Part 1:The Lexus and the Olive Tree...The New System... Information Arbitrage

The Lexus and the Olive Tree.
By Thomas L. Friedman
Foreword to the Anchor Edition 

Welcome to the paperback edition of The Lexus and the Olive Tree. Readers of the original hardback version of the book will notice that several things have changed in this new version. But what has not changed is the core thesis of this book: that globalization is not simply a trend or a fad but is, rather, an international system. It is the system that has now replaced the old Cold War system, and, like that Cold War system, globalization has its own rules and logic that today directly or indirectly influence the politics, environment, geopolitics and economics of virtually every country in the world. 

So what has changed? I have reorganized the early chapters to make my core thesis a little easier for the reader to identify and digest, and I have used the year since the book was originally published in April 1999 to gather more evidence and to update and expand the book with all the technological and market innovations that are enhancing globalization even further. I have also re-examined some of the more controversial sub-theses of this book. One is my Golden Arches Theory-that no two countries that both have McDonald's have ever fought a war against each other since they each got their McDonald's. I feel the underlying logic of that theory is stronger than ever, and I have responded to those who have challenged it in the wake of the Kosovo war. Another change is that the chapter originally entitled "Buy Taiwan, Hold Italy, Sell France" is now broken into two parts. The new chapter, called "Shapers, Adapters and Other New Ways of Thinking About Power," builds on a question I raised in the first edition: if economic power in the globalization system was first based on PCs per household in a country, and then on degree of Internet bandwidth per person in a country, what comes next? This chapter tries to answer that question by looking at evolving new ways of measuring economic power in the globalization era. Finally, I have tried to answer some of the most oft-asked questions I got from readers of the first edition: "Now that you have described this new system, how do I prepare my kids for it?" and "Is God in cyberspace?"-which is another way of saying, "Where do moral values fit in?" The new world order is evolving so fast that sometimes I wish this were an electronic book that I could just update every day. My more realistic hope is that when the day comes years from now when this book can no longer reside on the Current Affairs shelf in bookstores, it will find a comfortable home in the History section - remembered among the books that caught the start, and helped to first define, the new system of globalization that is now upon us. 

Thomas L. Friedman 

Bethesda, Md. 

January 2000 

Opening Scene: 

The World Is Ten Years Old 

It's aggravating - we have nothing to do with Russia or Asia. We're just a little domestic business trying to grow, but we're being prevented because of the way those governments run their countries. 

- Douglas Hanson, CEO of Rocky Mountain Internet, Inc., speaking to The Wall Street Journal after the 1998 market meltdown forced him to postpone a $175 million junk bond issue. 

On the morning of December 8,1997, the government of Thailand announced that it was closing 56 of the country's 58 top finance houses. Almost overnight, these private banks had been bankrupted by the crash of the Thai currency, the baht. The finance houses had borrowed heavily in U.S. dollars and lent those dollars out to Thai businesses for the building of hotels, office blocks, luxury apartments and factories. The finance houses all thought they were safe because the Thai government was committed to keeping the Thai baht at a fixed rate against the dollar. But when the government failed to do so, in the wake of massive global speculation against the baht-triggered by a dawning awareness that the Thai economy was not as strong as previously believed the Thai currency plummeted by 30 percent. This meant that businesses that had borrowed dollars had to come up with roughly one-third more Thai baht to pay back each $1 of loans. Many businesses couldn't pay the finance houses back, many finance houses couldn't repay their foreign lenders and the whole system went into gridlock, putting 20,000 white-collar employees out of work. The next day, I happened to be driving to an appointment in Bangkok down Asoke Street, Thailand's equivalent of Wall Street, where most of the bankrupt finance houses were located. As we slowly passed each one of these fallen firms, my cabdriver pointed them out, pronouncing at each one: "Dead! . . . dead! . . . dead! . . . dead! . . . dead!" 

I did not know it at the time - no one did - but these Thai investment houses were the first dominoes in what would prove to be the first global financial crisis of the new era of globalization - the era that followed the Cold War. The Thai crisis triggered a general flight of capital out of virtually all the Southeast Asian emerging markets, driving down the value of currencies in South Korea, Malaysia and Indonesia. Both global and local investors started scrutinizing these economies more closely, found them wanting, and either moved their cash out to safer havens or demanded higher interest rates to compensate for the higher risk. It wasn't long before one of the most popular sweatshirts around Bangkok was emblazoned with the words "Former Rich." 

Within a few months, the Southeast Asian recession began to have an effect on commodity prices around the world. Asia had been an important engine for worldwide economic growth-an engine that consumed huge amounts of raw materials. When that engine started to sputter, the prices of gold, copper, aluminum and, most important, crude oil all started to fall. This fall in worldwide commodity prices turned out to be the mechanism for transmitting the Southeast Asian crisis to Russia. Russia at the time was minding its own business, trying, with the help of the IMF, to climb out of its own self- made economic morass onto a stable growth track. The problem with Russia, though, was that too many of its factories couldn't make anything of value. In fact, much of what they made was considered "negative value added." That is, a tractor made by a Russian factory was so bad it was actually worth more as scrap metal, or just raw iron ore, than it was as a finished, Russian-made tractor. On top of it all, those Russian factories that were making products that could be sold abroad were paying few, if any, taxes to the government, so the Kremlin was chronically short of cash. 

Without much of an economy to rely on for revenues, the Russian government had become heavily dependent on taxes from crude oil and other commodity exports to fund its operating budget. It had also become dependent on foreign borrowers, whose money Russia lured by offering ridiculous rates of interest on various Russian government issued bonds. 

As Russia's economy continued to slide in early 1998, the Russians had to raise the interest rate on their ruble bonds from 20 to 50 to 70 percent to keep attracting the foreigners. The hedge funds and foreign banks kept buying them, figuring that even if the Russian government couldn't pay them back, the IMF would step in, bailout Russia and the foreigners would get their money back. Some hedge funds and foreign banks not only continued to put their own money into Russia, but they went out and borrowed even more money, at 5 percent, and then bought Russian T-bills with it that paid 20 or 30 percent. As Grandma would say, "Such a deal!" But as Grandma would also say, "If it sounds too good to be true, it usually is!" 

And it was. The Asian triggered slump in oil prices made it harder and harder for the Russian government to pay the interest and principal on its T-bills. And with the IMF under pressure to make loans to rescue Thailand, Korea and Indonesia, it resisted any proposals for putting more cash into Russia - unless the Russians first fulfilled their promises to reform their economy, starting with getting their biggest businesses and banks to pay some taxes. On August 17, 1998, the Russian economic house of cards came tumbling down, dealing the markets a double whammy: Russia both devalued and unilaterally defaulted on its government bonds, without giving any warning to its creditors or arranging any workout agreement. The hedge funds, banks and investment banks that were invested in Russia began piling up massive losses, and those that had borrowed money to magnify their bets in the Kremlin casino were threatened with bankruptcy. 

On the face of it, the collapse of the Russian economy should not have had much impact on the global system. Russia's economy was smaller than that of the Netherlands. But the system was now more global than ever, and just as crude oil prices were the transmission mechanism from Southeast Asia to Russia, the hedge funds-the huge unregulated pools of private capital that scour the globe for the best investments - were the transmission mechanism from Russia to all the other emerging markets in the world, particularly Brazil. The hedge funds and other trading firms, having racked up huge losses in Russia, some of which were magnified fifty times by using borrowed money, suddenly had to raise cash to pay back their bankers. They had to sell anything that was liquid. So they started selling assets in financially sound countries to compensate for their losses in bad ones. Brazil, for instance, which had been doing a lot of the right things in the eyes of the global markets and the IMF, suddenly saw all its stocks and bonds being sold by panicky investors. Brazil had to raise its interest rates as high as 40 percent to try to hold capital inside the country. Variations on this scenario were played out throughout the world's emerging markets, as investors fled for safety. They cashed in their Brazilian, Korean, Egyptian, Israeli and Mexican bonds and stocks, and put the money either under their mattresses or into the safest U.S. bonds they could find. So the declines in Brazil and the other emerging markets became the transmission mechanism that triggered a herdlike stampede into U.S. Treasury bonds. This, in turn, sharply drove up the value of U.S. T- bonds, drove down the interest that the U.S. government had to offer on them to attract investors and increased the spread between U.S. T-bonds and other corporate and emerging market bonds. 

