Third Millennium Capitalism: Convergence of Economic, Energy, and Environmental Forces

Third Millennium Capitalism

THIRD MILLENNIUM CAPITALISM Convergence of Economic, Energy, and Environmental Forces

WYATT M. ROGERS, JR.

QUORUM Westport, Connecticut • London

Library of Congress Cataloging-in-Publication Data Rogers, Wyatt M. Third millennium capitalism : convergence of economic, energy, and environmental forces / Wyatt M. Rogers, Jr. p. cm. Includes bibliographical references and index. ISBN 1–56720–360–4 (alk. paper) 1. Capitalism. 2. Twenty-first century—Forecasts. 3. Corporations. 4. Power resources. 5. Sustainable development. I. Title. HB501.R673 2000 330.12'2—dc21 99–40338 British Library Cataloguing in Publication Data is available. Copyright  2000 by Wyatt M. Rogers, Jr. All rights reserved. No portion of this book may be reproduced, by any process or technique, without the express written consent of the publisher. Library of Congress Catalog Card Number: 99–40338 ISBN: 1–56720–360–4 First published in 2000 Quorum Books, 88 Post Road West, Westport, CT 06881 An imprint of Greenwood Publishing Group, Inc. www.quorumbooks.com Printed in the United States of America TM

The paper used in this book complies with the Permanent Paper Standard issued by the National Information Standards Organization (Z39.48–1984). 10 9 8 7 6 5 4 3 2 1

Contents

Tables

ix

Preface

xi

Acknowledgments

xv

Introduction The Approaching New Era: Overview of Expected Changes Mandates for the Twenty-First Century

1 1 5

Part I: Capitalism and the Emerging Global Economy 1. Economic Forces in Modern Capitalism Capitalism: A Historical Perspective Globalization as an Economic Strategy Political and Economic Developments Affecting Capitalism Evolving Economic Concepts

11 11 18 22 33

2. The Third Millennium Corporation

53

The Corporation: The Emerging New Setting Developing a New Corporate Structure and Philosophy

53 57

The Corporation and the Global Economy The Corporation and Society

72 75

vi • Contents

The Evolving Third Millennium Corporation 3. Economic Development Challenges Developing Local Economies in a Global Market

77 81 81

Foreign Investments in Domestic Industries

87

Workforce: Composition and Changing Conditions

88

Urban and Rural Economic Development

92

Footloose Industries

94

The Special Case of Indigenous Populations

97

Economic Development Strategies for the New Era

98

Part II: Global Energy Resources 4. Energy Demand and Supply in the Global Economy

103

World Utilization of Energy

103

Electric Energy in the United States

111

Energy Resources and Technologies for the Twenty-First Century

114

5. Issues and Options for Energy Development

127

Global Energy Policy Issues

127

Fostering Optimum Energy Resources Utilization

134

Energy Conservation

138

Transformation of the Electric Utility Industry

140

Global Energy Development and Socioeconomic Progress

149

Synopsis of Future Global Energy Concerns

150

Part III: Managing Global Environmental Resources 6. World Environmental Concerns

155

The Global Environmental Challenge

155

Atmospheric Resources and Pollution

159

Water Resources

168

Land, Vegetation, and Wildlife

172

Environmental Protection and Mitigation

175

Recycling: A Tenet of the New Environmentalism

177

Global Environmental Policy Issues

178

Contents •

7. Capitalism and the Environment Evolution of the Environmental Ethic

vii

183 183

Environmental Resources Conservation Industrial Pollution Control

187 192

Private Industry Roles in Environmental Protection

193

8. Toward a Sustainable Global Environment The Environmental Goal: Meeting Human Needs

195 195

Strategies for Global Environmental Protection

197

Part IV: Capitalism in Transition 9. Convergence and Synergy Converging Forces in Third Millennium Capitalism Synergism in Capitalism 10. Energy, Environment, and Economic Growth

207 207 218 221

Economic Growth: Dependence on Capitalism and Energy Energy Conservation Mandate Energy Requirements in Developing Nations

221 222 223

11. Capitalism in the Third Millennium A New Capitalism Paradigm Changing Conditions and Outlook for Global Capitalism Private Industry and the Public Sector The Corporation as a Human Institution Improving Accountability in the Private and Public Sectors Globalization and Capitalism Global Governance Capital Formation and Mobility

227 227 235 240 248 252 255 258 262

Conclusion

265

Bibliography

269

Index

273

Tables

3.1 Civilian Noninstitutional Population—United States 3.2 Labor Force and Participation Rates—United States 4.1 World Energy Usage 4.2 Energy Production and Consumption—United States, 1996 4.3 Energy Consumption by End-Use Sector—United States, 1996 4.4 Comparison of Energy Resource Estimates by Resource Type—United States 4.5 Electric Generation by Type—United States, 1976, 1986, 1996 6.1 Sources of Carbon Dioxide in the United States 6.2 Growth in Atmospheric Greenhouse Gases

89 90 104 105 106 110 111 161 162

Preface

As an engineer–economist–administrator for over 35 years in the fields of economic development, energy resources, and environmental protection, I have observed an increasing convergence of issues in these three areas, which I believe will present great challenges for capitalism in the Third Millennium. This convergence lies in the increasing scales of population settlements, technological innovation, industrial development, and energy resource utilization and the resultant larger and more lasting impacts of these activities on the natural and human environments. We are witnessing unprecedented population and economic growth and technological change on a worldwide basis. We are also experiencing environmental degradation in many regions of the world, which is no longer limited to localized impacts. Global warming of the atmosphere, air pollution, and contamination of large water bodies are becoming increasingly evident on multinational and even global scales. The implications of the world population explosion mandate global as well as national and regional actions if mankind is to survive with any sense of equity and reasonable standard of living. I believe we must develop new approaches to economic development and energy resource utilization if the global environment is to be preserved in a form suitable for human habitation in the Third Millennium. We must rein in our international gluttony for resource exploitation and instead deploy the technologies and resources of private industry and the public sector in embarking upon a new course, one that is truly tailored to both human needs and the natural environment. This will require

xii • Preface

adoption of new philosophies and commitments by the private sector, and new services and regulatory roles for governments at all levels. While free-market economists argue for comprehensive privatization and globalization of markets and international policy analysts push for worldwide governmental institutions to cope with the needs for international cooperation, such globalism is not a utopian solution; at best, it can help provide a framework for resolution of globalwide issues within a complex mix of national, regional, and tribal economies. The primary thesis of this volume is that democratic capitalism should be the institution through which economic needs of the world are fulfilled during the Third Millennium. The resources and compassion of both the private sector and government must be mobilized through orderly and appropriate economic development, prudent energy and natural resource management, and enlightened environmental protection. These three areas are closely interrelated through choice of technology, rate of development, location, ecological conditions, and cultural and political context. The private business organization, as the centerpiece in the capitalistic economic system, is likely to be confronted with challenges regarding its philosophical, legal, strategic, and structural makeup as it engages in the great changes of the new era. No one, of course, can be highly specific as to the precise nature of these future changes, especially over longer time frames. Nevertheless, preconditions and trends already begun in the late 1990s are likely to be instrumental in many of the great changes to be realized in the new era. Industrial development has become highly energy-intensive. Global supplies of petroleum, coal, and other fossil fuels are limited and their utilization must be stretched out in the interests of both economic progress and environmental protection. The choice of fuels and energy conversion technologies can have widely different environmental impacts depending upon socioeconomic conditions of the locale involved. Equally important is growing depletion of finite fossil fuel resources. The wider deployment of sustainable or renewable energy technologies, such as wind, solar, biomass, and geothermal, can augment conventional energy sources in providing electric power and fuels in more environmentally benign ways and without fear of resource depletion. A parallel thesis is that governmental and other public institutions, in democratic as well as in more socialistic systems, should play major roles in providing the infrastructure and legal frameworks for these developments. A reality is that forms of socialism or communism are likely to be evident for the foreseeable future in various parts of the world. Greater public participation in shaping society will become increasingly important in both the public and private sectors. The current rhetoric about the desirability of “limited government” notwithstanding, the public

Preface • xiii

sphere has significant responsibilities in providing a proper environment for human advancement and in moderating behavior in the private sector. Finally, I believe that more humane and culturally sensitive initiatives are called for in the private sectors of industrialized nations as well as in other countries where oppression is rampant, where human rights are suppressed, and where violence, poverty, and starvation are widespread. As the world’s population approaches the six billion mark and the U.S. population reaches 300 million around A.D. 2000 or shortly thereafter, we must devote unprecedented efforts and commitment to the critical tasks of managing the resources of Planet Earth and providing for the burgeoning demands of its peoples. This will doubtless require a high degree of collaboration among nations and between private industry and government.

Acknowledgments

My appreciation is extended to several persons who provided inspiration and guidance during preparation of this book. First, I wish to acknowledge the encouragement of Robert Siek, now Vice President of Jacobs Engineering, over a 20-year period, which led to my increased involvement in environmental issues. Second, A. David Lester, Executive Director of the Council of Energy Resource Tribes, inspired me to examine the emerging energy issues of both Native Americans and society at large. Third, Anna Grace Patterson, recently deceased, provided encouragement and technical guidance in the development of the manuscript. Fourth, the staff at Greenwood Publishing Group, including Dr. James Sabin, James Dunton, and Lisa Webber, provided invaluable guidance in the editing and publishing process. And last, but certainly not least, has been the support of my wife, Billie, who encouraged me to take the time to actually write the book that had been dreamed about for some time.

Introduction

THE APPROACHING NEW ERA: OVERVIEW OF EXPECTED CHANGES With the year A.D. 2000 approaching, there has been much speculation as to the global outlook for capitalism and socioeconomic advancement. Will the Third Millenium usher in an era of great human progress? To what extent will future generations enjoy increased longevity, better health, higher living standards, and improved economic security? Or will the new era bring about chaos, socioeconomic decline, or environmental disaster? What business opportunities and responsibilities will the private sector encounter during this era of expected accelerating change? Futurist John Naisbitt, in his book Megatrends 2000, predicts massive changes in many aspects of the economy, political life, and society. Most of his predictions are quite positive, indicating that things will get better for much of mankind. He says it will be “a golden age in human history.” He adds that much of this progress will not be dependent upon technological advances, “but because of an expanding concept of what it means to be human.” Other analysts, such as Amory Lovins, Paul Erlich, and the authors of the Limits to Growth, take a more somber and pessimistic view of the world’s economy and environment. The Club of Rome authors of Limits to Growth predict dire environmental consequences in the next few decades unless population growth and natural resource exploitation are drastically reduced. Some of these predictions have been largely discred-

2 • Third Millennium Capitalism

ited as biased and unreliable; however, the present growing concerns over global warming and other environmental issues lend credence to some of these earlier alarms. In his 1970 book Future Shock, Alvin Toffler describes some of his expected societal changes over the next few decades. Although his book was written almost three decades ago, many of his predictions are still quite relevant. Indeed, some have already come to pass. A main point of his book was that the scope and pace of technological and societal changes will have profound effects on the ability of individuals, families, and communities to cope adequately with the stresses imposed on virtually every aspect of their lives. Whether one takes the optimistic or doomsday point of view, it is safe to state that major changes can be expected, some desirable and others unfavorable. The sheer size and explosive growth rate of the world population will generate enormous markets for goods and services. This great populace will also place unprecedented strains on world resources. Growing incomes and access to material needs will boost living standards in some regions, while poverty, disease, oppression, and starvation may be the fate of an increasing number of people in other areas of the world. Economic progress is likely to be highly varied among the industrialized and the developing nations. The income gap and standard of living differential between the “haves” and “have-nots” will probably continue to grow unless great measures are taken to raise living conditions for the lowest income groups. More than 30 years ago, President John F. Kennedy stated that “a rising tide lifts all the boats.” Unfortunately, this concept has not applied to recent socioeconomic developments around the world, including the United States. Per capita incomes of industrialized nations typically range from approximately $19,000 to $24,000 with Japan and the United States leading the pack. Among the developing nations, however, per capita incomes vary between around $120 for Ethiopia, $350 for India, and $1,300 for Colombia. The incomes for most other developing nations are in this range. This huge income gap between the industrialized and developing nations is likely to remain for the foreseeable future. In many of the developing countries, great poverty exists among the masses while a small, but often oppressive, ruling class enjoys substantial wealth. Even in some of the industrialized nations such as the United States, the income gap has actually widened in recent times. According to U.S. Internal Revenue Service data, the working poor (those families of four earning less than $20,000) who filed tax returns grew from 39 percent to 45 percent between 1970 and 1993. Meanwhile, the middle class ($20,000 to $75,000) shrank from 57 percent to 47 percent, and the number of affluent taxpayers (over $75,000) doubled, growing from 4 percent to 8 percent of the taxpaying public. Among the affluent, the top

Introduction • 3

1 percent experienced income growth of 215 percent between 1980 and 1992, from an average of $147,700 in 1980 to $464,800 in 1992. The bottom 90⫹ percent received an average income increase of 67 percent, or raises from $13,200 in 1980 to $22,100 in 1992. When taking inflation into account, people in the middle and lower income brackets suffered actual declines in real income over the past 15 years. World population growth has been explosive in recent decades and is now estimated at approximately 6 billion. Annual growth has averaged 1.7 percent in recent years and at this rate world population is expected to reach 6 billion in a few years. Much of this growth is projected in the developing nations of Africa, Asia, and South America despite efforts to reduce birth rates in some nations such as China. In the United States, population growth is continuing at a lower but steady rate with the total currently estimated at about 270 million. As of 1950, one-half of the world’s peoples lived in industrialized nations. By the early part of the twenty-first century, less than one-sixth will live there. This does not mean that the industrialized nations will lose population; to the contrary, most of them will continue to grow at relatively modest rates. It does mean that most of the world’s population growth will occur in the poor, developing countries. The industrialized nations now contain about 25 percent of world population, but they consume approximately 82 percent of world resources. These resources include minerals, timber and agricultural products, and energy fuels (coal, oil, natural gas, uranium, and biomass). These data confirm that industrialized nations are highly resource-intensive and that accelerated industrialization may place unsustainable burdens on world resources unless major improvements are achieved in materials and energy conservation and waste products recycling. Technological change accelerated significantly during the 1990s with the advent of new pharmaceuticals that promise breakthroughs in the fight against cancer, heart and other diseases, as well as AIDS. Telecommunications became a major growth industry as multichannel cable TV, satellite systems, cellular telephony, fiber optics, and the Internet offered new means of providing vast amounts and types of information and entertainment to homes and businesses. Other technological innovations in space research, energy systems, automotive safety and performance, composite materials, high-speed digital computers, and intensive agriculture, to name a few, were introduced over the past several decades and promise to undergo further advances in the New Millenium. Great technological strides are predicted in such areas as biomedical therapy and other aspects of the life sciences, computer systems, high-definition television, integrated communications, space exploration, and materials. Political, socioeconomic, and cultural changes around the globe will

4 • Third Millennium Capitalism

also have a major bearing on corporate strategies for marketing and production. Many American corporations are already well entrenched in foreign countries, having established manufacturing and/or marketing systems in many overseas venues during the past 10 to 15 years. Since “multinationalism” and “globalization” have been the magic words in corporate planning during the last few years, it behooves businesses with foreign aspirations to become expert in the political and sociocultural as well as economic aspects of their markets and operating environments. Many of these corporations are becoming increasingly multinational in ownership as well as operations. No longer are multinational corporations solely European or American-owned ventures; many have a wide variety of foreign shareholders or joint venture partners. Of course, the same is true of many foreign-chartered corporations in which Americans hold significant ownership. The impending economic partnerships among the European nations portend potential markets and competition for American businesses. Formation of the new European Union signifies the coming integration of the monetary systems and much of the economies of Germany, Great Britain, France, and other nations of Europe. However, France and other nations seem to be concerned recently about the potential of EU multinationalism in undermining their national sovereignty. Time will tell if such concerns are warranted. In any event, the combined financial and other economic resources of the EU are enormous and will likely have a major influence on global trade. During the next few decades, environmental degradation could accelerate significantly unless large-scale corrective measures are taken. Concerns have been raised increasingly regarding such environmental issues as global climate change, ozone depletion, water pollution, acid rain, toxic waste management, nuclear waste control, and loss of wildlife, wetlands, arable lands, and forest habitats in many regions of the world. Accelerated population growth, industrialization, and urbanization will no doubt add greatly to the current concerns about the fate of the world’s natural environment. Many of these environmental effects transcend state or national boundaries, and a few, such as global warming, are apparently becoming worldwide in scope and impact. Timely human intervention is crucial. What mechanisms do we need to mitigate our global environmental challenges? What level of commitment will be required by individual nations and international governmental bodies? To what extent will private industry be affected? The approach of the Third Millenium has significant religious and metaphysical implications for many people. Some have predicted the end of the world as the year A.D. 2000 arrives. Others have prophesied the Second Coming of Christ, while still others have predicted cataclysmic events of nature. Some groups holding such apocalyptic beliefs have sold their

Introduction • 5

possessions, quit their jobs, and moved to remote communes to be ready for the expected supernatural events. These groups are withdrawing from society, oblivious to the welfare of others. While no doubt groups holding such beliefs are in the small minority of the world’s citizenry, their activities could spill over into more orthodox societal norms and have some effects on public policy and the private sector. For perhaps the great majority of society, however, the Third Millennium seems to be viewed as a turning point or entry into a new, exciting, and hopefully better era for mankind. Despite the self-centered orientation of capitalism, many Americans seem to believe one of the biblical references to humanitarianism, “we are our brother’s keeper,” with attendant responsibilities for converting our inherent compassion into tangible benevolence at home and abroad. MANDATES FOR THE TWENTY-FIRST CENTURY If capitalism is to survive and prosper in the Third Millennium, it must expand its focus beyond simply the market economy. Its realm of operations will likely include new institutional arrangements and cooperative ventures both within and outside the private sector. Multinational corporations must develop truly global perspectives insofar as their markets and operating environments are concerned. Notwithstanding the recent rhetoric about the virtues of “privatization,” “free-market capitalism,” and “limited government,” it seems apparent that there are legitimate and growing roles for the public sector and private industry in meeting national and global economic and other needs. Private sector enterprises also need to adopt more humanitarian philosophies toward their employees, communities, and customers. Such humanitarianism should arise out of a sense of compassion and equity as well as for enlightened economic reasons, not from purely public relations motivations. Although the bottom line will still be the driving force for corporate survival and growth, perhaps the bottom line will need to be redrawn in many cases to reflect the requirement to address these socioeconomic and environmental externalities. National pride and sovereignty will not be lost in the move toward globalization. Ethnic, cultural, and social traditions are strong and will remain important elements in defining and preserving the essence of most nations. National security will still be an essential element in public affairs, both in the United States and elsewhere. This is not to say that massive military rearmaments will be required nor that more restrictive international trade policies are warranted. Rather, enlightened trade and military policies will continue to provide for national defense and other security needs, such as fuels and foodstuffs. Aside from the purely material and technological aspects of global socio-

