Clueless in Davos

As it always does this time of year, my inbox is filling up with messages of a certain kind. They all begin with: "I’m here in Davos" and then, in an intellectual form of name dropping, proceed to mention key words and phrases such as Geopolitical Risk, G-Zero World, and Rise of Regions. This, of course, sounds really heavyweight and important. But I am not fooled. Nobody knows what those words mean. The only purpose is inform me that the sender is among the elect glitterati who get invited to the World Economic Forum’s annual meeting in Davos.

You have to hand it to Klaus Schwab, the founder and CEO of the Forum. He’s the greatest showman since P.T. Barnum. Short, bald, and unimposing, he is what you envision when someone says "gnome of Zurich." Yet, despite his anti-charisma, Schwab has managed to persuade a large number of the world’s top CEOs, politicians, academics, media stars, and bureaucrats that they have to be in a cramped, second rate hotel in a cold Swiss village with mediocre skiing and food every year during the bridge weekend between January and February. Indeed, he has not only convinced these people that they have to be there, he has them begging him for invitations and prime spots on the program.

Of course, it’s a combination of competitive vanity and convenience that makes it all work. Glitteratus A begs for an invitation because he/she can’t stand the thought of not being there if Glitteratus B is there. The fact that many are there then makes it easy to do in a few days a lot of business with each other that without the meeting would take weeks or months. So, for organizing a nice party for them, the glitterati each pay Schwab anywhere from $50,000 to several hundred thousand dollars. I told you he’s the best since Barnum.

The theory of Davos is that Davos man is setting the agenda for and leading the charge toward a fully globalized system of international relations. It is at the annual meeting that the Masters of the Universe divine the alignment of global forces and develop the marching orders that will guide them through the year after they descend from the mountain.

The reality is quite different. At the Davos meeting in 1997, Southeast Asia was designated the most dynamic region in the world. Only three months later, the Asian financial crisis that became a global crisis was triggered when Thailand effectively fell into bankruptcy. None of the seers and whiz kids at the annual meeting had even hinted at the possibility of such a development. And when the crisis struck, the Davos men running each of the concerned countries could not develop an agreed response. Indeed, the Asian Davos men/women totally rejected the solutions imposed upon them by the European and American Davosers.

Similarly, at the Annual Meeting of 2008, none foresaw the bailout of Bear Stearns, the failure of Lehman Brothers, or the collapse of real estate markets in the United States and Europe. Nor in 2010 did the Davos elite foresee the need that quickly arose in the spring for a huge stability fund to deal with the financial crisis of Greece and other peripheral European countries. In short, Davos man has consistently proven clueless and unable to set an agenda with regard to the global developments on which he is supposed to be the expert.

This is actually not surprising in view of the forum’s two major flaws. The first is that the Davos meeting is a gathering of the global establishment. By definition, establishments are slow and even unable to see and understand developments that run contrary to the orthodoxy of the establishment. One should never expect the unexpected from an establishment institution. The second flaw is even more serious. It is that the theory of globalization underlying the Davos concept is false. That theory holds that globalization is a win-win economic movement that will enrich the whole world and thereby lead the nations to democracy and eternal peace.

This is false. Or, at least, it is false under present circumstances. Free trade and globalization are not necessarily win-win propositions. Indeed, they are only win-win on the basis of very restrictive assumptions such as that exchange rates are fixed, there are no cross border capital or technology flows, and there is no unemployment. Since these assumptions mostly don’t hold in today’s global economy, the truth is that globalization may well be a losing proposition depending on many circumstances. Certainly in today’s circumstances, the incentives in the global economy are such as to tend to move production and wealth creation out of the United States to off-shore locations. They are also such as to tend to create unsustainable imbalances in global trade and capital flows. Thus, Davos suffers from a great and irreconcilable internal contradiction. The kind of globalization that is its raison d’etre is unsustainable, ultimately even for Davos man/woman.

This was confirmed this morning by none other than the New York Times which, in its lead editorial, commented that the United States cannot rely upon some "unseen hand" to guide development of its economic policy. The Times didn’t learn that in Davos where Adam Smith’s unseen hand of the market is the dominant GSP device.

Maybe the Times has learned what the true cognoscenti have long known. Anyone interested in knowing what’s really happening or in changing the way things are doesn’t go to Davos.