The steep drop in the yield on U.S. Treasury bonds was then the transmission mechanism which crippled more hedge funds and investment banks. Take for instance Long-Term Capital Management, based in Greenwich, Connecticut. LTCM was the Mother of All Hedge Funds. 

Because so many hedge funds were attracted to the marketplace in the late 1980s, the field became fiercely competitive. Everyone pounced on the same opportunities. In order to make money in such a fiercely competitive world, the hedge funds had to seek ever more exotic bets with ever larger pools of cash. To guide them in placing the right bets, LTCM drew on the work of two Nobel Prize - winning business economists, whose research argued that the basic volatility of stocks and bonds could be estimated from how they reacted in the past. Using computer models, and borrowing heavily from different banks, LTCM put $120 billion at risk betting on the direction that certain key bonds would take in the summer of 1998. It implicitly bet that the value of U.S. T-bonds would go down, and that the value of junk bonds and emerging market bonds would go up. LTCM's computer model, however, never anticipated something like the global contagion that would be set off in August by Russia's collapse, and, as a result, its bets turned out to be exactly wrong. 

When the whole investment world panicked at once and decided to rush into U.S. T-bonds, their value soared instead of fell, and the value of junk bonds and emerging market bonds collapsed instead of soared. 

LTCM was like a wishbone that got pulled apart from both ends. It had to be bailed out by its bankers to prevent it from engaging in a fire sale of all its stocks and bonds that could have triggered a worldwide market meltdown. 

Now we get to my street. In early August 1998, I happened to invest in my friend's new Internet bank. The shares opened at $14.50 a share and soared to $27. I felt like a genius. But then Russia defaulted and set all these dominoes in motion, and my friend's stock went to $8. Why? Because his bank held a lot of home mortgages, and with the fall of interest rates in America, triggered by the rush to buy T-bills, the markets feared that a lot of people would suddenly payoff their home mortgages early. If a lot of people paid off their home mortgages early, my friend's bank might not have the income stream that it was counting on to pay depositors. The markets were actually wrong about my friend's bank, and its stock bounced back nicely. Indeed, by early 1999 I was feeling like a genius again, as the Amazon.com Internet craze set in and drove my friend's Internet bank stock sky high, as well as other technology shares. But, once again, it wasn't long before the rest of the world crashed the party. Only this time, instead of Russia breaking down the front door, it was Brazil's turn to upset U.S. markets and even dampen (temporarily) the Internet stock boom. 

As I watched all this play out, all I could think of was that it took nine months for the events on Asoke Street to affect my street, and it took one week for events on the Brazilian Amazon (Amazon.country) to affect Amazon.com. USA Today aptly summed up the global marketplace at the end of 1998: 'The trouble spread to one continent after another like a virus," the paper noted. "U.S. markets reacted instantaneously. . . People in barbershops actually talked about the Thai baht." 

It wasn't long, though, before Amazon.com started to soar again. pulling up all the Internet stocks, which in turn helped pull up the whole U.S. stock market, which in turn created a wealth effect in America, which in turn encouraged Americans to spend beyond their savings, which in turn enabled Brazil, Thailand and other emerging markets to export their way out of their latest troubles by selling to America. Amazon.com, Amazon.country, we were all becoming one river. 

If nothing else, the cycle from Asoke Street to my street, and from .Amazon.country to Amazon.com and then back again to Amazon. country, served to educate all of us about the state of the world today. The slow, fixed, divided Cold War system that had dominated international affairs since 1945 had been firmly replaced by a new, very greased, interconnected system called globalization. If we didn't fully understand that in 1989, when the Berlin Wall came down, we sure understood it a decade later. Indeed, on October II, 1998, at the height of the global economic crisis, Merrill Lynch ran full-page ads in major newspapers throughout America to drive this point home. The ads read: The World Is 10 Years Old. It was born when the Wall fell in 1989.

It's no surprise that the world's youngest economy - the global economy - is still finding its bearings. The intricate checks and balances that stabilize economies are only incorporated with time. Many world markets are only recently freed, governed for the first time by the emotions of the people rather than the fists of the state. From where we sit, none of this diminishes the promise offered a decade ago by the demise of the walled off world. The spread of free markets and democracy around the world is permitting more people everywhere to turn their aspirations into achievements. And technology, properly harnessed and liberally distributed, has the power to erase not just geographical borders but also human ones. It seems to us that, for a 10-year-old, the world continues to hold great promise. In the meantime, no one ever said growing up was easy. 

Actually, the Merrill Lynch ad would have been a little more correct to say that this era of globalization is ten years old. Because from the mid-1800s to the late 1920s the world experienced a similar era of globalization. If you compared the volumes of trade and capital flows across borders, relative to GNPs, and the flow of labor across borders, relative to populations, the period of globalization preceding World War I was quite similar to the one we are living through today. Great Britain, which was then the dominant global power, was a huge investor in emerging markets, and fat cats in England, Europe and America were often buffeted by financial crises, triggered by something that happened in Argentine railroad bonds, Latvian government bonds or German government bonds. There were no currency controls, so no sooner was the trans-Atlantic cable connected in 1866 than banking and financial crises in New York were quickly being transmitted to London or Paris. I was on a panel once with John Monks, the head of the British Trades Union Congress, the AFL-CIO of Britain, who remarked that the agenda for the TUC's first Congress in Manchester, England, in 1868, listed among the items that needed to be discussed: "The need to deal with competition from the Asian colonies" and "The need to match the educational and training standards of the United States and Germany." In those days, people also migrated more than we remember, and, other than in wartime, countries did not require passports for travel before 1914. All those immigrants who flooded America's shores came without visas. When you put all of these factors together, along with the inventions of the steamship, telegraph, railroad and eventually telephone, it is safe to say that this first era of globalization before World War I shrank the world from a size "large" to a size "medium."

This first era of globalization and global finance capitalism was broken apart by the successive hammer blows of World War I, the Russian Revolution and the Great Depression, which combined to fracture the world both physically and ideologically. The formally divided world that emerged after World War II was then frozen in place by the Cold War. The Cold War was also an international system. It lasted roughly from 1945 to 1989, when, with the fall of the Berlin Wall, it was replaced by another system: the new era of globalization we are now in. Call it "Globalization Round II." It turns out that the roughly seventy-five-year period from the start of World War I to the end of the Cold War was just a long time-out between one era of globalization and another.

While there are a lot of similarities in kind between the previous era  of globalization and the one we are now in, what is new today is the degree and intensity with which the world is being tied together into a single globalized marketplace and village. What is also new is the sheer number of people and countries able to partake of today's globalized economy and information networks, and to be affected by them. The pre-1914 era of globalization may have been intense, but many developing countries in that era were left out of it. The pre-1914 era may have been large in scale relative to its time, but it was minuscule in absolute terms compared to today. Daily foreign exchange trading in 1900 was measured in the millions of dollars. In 1992, it was $820 billion a day, according to the New York Federal Reserve, and by April 1998 it was up to $1.5 trillion a day, and still rising. Around 1900, private capital flows from developed countries to developing ones could be measured in the hundreds of millions of dollars and relatively few countries were involved. By 2000, it was being measured in the hundreds of billions of dollars, with dozens of countries involved. This new era of globalization, compared to the one before World War I, is turbocharged. 

But today's era of globalization is not only different in degree; in some very important ways it is also different in kind - both technologically and politically. Technologically speaking, it is different in that the previous era of globalization was built around falling transportation costs. Thanks to the invention of the railroad, the steamship and the automobile, people could get to a lot more places faster and cheaper and could trade with a lot more places faster and cheaper. But as The Economist has noted, today's era of globalization is built around falling telecommunications costs - thanks to microchips, satellites, fiber optics and the Internet. These new information technologies are able to weave the world together even tighter. These technologies mean that developing countries don't just have to trade their raw materials to the West and get finished products in return; they mean that developing countries can become big - time producers as well. These technologies also allow companies to locate different parts of their production, research and marketing in different countries, but still tie them together through computers and teleconferencing as though they were in one place. Also, thanks to the combination of computers and cheap telecommunications, people can now offer and trade services globally-from medical advice to software writing to data processing - services that could never really be traded before. And why not? A three-minute call (in 1996 dollars) between New York and London cost $300 in 1930. Today it is almost free through the Internet. 