6 • Third Millennium Capitalism

economic change, the challenge of improving human living conditions will become even more pronounced in the Third Millennium. While qualityof-life issues certainly are not new, these may become much higher priorities for much of the world. “Poverty in the midst of plenty” will become less tolerable, especially so in the industrialized nations. The question of the responsibilities of the wealthy nations in sharing some of their great resources with the much poorer developing countries will be addressed in several arenas: national capitals, United Nations, and other multinational alliances as well as through international industry associations. Some nations including the United States, in their humanitarian and selfinterests, will continue to provide social aid and emergency relief to the poorest nations. Whether other longer-term human needs (education, health systems, economic development, etc.) of the developing nations will be satisfied via the industrialized world is very much an open question. We cannot expect either the private sector or government to bear all the burden. Despite the calls in some quarters for limited government and for government to stay out of the economy, the public sector has a similar challenge: namely, to establish and maintain the ground rules and conditions that will enhance ethical private enterprise, and that will preserve social order and the public interest regarding individual property and human rights. Government must also make the kinds of investments in social overhead or infrastructure that will foster private enterprise and community development as well as educational and other social programs in which the private sector is not a direct participant. With its inherent efficiencies in resource allocation, capitalism holds promise for improving worldwide socioeconomic conditions, at least in the long run. While socialistic or other public economic systems may appear to be more directly benevolent than capitalism, empirical evidence strongly supports the notion that private enterprise is the most effective system for enhancing the economic and social welfare of a nation. Demographic changes in the United States and other industrialized nations will have significant impacts on virtually every industry. The nation is becoming decidedly older with the over-65 population growing faster than the under-18 category. With improved health and medical care, Americans are living longer. These seniors represent a sizable market segment for industry as well as a growing political bloc. At present, the American Association of Retired Persons (AARP) is arguably the most potent lobby in Washington. The older population now comprises 12 percent of the national population, but absorbs 56 percent of the nation’s entitlements via Social Security, Medicare, and so forth. The United States has the highest life expectancy for persons at age 80 in the world, yet it has one of the highest infant mortality rates among the nations. The great emerging issue is “Who gets, who pays?” according to former Colorado Governor Richard

Introduction • 7

Lamm. The entitlements trust funds, now quite solvent, are expected to reach insolvency in the next 30 to 40 years unless major corrective actions are taken. The implications are, of course, that the younger generation now paying into the funds may not be able to enjoy the same benefits when it reaches retirement as the present older generation is experiencing. Another possibility may be a new requirement that people must reach an older age before drawing benefits, say age 70 or 75. It is almost certain that higher payroll deductions for Social Security and Medicare will be part of the reform packages when they emerge from Congress within a year or so. Major population shifts among the U.S. geographic regions since World War II have occurred in both north-to-south and east-to-west directions with the West and the South experiencing significant population growth and economic expansion. These movements have greatly influenced the facility expansion plans and marketing patterns of American industry. Concurrently with these large-scale regional demographic shifts, the population of most urban and metropolitan areas continues to grow at a rapid clip. Over the past 50 years, the nation’s population shifted from rural communities to the cities, followed by expansion of suburbs surrounding the major urban centers. These movements have usually followed industrial expansion and job growth. Demographers and economists are not all in agreement as to the forces that will influence industry location and population settlements in the future. Some say that a “chicken and egg” proposition in involved here: Does industry locate where the potential workforce and markets are situated, or do potential employees move to where the jobs are? Obviously, both of these questions can be answered, to some extent, in the affirmative. However, myriad other factors are involved in plant location and job decisions. Usually, the bottom line is economics for a corporation, and for an individual employee it is economics plus a variety of qualityof-life considerations. The fundamental laws of conservation of matter and energy are still operative despite the world’s gargantuan appetite for using its natural resources. Every drop of water that was on Planet Earth eons ago is still here; it has been relocated or changed in form countless times. Its legal ownership has also changed many times. “Water runs uphill, chasing money,” as the saying goes. The same principle applies to other natural resources. One of the great issues of the Third Millennium is not the scarcity of natural resources; rather, it is the management and equitable distribution of these resources for the benefit of the world’s citizens. Capitalism should play a central role in global resource management and human advancement. In this sense, “resources” are to include all economic, human, natural, and technological resources that interact in the capitalistic system. In order for capitalism to achieve its potential for

8 • Third Millennium Capitalism

contributing to global progress, however, its institutions must undertake a commitment to human and environmental advancement in a wholistic manner. Narrowly focused and fragmented approaches currently employed in corporate and governmental planning must be replaced by integrated processes that reflect broader societal issues, not just bureaucratic or self-serving objectives.

PART I Capitalism and the Emerging Global Economy

1 Economic Forces in Modern Capitalism

CAPITALISM: A HISTORICAL PERSPECTIVE With the advent of the Third Millennium, the economic welfare of the burgeoning world population comes into question. Can private enterprise, the capitalistic system, become sufficiently engaged in the world’s enormous economic, social, and environmental issues so as to achieve a reasonable degree of prosperity for its corporate participants and equity for the public at large? Will capitalism remain the principal source of human progress? Capitalism emerged out of the old feudalism and mercantilism economic systems of England and Europe and reached full flower in the New World. There is no universally accepted definition of capitalism: it means different things to different people. Generally, however, a popular description is that capitalism is the “type of economic system which is characterized by private ownership of property, freedom of enterprise with expectation of profits and competition, and freedom of choice by individual consumers” (Collier’s Encyclopedia, Vol. 4). While capitalism is usually regarded as the most virtuous form of economic system, it can have its ugly manifestations. Monopolistic trusts and cartels became widespread in the United States and elsewhere during the late 1800s and early 1900s. Well-known examples were the Standard Oil empire of John D. Rockefeller and U.S. Steel Corporation founded by banker J. P. Morgan in 1901. U.S. Steel became the first billion dollar enterprise in history. Other huge businesses reached monopolistic proportions during the

12 • The Emerging Global Economy

1950s and again during the 1970–1990s as governmental antitrust activities were virtually nil during these periods. The most extreme form of private ownership, of course, is slavery, hardly a virtuous economic enterprise. Other despotic forms of capitalism were widespread in ancient times and are still extant in parts of the world where the ruling capitalistic class holds property rights and the masses are largely defenseless against it. On the whole, however, the freeenterprise system has been liberating and rewarding for the overwhelming majority of its participants, particularly when it operates within a participatory democracy or representative republic. Adam Smith, liberal economist, in his famous book of 1776, The Wealth of Nations, spoke of the “natural order” of liberty and the need for freedom from government intervention in maximizing individual self-interest and free enterprise. This remains a cardinal doctrine in laissez-faire capitalism, the most conservative form of capitalism, which exalts the merits of unrestrained prerogatives of business owners. The English and Dutch pioneered the use of the joint-stock company and regulated stock company on a widespread basis during the early 1600s. The English East India Company and the Dutch East India Company became formidable organizations in establishing trade operations in India and other parts of the Orient. These companies were quite colorful and were granted great powers by their charters. They coined money, passed laws, maintained armies and navies, waged war, and signed peace treaties. The English company, particularly, governed almost unilaterally a vast domain for many years. In several respects, these companies were forerunners of the modern corporation with multiple ownership and sharing of profits. At the founding of the United States, the economy was based largely on subsistence agriculture in one form or another with rudimentary mercantilism in the cities. Capitalism was practiced at the elementary level based largely on human labor with minimal borrowed capital. As the nation began to expand, federal and state governments became increasingly involved, especially in building the nation’s infrastructure of roads, canals, bridges—those essential transportation and national defense facilities that the private sector would not develop unless a profit could be clearly foreseen. As a matter of fact, private industry did build some toll roads, canals, and bridges, but most of these were unprofitable and eventually abandoned. The Industrial Revolution that began in England and later swept through the United States around 1800–1812 brought the factory system into being as well as the rise of consumerism. Aided by the introduction of steam power and the expansion of the railroads, mass production of durable goods as well as textiles and wood products brought about a great wave of prosperity, job creation, and urbanization. During this period, scien-

Economic Forces in Modern Capitalism • 13

tific management was introduced to the manufacturing industries via the works of Frederick W. Taylor and Henry L. Gantt. This era brought with it the need for heavy capitalization of industry and requisite expansion of the financial industry. The federal government was heavily committed to creating the proper economic environment for the private sector during the late 1800s and early 1900s. The nation’s transportation system, particularly deep-water seaports and highways, was expanded largely with federal funding. However, railroads and shipping industries were established and operated principally within the private sector. Government aided railroad expansion substantially through land grants and low-cost rights-of-way. Territorial expansion westward to the Pacific Coast was facilitated greatly by the railroad system. In the nineteenth century, most economic thinkers held that government’s main role in a developed capitalistic system was that of policeman, to preserve law and order, uphold the sanctity of private property, and give business as much freedom as possible. Later, this philosophy was epitomized by President Calvin Coolidge in 1923, who said, “The business of government is business.” Private enterprise was regarded as the primary engine for economic growth, and government was to establish and maintain a national defense capability and to enact only those regulations necessary to prevent social chaos. As a general rule, most industrialists were not concerned with what was not intimately associated with their businesses. George F. Baer, coal and railroad magnate, in 1902 was quoted as saying, “The rights and interests of the laboring man will be protected and cared for—by the Christian man who God, in His infinite wisdom, has given control of the property interests of the country.” These and other statements of the wealthy class during this period did not endear the industrialist to the public. Apparently, most industrialists were largely oblivious to public relations, since property rights and economic and political powers of big business were protected from public scrutiny by the laissez-faire policies of government. The public image of the industrialist was that he was an uncouth, avaricious, ruthless, antisocial moneygrubber. Farmers often portrayed industrialists as being responsible for sinful metropolitan ways of life and luxurious living to which they ascribed the decay and fall of civilization. American capitalism and government’s role in the economy underwent sweeping, fundamental changes during the Great Depression of the 1930s. This economic disaster, which was unprecedented in American history and which extended over a full decade (1929–1939), came on the heels of a period of prosperity that went amok. Abuses had crept into commercial financial practices on the expectation of further price inflation and continued high levels of industrial production. Pre-Depression inflationary commercial practices included easy credit, low interest rates,

14 • The Emerging Global Economy

and lack of margin requirements for buying securities on the exchanges, among others. Rampant speculation sent real estate prices to unprecedented heights. These activities led to the great crash of 1929, which resulted in national unemployment rates reaching 25 percent and higher in some areas, widespread bank and other business failures, a multitude of personal bankruptcies and home foreclosures, soup lines for the huge number of homeless and hungry in the cities, and nationwide malaise. A rash of suicides following the crash was just one indicator of the economic and social despondency. As a temporary measure to aid the desperate unemployed, President Franklin D. Roosevelt proposed a series of measures, one of which was the Works Progress Administration. This agency engaged hundreds of thousands of unemployed people at minimum wages in various public works projects such as building roads and parks. Under his New Deal programs, Roosevelt instituted numerous economic and financial reforms. Society clamored for correction of abuses that had been instrumental in the economic and financial crash of 1929. For the first time, government became an active participant in regulating and promoting certain aspects of private enterprise. Antitrust laws, regulatory controls over the national money supply, and measures to assure stabilization of the stock and other financial markets were among a host of governmental controls enacted or strengthened in the early stages of the Great Depression. Some of these measures were later challenged and found to be unconstitutional by the U.S. Supreme Court. However, most of these controls are still in place. The Great Depression of the 1930s changed the thinking of many economists; the laissez-faire system does not automatically provide incentives for orderly and equitable economic growth. Industry began to turn to government for certain economic stimuli. This period gave rise to Keynesian economic theory, which holds that active monetary and fiscal policies are desirable to stimulate employment and economic growth. This concept was promoted by John Maynard Keynes in 1936 in his book The General Theory of Employment, Interest, and Money, which was highly influential during the Roosevelt era. Under Keynesian economics, government actions may include direct programmatic spending, modification of federal tax rates on business, and manipulation of interest rates. Such actions may be desirable during periods of economic downturns as means of stimulating investment and economic activity in the private sector. Following the Great Depression, the nation’s economy had recovered sufficiently by 1940 to begin to address a new challenge, World War II. Mobilization of industrial production processes was undertaken on a massive, unprecedented scale. Factories and offices were taxed to capacity in meeting the war materiel requirements.

Economic Forces in Modern Capitalism • 15

During the post–World War II era, capitalism displayed its enormous capacity for contributing to national and global economic progress. Emerging from the war victorious over fascist Germany and imperialistic Japan but with great accumulated debt, the nation embarked upon the monumental task of transforming the economy from one oriented largely to military efforts to one supporting commercial, private enterprise and creation of millions of civilian jobs. This effort was, of course, highly successful, not only for the United States, but also for the allied European nations and Japan, which were beneficiaries of the U.S. postwar reconstruction programs such as the Marshall Plan. The period beginning around 1950 and continuing through the 1970s was marked by substantial economic progress as measured in increased per capita income, business productivity, investments in new capital resources, innovation, relatively low unemployment, and moderate price inflation. Societal progress was noted in the areas of personal health, educational attainment, life expectancy, and cultural pursuits. Overall, this period was a prosperous, progressive one in American history. During the 25 boom years following World War II, economic productivity doubled. However, between the mid-1970s and the early 1990s, the promise of ever-rising and more widely shared prosperity diminished markedly. Before the administration of President Ronald Reagan, economic productivity grew at an average annual rate of about 3 percent; however, from 1973 to 1991, annual productivity advanced by an average of only 1 percent. Wages for most Americans stagnated for two decades. Deregulation of several key industries that previously enjoyed natural monopolistic positions under federal and state laws occurred during the Reagan administration. These federal actions included the breakup of the giant telephone system of American Telephone and Telegraph as well as deregulation of airlines and interstate trucking firms. Banks and savingsand-loan industries likewise were largely deregulated. As a result, competition was increased substantially in these industries. Postwar economic thinking shifted again with the advent of the Ronald Reagan era. Ongoing and fairly balanced arguments among Keynesian economists, laissez-faire conservatives, and moderates gave way to a strident rhetoric of conservative politicians and economists who sought to impose a new brand of ultraconservative politics in American society. Ronald Reagan promised to “get the government off the backs of business” and to “break the back of inflation,” which had been ravaging the economy for several years. He attempted to implement some economic concepts that had long been advocated by conservative economists: namely, “supply-side economics,” “Laffer curve,” and “trickle-down” economics. These ideas were not new to the business and economics communities, but he put them into a political context suitable for governmental policy action.

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The economic record of this period makes clear that the Reagan administration’s application of these concepts was faulty and inept, and resulted in generally adverse effects on the national economy. Overall personal income growth was sluggish at best during this period. The modest growth that was achieved, however, was enjoyed by the wealthiest 1 percent of Americans, whose incomes doubled while income growth at the lowest income categories actually declined. The idea that economic advance of the upper income classes would “trickle down” and thus give prosperity to the middle and lower income groups did not materialize. The concept was rejected by many middle and lower income groups, which considered trickle-down economics an arrogant tool to enhance the wealthy class at the expense of others. Reagan strongly advocated expansion of the nation’s military capabilities and was successful in gaining approval for major increases in defense spending. While this benefitted corporate participants in the militaryindustrial complex, it also resulted in massive increases in deficit spending and the national debt during several consecutive years. However, the buildup of the American military arsenal was at least partially responsible for neutralizing the military threat of the former Soviet Union at a time when glasnost and perestroika were beginning in that union. Income growth of the wealthiest citizens was substantial due to significant tax reductions enacted by the Reagan administration, but this large increase in disposable income did not result in a significant amount of job-creating investment as had been projected by advocates of the tax breaks for the wealthy. One positive result of the stringent interest rate and related policies of the Reagan administration was that the rate of inflation was reduced substantially. Nevertheless, inflation reduction came at the large price of rising unemployment and stagnating personal incomes. By the end of the 1980s, the national poverty rate was 20 percent higher than it was in 1973. Americans in the top 20 percent of the income bracket controlled 44.6 percent of all U.S. income while the bottom fifth controlled only 4.4 percent. Per capita income grew slightly overall, mostly due to the growth of the wealthiest sector. Average wage rates, adjusted for inflation, actually declined over the period 1973 to 1997, from $11.35 per hour to $10.49 per hour, according to Commerce Department data, but have recovered slightly since. Economic sluggishness continued with only modest improvements during the administration of President George Bush, who continued many of the economic and fiscal policies initiated by Ronald Reagan. Unemployment improved slightly from over 9 percent to 7.5 percent; however, productivity, job growth, and industry profits stagnated during Bush’s term in office. After this long period of stagnation, the economy made a remarkable

Economic Forces in Modern Capitalism • 17

recovery during 1995–1998 with major reductions in unemployment, greatly improved business activity, and a modest rise in incomes and wage rates. Remarkably, there has been dramatic employment growth with virtually no inflation, contrary to conventional wisdom. According to the 1999 Economic Report of the President, about 3 million new jobs were created during 1998. Unemployment dropped to around 4.5 percent during 1998, virtually full employment. Productivity increased by 2.1 percent in 1998 compared with 1.7 percent in the preceding year. Wage rates appear to be rising modestly for the first time in several years. Much of the employment growth, however, has been in the service industries, which are known for their relatively low wage rates and lack of potential for upward mobility and advancement of employees. By mid-1998, some employment increases were also noted in manufacturing. Gross domestic product showed a 3.7 percent growth over the year 1997. Also, federal deficits were cut by 63 percent, from $290 billion to $107 billion in fiscal 1996. Deficits fell from 4.7 percent of GDP to 1.4 percent of GDP during the same period. For the first time in almost three decades, the federal budget experienced a slight surplus in 1998. Federal employment, likewise, has been reduced from a postwar high of 3.8 percent of total employment in 1953 to 1.8 percent in 1996. Productivity has increased at annual rates of slightly over 3 percent, and industrial capacity utilization has gradually increased from a low of 72 percent a few years ago to 83.3 percent. The securities markets have shown phenomenal growth during the past decade. The Dow Jones Industrial Average increased from 1,738 as of October 19, 1987, to over 10,500 in June 1999. Gains of over 1,700 points in the Dow were made during 1997 alone. Corporate profits during 1996–1998 were at record levels. Dividends and overall shareholder values also increased markedly during this period. After their meteoric rise in 1997–1998, the securities markets nosedived briefly in the autumn of 1998 on news of the financial crises in Southeast Asia, Latin America, Russia, and continued economic troubles in Japan. However, indications that stability was returning to these foreign markets and that the American economy was still showing strong economic progress were instrumental in a significant turnaround in Wall Street prices. The Dow Jones average climbed quickly to record-high levels in November 1998. These wide fluctuations in securities prices over such a short time period suggest an increasing volatility in globalized financial markets that is exacerbated by the growing linkages among established and immature economies. The 1995–1998 economic recovery was long overdue. The protracted recession of the 1980s and early 1990s was exacerbated by sluggish markets and relatively high interest rates, which collectively did not provide

18 • The Emerging Global Economy

sufficient incentives for private investment in industrial development. The trickle-down economics policy was found not to be operative when there were “few folks down there with buckets big enough to catch the trickle.” Further, the supply-side economics theory, which is based on maximizing productivity, became an excuse for the Reagan administration to abolish many regulatory controls as a cost-cutting scheme for the benefit of big business. What was deficient during this period was not “supply-push” but “demand-pull” economic forces. Reductions could be made in operating costs and consequently in prices, but unless adequate consumer income is generated to support demand in the markets, economic growth and business profits would not materialize. Business expansion was suppressed during this period due largely to slack consumer demand, which in turn was held down due to low income growth and above-normal unemployment. The lack of growth in disposable income for the great majority of consumers had inhibited expansion of the market. GLOBALIZATION AS AN ECONOMIC STRATEGY Economists and politicians have begun to recognize the increasing importance of a global orientation for private enterprise. Foreign governments and corporations are developing strategies for penetrating global markets. For many firms, world trade has been a fact of business life for years; however, only in the past few years have industrialists and politicians begun to espouse “globalization” as a major business strategy. Conservative economists have advocated “free-market” globalization featuring elimination of import and export quotas and tariffs among trading nations as a means of affording maximum possible production and consumption at competitive prices. Under ideal free-market conditions, genuine international competition would be possible, bringing lower prices and greater availability of goods and services in the aggregate. Corporations would compete in both national and world markets on the basis of true cost-price conditions, not prices inflated with heavy tariffs, underpriced due to subsidies, or sales limited by arbitrary quotas. Under free-market economics, there would be no governmental subsidies, no tariffs nor quotas; competitive conditions of the global market would be the sole factors in establishing prices. However, it may be unrealistic to expect that all trading nations will adopt free-market policies for extended time periods. Protectionism is still rampant in many industrialized countries and, to a lesser extent, in the United States. The government has been under constant pressure to limit imports of certain products that are seen as unfair competition by industry and labor unions. Elimination of American jobs due to import competition will likely be a continuing issue in future international trade negotiations.

