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The Creation and Destruction of Value: The Globalization Cycle_

Author(s):James, Harold
Reviewer(s):La Croix, Sumner

Published by EH.NET (March 2010)

Harold James, The Creation and Destruction of Value: The Globalization Cycle. Cambridge, MA: Harvard University Press, 2009. x + 325 pp. $20 (hardcover), ISBN: 978-0-674-03584-3.

Reviewed for EH.NET by Sumner La Croix, Department of Economics, University of Hawaii-Manoa.

In this short, well written and carefully argued volume, Harold James ?offers reflections on the phenomenon of globalization and its cyclical propensity to generate backlashes and collapses? (p. 6). His thoughtful analysis builds upon his earlier book, The End of Globalization: Lessons from the Great Depression (2001), which argued that the anti-globalization protests at the 1999 Seattle WTO meeting lacked the coherent alternative ideologies that galvanized international responses to the 1929-1933 financial crisis. This more recent volume, boldly published in early 2009 in the midst of the ongoing financial crisis, provides extensive comparisons with the 1929-1933 crisis, considers the limits and extents of the financial revolution of the 1990s and 2000s, and emphasizes how arguments for continued globalization are often trumped in downturns ?by a political logic that looks for conflicts and competitive advantages? (p. 230).

James spends considerable space asking whether we can learn more about the 2000s financial crisis from the stock market collapse of 1929 or the widespread international bank failures of 1931. He rightly argues that a central bank could counter a 1929-style stock market crash by using conventional monetary policy to provide markets with additional liquidity and notes how the Greenspan ?put? contained the effects of the 1987 and the 2000-2001 stock market crashes (p. 94). By contrast, a 1931-style event ?is institutionally more complex and requires the reconstruction of whole banking systems? (p. 40). His analysis of 1931 emphasizes the inherent political difficulties of the German government in effectively and fairly bailing out its failing banks; this sets the stage for his analysis in the following chapter (?The weekends that made history?) of the events surrounding government bailouts (or the lack thereof) of Bear Stearns, Lehman Brothers, AIG, and numerous large commercial banks.

James?s chapter on the extent and limit of the financial revolution of the last 30 years argues that politicians, regardless of their country, party, or the historical episode, tend to echo each other in their rhetoric as a financial crisis unfolds (?we must make the financial industry a servant of the economy rather than its master?) and their calls for more government control of banks. They also quickly find out ?how difficult [this] is to accomplish when complex cross-border issues are involved? (p. 167). These difficulties were magnified during the 2000s financial crisis because of the financial deregulation of the late 1990s and the rapid innovation of complex financial instruments that were difficult to understand, not covered by existing regulations, or implemented outside the regulated boundaries of the bank. However, to respond to the financial crisis with extensive new bank regulation or outright government ownership of troubled banks is, James argues, always a highly problematic strategy. Government involvement in banks often doesn?t prevent them from taking excessive risks; it doesn?t solve the problem of banks innovating around regulations; and it can lead to pressures not just to reduce risk but also to restructure lending practices along a host of more political dimensions. In light of this discussion, it?s quite astonishing that James ends his discussion of bank regulation with a forecast that innovation in banking regulations may yet ?solve? the industry?s periodic tendency to experience financial crises in which banks play central roles. In the future, ?many banking functions can and will be handled by machines rather than by error-prone humans? (p. 172).

James?s conclusion to the volume is somewhat speculative, as it is based upon a relationship between the globalization cycle and changes in social values. He posits that for market institutions to function successfully in the long run, participants need to be guided by an external source of common values. The process of globalization tends to gradually erode these common values, and when the crisis comes, individuals become aware that resumption of the globalization cycle can only occur when society makes solid progress towards restoring its core values. In his view, ?[r]egaining trust is a long and arduous process. That is why when globalization is broken, it is not easy to put together again? (p. 277).) Or, to paraphrase the great actress Bette Davis, ?fasten your seat belts, it?s going to be a bumpy decade!?

Sumner La Croix is co-author (with Christopher Edmonds and Yao Li) of ?China Trade: Busting Gravity?s Bounds,? Journal of Asian Economics, November-December 2008, and co-editor (with Peter Petri) of Challenges to the Global Trading System: Adjustment to Globalization in the Asia-Pacific Region, New York: Routledge, 2007.

Subject(s):Markets and Institutions
Geographic Area(s):General, International, or Comparative
Time Period(s):20th Century: WWII and post-WWII