These technologies are making it possible not only for traditional nation - states and corporations to reach farther, faster, cheaper and deeper around the world than ever before, but also for individuals to do so. I was reminded of this point close to home, when in the summer of 1998 my then seventy-nine-year-old mother, Margaret Friedman, who lives in Minneapolis, called me sounding very upset. "What's wrong, Mom?" I asked. "Well," she said, "I've been playing bridge on the Internet with three Frenchmen and they keep speaking French to each other and I can't understand them." When I chuckled at the thought of my card-shark mom playing bridge with three Frenchmen on the Net, she took a little umbrage. "Don't laugh," she said, "I was playing bridge with someone in Siberia the other day."

To all those who say that this era of globalization is no different from the previous one, I would simply ask: Was your great-grandmother playing bridge with Frenchmen on the Internet in 1900? I don't think so. 

But, as I said, this new era of globalization is also different politically from that of the 1900s. That earlier era was dominated by British power, the British pound and the British navy. Today's era is dominated by American power, American culture, the American dollar and the American navy. American power after World War II deliberately set out to forge an open international trading system to stimulate employment and counterbalance Soviet communism. It was America that drove the creation of the International Monetary Fund, the General Agreement on Tariffs and Trade (GATT) and a host of other institutions for opening markets and fostering trade around the world. And it was the American fleet that kept the sea lanes open for these open markets to easily connect. So when the Information Revolution flowered in the late 1980s-and made it possible for so many more people to act globally, communicate globally, travel globally and sell globally-it flowered into a global power structure that encouraged and enhanced all these trends and made it very costly for any country that tried to buck them. 

In short, there are some things about this new era of globalization that we've seen before (but which are much more intense now), some things that we've never seen before and some things that are so new we don't even understand them yet. For all these reasons, I would sum up the differences between the two eras of globalization this way: If the first era of globalization shrank the world from a size "large" to a size "medium," this era of globalization is shrinking the world from a size "medium" to a size "small."

This book is an effort to explain how this new era of globalization became the dominant international system at the end of the twentieth century - replacing the Cold War system - and to examine how it now shapes virtually everyone's domestic politics, commerce, environment and international relations. In that sense, it is meant as a contribution to the body of literature that has been attempting to define the post-Cold War world. Among the most widely read of this genre are four books: Paul M. Kennedy's The Rise and Fall of the Great Powers: Economic Change and Military Conflict from 1500 to 2000, Francis Fukuyama's The End of History and the Last Man, the various essays and books of Robert D. Kaplan and Samuel P. Huntington's The Clash of Civilizations and the Remaking of World Order. 

While all of these works contained important truths, I think none of them really captured the post-Cold War world in any holistic way. Kaplan's reporting was vivid and honest, but he took the grimmest corners of the globe and overgeneralized from them to the fate of the rest of the world. Huntington saw cultural conflicts around the world and wildly expanded that into an enduring, sharply defined clash of civilizations, even proclaiming that the next world war, if there is one, "will be a war between civilizations." I believe both Kaplan and Huntington vastly underestimated how the power of states, the lure of global markets, the diffusion of technology, the rise of networks and the spread of global norms could trump their black-and-white (mostly black) projections. 

Both Kennedy and Huntington tried to divine the future too much from the past and the past alone. Kennedy traced (quite brilliantly) the decline of the Spanish, French and British empires, but he concluded by suggesting that the American empire would be the next to fall because of its own imperial overreaching. His implicit message was that the end of the Cold War not only meant the end of the Soviet Union but would also herald the decline of the United States. I believe Kennedy did not appreciate enough that the relative decline of the United States in the 1980s, when he was writing, was part of America's preparing itself for and adjusting to the new globalization system - a process that much of the rest of the world is going through only now. Kennedy did not anticipate that under the pressure of globalization America would slash its defense budget, shrink its government and shift more and more powers to the free market in ways that would prolong its status as a Great Power, not diminish it. 

Huntington's view was that, with the Cold War over, we won't have the Soviets to kick around anymore, so we will naturally go back to kicking the Hindus and Muslims around and them kicking us. He implicitly ruled out the rise of some new international system that could shape events differently. For Huntington, only tribalism could follow the Cold War, not anything new. 

Fukuyama's path breaking book contained the most accurate insight about what was new - the triumph of liberalism and free-market capitalism as the most effective way to organize a society - but his title (The End of History) implied a finality to this triumph (much more than the book itself does) that does not jibe with the world as I find it. 

In a way, each of these works became prominent because they tried to capture in a single catchy thought "The One Big Thing," the central moving part, the essential motor, that would drive international affairs in the post-Cold War world - either the clash of civilizations, chaos, the decline of empires or the triumph of liberalism. 

My argument is different. I believe that if you want to understand the post-Cold War world you have to start by understanding that a new international system has succeeded it-globalization. That is "The One Big Thing" people should focus on. Globalization is not the only thing influencing events in the world today, but to the extent that there is a North Star and a worldwide shaping force, it is this system. What is new is the system; what is old is power politics, chaos, clashing civilizations and liberalism. And what is the drama of the post-Cold War world is the interaction between this new system and all these old passions and aspirations. .It is a complex drama, with the final act still not written. 

That is why under the globalization system you will find both clashes of civilization and the homogenization of civilizations, both environmental disasters and amazing environmental rescues, both the triumph of liberal, free-market capitalism and a backlash against it, both the durability of nation-states and the rise of enormously powerful non- state actors. What I have tried to write is a guidebook for how to follow that drama and how to think about managing it. 

Just one last word before we start. The publisher and editor of the first edition of this book, Jonathan Galassi, called me one day and said, "I was telling some friends of mine that you're writing a book about globalization and they said, 'Oh, Friedman, he loves globalization.' What would you say to that?" I answered Jonathan that I feel about globalization a lot like I feel about the dawn. Generally speaking, I think it’s a good thing that the sun comes up every morning. It does more good than harm, especially if you wear sunscreen and sunglasses. But even if I didn't much care for the dawn there isn't much I could do about it. I didn't start globalization, I can't stop it - except at a huge cost to human development and I'm not going to waste time trying. I am a journalist, not a salesman for globalization. As you will see from the book, I am keenly aware of globalization's downsides. The question in my mind is what to do about them. I believe the best way for us to deal with the brutalities of globalization is by first understanding the logic of the system and its moving parts, and them figuring out how this system can benefit the most people, while inflicting the least amount of pain. That is the spirit that motivated this book.

The first part of the book explains how to look at today's globalization system and how the system works. The second part explains how nation-states, communities, individuals and the environment interact with this system. The third part explains the backlash against globalization. And the fourth explains the unique role the United States plays, and needs to keep playing, in stabilizing this new system.  

1 

Seeing the System

The New System 
What was it that Forrest Gump's mama liked to say? Life is like a box of chocolates: you never know what you're going to get inside. For me, an inveterate traveler and foreign correspondent, life is like room service -- you never know what you're going to find outside your door.

Take for instance the evening of December 31, 1994, when I began my assignment as the foreign affairs columnist for The New York Times. I started the column by writing from Tokyo, and when I arrived at the Okura Hotel after a long transpacific flight, I called room service with one simple request: "Could you please send me up four oranges." I am addicted to citrus and I needed a fix. It seemed to me a simple enough order when I telephoned it in, and the person on the other end seemed to understand. About twenty minutes later there was a knock at my door. A room service waiter was standing there in his perfectly creased uniform. In front of him was a cart covered by a starched white tablecloth. On the tablecloth were four tall glasses of fresh-squeezed orange juice, each glass set regally in a small silver bowl of ice. 

"No, no;' I said to the waiter, "I want oranges, oranges-not orange juice." I then pretended to bite into something like an orange. "Ahhhh;' the waiter said, nodding his head. "Oranges, o-ranges." I retreated into my room and went back to work. Twenty minutes later there was another knock at my door. Same waiter. Same linen covered room service trolley. But this time, on it were four plates and on each plate was an orange that had been peeled and diced into perfect little sections that were fanned out on a plate like sushi, as only the Japanese can do. 

"No, no," I said, shaking my head again. "I want the whole orange." I made a ball shape with my hands. "I want to keep them in my room and eat them for snacks. I can't eat four oranges all cut up like that. I can't store them in my mini-bar. I want the whole orange." 

Again, I did my best exaggerated imitation of someone eating an orange.  

"Ahhhh," the waiter said, nodding his head. "O-range, o-range. You want whole orange." 

Another twenty minutes went by. Again there was a knock on my door. Same waiter. Same trolley, only this time he had four bright oranges, each one on its own dinner plate, with a fork, knife and linen napkin next to it. That was progress. 

"That's right," I said, signing the bill. "That's just what I wanted." 