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American corporations have exported products for decades with attendant benefits to the national economy. One economic maxim holds that maximum cash flow into a local economy occurs when a company utilizes local capital, local labor, and local raw materials and manufactures products for export outside the local economy. A similar philosophy applies on a national scale except in many cases large producers are oriented to national as well as external markets. Autarky, economic self-sufficiency, may be a laudable goal, but it is not easily attainable nor always desirable even for most industrialized economies, much less for developing nations. Thus, importation of a variety of goods and services is a fact of life in most economies. Of course, the issue is the extent to which exports and imports can be balanced to produce favorable economic results while maintaining national security. In the United States, trade with other countries has undergone tremendous growth over the past 60 years or so. In 1929, American industries exported $7.1 billion in goods while importing $5.9 billion, yielding a net surplus of $1.2 billion, or approximately 16.9 percent. By 1950, net exports were a positive $2.2 billion, with a yield of 15.2 percent. Considerable trade growth occurred during the 1950–1980 period with exports rising to $351 billion in 1980 and imports reaching $318.9 billion, resulting in a net trade surplus of $32.1 billion. However, during the 1980s, a major shift occurred in the nation’s international trade balance, turning the former steady flow of surpluses into a constant stream of deficits. The national trade deficit in 1989 was $50.8 billion on exports of $624.4 billion and imports of $675.2. The net deficit doubled to more than $114.2 billion seven years later. If domestic corporations are to operate effectively in free markets on a global scale, they must be competitive in terms of product quality and price. How is that achieved? The obvious answer is economic efficiency as defined in classic laissez-faire capitalism. Efficiency implies optimal utilization of capital and labor, including near-perfection in the employment of state-of-the-art production equipment and methods and in logistical and marketing arrangements. Free-market advocates suggest that efficiency can be achieved through open competition for every aspect of business operations that affects final sales price, including labor costs and capital. Opening of reciprocity among trading nations also opens domestic producers to increased competition at home. Over the past decade, dramatic increases in importation of foreign goods has displaced the sales of American goods in many product lines such as textiles, toys, electric appliances, and automobiles. Many products are being imported at prices under those for comparable American products, resulting in loss of business and thousands of jobs. Importation of crude oil from the Organization of Petroleum Exporting Countries (OPEC) and other foreign sources has grown rapidly over the past two decades and now constitutes over

20 • The Emerging Global Economy

one-half of domestic supplies. The United States has become highly dependent on foreign oil imports, adding substantially to the trade deficit, undermining the nation’s domestic oil industry, and posing risks to national security. It is often difficult for American firms to compete with foreign producers that employ workers at 35 cents to $1.15 per hour while workers in comparable domestic industries are paid 10 to 20 times that amount. One of the major challenges for the private sector in the next century is developing and maintaining global competitiveness under changing economic and social conditions at home and abroad. For purely domestic companies, maintaining competitiveness with foreign producers may be more difficult than that for multinational corporations, which can move production from their higher-cost facilities in one nation to lower-cost ones elsewhere almost at will. The national economy is often described, inaccurately, as a huge monolithic system that employs centralized decision making from headquarters in the financial capitals and in Washington, DC. Actually, the economy is an aggregation of millions of semi-independent economies at the corporate, regional, and individual household levels. Resources are accumulated and deployed and buying, spending, and savings decisions are made by these individual “economic units.” Decisions are made in response to perceived needs, market conditions, and the ability to pay for the desired goods and services. However, these individual economic units are rarely entirely independent of each other. Decision making increasingly is affected by factors outside the immediate purview of individual business units—factors such as interest rates on borrowed capital and credit established by lending institutions. The globalization trend is well underway and will likely be an increasing factor in both domestic and foreign capitalism. Indeed, expanded globalization seems inevitable. Increasing abilities of worldwide communications and more efficient international transportation systems will support growth in global commerce so long as peacetime conditions, economic stability, and fair trade practices exist. The latter can be enhanced via existing and yet-to-be-developed worldwide and regional trade agreements such as GATT and NAFTA. Participants in the global market will consist of: (1) domestic corporations engaged solely in exports; (2) multinational companies exporting to various foreign markets from multiple production facilities domiciled in more than one country; (3) corporations located outside the nation that import raw materials and intermediate components and assemble finished products for export; (4) firms utilizing other combinations of raw materials and finished goods in importing and exporting; and (5) providers of financial, professional, and other services.

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From the standpoint of a nation’s well-being, globalization has both positive and potentially adverse implications. As mentioned earlier, a strong national economy usually has within it a significant component for exporting many of its goods and services that generate employment and profits for private industry and tax revenues for governmental services. With a global perspective, a corporation can penetrate a vastly larger market, a market that may have more inherent stability and growth potential than simply a domestic one. However, efforts necessary to achieve satisfactory penetration of a foreign market may be substantial. Importing foreign goods will probably continue to be an economic factof-life in America due to the demand for certain goods with foreign labels, such as Italian shoes and French perfume and designer clothes, or goods available from single sources, such as coffee from South America. However, none of these goods are considered vital to the well-being or national security of the nation, as is the case with crude oil from overseas sources. The extent to which imports are in a state of imbalance with exports is a continuing national concern. Two aspects of an import-export imbalance are worrisome. First, excessive imports can undermine domestic suppliers with a potential loss of business and tax revenues and jobs for Americans. Second, overdependence of American industry on imported critical materials such as petroleum can jeopardize national security and cripple domestic industrial production. Such was the case during the 1973 oil crisis. Many multinational corporations have markets and production facilities in numerous domestic and foreign locations. While they may be chartered originally in the United States or perhaps in another country, they are organizations whose business may be anywhere they deem a profitable place to do business. Multinationals generate substantial employment and revenues and make enormous contributions to the global market as well as local economies where they have facilities. Increasing economies of scale, product line diversification, technological innovation, and growing international markets have encouraged development of multinationals and large corporate conglomerates. There may be circumstances, however, when a large multinational could utilize its superior financial power to overwhelm the political leadership and economic resources of a small nation with potential chaotic or despotic results. A multinational could take such action with its self-interest as a motive irrespective of the social or political consequences. A large corporation could undertake such action with little fear of retribution in many small nations inasmuch as there are no binding international laws governing such actions. Without a “home,” multinationals are truly global, footloose entities and may not feel obliged to exhibit allegiance to any nation, except when economic conditions continue to be favorable.

22 • The Emerging Global Economy

There are few incentives for multinationals to be patriotic during periods of national downturns since they may be able to shift economic resources quickly to other nations where they have industrial facilities. With this prospect always being at least a remote possibility, it may be unwise for a small nation to rely on the operations of a few multinational corporations as the primary sources of its economic stability. Instead, economic diversification should be pursued by such governments. Under globalized capitalism, the social expectations are that private enterprise will generate sufficient revenues and profits to create and maintain employment and income for the population and will produce tax revenues to support essential governmental activities. This becomes an increasingly challenging assignment in view of the changing socioeconomic conditions of the nation and the global markets of the next century, which include rapid population growth, aging citizenry, urbanization pressures, and environmental concerns. POLITICAL AND ECONOMIC DEVELOPMENTS AFFECTING CAPITALISM Domestic Developments Benjamin Franklin was once quoted as saying, “Democracy is a very bad form of government, but all the others are so much worse.” He was obviously referring to the cumbersome processes required in representative or democratic government systems. Another comment from times past is that the most efficient form of government would be a benevolent dictatorship in which wise decisions could be made by a single ruler on behalf of the people, thus eliminating the complex and messy democratic processes. Laissez-faire capitalism, of course, would not be feasible under such an authoritarian form of government, except perhaps a form of feudalism in which authority for capitalistic enterprises would be given by a monarch of the realm. Capitalism has flourished under democracy largely because the freedoms needed for its success have been preserved for the most part, notwithstanding the historic struggles associated with slavery and various forms of ethnic discrimination. In the Third Millennium, capitalism in the United States is expected to continue to serve as the foundation for economic progress. The extent to which capitalism can be nurtured in the developing nations is an open question. American businesses can no doubt be instrumental in encouraging capitalism in foreign nations through trade relations and cooperative business ventures. Foreign policies of the U.S. government in recent years have generally encouraged American business to establish such mutually beneficial links. In effect, the nation has sought to export capitalism as well as democracy, since the two are believed to

Economic Forces in Modern Capitalism • 23

be the best combination of political and economic systems for promoting world peace and domestic national security. Public policy on the domestic front has always stressed full employment and prosperity in the private sector as well as development of an educated and healthy populace. Long-standing differences, however, between liberals and conservatives regarding governmental policy continue to plague economic planning at the national as well as corporate levels. Historically, these debates have centered around the extent to which government should exercise its powers over the national money supply and direct governmental expenditures in stimulating or restraining economic activity. Generally, the conservative monetarists have advocated policies limited to regulating the money supply, while the more liberal Keynesianists favored more direct governmental activism to stimulate consumer spending and business investment. Other governmental roles in the economy include taxation, antitrust monitoring, regulation of rates and other aspects of businesses in monopolistic sectors of the economy, worker training subsidies, maintenance of essential public infrastructure, and technical information collection and dissemination. Among these, tax rates on corporate and personal incomes and capital gains tax policy have been under intensive scrutiny for several years. Conservatives have advocated much lower capital gains and income tax rates, especially for the wealthy, on the theory that persons in the upper income brackets would be encouraged to increase their investments in the economy, thus creating jobs in the lower income groups. Recently, the capital gains tax rate was reduced somewhat, and it is likely that there will be other proposals for further tax rate cuts. Corporate income tax rates were also reduced several years ago, having a positive effect on after-tax profits. In 1997 and 1998, corporate profits were at record high levels. Increasingly over the past three decades, two other governmental regulatory areas have become significant cost items for private businesses: environmental protection, and employee health and safety. The advent of the National Environmental Policy Act during the Nixon administration was followed by other omnibus laws concerning pollution prevention and cleanup such as the Clean Air Act, Clean Water Act, Superfund, Toxic Substances Control Act, pesticides legislation, and several others that are discussed more fully in Part IV. Further, the enactment of the Occupational Safety and Health Act brought with it comprehensive regulations concerning employee safety and the working environment as well as a large bureaucracy of field inspectors and auditors. Federal economic policy generally receives much attention due primarily to the universality of its applications. However, state, local, and tribal governments also have great influences on private business development

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by virtue of their sovereign powers to tax and otherwise regulate business activity. As more fully discussed elsewhere in this section, these governmental bodies are committed to economic growth and many, such as Indian tribes, have powers to create or invest in businesses of their own or others. Heavy competition exists among the 50 states, 3,100 counties, and thousands of local jurisdictions in attracting and developing viable economic enterprises. Under laissez-faire capitalism, policy goals and strategies for each individual business are established autonomously in their self-interest without governmental participation or interference. In practical terms, however, governmental regulations regarding such areas as employee safety, product safety, environmental pollution, antitrust, and trade practices impinge on corporate planning and operations. Thus, business investment decisions are based on all the conventional economic factors plus an array of “externalities” regarding government policy. Many of these governmental requirements involve costs to businesses and are usually complied with but not without some consternation. The great increase in federal regulations imposed on the private sector over the past two decades has spawned a rising tide of resentment and alarm by businesspersons. Many of these regulations were initiated by federal statutes such as those cited above. During the administration of President George Bush, a Council on Productivity consisting of a number of leading industrialists was established in the White House, chaired by Vice President Daniel Quayle, ostensibly for the purpose of seeking means to improve industrial productivity. In reality, the panel turned its attention to hundreds of government regulations that it considered offensive and presented its findings to the White House. Orders were then sent to the affected agencies for action, which resulted in major revisions or repeal of many regulations. In most cases, regulations were revised or abolished without opportunities for public review and comment. The extent to which this approach to public policymaking is appropriate, much less lawful or ethical, is debatable. Nevertheless, the Council was successful in eliminating hundreds of governmental regulations that it and its industrial supporters considered objectionable. The Council was disbanded, of course, as the incumbent President completed his term of office. Liberal economists and political scientists have long advocated that public policy provide for a substantial degree of central planning at the federal level as a means of developing a coordinated and uniform approach to providing governmental services and to help stabilize the economic swings associated with business cycles that are prevalent under laissez-faire capitalism. Central planning allocates resources based on its sense of collective socioeconomic needs and priorities. The ideal of central planning by the national government has long been advocated by liberal economists and politicians periodically in the United

Economic Forces in Modern Capitalism • 25

States since World War II. Central planning is, of course, a major tenet of socialism and communism. If fully implemented in a capitalistic economy, central planning would impinge greatly on the prerogatives of private industry and individuals. As a matter of public policy, the United States has heretofore resisted the concept of central planning, relying instead on the collective wisdom of the private sector. However, the nation has utilized some aspects of central planning in conducting massive technological programs. One noteworthy example is the federal program to develop the atomic bomb and later to commercialize the peaceful applications of atomic energy. The “Atoms for Peace” program, initiated by President Dwight D. Eisenhower following World War II, resulted in establishment of a large network of research laboratories and experimental facilities to develop nuclear power reactors and applications of radioisotopes for medical and industrial purposes. In the beginning of the program, virtually all research and demonstration facilities were owned by the federal government, although some were operated by private contractors. Later, the private sector was encouraged to utilize governmentdeveloped technology in private nuclear facilities. The development of the national space program is another example of centralized federal planning and development in the national interest. Others include the multistate systems of large hydroelectric plants and flood control dams in the Tennessee River valley and the Columbia River. These types of federal activities have some of the elements of centralized planning, but they are more directly associated with another aspect of Keynesian economics, namely “industrial policy.” In recent years, the very mention of industrial policy as a legitimate federal prerogative has raised objections in conservative circles. They have opposed the notion that government should favor any industry or category of industry over any other for virtually any reason. Nevertheless, industrial policy, as a practical matter, has been a part of economic thinking for many years and has been used effectively during times of economic crisis such as in World War II when key industries were given financial incentives, such as cost-plus pricing, for federal procurement of war material. Industrial policy, as a concept, provides for national encouragement to selected industries that are deemed to be essential to national economic health. Such encouragement can take a number of forms, ranging from direct federal establishment of selected industries to subsidies and other financial inducements to private corporations. The concept remains a viable option to many liberal economists but it is a virtual anathema to laissez-faire proponents and to most industrialists, except for those who are direct beneficiaries. Advocates usually link industrial policy and central planning as interdependent policy mechanisms. In recent times, conservative politicians have generally opposed most forms of national industrial policy on the grounds that it would inhibit

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competition in the private sector, contribute adversely to the federal budget situation, and move decision making to Washington instead of corporate headquarters. Actually, the United States has utilized various shades and tones of industrial policy for many decades. Today, federal policy provides import protection for the nation’s shoe industry and several others, and it has furnished matching funds for development of SEMATECH, a consortium of selected computer chip manufacturers, to support national competition against Japanese imports of computer components. After many years, federal financial support is still provided for further development of rural electrification and subsidization of agriculture. Another subsidy has been the unusually low fee of $2.50 per acre for hard-rock mining operations on federal lands, a fee that has been in effect for decades. Overall, federal industrial policy has not been executed in a coordinated manner; rather, it has been a purely ad hoc affair, influenced chiefly by actions of powerful members of Congress or the President in response to constituent pressures and industry lobbying efforts. Politicians on both sides of the Congressional aisle have decried the existence of “corporate welfare,” which consists of a variety of favors or benefits given by Congress or by regulation to individual corporations or groups of industries. A large array of special interest legislation is enacted in virtually every session of Congress, ranging from special tax breaks to outright grants for a variety of purposes. In most cases, such special interest legislation is attached as riders to other more omnibus bills and thus is often obscured from public scrutiny. The financial impacts of these forms of corporate welfare are largely unknown but are believed to be quite large. Supply-side advocates have argued for reduction in government taxation as a means of decreasing business costs and consequently fostering competition and economic growth. Some politicians have proposed a “flat tax” on both individuals and corporations at a rate of around 20 percent of income. They have argued that a flat tax rate would be more equitable to all taxpayers and would still generate adequate revenue for government operations. However, analyses by the Citizens for Tax Justice and the U.S. Department of Treasury indicate that these flat tax proposals would not accomplish their advertised goals. To the contrary, a flat tax of 20 percent would greatly increase taxpayer burden for persons earning less than $200,000 while reducing taxes for those earning over that amount. For businesses, the proposed flat tax would lower their taxes substantially. Further, under one proposal, a flat tax would completely eliminate capital gains taxes and income taxes on dividends. Therefore, wealthy shareholders would be given a substantial break in their tax burden, while other wage earners would be forced to pay higher taxes. Still another tax proposal advanced by a group of conservative Republicans is a national sales tax that would replace income taxes on both

Economic Forces in Modern Capitalism • 27

businesses and individuals. Of necessity, a national sales tax would require a rate of perhaps 15 percent or 20 percent in order to yield sufficient revenues to replace the income tax. Proponents claim a sales tax, by eliminating income taxes, would eliminate the need for the Internal Revenue Service and would result in reduced tax burdens to the poor as well as more affluent taxpayers. While the idea of simplifying the current unwieldy income tax code is appealing, the question of equity of taxpayer burden immediately arises. Under the national sales tax proposal, lower income persons would pay the same rate of tax on their purchases as the more affluent, resulting in a much higher effective tax burden for the lower income citizen, in terms of taxation as a percentage of income. One other recent proposal for tax reform is that of a “value-added tax” in which taxes for businesses would be paid only on the difference (i.e., the value added) between the purchase price of acquired materials and services and the final sales price of goods and services of the affected businesses. The application of the value-added concept for taxation of individuals has not been determined. Some analysts contend that some industries may find that determination of their taxes on various product lines and services would require complex accounting procedures under the value-added system. Over the past 50 years, the portion of federal tax revenues provided by the business sector has declined from 35 percent of all tax sources to 11 percent. During this same period, individuals’ share of federal revenues grew from 48 percent to 80 percent, according to the Economic Report of the President, 1995. The federal tax burden on individuals and businesses is lower today than anytime during the past 30 years. Further reductions of taxes on wealthy Americans and big businesses does not appear to be justified at present, especially at a time of budget deficits, national debt concerns, and pressing financial needs of other government programs. Federal income taxes have historically been oriented to the issue of “ability to pay.” As a result, tax rates for both individuals and businesses are “progressive” in that higher rates are applied to higher levels of income. A flat tax scheme would eliminate this provision and effectively destroy the intent of equity in the current system. The national sales tax and the flat tax proposals are regressive forms of taxation and would increase rather than diminish the great disparity of taxation among poor, middle class, and wealthy taxpayers. According to Forbes magazine (September 1997), the number of wealthy Americans has grown remarkably in recent years. In 1982, there were 13 billionaires in the country. By 1997, that number had grown to 170 billionaires. Among those is Bill Gates, the chief executive officer of Microsoft Corporation, whose fortune is said to be around $100 billion.

