On 31 January 1990, a great event took place in Pushkin Square, Moscow. A branch of MacDonald’s was opened. The same excitement was generated in Kiev on 24 May 1997, when the MacDonald’s franchise was extended to the Ukraine. The American author Thomas Friedman wrote in 1999 that no two countries with such a franchise had ever gone to war with each other. It is a striking and imaginative image, which rapidly spread to become part of the received wisdom of the chattering classes. If economic prosperity could become spread more widely across the world, liberalism and tolerance would follow.
This relationship has been dramatically overturned by the events in the Ukraine. Semantic quibbles aside, a state of war exists between Russia and the Ukraine. It shows the dangers of relying upon relationships which seemed valid in the past to try and predict the future – especially with no understanding of the underlying reasons why a relationship might have existed.
Friedman was aware of this problem. In his 2005 book The World is Flat, he developed the MacDonald’s observation into his Dell Theory of Conflict Prevention. Friedman proclaimed that “The Dell Theory stipulates: No two countries that are both part of a major global supply chain, like Dell’s, will ever fight a war against each other as long as they are both part of the same global supply chain.” He reasoned that countries do not just want to be better off, but they want part of the action of globalisation for themselves. They want multi-nationals to locate part of the global supply chain in their own countries, rather than just sell them things. If they go to war, large foreign companies are unlikely to want to base part of their operations there.
The trouble with this view is that for many people, the possibility of dramatic change is very scary. The past is no longer a reasonable guide to the future. An alternative which may eventually prove to be very much superior can be rejected in favour of the old familiar routines. Russia and the Ukraine are victims of this attitude. Neither country has really embraced Western market-oriented economic structures since the fall of the Berlin Wall. Bits of them have, hence the tension between the western and eastern parts of Ukraine. But overall, they prefer what they know to what they could be.
The costs have been huge. In Poland, income per head is now more than double what it was in 1990. In the Ukraine, it has now just about struggled back to the level of 1990. Two decades with virtually no overall growth! Yet many people in that country seem to prefer this outcome, with its security blanket, to the much more frightening world which the Poles embraced successfully.
A longstanding assumption in Western views of international relations is that economic growth will encourage the spread of liberal values. Events in the Ukraine show that many people may not even want the prosperity if it means they have to embrace uncertainty.
Paul Ormerod is an economist at Volterra Partners LLP, a Visiting Professor at the UCL Centre for Decision Making Uncertainty, and author of Why Most Things Fail: Evolution, Extinction and Economics
The functions of price are fairly elementary bits of economic theory that aren't always applied to real world problems in an intelligent fashion but technology is changing this.
This article, Hi Tech Car Park Opens in Palmerston North flagged up on the Marginal Revolution website gives a fantastic example of how real world outcomes can be made more efficient. It is, apart from the dig at "little old ladies", genius.
Can readers of the blog think of other examples - the cafe that gives away free coffee but charges for seat occupancy? The Cafe that Charges by the Minute
Any more out there?
Test your UK economy awareness and general knowledge with this fifteen question quiz! Good luck!
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