As he left the room, I looked down at the room service bill. The four oranges were $22. How am I going to explain that to my publisher? 

But my citrus adventures were not over. Two weeks later I was in Hanoi, having dinner by myself in the dining room of the Metropole Hotel. It was the tangerine season in Vietnam, and vendors were selling pyramids of the most delicious, bright orange tangerines on every street corner. Each morning I had a few tangerines for breakfast. When the waiter came to get my dessert order I told him all I wanted was a tangerine. 

He went away and came back a few minutes later. "Sorry," he said, "no tangerines." 

"But how can that be?" I asked in exasperation. "You have a table full of them at breakfast every morning! Surely there must be a tangerine somewhere back in the kitchen?" 

"Sorry." He shook his head. "Maybe you like watermelon?" 

"O.K.," I said, "bring me some watermelon." 

Five minutes later the waiter returned with a plate bearing three peeled tangerines on it. "I found the tangerines," he said. "No watermelon." 

Had I known then what I know now I would have taken it all as a harbinger. For I too would find a lot of things on my plate and outside my door that I wasn't planning to find as I traveled the globe for the Times.

Being the foreign affairs columnist for The New York Times is actually the best job in the world. I mean. someone has to have the best job, right? Well, I've got it. The reason it is such a great job is that I get to be a tourist with an attitude. I get to go anywhere, anytime, and have attitudes about what I see and hear. But the question for me as I embarked on this odyssey was: Which attitudes? What would be the lens, the perspective, the organizing system, the super story,  through which I would look at the world, make sense of events, prioritize them, opine upon them and help readers understand them? 

In some ways my predecessors had it a little easier. They each had a very obvious superstory and international system in place when they were writing. I am the fifth foreign affairs columnist in the history of the Times. "Foreign Affairs" is actually the paper's oldest column. It was begun in 1937 by a remarkable woman, Anne O'Hare McCormick, and was originally called "In Europe," because in those days, "in Europe" was foreign affairs for most Americans, and it seemed perfectly natural that the paper's one overseas columnist would be located on the European continent. Mrs. McCormick's 1954 obituary in the Times said she got her start in foreign reporting ''as the wife of Mr. McCormick, a Dayton engineer whom she accompanied on frequent buying trips to Europe." (New York Times obits have become considerably more politically correct since then.) The international system which she covered was the disintegration of balance-of- power Versailles Europe and the beginnings of World War II. 

As America emerged from World War II, standing astride the world as the preeminent superpower, with global responsibilities and engaged in a global power struggle with the Soviet Union, the title of the column changed in 1954 to "Foreign Affairs." Suddenly the whole world was America's playing field and the whole world mattered, because every corner was being contested with the Soviet Union. The Cold War international system, with its competition for influence and supremacy between the capitalist West and the communist East, between Washington, Moscow and Beijing, became the super story within which the next three foreign affairs columnists organized their opinions. 

By the time I started the column at the beginning of 1995, though, the Cold War was over. The Berlin Wall had crumbled and the Soviet Union was history. I had the good fortune to witness, in the Kremlin, one of the last gasps of the Soviet Union. The day was December 16, 1991. Secretary of State James A. Baker was visiting Moscow, just as Boris Yeltsin was easing Mikhail Gorbachev out of power. Whenever Baker had met Gorbachev previously, they had held their talks in the Kremlin's gold-gilded St. Catherine Hall. There was always a very orchestrated entry scene for the press. Mr. Baker and his entourage would wait behind two huge wooden double doors on one end of the long Kremlin hall, with Gorbachev and his team behind the doors on the other end. And then, by some signal, the doors would simultaneously open and each man would stride out and they would shake hands in front of the cameras in the middle of the room. Well, on this day Baker arrived for his meeting at the appointed hour, the doors swung open and Boris Yeltsin walked out, instead of Gorbachev. Guess who's coming to dinner! "Welcome to Russian soil and this Russian building," Yeltsin said to Baker. Baker did meet Gorbachev later in the day, but it was clear that power had shifted. We State Department reporters who were there to chronicle the event ended up spending that whole day in the Kremlin. It snowed heavily while we were inside, and when we finally walked out after sunset we found the Kremlin grounds covered in a white snow blanket. As we trudged to the Kremlin's Spas sky Gate, our shoes crunching fresh tracks in the snow, I noticed that the red Soviet hammer and sickle was still flying atop the Kremlin flagpole, illuminated by a spotlight as it had been for some seventy years. I said to myself, "That is probably the last time I'll ever see that flag flying there." In a few weeks it was indeed gone, and with it went the Cold War system and superstory. 

But what wasn't clear to me as I embarked upon my column assignment a few years later was what had replaced the Cold War system as the dominant organizing framework for international affairs. So I actually began my column as a tourist without an attitude - just an open mind. For several years, I, like everyone else, just referred to "the post-Cold War world." We knew some new system was adorning that constituted a different framework for international relations, but we couldn't define what it was, so we defined it by what it wasn't. It wasn't the Cold War. So we called it the post-Cold War world. 

The more I traveled, though, the more it became apparent to me that we were not just in some messy, incoherent, indefinable post-Cold War world. Rather, we were in a new international system. This new system its own unique attributes, which contrast sharply with those of the Cold War. To begin with the Cold War system was characterized by one overarching feature -- division. The world was a divided-up, chopped-up place and both your threats and opportunities in the Cold War system tended to grow out of who you were divided from. Appropriately, this Cold War system was symbolized by a single word: the wall - the Berlin Wall. One of my favorite descriptions of that world was provided by Jack Nicholson in the movie A Few Good Men. Nicholson plays a Marine colonel who is the commander of the U.S. base in Cuba, at Guantanamo Bay. In the climactic scene of the movie, Nicholson is pressed by Tom Cruise to explain how a certain weak soldier under Nicholson's command, Santiago, was beaten to death by his own fellow Marines: "You want answers?" shouts Nicholson. "You want answers?" I want the truth, retorts Cruise. "You can't handle the truth," says Nicholson. "Son, we live in a world that has walls and those walls have to be guarded by men with guns. Who's gonna do it? You? You, Lieutenant Weinberg? I have a greater responsibility than you can possibly fathom. You weep for Santiago and you curse the Marines. You have that luxury. You have the luxury of not knowing what I know - that Santiago's death, while tragic, probably saved lives. And my existence, while grotesque and incomprehensible to you, saves lives. You don't want the truth because deep down in places you don't talk about at parties, you want me on that wall. You need me on that wall." 

The globalization system is a bit different. It also has one overarching feature,  integration. The world has become an increasingly interwoven place, and today, whether you are a company or a country, your threats and opportunities increasingly derive from who you are connected to. This globalization system is also characterized by a single word: the Web. So in the broadest sense we have gone from a system built around division and walls to a system increasingly built around integration and webs. In the Cold War we reached for the "hotline," which was a symbol that we were all divided but at least two people were in charge - the United States and the Soviet Union - and in the globalization system we reach for the Internet, which is a symbol that we are all increasingly connected and nobody is quite in charge. 

This leads to many other differences between the globalization system and the Cold War system. The globalization system, unlike the Cold War system, is not frozen, but a dynamic ongoing process. That's why I define globalization this way: it is the inexorable integration of markets, nation-states and technologies to a degree never witnessed before -- in a way that is enabling individuals, corporations and nation-states to reach around the world farther, faster, deeper and cheaper than ever before, and in a way that is enabling the world to reach into individuals, corporations and nation-states farther, faster, deeper, cheaper than ever before. This process of globalization is also producing a powerful backlash from those brutalized or left behind by this new system.

The driving idea behind globalization is free-market capitalism-the more you let market forces rule and the more you open your economy to free trade and competition, the more efficient and flourishing your economy will be. Globalization means the spread of free- market capitalism to virtually every country in the world. Therefore, globalization also has its own set of economic rules, rules that revolve around opening, deregulating and privatizing your economy, in order to make it more competitive and attractive to foreign investment. In 1975, at the height of the Cold War, only 8 percent of countries worldwide had liberal, free-market capital regimes, and foreign direct investment at the time totaled only $23 billion, according to the World Bank. By 1997, the number of countries with liberal economic regimes constituted 28 percent, and foreign investment totaled $644 billion.