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Of course, this does not include those classified as millionaires whose numbers have grown by the thousands during the past decade. These fortunes have been accumulated under the present federal tax structure. The recent shift in the political alignment of Congress from a Democratic to a Republican majority, coupled with a second-term Democrat as President, has brought a mixture of new conservative as well as centrist economic thinking to Washington. In 1996, former House Speaker Newt Gingrich and his Republican colleagues adopted a plan entitled “Contract with America,” which outlined a long list of economic and social goals for Congressional legislative action. Despite the fact that the Republicans held majorities in both houses of Congress, only a minor portion of proposed legislation that would have implemented this Contract has been enacted so far and that which has been passed was highly amended during the legislative process. Generally, the Congress and President have been considered as probusiness and have sought workable solutions to the problems of national economic prosperity, private sector growth, employment, and fiscal policy. Five key components of the current Republican economic policy agenda have major implications for capitalism. First, there is the call for increased privatization of government in which much of the current governmental services would be turned over to the private sector or performed by private industry under contract to the government. Privatization would, according to its advocates, reduce government expenditures and consequently lower the requirements for corporate taxation as well as improve the efficiency and quality of public services. Presumably, the private sector would be able to perform such services more inexpensively than government, an assumption that has not always proven to be accurate. Second, conservative politicians advocate additional governmental fiscal restraints that would consist of actions to reduce the national debt and annual deficits, to restrain growth in interest rates, to moderate the money supply, and to lower business and individual tax burdens. By reducing the government’s fiscal impacts, such restraints purportedly would liberate the private sector to invest more heavily in productive ventures. Third, globalization of the market orientation of American industry has been advocated by the conservatives as a method for enhancing economic growth. The term “globalization” has come to mean different things to different people. To some, it means increasing exports; to others, it implies investment by domestic corporations in foreign ventures. Still others use the term to discuss the increasing integration of the world economy. Fourth, deregulation of industry is being promoted as a vehicle for reducing the governmental economic burden on the private sector. Actually, deregulation has been underway in a limited, although significant

Economic Forces in Modern Capitalism • 29

manner for several years. To date, the long-distance telephone industry has been demonopolized and largely deregulated as well as the interstate trucking industry, airlines, banks, and savings-and-loan institutions. Currently, efforts are continuing by federal and state governments to deregulate the electric power industry. As more fully discussed in Part III, deregulation of the electric power industry has major implications for the economy. The fifth element in the conservative agenda is devolution, that is, the transference of some governmental functions from the federal government to the states. Devolution would, as stated by its advocates, complement their concept of limited government, returning a large measure of decision-making authority and responsibilities to governmental entities closer to the people. Much of the focus of proposed devolution has been social, education, and welfare programs. Devolution has been met with much skepticism and concern by many of the states’ governors who claim that their states are not prepared to assume the financial burdens of these massive federal programs, especially Medicare. Other criticisms include the lack of uniformity that would likely ensue if each state established its own standards for many federal programs that now have some semblance of uniform standards for recipients in terms of eligibility, financial aid availability, and other qualifying conditions. In the absence of national uniform standards, the states are likely to continue to resist moves to rid the federal government of its social, health, educational, and welfare responsibilities by dumping these programs on the states. With the recent economic turnaround, the nation’s welfare load has experienced a significant reduction. This trend has been accelerated by recent legislative and executive branch actions to encourage welfare recipients to make concerted efforts at finding employment. Many former welfare recipients have been employed for the first time and the experience to date in most cases has been quite positive. However, the very tight job market at present no doubt has made many job openings available for unskilled former welfare recipients that might not have occurred when jobs were less plentiful and potential workers were in abundance. The Foreign Scene As corporations become increasingly globalized, their attention turns naturally to political developments in every nation where they have economic interests. Over the past decade, the political changes in much of the world have been staggering. The breakup of the former Soviet Union and the struggles of the nations remaining from that dissolution are presenting problems as well as great opportunities for American private enterprise. Political unrest in parts of Central America, South America,

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Southeast Asia, Africa, the Middle East, and nations of the former Soviet Union makes the matter of capital investment decisions and marketing strategies problematical. Politically and economically, China is a huge and different matter insofar as the degree of possible future American participation in its economy is concerned. It is an enormous potential market and competitor. With its 1.5 billion population, its potential market dwarfs virtually all others. According to various recent studies, China’s economy has reached $1.6 trillion, only about one-fourth that of the United States. However, a recent Chinese study predicted that China’s economy would surpass the American economy by the year 2030, reaching $155 trillion in that year. A similar Australian report indicated that China would become the world’s largest economy between 2010 and 2020. Recently, the Chinese government has announced plans to begin the process of “privatizing” many of its 115,000 state-owned industries, which employ approximately one-half of the Chinese workforce. This represents a significant departure from its long-held communistic policy of government ownership. The matter of whether foreign interests will be permitted to buy ownership positions in such industries has not been announced. Liberalization of private ownership indicates a desire for the nation to become more efficient and competitive in world markets and to utilize its available capital and labor in more advantageous ways. China is already a major contender in the world marketing arena, and may surpass the United States within a few years in terms of gross exports. In other nations of Southeast Asia and Indochina, economic progress over the past five years has been substantial with personal incomes rising and private sector employment experiencing growth. Much of the economic growth of these nations has come from increased exports. However, the recent financial and monetary crisis involving several nations, including Indonesia, Malaysia, South Korea, and Thailand, will no doubt retard economic progress in that region for many years and is expected to have at least minor negative financial impacts in other markets. The large nation of India has likewise enjoyed economic growth with a significant increase in average per capita income. With rising populations and personal income, the nations of Southeast Asia represent potentially important markets. At present, however, they are more competitors than buyers. On the North American continent, Canada and Mexico represent potential trading partners of immense importance to American industry. The North American Free Trade Agreement (NAFTA) is expected to provide a foundation for improving and streamlining trade among the three nations. With its relative prosperity, Canada remains a friendly and sizable market. Canada’s population density of only seven persons per square mile and its vast natural resources and favorable geographic posi-

Economic Forces in Modern Capitalism • 31

tion provide the ingredients for economic prosperity and successful ventures for industry growth. Mexico, on the other hand, has a rapidly rising population but has endured serious fiscal and economic problems in recent years and remains a relatively poor country. Mexico has become a competitor of the United States in certain labor-intensive industries where wage rates are one-tenth to one-fourth those of American enterprises. Privatization, if it occurs, of some of its nationalized industries such as PEMEX, its petroleum monopoly, may foster a new era of capitalism. Japan’s rise as an industrial power has brought with it struggles to redefine itself politically. The nation still practices protectionism extensively despite repeated efforts of the United States to allow certain American products into the country and thereby improve America’s unfavorable trade balance with the nation. Japan could become a major market for American durable goods as well as consumer items already being exported to Japan. Its large population, high per capita income, and high personal savings rate averaging 16 percent to 20 percent of income offer enormous potential buying power. Notwithstanding its very high population density of 824 persons per square mile and a protracted economic recession, Japan has a robust and diversified economy. Current trends suggest that Japan will experiment with new forms of business organization and management as well as some governmental reforms to strengthen its economic position vis-a`-vis its trading nations. Japan’s financial institutions recently became stressed due to numerous bad loans made to southeast Asian and other foreign borrowers who defaulted when the economies in those nations went into crisis. Many Japanese banks now hold inadequate reserves or are approaching insolvency. The Japanese economy has suffered recession for several years, although it remains a formidable international competitor. Over the past few years, European nations have been struggling with economic problems as evidenced by high unemployment, low income growth, and governmental financial crises. Much of the blame rests on low productivity growth, rising governmental costs for social programs, and underinvestment in industrial capacity due largely to high interest rates. As one means of addressing the increasingly integrated nature of European markets, the regional European Union (EU) is undergoing a transformation over the next few years that will effectively unify the economies of Great Britain, France, Germany, and other member nations. One recent action was the introduction of regional common currency, the Euro. Recently, there has been some political resistance in some quarters, notably in France, to the notion of a truly unified Europe. These factions seek to limit the powers of the European Union and to retain sovereignty by the individual nations over most economic and fiscal functions. Re-

32 • The Emerging Global Economy

gardless of the outcome of these political moves, European economic unity in some degree is a reality and will probably increase significantly. Under this plan, the EU would become a formidable economic and trading bloc, offering strong competition to the United States. The transformation of the former Soviet Union from a centralized communist economy into a democratized society in Russia has been fraught with a host of economic, financial, and political setbacks. The lack of a stable monetary and financial system, political corruption, and the emergence of a cartel of industrialists, referred to as the Oligarchs, have combined to undermine the economic and political reformation of the nation. As Russia enters the new era, the outlook for its near-term economic recovery is bleak. Nevertheless, with a heavy infusion of capital and new business and political leadership, the country can undertake the necessary reforms to eventually emerge as a world economic power. South America is a logical market for further expansion by U.S. companies. With its growing population, vast mineral and timber wealth, and favorable location with respect to markets elsewhere, South America could become a primary market and industrial site for joint ventures with indigenous firms. Countries such as Brazil, Argentina, Venezuela, Paraguay, and Uruguay have relatively democratic governments and expanding economies. However, political instability and poverty exist in other South American countries, reducing the immediate potential for export expansion. Socioeconomic and Demographic Developments The United States and other industrialized nations have experienced sweeping socioeconomic transformations since World War II. Demographers have identified three socioeconomic groups in the United States as having distinctly different values and economic priorities. First are the socalled Builders or Mature generation whose members were born between 1930 and 1945. The next generation, the Boomers, was born between 1946 and 1964. A third group, referred to as the X Generation, includes those citizens born between 1965 and the present. The different experiences, life-styles, and worldviews of the generations have greatly influenced the economy, social systems, community life, and politics. The Builders, with their experiences of sacrifices during the Great Depression and World War II and the great demands to rebuild the American economy following the war, tend to be conservative in taking risks and more attuned to religious and moral concerns. Their heroes were former President Franklin D. Roosevelt, who led the nation out of the Depression, and General Dwight D. Eisenhower, who was the great military leader as the war ended. Clothing styles were conservative until the

Economic Forces in Modern Capitalism • 33

1960s, with men wearing hats virtually everywhere and women wearing dresses. Women also wore hats in church. The Boomer generation marked a significant departure in types of clothing, music preferences, longer hair styles for both sexes, more liberal politics and philosophy, and an increased willingness to take risks. This generation had no memory of the deprivations of the Great Depression nor World War II. This large cohort of post-WWII people has been immensely influential in shaping economic and social policy during the past 25 years. The third group, the X Generation, were greatly affected psychologically by the aftermath of the Vietnam War and by the environmental movement. They tend to be more conservative and adventuresome than the Boomers, but less so than the earlier Builders generation. Now just beginning to reach maturity, the Xers will have major influences on economic and social trends well into the next century. In each generation there have been major shifts in priorities and lifestyle choices resulting in numerous cultural changes in such areas as music preferences, clothing, politics, recreation, and religion. Increasing life spans and steadily improving health of the populations of American and other industrialized nations have profound implications for the public and private sectors during the Third Millennium. An array of new industries is expected to develop to serve the aging sector of society, including leisure, travel, sports, health, continuing education, arts and crafts, and numerous others. While this large population of senior citizens will be more affluent than the present generation and thus will be better able to enjoy leisure pursuits, there is likely to be a counter movement of seniors who decide to work longer careers out of desire to remain productive or to accumulate retirement funds. EVOLVING ECONOMIC CONCEPTS Economic Forces in Capitalism Capitalism as an economic system has been caught up in the socioeconomic and cultural movements of the three post-WWII generations and of necessity has introduced a spectacular array of innovations in products and services. The great majority of new consumer products introduced over the past decade has been directed overwhelmingly to the younger generations. However, the nation’s demographics are shifting steadily toward an aging population. With a declining birthrate and increasing life expectancy, the population will continue to move toward a higher median age. If it does its job, capitalism will accommodate this changing

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market by influencing and responding to the evolving economic forces of supply and demand. A capitalistic economy consists of two main realms: (1) the private sector, which comprises the great majority of economic wealth and productive capacity; and (2) the public sector, consisting of governmental entities at the federal, state, tribal, regional, and local levels as well as publicly owned lands and enterprises. Private enterprise is given great freedom to establish and operate businesses and to seek profits and wealth, while the responsibilities of government are to provide public safety, a reasonable degree of regulation to assure that essential public interests are protected, and other public services. Within the private sector, there is also a large and growing “nonprofit” segment consisting of a wide array of educational, scientific, cultural, medical, and other institutions and associations that are increasingly influential in society. These organizations will no doubt continue to wield political and economic power as social changes occur in the new era. In both capitalistic and socialistic systems, there are two fundamental activities that govern economic progress. First, the creation of wealth under capitalism is a function of free enterprise, whereas under socialism all wealth is both owned and created by the central government. Second, the allocation of wealth under capitalism theoretically is a function of free-market forces. Under socialism, of course, such allocation is performed by the central government based on predetermined formulae or bureaucratic decision. The first function, creation of wealth, is relatively free of recent political disagreement. However, the allocation of wealth has been the subject of debate for decades with conservatives arguing that free-market forces are more efficient and probably as equitable as socialism. Liberals contend that the inherent self-interests and tendency toward greed among capitalists inhibit equitable allocation. The ongoing argument among conservatives and liberals concerns the extent to which government should intervene in the primarily private capitalistic economy. Conservatives generally take a position that the government role should be limited to that of a policeman, ensuring that fundamental laws regarding rules of business contracts are observed in the interest of fairness. On the other hand, liberals usually argue for a more active role of government, one in which public investments, regulatory policies, and financial incentives or disincentives are utilized to maintain a “level playing field” in the business world and to moderate periodic business cycles. Between these two polar philosophies are any number of centrist or moderate economic policy positions. Over the nation’s history, the economic policy pendulum has swung periodically from conservative to more liberal stances and back again many times. Currently, federal eco-

Economic Forces in Modern Capitalism • 35

nomic policy is being molded by a largely conservative Republican Congress and a more centrist Democratic President. A decidedly conservative tilt to economic policy has resulted, and there are indications that conservative politicians will propose further policy initiatives, especially those related to their “limited government” goals. Often forgotten in current economic analysis is that each element in a capitalistic economy is highly dependent upon other elements. For example, much has been discussed about the fact that America is now a “service economy” instead of its former designation as an industrial nation. While the service sector has grown significantly in overall size, complexity, and in relation to all industries, it does not exist as a free-standing entity; it is vitally dependent upon the economic health of the “basic” industries. Basic industries include mining, agriculture, and manufacturing. In more primitive economies, even manufacturing would not always be considered a basic industry, since its raw materials are dependent on the products of mining or agriculture. One basic industry in the United States, agriculture, has undergone a major transformation by way of mechanization, which has revolutionized farming techniques. As a result, farm employment has dropped from 10.45 million workers in 1959 to only 3.44 million in 1996, a decline of 67 percent. Despite this employment decrease, agriculture has increased its annual output more than twofold during this same period. Mining and manufacturing have experienced somewhat similar changes in the past few decades. Output from these segments has increased substantially over recent decades, but employment has not followed suit. With the relative decline in these basic industries, some analysts contend that public policy emphasis should shift to expansion of the service sector. However, this ignores the fact that the service industry cannot exist in a free-standing vacuum; it must be oriented to serving consumers and other businesses that are adding value to raw materials and products and employing workers who have payrolls to spend in the service sector. The so-called “information industry” has been characterized as the wave of the future. This industry is many-faceted, ranging from telecommunications in all its manifestations to advanced computers. The information industry has in recent years revolutionized the creation, processing, storage, and transmission of information. It has made possible the creation of home-based industries that are having positive impacts on employment as well as reducing the needs for commuting. Some planners hope that continued growth of home-based businesses will contribute to reduced traffic volumes in the cities and thus bring improved air quality. Its glamour and growth potential notwithstanding, the information industry should be recognized as a service industry and thus is highly dependent upon the growth and economic health of other basic industries. This, of course, does not necessarily imply that all service businesses must

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have basic industries as direct customers. Often, the linkage between the service and basic industries segments is indirect or several steps removed from each other. There are often several layers of intermediate customers, but the dependency of the service industry on basic industrial activity is clear and unavoidable. The demise of basic industries will ultimately result in a similar decline of service businesses. As mentioned earlier, capitalism as practiced in the United States has undergone several transformations since the turn of the century. While volumes could be devoted to the many subtleties and economic manifestations of conservative and liberal versions of capitalism, suffice it to say that fundamentally the chief difference tends to lie in the relative roles of the private and public sectors in the economy. Under “pure” laissezfaire capitalism, of course, virtually all economic activity and business decisions would be in the province of free private enterprise. Government would have only national defense and public safety roles. Even regulatory activities would be done by private industry on a self-policing basis. All else would be the prerogative and responsibility of the private sector. Supply-side economics has been advanced by conservatives as the preferred means of improving economic growth. Under this theory, production costs would be minimized by increasing the productivity of capital and labor, thereby lowering prices and enhancing competitiveness of products in domestic and world markets. In order to further reduce production costs, the supply-siders advocate reduction in federal and state taxation as well as government regulation. Fundamental economic theory holds that prices and quantities of goods sold are established in an unrestrained market based on the forces of demand and supply. Under the supply-side theory, emphasis is placed on competitiveness of product prices, whereas under demand-side philosophy, prices and quantities are determined by consumer preference and ability to purchase. Supply-siders often downplay the demand side of the market, reflecting their preoccupation with appeasing private industrialists who seek reductions in costs. Demand-siders tend to emphasize the need for improving the ability of consumers to spend; therefore, they stress the desirability of expanding aggregate demand. This dichotomy of views has often been reflected in governmental economic policy shifts for decades. Balancing supply and demand in a capitalistic economy usually includes governmental efforts to establish low rates of inflation, full employment, gradual but steadily rising incomes, and capital investment at moderate interest rates. Achievement of such conditions over a long time period is possible, but apparently is difficult to accomplish in view of the differing philosophies and priorities of the conservative and liberal political factions that often become manifested in public policy and corporate decisions.

