Book Review: 'The Creation and Destruction of Value: The Globalization Cycle' by Harold James

by: John M. Mason

Harold James, the author of The Creation and Destruction of Value: The Globalization Cycle (Harvard University Press: 2009), considers two different concepts of value. The first relates to monetary values and their determination, which depends upon assessments of the future. The second relates to immaterial values which are vital to trust and social cohesion. His book is about the collapse of globalization and how this collapse “becomes a story of changing values in both the usual senses of the term, as monetary and ideal values are shaken.”

James argues that, “the consequence is profound vulnerability. Trust depends on a wide range of institutional arrangements, on states, on corporations, but both governments and businesses become vulnerable when values change abruptly and unexpectedly.” It is this lack of trust that we now face and must deal with before full recovery can be achieved.

There is a lot of economics and finance in this book, but there is also much more. Harold James is a well know author and is Professor of History and International Affairs at Princeton University. This is good, we are told on the cover of the book, by Niall Ferguson, author of “The Ascent of Money: “if you want to understand our current predicament, history is a much better guide than economics.”

And, it is good for we are dealing with more than just economics when we start discussing values and trust.

In presenting a comparative history of the Great Depression and “the current predicament,” James separates the former period into two segments. He argues that there were two crises in the Great Depression and that each type of crisis required a different policy response.

The first crisis occurred in 1929 and was associated with the events leading up to and surrounding the stock market collapse in October of that year. This event was an American happening and was something that could be handled by the “provision of increased liquidity and by the conventional tools of monetary policy.”

The second crisis came in 1931 and it “was characterized by a worldwide contagion in which banks fell like a row of dominos.” Responding to this kind of event, the author argues, “is institutionally more complex and requires the reconstruction of whole banking systems.” Measures were implemented, but they took a long time to work themselves through the economy because they dealt with microeconomic solutions to specific institutional problems.

James states that, “there were no simple macroeconomic formula for dealing with this sort of financial disturbance. After a ‘1931’ it is impossible simply to wave a magic wand and return the world to stability.” Trust and the cohesion of the society had to be re-established before full recovery could be accomplished.

James then goes on to discuss the current situation and the events that led up the recession that began in December 2007 and the financial collapse that took place in September 2008. He argues that the current experience can be related to the history he examined relating to the Great Depression.

Like the earlier events, the current trauma can be divided into two segments. The earlier segment was more conventional, more like other recessions that America experienced in the post-World War II period, and, hence, could be attended to by a central bank that provided sufficient liquidity to the financial markets through the conventional tools of monetary policy.

The second segment, which began September 14, 2008 and continues to this day, is more like the ‘1931 experience.' As such, what is going on now must be understood in similar terms and addressed in a similar way. That is, worldwide trust and cohesion has been wounded and must be restored before a full recovery can be achieved. And, people must not expect this recovery to take place overnight.

In concluding, James examines three components of the current institutional framework that must be dealt with in any solution to the current situation. First, since globalized business is not confined to national frontiers, decisions must be made about which regulators are responsible for what institutions and which sets of rules need to be followed in what situations.

Second, innovative businesses are very good at anticipating and circumventing attempts at regulation. Legislators and regulators are always fighting the last war. Progressive businesses, especially financial institutions, seem constantly to be one step ahead of the politicians and regulators. How regulation can keep from being “obsolete or inappropriate” is a major question that must be answered.

Third, “the character and structure of a company are constantly changing with new technologies and are as a consequence less subject to hierarchical control.” That is, the organizational structure of a company is “flatter” now than it was and there is more room for “autonomous action at all levels of the business.” Decision making is decentralized and “isolated examples of bad behavior have profound effects on corporations that have a global reach.” This seems to be especially true in the financial services industry where several examples come quickly to mind.

In all three cases, James argues that there is “the need for an ethic of personal responsibility that cannot simply be subsumed in some vague sense of corporate culture. Ethical questions have become again absolutely central to a firm’s reputation, and to its ability to do business.”

Thus, the problems that must be dealt with concern microeconomic issues and not macroeconomic ones. And, in each case there are moral issues associated with the solutions. The (global) world cannot just revert back to the pre-2007 period as would be the case if “blunt and all-encompassing” macroeconomic policies were looked upon as the sole solution.

Full recovery, according to Harold James, is dependent upon devising “microeconomic solutions” to these three problem areas and upon a return to a more moral framework for individual decision making. Achieving such a recovery, he states will take a good deal of time and will require the society to respond to personal and community distress in a way that encourages and speeds along the transition.