Unlike the Cold War system, globalization has its own dominant culture, which is why it tends to be homogenizing to a certain degree. In previous eras this sort of cultural homogenization happened on a regional scale -- the Romanization of Western Europe and the Mediterranean world, the Islamification of Central Asia, North Africa, Europe and the Middle East by the Arabs and later the Ottomans, or the Russification of Eastern and Central Europe and parts of Eurasia under the Soviets. Culturally speaking, globalization has tended to involve the spread (for better and for worse) of Americanization-from Big Macs to iMacs to Mickey Mouse. Globalization has its own defining technologies: computerization, miniaturization, digitization, satellite communications, fiber optics and the Internet, which reinforce its defining perspective of integration. Once a country makes the leap into the system of globalization, its elites begin to internalize this perspective of integration, and always try to locate themselves in a global context. I was visiting Amman, Jordan, in the summer of 1998 and having coffee at the Inter- Continental Hotel with my friend Rami Khouri, the leading political columnist in Jordan. We sat down and I asked him what was new. The first thing he said to me was: "Jordan was just added to CNN's worldwide weather highlights." What Rami was saying was that it is important for Jordan to know that those institutions which think globally believe it is now worth knowing what the weather is like in Amman. It makes Jordanians feel more important and holds out the hope that they will be enriched by having more tourists or global investors visiting. The day after seeing Rami I happened to go to Israel and meet with Jacob Frenkel, governor of Israel's Central Bank and a University of Chicago trained economist. Frenkel remarked that he too was going through a perspective change: "Before, when we talked about macroeconomics, we started by looking at the local markets, local financial systems and the interrelationship between them, and then, as an afterthought, we looked at the international economy. There was a feeling that what we do is primarily our own business and then there are some outlets where we will sell abroad. Now we reverse the perspective. Let's not ask what markets we should export to, after having decided what to produce; rather let's first study the global framework within which we operate and then decide what to produce. It changes your whole perspective." 

While the defining measurement of the Cold War was weight - particularly the throw weight of missiles - the defining measurement of the globalization system is speed - speed of commerce, travel, communication and innovation. The Cold War was about Einstein's mass-energy equation, e = mc 2 . Globalization tends to revolve around Moore's Law, which states that the computing power of silicon chips will double every eighteen to twenty-four months, while the price will halve. In the Cold War, the most frequently asked question was: "Whose side are you on?" In globalization, the most frequently asked question is: "To what extent are you connected to everyone?" In the Cold War, the second most frequently asked question was: "How big is your missile?" In globalization, the second most frequently asked question is: "How fast is your modem?" The defining document of the Cold War system was "The Treaty." The defining document of globalization is "The Deal." The Cold War system even had its own style. In 1961, according to Foreign Policy magazine, Cuban President Fidel Castro, wearing his usual olive drab military uniform, made his famous declaration "I shall be a Marxist-Leninist for the rest of my life." In January 1999, Castro put on a business suit for a conference on globalization in Havana, to which financier George Soros and free-market economist Milton Friedman were both invited.

If the defining economists of the Cold War system were Karl Marx and John Maynard Keynes, who each in his own way wanted to tame capitalism, the defining economists of the globalization system are Joseph Schumpeter and Intel chairman Andy Grove, who prefer to unleash capitalism. Schumpeter, a former Austrian Minister of Finance and Harvard Business School professor, expressed the view in his classic work Capitalism, Socialism and Democracy that the essence of capitalism is the process of "creative destruction" - the perpetual cycle of destroying the old and less efficient product or service and replacing it with new, more efficient ones. Andy Grove took Schumpeter's insight that "only the paranoid survive" for the title of his book on life in Silicon Valley, and made it in many ways the business model of globalization capitalism. Grove helped to popularize the view that dramatic, industry transforming innovations are taking place today faster and faster. Thanks to these technological breakthroughs, the speed by which your latest invention can be made obsolete or turned into a commodity is now lightning quick. Therefore, only the paranoid, only those who are constantly looking over their shoulders to see who is creating something new that will destroy them and then staying just one step ahead of them, will survive. Those countries that are most willing to let capitalism quickly destroy inefficient companies, so that money can be freed up and directed to more innovative ones, will thrive in the era of globalization. Those which rely on their governments to protect them from such creative destruction will fall behind in this era. 

James Surowiecki, the business columnist for Slate magazine, reviewing Grove's book, neatly summarized what Schumpeter and Grove have in common, which is the essence of globalization economics. It is the notion that: "Innovation replaces tradition. The present - or perhaps the future - replaces the past. Nothing matters so much as what will come next, and what will come next can only arrive if what is here now gets overturned. While this makes the system a terrific place for innovation, it makes it a difficult place to live, since most people prefer some measure of security about the future to a life lived in almost constant uncertainty. We are not forced to re-create our relationships with those closest to us on a regular basis. And yet that's precisely what Schumpeter, and Grove after him, suggest is necessary to prosper [today]." 

Indeed, if the Cold War were a sport, it would be sumo wrestling, says Johns Hopkins University foreign affairs professor Michael Mandelbaum. "It would be two big fat guys in a ring, with all sorts of posturing and rituals and stomping of feet, but actually very little contact, until the end of the match, when there is a brief moment of shoving and the loser gets pushed out of the ring, but nobody gets killed." 

By contrast, if globalization were a sport, it would be the l00-meter dash, over and over and over. And no matter how many times you win, you have to race again the next day. And if you lose by just one-hundredth of a second it can be as if you lost by an hour. (Just ask French multinationals. In 1999, French labor laws were changed, requiring every employer to implement a four-hour reduction in the legal workweek, from 39 hours to 35 hours, with no cut in pay. Many French firms were fighting the move because of the impact it would have on their productivity in a global market. Henri Thierry, human resources director for Thomson-CSF Communications, a high-tech firm in the suburbs of Paris, told The Washington Post: "We are in a worldwide competition. If we lose one point of productivity, we lose orders. If we're obliged to go to 35 hours it would be like requiring French athletes to run the 100 meters wearing flippers. They wouldn't have much of a chance winning a medal."

To paraphrase German political theorist Carl Schmitt, the Cold War was a world of "friends" and "enemies." The globalization world, by contrast, tends to turn all friends and enemies into "competitors." 

If the defining anxiety of the Cold War was fear of annihilation from an enemy you knew all too well in a world struggle that was fixed and stable, the defining anxiety in globalization is fear of rapid change from an enemy you can't see, touch or feel - a sense that your job, community or workplace can be changed at any moment by anonymous economic and technological forces that are anything but stable. The defining defense system of the Cold War was radar-to expose the threats coming from the other side of the wall. The defining defense system of the globalization era is the X-ray machine - to expose the threats coming from within. 

Globalization also has its own demographic pattern - a rapid acceleration of the movement of people from rural areas and agricultural lifestyles to urban areas and urban lifestyles more intimately linked with global fashion, food, markets and entertainment trends.

Last, and most important, globalization has its own defining structure of power, which is much more complex than the Cold War structure. The Cold War system was built exclusively around nation-states. You acted on the world in that system through your state. The Cold War was primarily a drama of states confronting states, balancing states and aligning with states. And, as a system, the Cold War was balanced at the center by two superstates: the United States and the Soviet Union. 

The globalization system, by contrast, is built around three balances, which overlap and affect one another. The first is the traditional balance between nation-states. In the globalization system, the United States is now the sole and dominant superpower and all other nations are subordinate to it to one degree or another. The balance of power between the United States and the other states, though, still matters for the stability of this system. And it can still explain a lot of the news you read on the front page of the papers, whether it is the containment of Iraq in the Middle East or the expansion of NATO against Russia in Central Europe. 

The second balance in the globalization system is between nation-state and global markets. These global markets are made up of millions of investors moving money around the world with the click of a mouse. I call them "the Electronic Herd," and this herd gathers in key global financial centers, such as Wall Street, Hong Kong, London and Frankfurt, which I call "the Supermarkets." The attitudes and actions of the Electronic Herd and the Supermarkets can have a huge impact on nation-state today, even to the point of triggering the downfall of governments. Who ousted Suharto in Indonesia in 1998? It wasn't another state, it was the Supermarkets, by withdrawing their support for, and confidence in, the Indonesian economy. You will not understand the front page of newspapers today unless you bring the Supermarkets into your analysis. Because the United States can destroy you by dropping bombs and the Supermarkets can destroy you by downgrading your bonds. In other words, the United States is the dominant player in maintaining the globalization gameboard, but it is not alone in influencing the moves on that gameboard. This globalization gameboard today is a lot like a Ouija board, sometimes pieces are moved around by the obvious hand of the superpower, and sometimes they are moved around by hidden hands of the Supermarkets. 