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Liberal capitalism, as advocated by economist John Maynard Keynes and his followers, would have a major role for government in stimulating and regulating the economy. The government would help stabilize business cycles and moderate the effects of an inflationary economy or economic depressions by exercising its influence and control on the national money supply, by regulating interest rates, by direct investments and expenditures of federal agencies, and by taxation. In times of depression, the theory goes, government outlays will stimulate the economy, create employment, and encourage the private sector to engage in expansionary activities. During boom times when inflation is threatening, government actions could include one or more of the following to decrease the pace of private sector activity: (1) increase taxes on business profits; (2) increase interest rates through the Federal Reserve system; or (3) decrease federal agency outlays. Any predictions as to the scope and timing of these philosophical swings in capitalism over a 1,000-year period of the Third Millennium would be foolhardy and wildly speculative at best. However, if the demographic and cultural trends established in the last two decades of the twentieth century are any harbingers of future changes, it may be safe to predict that economic growth will continue in the industrialized nations at somewhat slower rates while developing countries may experience dramatic growth, at least during the first several decades of the twenty-first century. Nevertheless, since capitalism seems to be prone to periodic business cycles, it is also safe to expect that growth will not always be orderly and predictable. The extent to which developing nations will fully employ capitalism will likely vary with the political leadership and the degree of democratization adopted. Democracy may come quite slowly or not at all to some nations of the Middle East as well as several countries of Africa or Southeast Asia, due to entrenched autocracies or cultural traditions. On the whole, however, democracy is making inroads into former monarchies and totalitarian societies elsewhere. Laissez-Faire Capitalism This form of capitalism is often considered to be the “purest” form in that it couples private ownership of a nation’s resources with a “handsoff” posture of government. Under laissez-faire, private industry would have virtually unchallenged authority to do whatever it wishes with its resources without fear of public intervention. All real property would be in private ownership. This would include roads, schools, health care facilities, and all other facilities. Use of any of these services would likely entail tolls or fees. While some manifestations of laissez-faire were evident in times past, the many abuses that evolved from lack of accountability

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by monopolistic corporations resulted in government reforms that have since placed some degree of regulatory authority over private businesses. A primary tenet of classical economics is the assumption that a person will have access to and utilize “perfect information” in making economic decisions. This would apply to both producers and buyers. Obviously, no one will ever have access to absolutely complete and perfect information, even under the best conditions with modern computerized information systems. In the absence of perfect information, of course, decisions must be made on the basis of incomplete and sometimes faulty data. This concept of assuming use of perfect information applies to any form of economic decision, of course, but laissez-faire stresses its application. Laissez-faire capitalism was largely dormant politically for several decades after World War II until some elements of it came into vogue during the administration of President Ronald Reagan. He made a strong case for reduction in government regulations, stating that regulatory costs were a major burden on American industry. The implication was that these costs were being passed along to consumers when possible. During the past few years, conservative politicians and economists have chosen the term “free-market capitalism” in lieu of laissez-faire to denote that under free-market conditions, capitalism can thrive and produce optimum economic results. Some of these conservative advocates have also pressed for major reductions or outright elimination of tariffs and quotas on foreign trade. They contend that goods produced by domestic industries need a “level playing field” in order to compete effectively with other nations. Of course, that can work to the disadvantage for domestic industries that are forced to compete with low-cost overseas companies. Under free-market capitalism, over the long run, domestic and foreign competitors would theoretically operate under similar trade conditions. Their internal cost structures would be adjusted to make competition possible. For example, a domestic producer with higher labor cost might be able to compete by using automated production methods with higher efficiency. If they could not compete profitably, they could be forced out of business. The government would remain outside the trade realm, except for ensuring that any international trade agreements are properly enforced. Aside from the matter of foreign trade, laissez-faire capitalism also implies autonomy of all aspects of business operations. In its “purest” form, a laissez-faire business would be free to enter virtually any type of business, hire employees on any basis it chooses, and conduct its business without fear of governmental interference. Of course, such a business would be expected to pay some nominal taxes, but laissez-faire advocates do not seem to agree on the rates of such taxes. A laissez-faire business would not be saddled with occupational safety and health rules, employment discrimination regulations, environmental

Economic Forces in Modern Capitalism • 39

pollution controls, nor antitrust limitations. Without such burdens, advocates claim, the costs saved from elimination of government regulations could be better used in raising employee wages, reducing prices, increasing profits, and expanding corporate productive activities. They also contend that, under free competition, they would be forced to follow the leadership of competitors in being responsive to public and community concerns. Under theoretically ideal conditions, laissez-faire capitalism would produce the lowest-cost products and services. This would be possible by making every article of cost in a business subject to unfettered competition within a free global market. This implies that labor as well as purchased goods and services could be subject to competitive forces from both domestic and foreign sources. Nevertheless, as a practical matter, laissez-faire capitalism would likely be a chaotic, unworkable proposition on a national scale. Under pure idealistic conditions, it would inhibit free flow of commerce by its use of private highways and other transportation modes that would be built without any nationally agreed upon standards. Commerce would be impeded by frequent stops at tollbooths and a wide variety of toll charges and fees. Public safety would be jeopardized by lack of uniform standards for highway or air transport. Further, public safety could be endangered since a minimum of police officials, probably private contractors, would likely be available to monitor transportation and other commerce and public activities. Educational and health facilities and services would be at the whim of short-term market conditions as determined by the privately owned health care and education companies. Again, there would likely be no nationally accepted standards for education and health care. While laissez-faire advocates continue to press for less public involvement in the economy, there seems to be scant public support for this approach to economic and social progress. Rather, the populace of most industrialized nations seems to favor a balanced system in which private industry is the primary generator of wealth and where government provides a moderating influence on economic variables and support systems for the private sector. The Hybrid Capitalistic Economy In its pure form, laissez-faire capitalism does not exist as an economic system at the national or regional level. It is not a practical system in a democracy since its private, self-centered orientation usually cannot be reconciled readily with the need to accommodate the rights and responsibilities of other interests outside its own purview. Historically, the United States has always had at least some degree of public involvement in the

40 • The Emerging Global Economy

development of its economic resources. Each of the 13 original colonies participated in various ways in laying the legal and political framework for private industry, including building much of the public infrastructure of canals, roads, bridges, and some of the schools. More recently, in the United States and elsewhere in the industrialized world, government has had an active and direct or indirect involvement in capitalistic economic development. Often government has become a direct participant in developing critical infrastructure to support the economy, especially when the private sector seems unwilling or unable to do so in the public interest. What has evolved then is a hybrid form of capitalism, sometimes referred to as “mixed” capitalism, in which both the private sector and the public sector participate actively in the national economy. The types and degree of participation by the government are, of course, the subject of considerable debate, which will likely continue for decades. Liberal economists and politicians continue to stress the need for active and direct governmental actions, whereas conservatives argue for minimal government. Hybrid systems of private-public enterprise are operative at present in many nations, ranging from the Middle East, Africa, and Europe to the United States. One example is Israel where all land is owned by the national government and all residents and businesses may acquire rights to use the land for specified periods, usually not exceeding 49 years, via lease agreements. While this arrangement is highly restrictive to business development, the economy of Israel has accommodated the concept of public land ownership and generally prospered. In his book Everything for Sale, Robert Kuttner makes an extensive case for strengthening the “mixed economy,” one in which a cooperative, and to some extent an adversarial, relationship between private industry and the federal government is maintained. Kuttner points out that the marketplace should not be the only means by which society makes decisions, establishes worth, and conducts human relations. He refutes many of the “resurgent” free-market economic politics and argues convincingly for a return to a mixed (hybrid) economy. Government activities in a capitalist economy, by definition, are limited to those that support, regulate, and defend the private sector. A democratic government “of the people, for the people, and by the people” implies that the interests of the citizens, as well as their common (i.e., public) interest, are paramount. However, the inherent limitations of government as specified in the U.S. Constitution and Bill of Rights are clear: that government shall acknowledge and protect rights of individual citizens and that the “public interest” does not always override the rights of individuals. Thus, an inherent conflict is established in the U.S. governmental system that calls for a balancing of private and public interests in economic as well as other public affairs. Inevitably, there are periodic

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clashes between the two sectors with the “winner” largely determined by which sector has the most political or economic clout at the time. The hybrid nature of the U.S. economy has spawned a mixture of predominantly privately owned small and large businesses in the form of proprietorships, partnerships, joint ventures, and corporations as well as nonprofit institutions, government corporations, and government agencies at the federal, state, tribal, and local levels—each with distinct roles in the economy. Much of the economic debate has centered around the roles of the federal government, and with good cause, since the nation’s monetary system and fiscal policies have a great bearing on overall economic activities throughout the nation and, for that matter, the world. The activities of other levels of government should not be overlooked, because their actions can have major influences on regional and local economic progress. State governments have great influence on entrepreneurship, local business growth, attraction of industries, and socioeconomic development by virtue of their educational systems, vocational training, transportation facilities, taxation policies, and general business “climate.” Likewise, Indian tribal governments and municipal governments have prerogatives and authority to influence business development, housing, community planning and zoning, and educational activities. In the Third Millennium, the hybrid economy is likely to continue as the dominant form of capitalism. Although there will be ongoing efforts by both ends of the political spectrum to shift the centrist hybrid economy to the left and right, the American public is expected to insist on economic dominance by the private sector with an appropriate level of governmental regulation and support at the federal level. Government involvement at the state and regional levels, however, is expected to become more pronounced and activist in order to deal with the myriad growing socioeconomic issues such as community planning, zoning, housing, crime, education, health care, welfare, transportation, and environmental protection. The hybrid capitalistic economy is the form of capitalism practiced in virtually every industrialized nation of the world. Each nation practices capitalism with its own mixture of private enterprise and governmental participation. Among the industrialized nations, Germany, France, Great Britain, Italy, and Japan have adopted forms of hybrid capitalism that provide for strong governmental participation including nationalization of certain key industries. However, Great Britain and Japan are reducing their reliance on nationalization and are returning many industries to private ownership. Even communist China is privatizing thousands of its nationally owned enterprises as an economy measure. Government ownership of industry in the United States has been relatively minimal, except during wartime conditions. Even then, the government contracted with private industry to operate key facilities such as

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munitions factories and shipyards. Over the past decade, increased privatization of government activities at the local level has been in vogue, with many municipalities turning to private contractors to perform such functions as trash disposal, commuter transit, and public education. This kind of privatization has seen mixed results with some local governments enjoying lower costs and improved service for certain functions while others are considering returning to publicly operated programs. Capitalism as practiced in the United States and other industrialized democracies is an enormously complex system involving many millions of individual citizen-consumers and businesses and thousands of governmental agencies at the federal, state, and local levels—all seeking to accomplish their own objectives, which sometimes are in conflict with other private prerogatives and public goals. Despite its cumbersome processes, hybrid capitalism has succeeded for the most part in advancing socioeconomic development in the United States and elsewhere. Merits and Abuses of Capitalism The main appeal of capitalism is, of course, freedom: freedom to seek financial gain through human effort and ingenuity; freedom of choice of occupation; freedom to employ individual initiative without government interference; freedom to own property without fear of confiscation; and, yes, the freedom to fail. For these compelling reasons, capitalism is a natural companion of a political democracy or representative republic. The prospects of financial gain through private investment have been the motivating force of capitalism. Stories are legion about enterprising individuals who established small business ventures and later parlayed modest initial investments into giant corporations. No doubt these success stories continue to motivate individuals to become entrepreneurs who risk their own or borrowed capital as well as their time and reputations. Such risks are high; more than three-fourths of all new businesses fail within the first five years, according to federal statistics. Nevertheless, many entrepreneurs of such failed businesses later establish successful ventures. Overall, there are sufficient successes, in the long run, to continue to provide incentives for entrepreneurship. Innovation is encouraged in capitalism by the inherent liberty to experiment with new ideas. The introduction of new products and services often holds promise of establishing new markets or larger market share while improved production methods may reduce costs and enhance returns on investment. Utilization of new technology developed under private or government auspices can often be made by other private businesses in product innovation so long as proprietary rights are honored. One example is the digital computer, which was developed largely by government for the national atomic energy and space programs but

Economic Forces in Modern Capitalism • 43

has been widely adopted by the commercial and residential sectors. Nuclear reactors are widely used in education, research, medicine, and in the commercial electric power industry. Space launch vehicles and satellite systems are being used increasingly in the telecommunications and related industries. Similar commercial use has been made of government-developed management systems such as the “critical path method” (CPM) and the “program evaluation and review technique” (PERT), which were developed by the Defense Department to manage large aerospace, shipbuilding, and other projects. CPM has been a widely used management system in the construction industry for almost 40 years. Variations of CPM, PERT, and numerous other techniques developed under government programs are in widespread use in other segments of private industry. Entrepreneurs may also take advantage of numerous research and development programs offerred by colleges and universities, which often provide special information dissemination and outreach activities to encourage innovation in private firms. Federal patent and copyright laws provide much-needed governmental protection to promote innovation in the private sector. Often, an entrepreneur will develop an innovative product that will form the basis for capitalizing a new venture. If the new product is patentable, the owner may achieve an enviable and unique economic position, vis-a`-vis potential competitors, for a number of years if he/she is otherwise adept at marketing the product. Under capitalism, the introduction of new concepts is also encouraged by market forces. Consumers seek improved products and services, if the price is right. The process of innovation, while never easy and risk-free, is comparatively free of the constraints usually found under authoritarian systems such as socialism or communism. The economics of classical capitalism centers around two basic interrelated concepts: (1) the market system in which the forces of demand and supply interact to establish prices and quantities of goods and services sold; and (2) the efficiency of the so-called “factors of production.” These factors include the fundamental elements for producing goods in a free economy—land, labor, capital, and management. The degree to which each of the factors is utilized is determined largely by the nature of the industry involved. Some industries, such as the garment industry, are classified as “labor-intensive,” whereas others, such as steelmaking, chemicals, and petroleum refining, are considered to be “capitalintensive.” Laissez-faire capitalism argues for a completely “free-market” system, free of interferences by government regulations, trade quotas, and tariffs. Without such interventions and barriers, the free-market advocates proclaim, markets will be self-regulating and competitive. Any temporary perturbations in the market would be self-correcting due to demand and

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supply forces that would make automatic adjustments in price or product availability. With such “natural” forces at work, they argue, there is no need for intervention by government even if such actions are well intended. They often state that government intervention of any type is usually counterproductive, often disrupting normal economic activity. All of the factors of production are utilized in capitalistic enterprises; however, the extent to which each is used is determined largely by the technology involved in a particular industry. Simple agriculture, as often performed in developing countries, may involve only land and labor. If a farmer is also a landowner, he is by definition a capitalist. If he does not own the land, he is only a contract worker and may or may not profit from the revenues generated, except to the extent that his wages are derived from such revenues. The fourth factor, management, is sometimes classified synonymously with capital, since in many small firms ownership and management functions are often performed by one and the same person. However, in larger corporations, in which ownership is diffused among many shareholders, management is usually a separate function. Managers are usually paid employees who may or may not participate in the ownership and profits of the enterprise. Capitalism has the potential for the creation of considerable wealth via the profit system and operation of the market. When freedom of economic enterprise is coupled with minimal governmental interference and taxation, the capitalistic system can provide rapid and great accumulation of wealth. Obviously, there is no guarantee of financial success under capitalism; to the contrary, there is usually considerable risk involved. One of the most appealing aspects of capitalism, its ability to accumulate great wealth, also gives rise to potential abuses, namely, the creation of monopolies and trusts. The possession of great economic wealth tends to result in self-serving actions that may further concentrate economic or financial power, thus unfairly reducing the ability of other businesses to compete or for customers to enjoy the benefits of competitive products and prices. Creation of a monopoly permits one business to dominate a market or a community in which the firm operates. As discussed earlier, monopolies were prevalent during the past 100 years and today are less dominant due to federal antitrust laws. However, monopolies still exist and are evolving, some by design, others by actions of the market. Monopolistic abuses were fairly common during the pioneering era of coal mining in Appalachia and gold mining in the Rocky Mountains. Mining companies established communities, built houses and roads, and provided other facilities for their employees who were usually recruited from outside the region and in many cases from foreign nations. One-industry towns with their company stores were entirely dependent on the largess

Economic Forces in Modern Capitalism • 45

and fortunes of their industrial benefactor. Employees were at the mercy of their employers for jobs, housing, food, health care, education, and virtually everything else. Abuses often came in the form of suppressed wages, unsafe and unhealthy working conditions, and overpriced groceries and supplies from the only local sources, the company-owned stores. In many cases, employees were paid in company scrip, not cash, thus compelling them to make their purchases only at a place that recognized this form of payment: again, the company store. The rise of the textile industry in the South during the early 1900s was based on the availability of cheap water power, cotton, and wool, and low-cost labor. Numerous communities were built around textile mills with workers recruited from other areas. Abuses were apparent as employees were held in virtually involuntary servitude as evidenced by chronically low wages, long working hours, company-owned housing, and food and supplies available only at company-owned stores. These company-owned communities usually had only nominal governments, which were dominated by the companies. In mining and textile communities where banks were eventually established, usually by the mining companies or with their heavy participation, employees often had difficulty taking out loans except at interest rates that ensured employee loyalty and a substantial profit to the mining companies. Such socioeconomic abuses were rampant until the advent of mining labor unions and government regulations in the 1930s. In addition, mining companies often left a legacy of environmental degradation in the form of toxic mine tailings, polluted streams, and deforested terrain. Competition is the essence of a free-market economy under capitalism. Monopolies, cartels, trusts, and other forms of anticompetitive business activity are anathema to the free-market economy. Yet, businesses strive to accumulate economic power, sometimes by monopolistic action. However, if profitable operations can be maintained in the midst of vigorous market competition, monopolies can be minimized, prices optimized, and economic growth sustained. While hybrid forms of capitalism, such as that practiced in the United States and other industrialized nations, have the same merits and potential for abuses as laissez-faire capitalism, they are subject to some checks and balances by government that can become moderating influences on such problems as “boom and bust” economic cycles and attendant socioeconomic problems. Government participation in education, public infrastructure, and health care can also support and augment the private sector. Capitalism has always been prone to wide oscillations in the “business cycle” in which periods of economic expansion are followed by periods of recession. Business cycles are often the result of excessive “me-tooism” in the economy. A few leading corporations may announce a new

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direction for their firms; soon thereafter, other firms follow suit, leading to a round of increased borrowing, capital investment, and hiring. If personal incomes improve during this period, consumer confidence is enhanced resulting in increased consumer spending and corporate profits. These actions provide further fuel to the economic boom. They can also lead to undesirable price inflation. The reverse, of course, occurs during economic recessions; investment declines, personal incomes stagnate or decrease, corporate revenues and profits drop, and employee layoffs are prevalent. During the past four decades, the United States’ economy has experienced these business cycles every four to five years on the average. Maldistribution of income and wealth continues to be a thorny issue in a capitalistic economy. As discussed earlier, there has been a growing disparity of income among the various socioeconomic classes in America. Wealthy citizens are doing quite well under the current tax and investment codes. Corporate profits are rising and reached record levels recently. Yet lower and middle income citizens are struggling due to flagging wage levels, forcing many families to rely on two or more wage earners. The income gap between developing and industrialized nations is also widening. Economic development programs in many poorer countries have not worked well to date, at least not as they were intended. So far, capitalism has been practiced in these nations on a very limited scale and has not as yet been able to deal with the lack of skills, poor health, and other socioeconomic problems as well as political morass that exist in some developing nations. That brings to point another flaw in capitalism, namely, that the private sector, except for the extractive industries, often has little incentive to invest in undeveloped areas (domestic or foreign), which usually requires large outlays for infrastructure (roads, schools, health care facilities, utilities, etc.) prior to industrialization. In the absence of private investment, these areas must rely on government programs. As an imperfect economic system, capitalism has its virtues and its weaknesses. Theoretically, it could achieve sustained and balanced economic growth, full employment, and make optimum utilization of all economic resources. As a practical matter, however, myriad factors often come into play that perturb the system, namely, human frailties such as greed and other selfish motivations. Capitalism is often criticized for commonly heard abuses such as consumer fraud, misleading advertising, predatory practices related to senior citizens, pressures for consumers to assume debt to facilitate purchases, impulse buying enticements, overcharging of prices and interest rates, employee mistreatment in the form of age, gender, and ethnic bias, in-

