worker. Humans didn’t rise to the top of the evolutionary food chain to eventually be replaced by their toaster. Too many globalists believe that the average worker will be better off if machines take two-thirds of the jobs and society provides a “minimum living wage” to replace them. To quote George Orwell, “there are some ideas so absurd that only an intellectual could believe them.” One such idea is that humans will sit back passively and accept a few bucks in exchange for technology throwing them under the bus. Mr. Bremmer has an optimistic view about the resilience of humans: “Human beings use their natural ingenuity to create the tools they need to survive. In this case, survival requires that we invent new ways to live together. Necessity must again become the mother of invention.”

“Local is the new global” isn’t a fad. If the smartest people in the room are right, the world soon will reverse the flow of goods and the most valuable thing will be proximity to the consumer. The “last mile” will apply to more and more businesses in our communities. Local people producing local goods that are preferred by the locals? Let’s do the time warp again!

By Spencer Levy, Americas Head of @CBREResearch | Senior Economic Advisor

Read more about #LocalIsTheNewGlobal and the ways that consumers and industries are adapting.