The third balance that you have to pay attention to in the globalization system - the one that is really the newest of all-is the balance between individuals and nation-states. Because globalization has brought down many of the walls that limited the movement and reach of people, and because it has simultaneously wired the world into networks, it gives more power to individuals to influence both markets and nation-states than at any time in history. Individuals can increasingly act on the world stage directly - unmediated by a state. So you have today not only a superpower, not only Supermarkets, but, as will be demonstrated later in the book, you now have Super-empowered individuals. Some of these Super-empowered individuals are quite angry, some of them quite wonderful - but all of them are now able to act directly on the world stage.

Without the knowledge of the U.S. government, Long-Term Capital Management - a few guys with a hedge fund in Greenwich, Connecticut - amassed more financial bets around the world than all the foreign reserves of China. Osama bin Laden, a Saudi millionaire with his own global network, declared war on the United States in the late 1990s, and the U.S. Air Force retaliated with a cruise missile attack on him (where he resided in Afghanistan) as though he were another nation-state. Think about that. The United States fired 75 cruise missiles, at $1 million apiece, at a person! That was a superpower against a Super-empowered angry man. Jody Williams won the Nobel Peace Prize in 1997 for her contribution to the international ban on landmines. She achieved that not only without much government help, but in the face of opposition from all the major powers. And what did she say was her secret weapon for organizing 1,000 different human rights and arms control groups on six continents? "E-mail." 

Nation-states, and the American superpower in particular, are still hugely important today, but so too now are Supermarkets and Super empowered individuals. You will never understand the globalization system, or the front page of the morning paper, unless you see it as a complex interaction between all three of these actors: states bumping up against states, states bumping up against Supermarkets, and Supermarkets and states bumping up against Super-empowered individuals.

 Unfortunately, for reasons I will explain later, the system of globalization has come upon us far faster than our ability to retrain ourselves to see and comprehend it. Think about just this one fact: Most people had never even heard of the Internet in 1990, and very few people had an Email address then. That was just ten years ago! But today the Internet, cell phones and E-mail have become essential tools that many people, and not only in developed countries, cannot imagine living without. It was no different, I am sure, at the start of the Cold War, with the first appearance of nuclear arsenals and deterrence theories. It took a long time for leaders and analysts of that era to fully grasp the real nature and dimensions of the Cold War system. They emerged from World War II thinking that this great war had produced a certain kind of world, but they soon discovered it had laid the foundations for a world very different from the one they anticipated. Much of what came to be seen as great Cold War architecture and strategizing were responses on the fly to changing events and evolving threats. Bit by bit, these Cold War strategists built the institutions, the perceptions and the reflexes that came to be known as the Cold War system. 

It will be no different with the globalization system, except that it may take us even longer to get our minds around it, because it requires so much retraining just to see this new system and because it is built not just around superpowers but also around Supermarkets and Superempowered individuals. I would say that in 2000 we understand as much about how today's system of globalization is going to work as we understood about how the Cold War system was going to work in 1946 - the year Winston Churchill gave his speech warning that an "Iron Curtain" was coming down, cutting off the Soviet zone of influence from Western Europe. We barely understood how the Cold War system was going to play out thirty years after Churchill's speech! That was when Routledge published a collection of essays by some of the top Sovietologists, entitled Soviet Economy Towards the Year 2000. It was a good seller when it came out. It never occurred at that time to any of the authors that there wouldn't be a Soviet economy in the year 2000. 

If you want to appreciate how few people understand exactly how this system works, think about one amusing fact. The two key economists who were advising Long-Term Capital Management, Robert C. Merton and Myron S. Scholes, shared the Nobel Prize for economics in 1997, roughly one year before LTCM so misunderstood the nature of risk in today's highly integrated global marketplace that it racked up the biggest losses in hedge fund history. And what did LTCM's two economists win their Nobel Prize for their studies on how complex financial instruments, known as derivatives, can be used by global investors to offset risk! In 1997 they won the Nobel Prize for managing risk. In 1998 they won the booby prize for creating risk. Same guys, same market – new world.

2 

Information Arbitrage 

At the wonderful science museum in Barcelona, I saw an exhibit that beautifully illustrated "chaos." A nonlinear version of a pendulum was set up so that the visitor could hold the bob and start out in a chosen position and with a chosen velocity. One could then watch the subsequent motion, which was also recorded with a pen on a sheet of paper. The visitor was then invited to seize the bob again and try to imitate exactly the previous initial position and velocity. No matter how carefully that was done, the subsequent motion was quite different from what it was the first time. . . I asked the museum director what the two men were doing who were standing in a corner watching us. He replied, "Oh, those are two Dutchmen waiting to take away the 'chaos.'" Apparently, the exhibit was about to be dismantled and taken to Amsterdam. But I have wondered ever since whether the services of those two Dutchmen would not be in great demand across the globe, by organizations that wanted their chaos taken away. 

-Murray Gell-Mann, author of 

The Quark and the Jaguar 

Like everyone else trying to adjust to this new globalization system and bring it into focus, I had to retrain myself and develop new lenses to see it. In order to explain how, let me start with a confession that I have wanted to unburden myself of for a long, long time. Are you ready? Here it is: I used to make up the weather reports from Beirut. 

Well, actually, I didn't make them up. That would be wrong. I "estimated" them. It was 1979 and I was working as a cub reporter in Beirut for United Press International. I often had to work the late-night shift, and one of the responsibilities of the late person was to file the weather report from Beirut, which would be included in UPI's worldwide weather roundup that went out to newspapers each day, with the highs and lows. The only problem was that there was no weatherman in Beirut, or at least none I was aware of. The country was in the midst of a civil war. Who cared what the temperature was? People were just glad to be alive. The only temperature you cared about in Beirut in those days was your own - 98.6 degrees. So I estimated what the temperature was, often by ad hoc polling. Gathering the weather report basically involved my shouting down the hall or across the room: "Hey, Ahmed, how does it feel out there today?" 

And Ahmed or Sonia or Daoud would shout back, "Ya'ani, it feels hot:' 

"About ninety degrees?" I would ask. "Sure, Mr. Thomas, whatever you say," the answer would come back. "Something like that:' So I would write, "High 90 degrees:' Then I would ask later, "Kinda cool out there now?" "Sure, Mr. Thomas," the answer would come back. "About seventy-two degrees, would you say?" "Sure, Mr. Thomas, whatever you say," the answer would come back. And so I would write, "Low 72 degrees:' And thus was the weather report filed from Beirut.  

Years later I would recall those moments when I found myself working in the Business Day section of The New York Times. I was occasionally assigned to write the daily dollar or stock market stories and had to call around to brokers after the markets closed to find out where the dollar finished against other major currencies, or to ascertain why the Dow Jones Industrial Average moved up or down. I was always amazed that whichever way the markets moved, whether the dollar fell or rose, some analyst always had a pithy one liner explaining why $1.2 trillion in transactions on six different continents across twenty-four different time zones resulted in the dollar falling or rising against the Japanese yen by half a penny. And we all believed this explanation. But somewhere in the back of my mind I used to wonder whether these commentators weren't just pulling my leg. Somewhere in the back of my mind I used to wonder whether this wasn't just the Wall Street version of the weather report from Beirut, with someone shouting down the hall at the offices of Merrill Lynch or PaineWebber the equivalent of "Hey, Ahmed, why did the dollar go down today?" And whatever the stock boy or the secretary or the first broker to walk by his desk happened to answer ended up in the next day's newspaper as the global explanation for the behavior of thousands of different traders around the world. In 1994 I was the New York Times international trade and finance correspondent, covering the United States-Japan trade talks. One afternoon, I was sitting at my desk, scrolling through the news wires on my computer, when I noticed two items move on Reuters, one right after the other: Dollar Ends Higher on Optimism over Trade Talks 

NEW YORK (Reuters) - The dollar finished higher against most leading currencies Friday as optimism grew that Washington and Tokyo would reach a trade agreement. Blue Chip Stocks End Lower on Uncertainty over Trade Talks.

NEW YORK (Reuters) - Blue chip stocks closed lower Friday amid uncertainty over U.S.-Japan trade talks ahead of a midnight deadline for possible sanctions. 