Economic Forces in Modern Capitalism • 47

ferior products, inadequate service, and failure to provide or acknowledge product warranties. Is it possible to avoid large adverse swings in business activity and foster steady and orderly growth in the business world? Many business economists insist that business cycles are inevitable in a capitalistic economy, believing that a hands-off policy by government is best. They argue that the economy is self-correcting. Others believe that government intervention, through such means as changes in interest rates or taxation, may provide beneficial moderating effects in stimulating or depressing business cycles as needed. Others advocate more direct government actions, such as the New Deal program during the Great Depression and less expansive programs in more recent times, arguing that such efforts have been effective in enhancing economic growth and stability. Prospects and Pitfalls of Globalization Global markets are becoming increasingly integrated with the expansion of trade and stronger economic and financial ties among nations and their industries. Recent proposals for further globalization of economies have both altruistic and self-serving political and economic motivations. Among these is the belief that a vigorous commercial trade among nations will lessen international tensions and foster world peace. Second, most nations seek to expand exports to develop a positive monetary balance of trade, thus retaining profits in the economy and increasing domestic employment and wealth. A third objective in some quarters is to promote socioeconomic progress in other nations for humanitarian reasons. Globalization has been advocated for a number of years through international organizations such as the United Nations, the World Bank, the World Trade Organization, and the International Monetary Fund. The term “globalization” has not been well defined. It seems to means slightly different things to various advocates. In general, it implies a closer alliance among nations in seeking to foster economic progress through beneficial trade and financial activities. Naturally, each nation seeks to gain benefits and often an economic advantage in these relationships. Industrial specialization often comes into play in which a nation with acknowledged expertise in a given industry or product line may hold a favored position in exporting that product, while other nations may have their own strengths in products or services. Overall, as the theory goes, nations will sort out their relative strengths and weaknesses and adjust their international trade relations accordingly. Among the industrialized nations, businesses involve themselves in at least two aspects of globalization. One of these is, of course, exporting

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and importing goods or services as a means of increasing profits. The United States has suffered from a net trade deficit for years, as discussed earlier, despite steady increases in exports. Increased exports relative to imports are important elements of the national economy. Much of America’s trade deficit has been due to automotive imports from Japan and oil imports from OPEC nations. The other aspect of globalization is the prospect for capital investments and profitable enterprises in foreign nations. American investment overseas has grown significantly in the past decade, and it is likely to rise even further if the political climates in potential host countries as well as the United States are favorable. Globalization is not without its pitfalls. In the quest for integration of national economies into one unified worldwide economic system, the sovereignty as well as economic and military security of individual nations could become jeopardized under various political or economic circumstances. This could occur in any of several ways. As individual nations become increasingly specialized in their products and services within the global market, they may find themselves deficient in the domestic production of certain other basic materials and products considered essential to their long-term survival. They may have relied upon acquiring these products from a trading nation, and may encounter a sudden shutoff of supplies due to economic conditions or political fiat. Such nations may have sacrificed their economic self-sufficiency in order to maximize their gains through economic specialization in the global economy. The oil embargo of 1973 is a case in point. In this instance, the Organization of Petroleum Exporting Countries (OPEC) for political reasons decided to stop the delivery of crude oil from its member nations to the United States and selected other countries. As a result, crude oil supplies from the United States’ own sources were quickly overtaxed, gasoline prices rose rapidly, and retail gasoline supplies were rationed. Widespread economic disruptions were felt nationwide. Following the OPEC oil embargo, the Interior and Insular Affairs Committee of the U.S. House of Representatives commissioned studies of the world and national energy situation and determined that national security of the United States would be threatened when the nation became dependent on foreign sources for more than 15 percent of its crude oil needs. At that time, the United States was already importing almost that much of its crude oil. Today, the United States is even more vulnerable to oil supply disruptions from abroad than it was in 1973; the nation now imports slightly more than 50 percent of its oil. The federal government responded to the 1973 oil crisis by creating a cabinet-level Department of Energy to coordinate national energy policy. Other responses included establishment of a Strategic Petroleum Reserve in which crude oil supplies were gradually stockpiled against such con-

Economic Forces in Modern Capitalism • 49

tingencies. Stockpiles containing enough oil for a few weeks’ needs in the nation have been maintained, although the Reserve has never accumulated the quantities specified in federal legislation that created the Reserve. (Part II discusses the national energy situation in more detail.) National security dictates that certain critical materials must be stockpiled as a precaution against the possibility of military hostilities, economic emergencies, or natural disasters. Unfortunately, there seems to be little consensus as to the extent of national preparedness required for such events. National policy has historically vacillated on this topic and is dependent usually on federal budgetary conditions. The critical industries that affect the degree of self-sufficiency of a nation under emergency conditions include the obvious ones: agriculture, metals, fossil fuels, and wood products. Of course, many nations are not endowed with the necessary mineral and other resources to become truly self-sufficient. In these cases, reliable alternative supply sources should be developed. However, the industrialized nations, and certainly the United States, should provide for such contingencies in their national security programs. Globalization should not be considered as an excuse for minimizing national security requirements. Besides the question of economic self-sufficiency is the matter of national sovereignty. Globalization is likely to spread through a host of multinational alliances and corporate joint ventures that could transcend the sovereignty of individual nations under various circumstances. It is possible that such multinational consortia could overwhelm the economic and financial resources of small nations, undermining their sovereignty and economic stability. Safeguards are needed in such multinational compacts to protect the sovereign rights and political foundations of individual nations. Laissez-faire globalization argues for international free-market economics in which no artificial constraints exist to impede trade. Practical globalization, however, suggests that there should be oversight of private industry actions by appropriate authoritative organizations to ensure fair trade practices among trading entities. Otherwise, abuses such as price fixing and trading bloc cartels could arise that subvert the goals of the world system. Globalization, as discussed recently in industry and political circles, has focused on the means by which worldwide markets can be fully developed and maintained. Much less has been said about the inequities and socioeconomic impacts of globalization and related industrial development in developing nations. Pursuit of global markets can sometimes be costly to even the most sophisticated corporations. A case in point is the Wal-Mart Corporation, one of the largest and most aggressive marketing organizations in the United States. According to the Wall Street Journal (October 8, 1997),

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Wal-Mart made elaborate plans for entering the markets in Argentina, Brazil, and other parts of South America. To date, losses have far exceeded expectations, ranging up to $30 million in Brazil during 1998 and an additional $48 million in South America since 1995. What went wrong? From all reports, the corporation assumed that its successful marketing and distribution strategies used in the United States would apply in the South American markets. Among the problems cited were technical and cultural differences in: distribution and delivery systems, packaging, quality control, and merchandise selection; lack of familiarity with the countries’ accounting methods and banking and credit systems; and underestimating the regional competitors. Labor leaders and many laid-off workers have complained bitterly about the inequities of American economic policy that encourages domestic corporations to both export products and establish manufacturing facilities overseas. Many observers have noted the numerous instances where American factories have moved to foreign nations, laying off domestic workers by the thousands and employing comparable numbers of foreign workers at wages that are often one-fifth or less of the wages previously earned by the displaced Americans. “Global economic development isn’t working,” according to Robert S. McNamara, former Secretary of Defense, Ford Motor Company CEO, and President of the World Bank. He states that there is a widening gulf between wealthy, industrialized nations and the impoverished rest of the world. Rodrigo Botero, former finance minister of Colombia and now a fellow at the Harvard University Center for National Affairs, adds that there is no way to close the gap for most developing nations within the next 50 years. However, Botero added, there is hope. He calls for a more comprehensive view of economic development, one in which several relevant indicators, such as infant mortality, population density, education, life expectancy, literacy, and modest population growth, are considered in addition to the usual per capita income criterion. The negative tone of some observers is probably warranted in analysis of many developing countries. There have been some hopeful signs of economic progress in Southeast Asia. Over the past several years, Indonesia, Malaysia, and South Korea, among others, recorded significant economic growth, often referred to as the Asian miracle. However, in 1997, their growing debt and other aspects of their financial affairs caused an economic collapse that may have wide repercussions for a number of years. The World Bank and the International Monetary Fund are taking steps to stabilize economic activity in several countries in the region. In some of the developing nations, political and economic corruption have continued to plague economic development. Foreign businesses seeking to do business in places such as Kenya, Mexico, and other developing nations in Africa and Central and South America have often been

Economic Forces in Modern Capitalism • 51

required to pay bribes to national and local officials to acquire permits or access to virtually anything involved in production such as recruitment of labor and purchasing of supplies. A mining engineer told the author a few years ago of his difficulties in transporting and installing mining equipment from the United States in a Central American country where he had been contracted to open a mine. The projected overall cost of the project had increased by more than 30 percent due chiefly to the system known as mordida in which bribes are required of virtually all foreign businesses attempting to do business in that country. Mexico has taken steps recently to eliminate mordida in an effort to attract foreign investment. However, corruption in many other developing countries is still rampant. Two of the major international institutions, the World Bank and the International Monetary Fund, have instituted measures to correct these abuses through suspension of loans or imposition of special financial restrictions. Businesses uninitiated in these distasteful and usually illegal practices in developing nations can save themselves considerable costs and inconvenience by becoming thoroughly briefed by international consultants, officials of the U.S. State Department, U.S. Department of Commerce, and consulates of the nations involved. At present, the trend toward privatization of formerly nationalized industries in foreign countries appears to grow, with Great Britain, China, Mexico, and others making significant steps in this direction. However, in considering the long-run prospects for investments in developing countries and elsewhere, private industries must take a cautious look at the political as well as economic climates. Nationalization or outright confiscation of foreign businesses is still a remote contingency that should be provided for in any strategic investment plan. Only a few decades ago, for example, Cuba was a relatively properous island nation with a quasi-democratic political regime friendly to the United States and with substantial American investments and industrial operations. The communist takeover led by Fidel Castro resulted in confiscation of American businesses and lost investments of several billion dollars. Thousands of Americans fled the country after losing most of their possessions and occupations as well as being subjected to imprisonment. Globalization is not a panacea for worldwide economic growth nor for the economic development of individual nations. Expansion of global markets generally is both desirable and inevitable. As a political as well as economic instrument, globalism can have both positive and negative effects, depending upon its specific applications within individual trading nations. It can enhance corporate and national economic gains, but it can also be utilized to undermine national security and socioeconomic wellbeing.

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International bodies such as the World Trade Organization and others can exert moderating influences and serve as a referee during trade disputes or when compacts are breached among trading nations. These agencies should be given sufficient authority to perform their coordinating and monitoring functions and to establish rules of commercial engagement.

2 The Third Millennium Corporation

THE CORPORATION: THE EMERGING NEW SETTING Private enterprise will address the challenges of the Third Millennium with a vigor and a determination that will produce new wealth and social gain for the world. Is this statement pure fantasy, or does it reflect a realistic possibility? There is little doubt that, given a proper environment, private industry is capable of creating great new wealth at home and in developing nations. However, organizing and mobilizing economic resources to address rapidly changing global market and socioeconomic conditions will be a formidable task. When we speak of a “new setting,” we are making an attempt to consider the long-range perspective in which the social and economic environments of most nations will be transformed in varying degrees during the Third Millennium. As is the case with virtually any long-range projections, any number of scenarios could be conjured up, each using various assumptions regarding future economic and social conditions at the national, regional, and world levels. One scenario would assume simply a gradual emergence of capitalism among the developing countries, resulting in socioeconomic advancement and beneficial trade and political relations with other countries under peacetime conditions. A more cautious scenario would assume that political tensions among democratic nations and lesser developed countries will ensue that could include periodic breakdowns in political relations and possible disrup-

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tions of trade. Under this scenario, investments by private industry in overseas locales could be in frequent jeopardy. Planners cannot entirely rule out a scenario of large-scale warfare occurring during the next century in parts of the globe. For this reason, the nuclear powers must maintain vigilance in military preparedness while working to minimize the possibility of certain nations acquiring nuclear weapons capability. The United States and Russia have reduced nuclear arsenals significantly in recent years and, together with other great military powers, are making further efforts to minimize the possibility of nuclear war. Nevertheless, China and France are not presently signatory to the Nuclear Test Ban Treaty and still present risks in military utilization of nuclear weapons. India and Pakistan displayed their nuclear expertise in recent tests. Israel and perhaps other nations are believed to have some limited nuclear capability. Of course, a nuclear attack on virtually any scale could result in widespread destruction and disruption of international commerce. Equally troubling are the prospects for increased terrorism or use of biological and chemical agents in warfare or against civilian targets. The recent events in Iraq, in which the government is reported to have used such agents on some Kurdish and other citizens, indicates the relative ease in developing and using such weapons. Some of these agents, such as anthrax and nerve gas, are lethal even in relatively low concentrations. Unlike ionizing radiation that would be emitted from nuclear weapons, biological and chemical agents may persist in the environment for many years after their release. Corporations are facing mounting risks from sabotage and other forms of terrorism by a variety of ethnic, ecological, and nationalistic dissidents. One form, ecoterrorism, is often directed toward industries engaged in natural resources utilization, such as mining, forestry, or skiing. In October 1998, ecoterrorists struck Vail Mountain, Colorado, with four fires set simultaneously at the famous Vail ski area. Later, a group calling themselves the Earth Liberation Front claimed responsibility and voiced its opposition to planned expansion of skiing into an area some believed to be a habitat for the lynx. Terrorism was a tactic used by an environmental group, Earth First!, in the Pacific Northwest timber region a few years ago to thwart logging in habitats of the spotted owl. Many trees were spiked with large nails that would result in injury to timber workers when their chain saws struck the spikes. Political terrorism by survivalists or religious extremists is a worrisome threat virtually anywhere. The Oklahoma City bombing a few years ago points to the vulnerability of many public and private institutions to even relatively unsophisticated terrorist attack.

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A more optimistic and unrealistic scenario would envision peaceful conditions over much of the world for an extended time period, providing a setting for capitalism to thrive. Establishing such a peaceful economic climate would likely require the consummation of a number of additional treaties and other regional trade and commerce agreements. This scenario would also assume stability in money supply, interest rates, taxation, governmental regulation, technological innovation, labor supply and labor relations, political climate, and environmental quality—a rigorous set of conditions. Private industry usually has difficulty in planning much more than a few years ahead. Even with the recent emphasis on strategic planning, corporations are often forced to take the short-term view. Much of this pressure for the near-term emphasis comes from shareholders and securities brokers who demand maximization of current profits and dividends, often at the expense of potentially greater long-term profits. With the current emphasis on worldwide free markets, corporations may expect easier entry to certain previously closed international markets. Reduction or elimination of tariffs and other duties will reduce the costs of exporting and permit products of domestic industries to compete more effectively in foreign markets. This, of course, assumes that the exporting corporations have become skilled in marketing and logistical arrangements in the countries to which export products are directed. Effective merchandising in foreign lands also requires a knowledge of cultural as well as economic conditions in individual nations. Marketing in some nations entails acquiring a thorough grounding in local human and business relations. Japan is a prime example. Customs for conducting business in that nation are far more interpersonal in nature than those of Western countries. Business contacts that may lead to marketing opportunities may take years, not days, to establish. Personal attributes such as trust, respect, and dignity are cherished traits in Japan, in business as well as personal relationships. Regardless of the fact that the product may be satisfactory as to quality, price, delivery schedule, and technical specifications, a Japanese buyer will usually expect to establish a personal relationship with his supplier. Developing such a relationship takes time, time that many American businesses are not accustomed to spending in their marketing efforts. Free-market competition on an international scale will have its domestic implications, both pro and con. Exports mean increased revenues and employment for domestic industries. However, many of these same exporting companies will find growing and formidable competition from imports. In the rush to capitalize on opportunities in the globalized market, an exporter may discover that his long-standing domestic market share has become eroded by foreign and other competitors. He may have

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concentrated on developing an overseas customer base only to find that his neglected customers at home have turned to foreign or other domestic suppliers. Greatly enhanced worldwide information systems now offer real-time intelligence and communications for industries utilizing the Internet computer information network as well as satellite, fiber optics, and conventional communications systems. The ability to detect and respond to worldwide marketing opportunities virtually instantaneously can be instrumental in improving domestic industry penetration of foreign markets. Further advances in information systems are expected in the near future that can enable even small businesses to capitalize on foreign as well as domestic marketing opportunities. However, the availability of data, in and of itself, may have only marginal value to many industries. Although modern information systems are invaluable tools for business, there is no substitute for utilizing human intelligence sources, agents of the company or equivalent, located on the scene for the purpose of interpreting economic and other information that may be of importance to industry. This is especially true for corporations doing businesses in foreign countries. Establishing effective working relationships with bankers, business leaders, and key government officials is vital to long-term success. Increasing democratization and more stable political situations in many developing nations will enhance prospects for expanding world trade and for developing multinational partnerships for production and marketing. Nevertheless, as discussed above, progress is likely to come in fits and starts with some countries faltering in their economic development efforts and others achieving some degree of success. A major factor in the globalization movement is the establishment of appropriate ground rules governing future international trade and capital investment. International agreements have been put in place in recent years that represent the early stages of expanded world trade. A few of the more significant agreements include the North American Free Trade Agreement (NAFTA), involving Canada, Mexico, and the United States, and the broader General Agreement on Tariffs and Trade (GATT). Of course, the European Union and other regional compacts are emerging as major multinational trading blocs. On the domestic front, major changes are expected in demographic characteristics, population shifts, educational attainment, employment and occupational choices, and personal wealth—each having profound implications for capitalism. Perhaps the most dramatic changes will be in the makeup of the human population. Life expectancy in the United States is predicted by some experts to increase by around 15 to 20 percent over the next century. In 1996, the life expectancy of men at age 65 was 15 additional years. For women, it was 19 additional years at age 65

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in 1996. By the year 2070, men at age 65 can expect 18 more years, while women would be expected to live 22 years after their 65th birthday. The median age of the American population will rise accordingly as the birth rate remains at a low rate of around 1.8 per 1,000 population. Aging of the American population will result in a growing ratio of “dissavers” to savers, that is, a higher portion of the citizens who spend more than they earn during retirement years. As the population ages in relation to the whole, its needs for services and products will comprise an enormous and growing market. Enlightened businesses will recognize that these sweeping demographic changes will herald an era that is no longer almost entirely youth-oriented. The ramifications of this “mature market” are expected to encompass virtually every aspect of the business world, including health services, travel and leisure pursuits, new designs for housing and community living, and more convenient forms of transportation. Another demographic and cultural phenomenon in the United States is the rapid growth of ethnic minorities. Some demographers predict that the Hispanic population in America will surpass that of African-Americans by the year 2010 and that the Hispanic market, now at an estimated $323 billion, will reach $965 billion in that year. Sol Trujillo, CEO of U.S. West Communications, stated in a recent report, “Change is irrefutable. The white population is not replacing itself, and the non-white groups are growing at rates greater than replacement both through natural increase and immigration.” In the past decade, there have been remarkable population increases in Asian, Hispanic, and other minorities and a growing diversity of these groups. The implications of this rapidly growing and increasingly diversified population for American business are enormous. Marketing strategies need to reflect cultural preferences among certain groups. Likewise, sociocultural mores and taboos should be learned and accommodated in product development, advertising, and public relations. Further, recruiting and absorbing recent ethnic immigrants into the workplace will present challenges to many businesses. DEVELOPING A NEW CORPORATE STRUCTURE AND PHILOSOPHY The Corporation Defined In a capitalistic economy, the business organization—whether a small farm or retail store operating as a proprietorship or a major conglomerate corporation—is generally considered to be the means by which a nation’s economic wealth and employment is generated. The majority of American businesses are classified as “small business,” that is, firms with less than

