The Merchant of Venice
On December 21st, 1844, in Rochdale, 28 working men decided to set up shop together. They were the ‘Rochdale Pioneers’, and what they began in Toad Lane in a grimy Lancashire town became the mighty Co-operative Wholesale Society. There has long been an earthy practicality about life in the North, remote as it is from the fine calculation of Whitehall and Westminster, which has helped men and women get together to their mutual advantage.
The object of co-operation among those early pioneers was to get access to standard goods at standard prices. In our own generation the trading nations of the world have learnt, like the Rochdale pioneers, to co-operate to secure common economic objectives. The result is what is known in today’s jargon as ‘economic convergence’, which is a grandiose way of saying that the nations have standardised their economic policies.
The seeds of post-war co-operation among nations have been nourished in recent years by the growth of cross-border investment by multi-national companies. Whether in America, Europe, or Japan, businessmen like growth, and by standardising their operations across the frontiers and widening their markets, they achieve more of it.
First the US car makers, then computer and pharmaceutical companies, then consumer electronics and communications, now even brewers, have become suppliers of standard multi-national products to a global market. Space-age communications systems make it possible to serve such a market and they bind far-flung businesses together under central control which can be sited virtually anywhere.
So it is that over the past 40 years or so, the boundaries of sovereign nations, once fortified against violent assault, have been gradually abandoned to the peaceful advance of international trade and investment, an advance further assisted by the disintegration of the Soviet empire and a crumbling of ideological barriers. We no longer live in a world of super-powers, but in a world super-market.
Trading groups have throughout history co-operated to secure common objectives for themselves. The Hanseatic League was a sort of trade ‘co-op’ organised among the maritime cities of Northern Europe and it endured for the best part of 500 years. It only fell apart when trade moved to the Atlantic ports in the 16th century as the New World was being opened up.
Economic convenience has long been a yoke for harnessing the peaceful energy of nations and we can assume that the impetus behind economic convergence and co-operation today will be maintained for as long as the world’s major trading blocs – Europe, North America, and the Pacific nations around Japan – want it to be.
But co-operation can bring strains as well as benefits, as when an economy yoked by trade association cannot keep up with the rest of the team. Eastern Germany and the ex-Russian satellites simply cannot cope with an economic mean set so far above their existing capacity.
There may also be political strains at points where wider trade and investment objectives collide with local priorities. Take the debate in Europe. Competitive British companies have everything to gain from the economic integration of the UK within the EEC. But the very mention of forfeiting one iota of sovereignty brings instant prickly heat to the debate. A similar dilemma faces Switzerland as it squares up to the alternatives of being frozen out of European markets or ceding some of its independence – and maybe neutrality – to the EEC.
Nowhere is the collision between economic and political priorities clearer than in the agricultural sector. Existing farm price support systems, however well intentioned, are a grotesque distortion of the market pricing mechanism and an affront to the equitable distribution of the world’s resources. Yet only unrelenting pressure from the Americans in the Uruguay round of trade negotiations has begun to dismember them.
The trouble is that economic and political integration cannot be separated, as Karl Otto Pohl has recently pointed out. Most of the big political issues of our time are simply the active expression of differing economic objectives, and although political leaders can seize on them for their own purposes, they are in the end powerless to withstand the pressure of economic circumstances. There is no such thing as a ‘designer’ state in purely political terms. In peace time it all comes down to money.
The results of co-operation are already visible in a number of areas. Business practice across the major economies is converging in fields such as accountancy, law, and the regulation of securities markets. The standardisation of mass consumer products has been evident for many years. More is to come. As the flow of capital across the boundaries gains pace, labour costs among the major trading areas will tend to converge, and the relatively low wage levels of production sites in developing countries are likely to climb towards the world standard. The free flow of funds across the international capital markets will mean that the returns on capital in different economies are likely to converge. So will the cost of capital, which is to say the level of interest rates and the market ratings of ordinary shares.
In stock market terms, this trend to compression round a mean will tend to drag up the more lowly rated markets and pull down the most expensive. At the margins, the most highly rated markets may prove extremely vulnerable and the reverse should be true of the lowest. This convergent tendency can already be seen with the decline in the rating of the huge Japanese equity market, and a corresponding rise in the rating of Mexico and Latin-American markets.
One consequence for investors will be that companies, rather than the countries in which they operate, will increasingly be the swing factor in deriving superior or inferior results. It will become more than ever a matter of people assessment rather than country by country economic analysis.
It will also become difficult for any one economic power or trading bloc to act as a locomotive force for the world economy and, whilst that may not matter at times of sustainable moderate growth worldwide, it will be next to impossible to reverse a world inflation or recession. If we have world industries, we will also have world peaks and troughs. As one sees today, it is no easy matter to turn round a world economy.
The fruits of co-operation by those Rochdale pioneers can be seen 150 years later in supermarkets across the developed world where shoppers buy standard goods at standard prices. Economic co-operation among the nations of today will likewise have enduring results for all of us.
As for investors shopping in what is becoming the world financial supermarket, they will need to recognise one thing before all others and that is the standard of value upon which the universe of markets and stocks is already converging. To do so will require both an historical and international perspective, and those so possessed will find their way comfortably round the shelves. Those without that perspective will find their surroundings unfamiliar and bargains, such as they are used to snapping up, about as common as turkeys voting for an early Christmas.
20 November 1991