"Hey, Ahmed, what do you think of the U.S.-Japan talks?" That I was doing back in those days filing the weather report from Beirut, and what Reuters was doing with its stock and currency stories, was trying to order the chaos-without much success in either of both our cases. I knew when I began my foreign affairs column in 1995 that I would not survive very long if all I was doing to order the chaos was the political equivalent of just guessing the temperature in Beirut. So what to do? How to understand and explain this incredibly complex system of globalization? 

The short answer is that I learned you need to do two things at once look at the world through a multi-lens perspective and, at the same time, convey that complexity to readers through simple stories, not grand theories. I use two techniques: I "do information arbitrage" in order to understand the world, and I "tell stories" in order to explain it. What is information arbitrage? Arbitrage is a market term. Technically speaking, it refers to the simultaneous buying and selling of the same securities, commodities or foreign exchange in different markets to profit from unequal prices and unequal information. The successful arbif trageur is a trader who knows that pork bellies are selling for $1 per pound in Chicago and for $1.50 in New York and so he buys them in Chicago and sells them in New York. One can do arbitrage in markets. One can do it in literature. It was said of the great Spanish writer Jose Ortega y Gasset that he "bought information cheap in London and sold it expensive in Spain:" That is, he frequented all the great salons of London and then translated the insights he gained there into Spanish for Spanish readers back home. But whether you are selling pork bellies or insights, the key to being a successful arbitrageur is having a wide net of informants and information and then knowing how to synthesize it in a way that will produce a profit.

Today, more than ever, the traditional boundaries between politics, culture, technology, finance, national security and ecology are disappearing. You often cannot explain one without referring to the others, and you cannot explain the whole without reference to them all. Therefore, to be an effective foreign affairs analyst or reporter, you have to learn how to arbitrage information from these disparate perspectives and then weave it all together to produce a picture of the world that you would never have if you looked at it from only one perspective. That is the essence of information arbitrage. In a world where we are all so much more interconnected, the ability to read the connections, and to connect the dots, is the real value added provided by a journalist. If you don't see the connections, you won't see the world. 

I wish I could say I understood all this when I began my career, but I didn't. I came to this approach entirely by accident, as successive changes in my career kept forcing me to add one more lens on top of another, just to survive. Here's what happened: 

" I began my journalistic life as the most narrow of reporters. For the first decade of my career I covered the "Mother of All Tribal Wars" - the Arab-Israeli conflict, first from Beirut and then from Jerusalem. In those days, journalism for me was basically a two-dimensional business. It was about politics and culture, because in the Middle East your culture pretty much defined your politics. Or, to put it another way, the world for me was all about watching people clinging to their own roots and uprooting their neighbors' olive trees. " 

Then in 1988 I left Jerusalem, after a decade in the Middle East, and came to Washington, where I became the New York Times diplomatic correspondent. The first story I was assigned to cover was Secretary of State-designate James A. Baker's confirmation hearing before the Senate. I am embarrassed to say that since both my B.A. and M.A. were in Arabic and Middle Eastern Studies, and since I had spent almost my entire journalistic career up to that point covering the Middle East, I really did not know very much about any other parts of the world, and I certainly did not know anything about most of the issues the senators were quizzing Mr. Baker about, such as the START treaty, the Contras, Angola, the CFE (Conventional Forces in Europe) arms control negotiations and NATO. 

My head was swimming as I came out of the hearing. I had no idea what the lead was. I didn't even know what half the acronyms stood for. I couldn't keep straight whether the Contras were our guys or their guys, and I thought CFE was a typo and was actually "cafe" without the "a." As I took a taxi back to the Times bureau, all I could see in my head was a banner headline in The Washington Post the next morning about something Baker had said that I would not even have mentioned in my story. 

Only thanks to help from the Times's Pentagon reporter, Michael Gordon, did I manage to pull a story together that day. But I knew then and there that two dimensions weren't going to cut it anymore. Fortunately, thanks to four years of covering diplomacy, including some 500,000 miles on the road with Baker, I managed to add a new dimension to politics and culture - the national security, balance-of-power dimension. This comprises the whole nexus of issues revolving around arms control, superpower competition, Cold War alliance management and power geopolitics. 

Thus my own two-dimensional view of the world was transformed. I remember once flying with Baker to Israel, and his plane got diverted briefly over the Tel Aviv airport and was sent on a big, wide arc over the West Bank before coming in for its landing. I found myself looking out the window of the Secretary of State's airplane, down at the West Bank, and thinking, "You know, in raw power terms, this place really isn't very important anymore. Interesting, yes. But geopolitically important, no." 

Following my tour at the State Department, and then a mercifully brief stint as a White House correspondent (none dare call that journalism), I added another lens in 1994 when the Times asked me to start a new beat that would cover the intersection between foreign policy and international finance. It was becoming apparent that with the end of the Cold War and the collapse of the Soviet Union, finance and trade were taking on a bigger role in shaping international relations. 

Having a beat that was at the intersection of economics and national security policy making was something of an experiment for me and the Times. I was technically assigned to be the Treasury - trade correspondent, but given I my background covering the State Department and the White House, I was asked to integrate it all. We described the beat variously as "Commercial Diplomacy" or "Foreign Affairs and Finance." What I discovered when I stood at that intersection were two things. 

First was that with the end of the Cold War system, this intersection was going to produce a huge amount of news. The other thing I discovered was that nobody else was there. Instead, there were a lot of trade reporters who didn't cover diplomacy. There were a lot of finance reporters who didn't cover national security affairs. There were a lot of diplomatic reporters who didn't cover finance. And there were White House reporters who didn't cover trade, finance or foreign affairs, but only what the President said or did. 

For me, adding the financial markets dimension to politics, culture and national security was like putting on a new pair of glasses and suddenly looking at the world in 4-D. I saw news stories that I would never have recognized as news stories before. I saw causal chains of events that I never could have identified before. I saw invisible hands and handcuffs impeding leaders and nations from doing things that I never imagined before. Alas, four dimensions were not enough. Once I was assigned to be the foreign affairs columnist, I gradually realized that what was driving the rise and power of markets, what was reshaping how nations and individuals interacted with one another, and what was really at the heart of globalization, was the recent advances in technology - from the Internet to satellite telecommunications. 

I realized that I could not explain to myself, let alone to readers, the forces that were shaping global politics unless I better understood these technologies that were empowering people, companies and governments in all sorts of new ways. Who controls the guns in a society is always critical. But who controls the phones and how they work also matters. 

How many troops and nukes your country possesses is always critical. But how much bandwidth you have for your Internet also matters. So I had to add yet another dimension – technology - and become a 5-D reporter. It meant adding Silicon Valley to the list of world capitals - Moscow, Beijing, London, Jerusalem-that I felt I had to visit once a year just to stay abreast of what was going on. 

Finally, the more I observed the system of globalization at work, the more obvious it was that it had unleashed forest-crushing forces of development and Disney-round-the-clock homogenization, which, if left unchecked, had the potential to destroy the environment and uproot cultures at a pace never before seen in human history. I gradually realized that if I didn't bring this environmental perspective into my analysis, I would be leaving out one of the major forces that could limit development and trigger a backlash against globalization. So I added the sixth dimension to my arbitrage -- educating myself in environmentalism and began including environmental side trips to my travels to understand how ecosystems were being affected by globalization and how their degradation was affecting globalization. 

Now that I am up to six D's, I don't know what's next. But if and when a new dimension becomes apparent, I will add it. Because I am a "globalist." That is the school of thought to which I belong. That means I am not a realist, who thinks everything in foreign affairs can be explained by the quest for power and geopolitical advantage--and markets don't really matter. I am not an environmentalist, who looks at the fate of the world only through the prism of the environment and what must be done to save it-and development doesn't matter. I am not a technologist--one of those Silicon Valley techno-nerds who believe that history began with the invention of the microprocessor and that the Internet will determine the future of international relations-and geopolitics doesn't matter. I am not an essentialist who believes that people's behavior can be explained by some essential cultural or DNA trait - and technology doesn't matter. And I am not an economist who believes that you can explain the world with reference only to markets-and power politics and culture don't matter.

I believe that this new system of globalization - in which walls between countries, markets and disciplines are increasingly being blown away - constitutes a fundamentally new state of affairs. And the only way to see it, understand it and explain it is by arbitraging all six dimensions laid out above - assigning different weights to different perspectives at different times in different situations, but always understanding that it is the interaction of all of them together that is really the defining feature of international relations today. And therefore being a globalist is the only way to systematically connect the dots, see the system of globalization and thereby order the chaos. 