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500 employees. Small businesses have created over half the nation’s employment. However, the corporate form of business organization is emphasized here, since the operations of corporations have a pervasive impact on virtually all aspects of a national economy. Corporations are unique entities as chartered in most countries. Their existence, classes of ownership, and other characteristics are defined in their charters. Corporations are legal “persons” and can sue and be sued in the same manner as any human business owner. Thus, corporations can take on a life of their own irrespective of their owners or managers. Owners (shareholders) may change often, but the purchase or sale of their shares of stock may have little bearing on the future existence of the corporation. In the United States, most privately owned corporations are not chartered by the federal government; rather, they are chartered by a state. Once chartered in the “founding state,” it is usually not necessary for corporations to obtain additional charters from other states. However, companies are required to acquire licenses in other states and sometimes localities where they operate. Each state’s corporate charter requirements are somewhat unique, but they are sufficiently uniform that corporations operate throughout the nation under their initial charter and individual state/local licenses. For all practical purposes, the shareholders are indeed the owners and greatly influence the operations and future life of the corporation. In modern forms of ownership, shareholders usually are either of two types: voting, common stock owners or nonvoting, preferred share owners. The vast majority of shareholders are owners of voting common stock. Shareholders are represented by a corporate board of directors who are authorized to act in their behalf in all corporate matters. What or who is a “corporation”? From the discussion above regarding the charter that establishes a corporation, we can state that it is a legal “person” that exists for one or more purposes, which are often defined in the initial charter. As a legal piece of paper, it can lie dormant without activity or it may provide the legal wherewithal to set in motion an enormous array of human activities. Some would say that a corporation has its shareholders as the primary “owners” and all its efforts should be directed toward enhancing the value of the shareholders’ investments. Others would say that a corporation also has an allegiance to its employees although most have little or no financial investment in the firm. Rather, employees have commitments of time and loyalty—“sweat equity.” Employees may be regarded as important stakeholders; however, they have little control over their destinies insofar as tenure, compensation, or advancement is concerned. Pronounced changes have occurred over the past few decades in the basic types of control exercised over corporations. Formerly, most cor-

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porations were controlled by top management under general policy guidance by their boards of directors. Recently, however, effective management control has shifted significantly to corporate investors, particularly money managers of mutual funds, pension funds, and insurance companies, which hold large share positions in corporations. In the process, top corporate management has relinquished considerable control to these outside financial interests. Communities that provide the human and physical environments for business operations are also among the “stakeholders.” The socioeconomic environments of communities are greatly affected by the progress of corporations. Host communities naturally take great interest in the welfare of their businesses. The loss of jobs from corporate layoffs or plant closures is often devastating to many communities. Unfortunately, in many cases, corporations exhibit little regard for the adverse socioeconomic effects of downsizing in cities and towns where they are located. Another set of stakeholders to be considered in corporate planning is, of course, customers, especially large and regular ones who rely on the delivery of quality products or services at a fair price. It is axiomatic that “the customer is always right.” While this may be far from the truth in actual practice, the customer is sufficiently important as to warrant a “place at the table.” Broadly speaking, a corporation may be defined as an entity consisting of shareholders that seeks to accomplish certain common objectives, assisted as necessary by human and other resources as stakeholders. Corporate philosophies concerning interactions with stakeholders outside the immediate purview of corporate operations vary widely with some public-minded firms taking an “open-door” humanitarian approach while others hold to a policy of strict nonparticipation by “outsiders,” including employees and community leaders. Functions and Responsibilities of Management The traditional corporate organizational structure includes a board of directors elected by shareholders at annual meetings, a president and other corporate officers, a line-and-staff arrangement of upper, middle, and first-line managers, and nonmanagement technical, operations, and support personnel. Service-oriented corporations usually differ in their organizational structures from manufacturing firms. In either case, strategic planning and decision making are conducted at the top organizational levels. Corporate management, consisting of top corporate executives and the board of directors, wields the authority and economic power to govern the fortunes of the firm and its employees and sometimes its suppliers and customers as well. Authoritarian philosophies largely dominate cor-

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porate management, although some firms have begun to “democratize” their organizational arrangements through such approaches as “quality circles,” semi-independent project teams, matrix organizations, Theory X, Theory Y, and other structures in efforts to enhance productivity by increasing workers’ sense of participation in decision making. Changing Times in Employee-Management Relations With the rise of large corporations following the Industrial Revolution also came the establishment of labor unions in the early decades of the twentieth century as means for workers to band together to form blocs of economic power that they lacked previously. Unions were effective in negotiating wages and working conditions for workers in the garment, steel, coal, aircraft, chemical, and other manufacturing industries. To a lesser extent, unions made inroads into some service industries and white-collar professions. Union membership in the United States has declined dramatically in the past 30 years as major manufacturing and mining industries have undergone significant changes due to foreign import competition, shifts of production outside the nation, and technological innovations requiring reduced workforces. Union membership has dropped from more than 25 percent in the early 1970s to around 14 percent of the national workforce. As a result, unions have lost much of their former economic and political power. This has introduced an era in which management-labor relations have been largely free of conflicts. However, there are signs that unionism is coming into favor again as employee anxieties over job security and compensation appear to be on the increase. The recent United Parcel Service strike was the first major nationwide walkout in a number of years, and many observers indicate it may be a harbinger of other conflicts. The UPS strike of 1997 was brought about by working conditions that have become fairly typical of other corporations in recent times, namely, growing use of “outsourcing” (i.e., utilizing outside suppliers to acquire goods and services formerly performed by corporate employees), parttime workers, and temporary employees. These methods of acquiring labor have been increasingly popular since the wage rates for part-time and temporary personnel are usually considerably less than those of fulltimers. Additionally, fringe benefits are not usually provided to other than regular, full-time employees. The Teamsters Union claimed UPS had created 46,000 jobs over four years of which 38,000 were part-time. It stated that 13,000 of these employees were working at least 35 hours per week and that more than 10,000 of these workers should be reclassified as fulltimers with higher pay and benefits. The strike was settled when UPS agreed to convert 10,000 jobs from part-time to full-time status with dou-

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bled hourly pay, to maintain pension plan participation at the Teamsters Union, and to raise wages for full-time employees by 15 percent and up to 35 percent for part-timers over a five-year period. Major labor strikes in 1998 at Bell Atlantic and Northwest Airlines also reflected growing frustrations of employees in meeting company demands for increased workweeks and continuous productivity improvements. In the Third Millennium, employees may become more emboldened in their dealings with corporate management. Workers are becoming increasingly educated and aware of the economic forces that govern a capitalistic economy. They have seen that their long-term loyalty to an employer counts for little when economic downturns occur. They have watched helplessly as their employers replaced domestic jobs with imported goods and moved operations overseas where labor is cheap. Their family’s health care may be adversely affected by reductions in their fringe benefits and other compensation. They rue the fact that their spouses may also be required to work, even when they had rather have their spouses stay home to nurture the family. In fact, some are working two or three jobs in attempts to cope with stagnant wages from their primary jobs. They are required to pay for expensive day care services for children in order for both parties to work. If these conditions persist, unionism will have a strong basis for a revival. In their quest for lower costs of operation, corporations typically focus on labor since these variable costs can be controlled by hiring, firing, and compensation rates. Management often can assert less control over fixed costs such as facilities and equipment that cannot be “modularized” readily for disposition. Even under a typical union contract, a corporation can still dispose of workers (union or nonunion members) but usually only under specified conditions such as seniority preference rules. Virtually all of the restructuring activities in Corporate America have been aimed at cost reductions and have come at the expense of workers’ jobs, leading to adverse socioeconomic effects on families and communities. These cost-cutting efforts, however, have posed considerable expenses to many companies. For example, front-end charges taken in recent cost-cutting efforts ranged from $162 million by Raytheon Company to $1.8 billion by GTE Corporation. Delta Air Lines reported a $600 million charge in one calendar quarter in 1994 as part of its efforts to reduce annual losses since 1991. In laying off up to 15,000 employees in stages over a two-or-more-year period, Delta will incur costs of severance pay, job counseling, and limited-time health insurance. For over a decade, productivity in the United States languished with annual growth rates averaging just about 1 percent. Meanwhile, productivity in Japan and Europe rose significantly, increasing the prospects of sharp foreign competition. Corporate America experimented with various types of organizational arrangements and increased use of labor-saving

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equipment, especially computers, in efforts to increase productivity. During 1996 and 1997, productivity resumed a much-needed upward swing with reports of quarterly increases of around 2 percent or higher. With the possible exception of Japan, productivity in the United States appears to be at least on par with its major industrialized competitor nations, especially when considering wage differentials. Japan’s population of 130 million compares with 270 million for the United States. With approximately 2 percent of the global population, Japan produces more than the United States from its manufacturing sector. Japan produced $33,701 in Gross Domestic Product per worker in 1996, while the United States generated $26,300 GDP per employee. Productivity will ultimately be a major factor in a nation’s competitiveness in the global economy. Workers and members of the general public have been told that American corporations are earning record profits over the past three years, that corporate executives are receiving unprecedented huge compensation packages, and that the stock market has soared, making many Americans quite wealthy. Meanwhile, the average worker is earning only slightly more than he/she was earning a decade ago. The disparity of incomes between typical workers and the “capitalists” has become a sore point, leading to cynicism about the real goals of capitalism. This skepticism and the increasing concerns over long-term job security and national economic stability may lead to increasing efforts by organized labor, consumer groups, and new employee coalitions to revamp the nation’s labor laws and to exert pressure on corporations to develop more equitable employment systems. “Downsizing,” “rightsizing,” “reengineering,” and “restructuring” have been among the terms used euphemistically by corporations in recent years to announce layoffs. Losses of jobs in the 1980s and early 1990s produced national unemployment rates that grew to almost double digits. Many workers were forced into early retirement while others lost jobs without compensatory benefits except perhaps for a few months of severance or unemployment payments. Other employees have faced downgrading of their jobs with reductions in pay. Still others have suffered loss or reduction in benefits such as health insurance coverage as corporations seek ways to cut costs. Many people, especially those who do not qualify for overtime compensation, are working longer hours. And a large fraction of the workforce is holding down more than one job in efforts to maintain their family standard of living. With the major economic turnaround that began in 1996, the employment picture is much improved with the national unemployment rate declining to around 4.6 percent in early 1998. Some corporations began to complain about labor shortages in some areas.

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However, there are signs that the American economy may be slowing slightly. New rounds of layoffs have been announced recently by a number of large corporations. One of these, Eastman Kodak Company, plans to terminate 10,000 workers in an effort to reduce costs by one billion dollars in the face of mounting competition from the firm Fuji of Japan. These losses are in addition to 40,000 jobs previously cut by Kodak since 1983. In the utility industry, a recent example is New Century Energies, a new holding company formed from a merger of Public Service Company of Colorado and Southwestern Public Service Company of Amarillo, Texas. PSCo laid off 2,100 workers to facilitate the merger with SWPSCo and in the process paid its retiring chairman, Del Hock, a $4.1 million bonus in addition to his $246,000 regular bonus and salary of $450,000. The deal left a bitter taste in the mouths of many long-time PSCo workers who were terminated or forced into early retirement. The perception of many Americans is that big business has become callous and self-serving to the point that it cares little for the plight of its employees and the community at large. This was not always the case: only a few decades ago, layoffs were events not relished by top corporate management. Indeed, many managers felt the stigma of layoffs almost as keenly as the laid-off workers since layoffs were considered evidence of some failure on the part of management. There are, however, many companies with a sense of moral as well as economic responsibilities to stakeholders other than just the shareholders. In an article in the New York Times entitled “God and Toothpaste” (12/22/96), Tom Chappell, CEO and cofounder of Toms’s of Maine, a small but robust $20 million manufacturer of personal hygiene products, said he had staked his company on the belief that a person can run a business as both “a capitalist and a moralist.” He adds, “The ultimate goal of business is not profit. Profit is merely a means toward the ultimate aim of affirming the health and dignity of human beings and their families, affirming the aspirations of the community, and affirming the health of the environment. . . . The world of business today is one big accommodation for the sake of the bottom line . . . and people’s souls are being sold right down the river for it.” Another case of corporate compassion was that of Malden Mills in Massachusetts, a textile manufacturer employing some 3,000 workers, which suffered a massive fire in 1995 that almost destroyed its factory. In a gratifying surprise to his staff and nearby communities, company CEO Aaron Feuerstein responded by retaining most of his workers on payroll during the three months required to restore the plant. Most of them were put back on their regular jobs, and those that he had to lay off were given help in finding other work. He said, “I have a responsibility to the work-

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ers, both blue-collar and white-collar. It would have been unconscionable to the community. It would have been unconscionable to deliver a death blow to the cities of Lawrence and Methuen.” In purely economic terms, the “bottom line” is, of course, vitally important over the long run. Corporations may be able to withstand shortterm losses, but their long-range survival depends on efforts of a committed workforce creating reasonable profits. Likewise, the welfare of the workforce is based on private sector profits. Management and labor continue to engage in an economic “tug of war” seeking what each believes to be a “proper” balance in the cost-price struggle. To what extent will new forms of management-labor relations evolve during the twenty-first century? Will working people feel the need to organize under some new arrangements or to join existing labor unions as means of gaining economic and political power and recognition of their rights and needs? Or will workers feel that their labor union affiliation will jeopardize their jobs? On the other side of the table, management will be faced with a growing, mature, yet skilled workforce being challenged for jobs by younger workers with family obligations. Will there be enough jobs to go around? Corporate treatment of employees has taken a turn for the worse in the last decade as workers have encountered increased discrimination in hiring and advancement. With the relative scarcity of employment opportunities and the great number of persons competing for jobs during the last decade, it has been easy for corporations to be quite selective in hiring. This has led to many cases of racial, gender, and age discrimination. A recent case in point is the lawsuit filed by a dozen former employees of Storage Technology Corporation, a large manufacturer of computer information storage devices, which charged the company with discrimination against older workers. Court documents revealed that the firm had prepared memoranda and employee manuals that claimed, among other things, that older workers were “less productive and were compensated more than they contributed to the company” and that “two older workers are needed to perform one job.” One company memorandum stated that the aging workforce may increase health and insurance costs and cause decreased morale among its younger workers. The case is pending. A similar lawsuit charging age discrimination was brought by 2,000 former employees of Lockheed Martin, a major aerospace firm, last year. The Equal Employment Opportunity Commission decided to award over $21 million to a number of the plaintiffs and other claimants and ordered the company to rehire 450 former workers. As the nation’s population grows in numbers and longevity, and its ability to work much longer careers increases, the private sector may be forced to acknowledge the emerging importance of older Americans in

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the economy. Older Americans are both customers and skilled workers and should be recognized as such. Age, gender, religious, and ethnic discrimination is of course unlawful, yet it is practiced widely despite official and social pressures to prevent it. The sweeping changes in labor-management relations occurring over the past eras will likely continue, perhaps in different forms, during the Third Millennium. From the feudalism of the Middle Ages, to slavery in America during the sixteenth to nineteenth centuries, to the rise of labor union power in the 1920s, and more recently to the decline of unions, the history of labor-management relations has been marked by periodic cycles of strife and peace. Until the UPS strike in 1997, relative peace prevailed for much of the last two decades. If capitalism and democracy are to achieve their goals of creating wealth and providing the means by which wealth can be shared equitably, a new philosophy should guide management-labor relations. Creative approaches to job creation, compensation, job security, and upward mobility of workers must be implemented. Autocratic management practices should give way to more participatory approaches allowing employees a bona fide voice in their work environment and operations. Management policies should include more attention to employee seniority and equitable compensation in order to promote loyalty and job security. Financial Markets and the Corporation Historically, the prices of corporate shares have been determined on the exchanges largely based on performance of the corporation and future financial expectations. Shareholders buy stocks they believe are increasing in price, and sell shares that are expected to decline. Except for speculators who often seek short-term gains, many shareholders consider the long-term growth potential of a particular stock when making investments and hold ownership over fairly long periods, with lesser concern for the short-term fluctuations in price and dividends. Of course, during periods of major stock market price declines, shares of even the most stable or growth-oriented corporations often decline. But the tendency of many investors to buy stocks for the long run provided a measure of desirable stability to the financial markets. The stock market in recent years has changed markedly in its volatility and growth patterns. The ascendancy of mutual fund markets has provided both stability and volatility since it is now common for large blocks of stocks to be bought or sold instantaneously, affecting share prices significantly. From the investors’ standpoint, mutual funds provide a convenient means of investing in Corporate America by selecting funds that consist of stocks with the degree of risk and potential return that the investor is seeking. Mutual funds have become quite popular as an in-

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vestment tool over the past few decades and have generally enjoyed a profitable history. The great growth in mutual funds and institutional investors, such as insurance companies, within the American financial market system has transformed decision making in the corporate world. Corporate managers are now under constant pressure not only from their own boards of directors and shareholders but also from stockbrokers, mutual fund managers, and institutional investors concerning stock prices and any decisions the corporation makes that may affect share values. Long-range corporate strategies and profitability have taken a back seat to immediate quarterly financial results and maximization of current stock values. Top corporate managers are often shareholders as well as salary earners in their corporations. Many chief executive officers (CEOs) are given stock options that they may convert into shares. This form of executive compensation is generally considered desirable since it provides some incentive to enhance corporate performance. In some instances, however, this may give rise to a conflict of interest since the CEO may exercise his options when stock prices are low, knowing in advance of decisions he will make that will probably cause the stock value of his corporate shares to rise. In such circumstances, a CEO could reap substantial profits because of this “insider” knowledge. He and stockholders may gain substantial monetary benefits although his company as a whole may not receive such immediate gains. Further, his actions may result in widespread termination of his own employees; he benefits, they suffer. There have been many cases in which corporations announced downsizing decisions, resulting in increases in stock prices. Stock market analysts interpreted these moves as signs that the corporations were cutting costs and thus enhancing profit potential. Trade sources tell of pressures by stock brokers placed on CEOs and corporate boards of directors to “do something” to excite interest in their securities. A recent example was the efforts of Wall Street stock brokers to influence management at American Telephone and Telegraph into corporate actions that would increase share value. In this case, members of the AT&T board of directors were pressured by Wall Street brokers into removing the AT&T president who had been on the job less than a year. In some cases, these overtures have led to premature or ill-advised “restructuring” or “downsizing” events. These announced events often resulted in an immediate share price rise that benefitted both shareholders and CEOs who held sizable stock positions or options. Most of these events involved large layoffs of employees. Compensation of Corporate Executives and Other Workers Earlier, the troubling phenomenon of the widening income gap among socioeconomic groups in the United States and the similarly growing dis-

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parity of wealth between the developing nations and industrialized countries was noted as a sign of failure of the capitalistic system on a global basis. Likewise, on a national scale in the United States, income disparities among workers have shown a startling spread in recent times. According to data from the U.S. Bureau of Labor Statistics, the current average wage rate in 1996, adjusted for inflation, was $10.49 per hour, which is some 8 percent below the all-time high of $11.35 per hour in 1973. In an earlier section, it was noted that, when inflation is accounted for, average wage rates have plateaued and actually declined in recent years. As a result, family incomes have likewise stagnated despite the fact that a growing number of families have two wage earners. Not accounted for in the direct wage rate data are fringe benefits for corporate employees, which, like wages, have been reduced or eliminated outright in many corporations as cost-saving measures. As a result, many employees and their families are now without any health insurance and often cannot afford to buy it. Commerce Department data indicate that wages and other compensation as a percentage of national income declined for four consecutive years (1993–1996) while corporate profits as a share of national income grew sharply during the same period. Meanwhile, wage rates in other industrialized nations increased to levels virtually equal to or surpassing those in the United States. Increasing affluence among upper income Americans is, however, an entirely different matter. This phenomenal growth also applies to the top executives of many corporations. Salaries in the seven digits, large bonuses, stock gifts and options, and a host of executive perquisites, including various forms of “golden parachutes,” have become commonplace over the past few years for many of America’s CEOs. In 1974, corporate top executives earned an average of 35 times more than the average production worker. By 1990, however, that ratio had leaped to 120 times the average employee, according to a recent survey. This startling statistic indicates a fundamental change in management philosophy among many corporations, a shift from emphasis on production and marketing achieved by internal development to one centered around financial manipulation and growth by merger and acquisition. Many of the highest-paid executives have financial, accounting, or legal backgrounds, whereas in prior years, engineering and business administration were the favored professional backgrounds for CEOs. Rand Araskog, chairman of ITT Corporation, has been criticized for accepting $5.5 million in additional stock in 1996 (and a total of $24 million in stock over the past five years) along with his salary of $4.3 million and a total annual compensation of $10.47 million while laying off 125 office workers in order to fight off a hostile takeover attempt by a rival hotel chain, Hilton Hotels. The layoffs were designed to raise the price of ITT stock, making more expensive the takeover attempt.