If I am wrong about this world, that will be apparent soon enough. But if I am not wrong, there are a lot of people who are going to have to go back to school. I believe it is particularly important for both journalists, who are charged with explaining the world, and strategists, who are responsible for shaping it, to think like globalists. There is increasingly a seamless web between all of these different worlds and institutions, and reporters and strategists need to be as seamless as that web. Unfortunately, in both journalism and academe, there is a deeply ingrained tendency to think in terms of highly segmented, narrow areas of expertise, which ignores the fact that the real world is not divided up into such neat little beats and that the boundaries between domestic, international, political and technological affairs are all collapsing.

Let me offer just one example. For years, the Clinton Administration kept threatening to impose trade sanctions on Japan unless it eliminated certain official and hidden tariffs on a variety of goods. But every time the savvy U.s. Trade Representative Mickey Kantor would seem to have won the argument inside the Administration for taking action, and the President was about to lower the boom on Japan, at the last minute Clinton would back off. Here is what I imagine was going on inside the Oval Office at the time: Kantor would walk into the Oval Office, pull up a chair next to the President and say, "Mr. President, those damn Japanese are stonewalling, they are sticking it to us again. They are not allowing our exports in. It's time we really lowered the boom. Sanctions, Mr. President. Big-time sanctions. This is the time for them. This is the place for them, and, by the way, Mr. President, the unions will love us for it." 

"Mickey, you are dead right," the President would say. "Go for it." But just as Kantor was about to leave to lower the boom on Tokyo, Treasury Secretary Robert Rubin would come in the side door of the Oval Office. 

"Ah, Mr. President," Rubin would say, "you realize that if we impose trade sanctions on Japan the dollar is going to nosedive and the Japanese could start selling all the U.S. Treasury bills they hold, and domestic U.S. interest rates will rise." 

The President would then motion to Kantor, who was halfway out the door. "Yo, Mickey, Mickey, Mickey. Come back here for a second. We've got to think this over." A few days later, Kantor would be back. He would make the same arguments. This time the President would be really convinced. He would tell Kantor: "I am not going to take it from those Japanese anymore, Mickey. Sanctions. Lower the boom." 

Just as Kantor would be about to leave to lower the boom on Tokyo, Defense Secretary William Perry would come in the side door of the Oval Office. 

"Ah, Mr. President," Perry would say, "you realize that if we impose trade sanctions on Japan, the Japanese will not renegotiate our base agreement at Okinawa, or pay for that North Korean nuclear reactor we're counting on." 

The President would then frantically motion to Kantor, who was trying to get out the door. "Yo, Mickey, Mickey, Mickey. Come back here for a second. We've got to think this over." 

This is an imaginary scene, but I would bet a lot of money it bears a close resemblance to what was actually going on, and the reporter who will capture it properly for readers will not be the trade reporter, Treasury reporter or Pentagon reporter, but the one who is moving back and forth, arbitraging all three beats at the same time.  

The Yale international relations historians Paul Kennedy and John Lewis Gaddis see one of their jobs as training the next generation of American strategists. To their great credit, they decided they had to find a way to broaden their curriculum in order to produce a new generation of strategists who could think as globalists and not just particularists. In an essay they jointly authored, Gaddis and Kennedy argued that while it is important that we have particularists in every subject - having a pool of people with deep knowledge of different spheres is always important - it is also important that the particularists alone not be the ones making and analyzing foreign policy.

"These people," the two Yale historians wrote, "are perfectly competent at taking in parts of the picture, but they have difficulty seeing the entire thing. They pigeonhole priorities, pursuing them separately and simultaneously, with little thought to how each might undercut the other. They proceed confidently enough from tree to tree, but seem astonished to find themselves lost in the forest. The great strategists of the past kept forests as well as the trees in view. They were generalists, and they operated from an ecological perspective. They understood that the world is a web, in which adjustments made here are bound to have effects over there - that everything is interconnected. Where, though, might one find generalists today? The dominant trend within universities and the think tanks is toward ever-narrower specialization: a higher premium is placed on functioning deeply within a single field than broadly across several. And yet without some awareness of the whole-without some sense of how means converge to accomplish or to frustrate ends - there can be no strategy. And without strategy, there is only drift."

Some people are starting to catch on. That's why in the late 1990s the super-secret National Security Agency (NSA), which eavesdrops allover the globe, vacuuming up huge amounts of intelligence, decided it had to shift its internal way of handling information from the Cold War motto of "need to know," meaning you only got to see information if you had a need to know it, to "need to share," meaning we'll never understand the big picture unless we all share our little ones.

Maybe that explains why I gradually found that some (but by no means all) of my best intellectual sources these days were neither professors of international relations nor State Department diplomats, but rather the only real thriving school of globalists in the world today - hedge fund managers. I found myself drawn more and more to smart hedge fund managers-as opposed to diplomats or professors - because the best of them tended to be extremely well informed about global affairs and had a natural ability and willingness to arbitrage and interpolate information from all six dimensions before drawing their conclusions. One of the best of this group is Robert Johnson, who used to be a partner of George Soros. Johnson and I often remarked, after one of our conversations analyzing the world, that we were both basically doing the same thing - the only difference was that at the end of the day he was making a bet on a stock or bond and I was writing an opinion about some aspect of international relations. But we both had to go through the same arbitrage process to get there.

While six-dimensional information arbitrage is the best way to see the system of globalization, it is too complex a system to be explained by grand theories alone. The best way to explain it is often through simple stories. I mentioned that one afternoon to Robert Hormats, the vice chairman of Goldman Sachs International, and he observed: "To understand and then to explain globalization it is useful to think of yourself as an intellectual nomad. In the world of the nomad, there is no carefully defined turf. That's why the nomads were the ones who developed the monotheistic religions of Judaism and Islam. lf you were sedentary you could develop all sorts of mythologies about this rock or that tree, and think that God was in that rock or that tree, alone. But the nomads always saw more of the world. They knew that God was not in that rock. He was everywhere. And the nomads, sitting around their campfires or walking from oasis to oasis, then conveyed that complex truth through simple stories."

In the old days a reporter, columnist or statesman could get away with thinking of his "market" as City Hall, or the Statehouse, or the White House, or the Pentagon, or the Treasury Department, or the State Department. But the relevant market today is the planet Earth and the global integration of technology, finance, trade and information in a way that is influencing wages, interest rates, living standards, culture, job opportunities, wars and weather patterns all over the world. It is not that the system of globalization explains everything happening in the world today. It is simply that to the extent that one system is influencing more people in more ways at the same time, it is globalization. Murray Gell-Mann, the Nobel laureate, former professor of theoretical physics at Caltech and one of the founders of the Santa Fe Institute, once argued in a series of lectures that what I call information arbitrage is not much different from the approach taken by scientists trying to make sense of complex systems. He is right. And there is no more complex political system today than globalization, and understanding it requires the journalist and strategist to be equally complex. 

"Here on earth, once it was formed, systems of increasing complexity have arisen as a consequence of the physical evolution of the planet, biological evolution and human cultural evolution," said Gell-Mann. "The process has gone so far that we human beings are now confronted with immensely complex ecological, political, economic and social problems. 

When we attempt to tackle such difficult problems, we naturally tend to break them up into more manageable pieces. That is a useful practice, but it has serious limitations. When dealing with any non-linear system, especially a complex one, you can't just think in terms of parts or aspects and just add things up and say that the behavior of this and the behavior of that, added together, makes the whole thing. With a complex nonlinear system you have to break it up into pieces and then study each aspect, and then study the very strong interaction between them all. Only this way can you describe the whole system." 

That to me is the essence of what I consider the globalist school in international relations. But to have a globalist school, we need more students, professors, diplomats, journalists, spies and social scientists trained as globalists. 

"We need a corpus of people who consider that it is important to take a serious and professional crude look at the whole system," says Gell-Mann. "It has to be a crude look, because you will never master every part or every interconnection. You would think most journalists would do this. But they don't. Unfortunately, in a great many places in our society, including academia and most bureaucracies, prestige accrues principally to those who study carefully some [narrow] aspect of a problem, a trade, a technology, or a culture, while discussion of the big picture is relegated to cocktail party conversation. That is crazy. We have to learn not only to have specialists but also people whose specialty is to spot the strong interactions and the entanglements of the different dimensions, and then take a crude look at the whole. What we once considered the cocktail party stuff - that's a crucial part of the real story." 

So, on to my cocktail party. 


next
The Lexus and the Olive Tree 48s 

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