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Walt Disney Company’s chairman, Michael Eisner, received one of the most lucrative compensation packages in American industry, which in 1996 included $8.65 million in salary and bonuses plus stock options estimated by the company at an unprecedented $196 million. Other examples among executive compensation packages are: Roberto Goizueta of Coca-Cola, who earned over $7 million in cash and roughly $25 million in stock options in 1995; and Jack Welsh of General Electric, who received an estimated $8 million in salary and bonuses and over $10 million in stock options in 1996. A recent study of Colorado businesses, conducted by Nordby International Inc., indicated the wide spread of annual compensation of chief executives among industries in that state. The highest annual pay reported was $18.3 million for Larry D. Hall of KN Energy Corporation, followed by Milton Ward of Cyprus Amax Minerals with $11.1 million. Much smaller companies in the survey reported 1996 compensation for their chief executives in the range of $45,000 to $125,000. In evaluating the financial effectiveness of CEOs in the survey, Nordby calculated the ratio of annual executive compensation to dividends submitted to shareholders and changes in stock price. Some of the smaller companies exhibited much higher ratios than many larger ones. For example, Thomas Geimer of Acceler8 Technology earned $107,958 in 1996 while returns to shareholders were 614 percent. Other smaller firms showed returns ranging from 41 percent to 243 percent. Golden parachutes, in the form of enormous severance pay, were given to three top US West executives when their positions were eliminated as part of a split of the firm into separate telephone and cable-television companies in 1998. The US West Chairman, Richard McCormick, will be awarded $24.5 million in severance pay in addition to his regular $2.0 million salary and fringe benefits. The company’s chief lawyer, Charles Russ, will receive $11.3 million, and Michael Glinsky, Chief Financial Officer, will be awarded $9.3 million in the $45.1 million package for the three executives. As reported by the Denver Post, the lump-sum severance benefits were determined by a formula approved by the board of directors equal to: three times annual base salary, three times annual shortterm bonus, three times the value of stock option grants under a long-term incentive plan, the value of the most recent grants, and the value of an additional three years of company service. In announcing the packages, McCormick said that the shareholders, not the ratepayers, will pay the cost. A spokesman for a consumer advocate group, Chuck Malick, criticized McCormick’s comments indicating that US West is a monopoly with huge profits that can afford these huge rewards. The unheard-of scope of these and other corporate compensation packages is baffling in view of the stated intentions of many corporations to control costs. Some economists as well as consumer advocates deplore

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recent trends in providing huge compensation for top officers on the grounds of unnecessary expense and that these policies stir further resentment among corporate employees. Corporate Growth Strategies Internal expansion, diversification, technological innovation, as well as acquisitions and mergers with other industries are among the factors usually considered by corporations in strategic growth planning. For decades, the favored option was internal growth, since it usually provides autonomy of action and a measure of stability within the organization even under conditions of change and growth. Some corporations may not want to compromise their management structures or philosophy by allowing participation of “outsiders” via mergers or acquisitions, despite the possibilities of receiving new financial resources or technological knowledge. The internally focused approach has obvious limitations, however. Expansion by relying strictly on internal resources may be restricted by the ability of the corporation to finance such endeavors. Also, the injection of new ideas and assistance from outside sources can often be beneficial to firms that are governed by long-tenured managers, outdated technology, or product lines that need rejuvenation. During the 1970s and 1980s, the trend in corporate mergers was toward creation of conglomerates that would bring diversification or complementary functions to the merging entities. While there were some successes, many conglomerate mergers were economic disasters. Incompatible technologies, marketing blunders, and a host of management problems plagued many of these ill-conceived corporate marriages. The new trend is generally toward mergers of similar businesses, often former competitors, in efforts to expand market share. While the diversification strategy was largely immune from antitrust concerns, mergers of former competitors, especially those that are dominant in an industry, may give rise to monopolistic practices and thus be of interest to trustbusters. Growth of larger corporations in the past two decades has increasingly been sought by mergers and acquisitions. In their search for ways to expand rapidly, many firms have chosen to merge with or acquire other corporations in whole or part. The pace of mergers and acquisition activity, both hostile and friendly takeovers, reached all-time record levels during 1998 with some 11,000 applications reported by federal agencies totalling some $1.6 trillion. Among these deals were several megamergers with values in the tens of billions. Industries especially affected were the telecommunications, energy, aerospace, biomedical, and other hightechnology enterprises.

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Exxon and Mobil Oil, America’s two largest oil companies, recently announced a merger totaling $80 billion, the largest one in history. Protracted low oil prices and a global petroleum surplus were given as reasons for the merger in the interest of survival. The proposed merger may be challenged on antitrust grounds. One of numerous mergers in the telecommunications industry was the recent $37 billion takeover of MCI by the smaller WorldCom Inc., which the latter firm has said would provide significant competition to the nation’s telecommunications giants such as AT&T and Sprint. In its offer to MCI, WorldCom outbid GTE Corporation’s offer of $28 billion and a $24 billion bid by British Telecommunications PLC. The second most lucrative merger in 1997 was the Bell Atlantic Corporation deal with Nynex Corporation in an exchange of stock valued at $25.6 billion. The merger trend continued in 1998. Shortly after these mergers were announced, others involving American Telephone and Telegraph (AT&T), Telecommunications (TCI), US West, and Global Crossings Ltd. made news. Mergers over the past two decades have been consummated largely unchallenged by the federal antitrust agencies. Not since the federally directed breakup of the former telephone giant AT&T has the private sector been so free of federal interference in creating large combines of corporate resources. Many observers have questioned many of these mergers as possible candidates for antitrust action due to their apparent monopolistic characteristics. During the probusiness and antigovernment Reagan and Bush administrations, federal antitrust activities were virtually nil. The hands-off attitude of government was said to be justified on the basis that, in the expansion of business, bigness was needed due to increasing economies of scale and that stronger domestic corporations were required to challenge foreign competition. The corporate merger trend has also spread globally. In Japan for example, 1,476 mergers were approved by the Japan Fair Trade Commission in 1996. Acquisitions by American companies in overseas firms are taking place with increasing frequency. One example is the purchase of a British utility by Public Service Company of Colorado. The phenomenal growth of the Microsoft Corporation has resulted from mostly internal product development and aggressive marketing, led by Bill Gates, CEO and cofounder. Nevertheless, Microsoft has acquired several smaller companies, merging them into the firm. In one of the few antitrust actions taken by federal regulators in 1997, Microsoft has been fined one million dollars per day for allegedly monopolizing the market for certain computer software providing access and facilitation in using the Internet. In commenting on the proposed WorldCom-MCI merger, Donald Sturm, a well-known businessman in Denver, said, “There’s a lot of synergy between the two companies so they don’t have to duplicate facilities,

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they don’t have to duplicate people.” His comments seem to reflect the attitude of many business managers involved in planning mergers, namely, that increased efficiency will result when duplicate facilities and workforces can be eliminated via mergers. Naturally, these kinds of comments are received with dismay by affected employees and others who are concerned with human resource utilization or monopolistic corporate actions. According to the human resource company Challenger, Gray, & Christmas, job cuts announced in May 1997 alone totaled 21,004, 30 percent of which resulted from corporate mergers. Thus, mergers and acquisitions are often greeted by workers and the general public with skepticism and concern. Corporate mergers and takeovers have continued unabated during the administration of President Bill Clinton, despite the expectations that his appointed agency heads at the Federal Trade Commission and the Antitrust Division of the Justice Department would be more aggressive in prosecuting monopolistic deals. Under its new chairman, Robert Pitofsky, the FTC has redefined basic rules for evaluating antitrust cases with emphasis on effects of mergers on specific product line markets, both domestically and globally. The hypercompetitive markets in several fields are changing so rapidly that some antitrust analysts have come to believe that markets are largely self-correcting and that potential monopolies can exist only for a short time before other competitors will enter the field. This view may have merit for some markets, but not others. For instance, the “entry” requirements for competing in certain low-technology markets, such as the manufacture of wood furniture, are likely to be orders of magnitude less than that for viable competition in another, high-technology market, such as commercial jet airplane production. Thus, the antitrust reviewers at Justice and the FTC need to recognize the economies of scale, entry requirements, and market penetration characteristics of each specific market when evaluating cases. In pursuit of growth, corporations have utilized the merger-takeover strategem widely for over two decades, with mixed or uncertain results. Costs of implementing most takeovers and mergers have been high, including financing costs, downsizing costs where applicable, and accelerated write-offs of certain assets. For some mergers, such as in the aerospace industry, the very survival of many of the corporations was at stake. In other industries, such as the burgeoning telecommunications industry, mergers and takeovers are being directed toward greater market penetration or dominance. Growth in industries subject to regulation, such as electric utilities, has in recent years focused on two strategies, namely, diversification, and the projected deregulation of electric power. (The latter is more fully discussed in Part III.) Electric utilities have branched out into fields such as real estate or power production in foreign lands. Many of these expan-

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sions involved leveraged mergers and buyouts although some modest deals were financed internally. Recognizing that approximately one-half of the national employment is furnished by small businesses, growth strategies applicable to these small firms should be institutionalized more firmly in public policy. Although several federal and state programs provide technical and financial assistance to small businesses, these efforts are relatively small and often subject to political manipulation especially at the local level. While laissez-faire advocates may frown on special aid to fledgling firms, it seems clear that such assistance for this sector of private enterprise is well justified in the national interest when considering the fact that most new jobs are created by small businesses and that the next generation of major corporations will likely evolve from these meager beginnings. THE CORPORATION AND THE GLOBAL ECONOMY Globalization has been touted as a requisite to the economic growth of both industrialized and developing economies. Industrialized nations are now highly dependent on critical imported supplies such as crude oil while developing nations rely on imports of machine tools and implements in their quest for increased industrialization. Corporations in industrialized nations are aggressively pursuing increased foreign trade with the blessings of their governments. The merits of globalization have been stressed by advocates in the business community and political circles as far outweighing the risks to the domestic economy or national security. By increasing domestically produced exports vis-a`-vis imports through enhanced productivity, the net inward flow of capital will contribute substantially to national economic growth. Promoters also point to the desirability of national industrial specialization in which each nation develops its strong points in product development. In this way, they argue, competitive advantages will result in enhanced exports. Multinational corporations are a special case in the global economy. Multinationals, by definition, may have production facilities in several nations. In times of political instability or economic stress, their allegiance politically could be called into question by one or more host nations, possibly jeopardizing their economic condition. Of course, multinationals have the possible advantage of being able to shift production to their facilities in more friendly host countries. The risk of investment in developing nations, of course, varies widely depending on the political and economic stability of each nation. Numerous instances of seizures and confiscation of American or other private corporate facilities by “host” foreign coups or entrenched governments remind us of the risks of investment in many foreign lands.

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In Cuba, for example, during the early phase of Fidel Castro’s regime, many American businesses were seized including a large garment factory owned by BVD Inc. A former co-worker of the author was general manager of the facility when it was confiscated. He told of persecutions of his family and other Americans before they eventually escaped to the United States. The stock market and banking turmoil in the Hong Kong, Japanese, and other financial markets in 1997 was largely the result of financial excesses in Indonesia, Malaysia, South Korea, the Philippines, and Thailand. Over the past few years, the economies of these countries had mushroomed, leading to massive building programs and speculation in the currency and stock markets. Investors borrowed heavily from the United States and Japan at low interest rates of perhaps 2 percent with expectations of returns of 8 to 10 percent. By mid-1997, it became apparent that these nations could not continue to support high debt costs without compensating revenues. Overcapacity in many industries had developed in anticipation of further high industrial growth. Financial bailout by the International Monetary Fund ensued. The Hong Kong stock market crash reflected financial difficulties of developing nations in one part of the world; however, the increased degree of globalization in financial markets led to a situation in which financial markets worldwide were adversely affected, including the New York Stock Exchange, which experienced a brief decline stemming from the Southeast Asia crisis. Two points regarding increased globalization are relevant: First, the growing linkage among world financial markets can pose serious consequences even in areas not directly involved in the financial transactions. Corporations whose shares are traded on several international exchanges can be adversely affected during times of financial stress in even remote regions. Without an effective means of decoupling the linkages of the financial markets, corporations and economies of even industrialized nations may become much more vulnerable to foreign economic and political events. National security could be undermined in extended adverse crises. Second, accelerated globalization can lead to overcapacity of production facilities, which can in turn cause reduced prices and wages in order to stimulate sales and support production that will utilize the excess capacity. This can generate downward pressures on prices and wages among competitors. Reduced wages and income can further reduce the ability of workers, who are also consumers, to purchase goods and services. Therefore, a recessionary spiral can be set in motion that can have dire economic consequences. Jack Welch, chairman of the General Electric Company, recently stated, “There is excess capacity in almost every industry.” There is a great ten-

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dency for industry to overbuild in order to compete in the global economy. In the short run, excess industrial capacity can be absorbed by cutting prices in hopes of stimulating sales. This may be effective in some markets, but not others. Overcapacity in the long term is another matter; most corporations cannot sustain high rates of overcapacity for extended periods without serious economic consequences. William Greider, an economics journalist, stated in his recent book, One World, Ready or Not, that the global economy is capable of selfdestruction and that “it produces more and more goods even as it suppresses wages at both ends of the world, in industrial as well as developing countries.” He added, “You cannot do that forever—producing more and cutting the wages of those who buy—without some collapse.” In an unregulated global economy, periodic overcapacity and financial crises seem inevitable. When the political dimension is added to these uncertainties, the global economy appears to be at best a mixed blessing. Private investment in this international quagmire is a risky proposition. For astute business leaders who are knowledgeable about the specific risks involved in ventures, the rewards of global investments may be significant. However, political uncertainties in much of the world should give pause to any but the most experienced capitalists in undertaking large ventures. Political leaders of the industrialized nations have supported the concept of globalization as a means of enhancing economic growth in their own as well as other nations and as a vehicle for infusing capitalism and democratic governments in developing nations. Elements of the global economy may be developed under authoritarian as well as democratic governments. Corporations will likely continue to participate in markets that may be manipulated by authoritarian rule while also enjoying success in laissez-faire foreign markets. Thus, globalization will probably continue to evolve as a mixture of free and regulated markets. To what extent should the global economy be regulated? While considerable research and debate should attend discussions of global economic regulation, a top-priority issue would be financial controls that would address the issue of international debt management, particularly in developing nations. Even some industrialized nations, such as Japan, have incurred problems in debt and reserves management. Other related issues include measures to prevent foreign “dumping” (i.e., flooding a market with products at very low, sometimes subsidized prices as a means to undercut competition), trade tariffs, import quotas, and worldwide minimum wages for nations engaging in foreign trade. Corporations will continue to confront a bewildering array of foreign issues in their efforts to participate in the global economy. No doubt these challenges will be ameliorated by some of the new international

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trade agreements, such as NAFTA. In some markets such as Europe, American corporations may find increasing competition due to the new “regionalism” developing in that area. Overall, however, the risks of doing business in foreign lands will probably diminish and the opportunities will be heightened during the Third Millennium. THE CORPORATION AND SOCIETY In democratic capitalism, the private business organization is considered the principal vehicle by which economic progress is developed and nurtured. Society, through its government, bestows upon business the right to conduct its affairs under a broad license. A corporation exists at the sufferance of government and is offered opportunities to earn a fair profit. In return for these privileges, society expects the business to operate lawfully and within the bounds of human decency. As a human institution, a corporation exists to serve mankind in many ways. Its owners are humans who invest in the organization and who seek a reasonable return on their outlays. Its managers are humans who are committed to guiding the corporation to success. Its employees are humans who invest their time and energies into the organization and expect appropriate compensation for their efforts and loyalty. Its customers are humans who expect to receive fair treatment in their purchases of goods and services. Its neighbors are humans who provide a socioeconomic environment for the employees and managers and who benefit from some of the economic activities of the organization. These are the immediate stakeholders of a business organization. There are other stakeholders to be considered; there may be citizens downwind or downstream from the corporation’s factories who may be affected by its emissions into the atmosphere or watershed. Within nearby communities, there may be schoolchildren who depend upon the local property tax revenues from the corporation for the quality of their education. In a larger context, the quality of a state’s highways, colleges and universities, and other elements of the public infrastructure is heavily dependent on the taxes paid by the corporation and other businesses. The majority of American corporations are regarded as good citizens; they pay their taxes, not gleefully, but with resigned acceptance in most cases. However, a disturbing trend has set in over the past two decades that portends trouble for many communities; namely, corporations increasingly are resisting raises in local property taxes in many states and some have threatened to relocate unless tax relief is given. Since most local schools are supported for the most part by property taxes, reductions in tax revenues are jeopardizing the efficacy of elementary and secondary education. While it is conceded that property taxes in some states are perhaps excessive, this is probably not the case everywhere.

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The point here is simply this: if corporations are to continue to rely on the public school systems for qualified future employees as well as for the education of their employees’ children, they should be prepared to provide their fair share of the financial support. Schoolchildren and their families are indeed among the stakeholders of a corporation. As the array of stakeholders becomes more diffuse and detached from the center of corporate ownership and decision making, the less visible and influential they become in corporate affairs. As a consequence, in modern corporate life, the stakeholders are usually confined to the owning shareholders and top management. Rarely is there any representation from this larger group of stakeholders in corporate decision making. Without effective interaction between the corporation and this extended family of stakeholders, it is likely that the community’s interest or the interests of society at large may not be considered in business affairs. Among the mandates of a typical corporation is the cardinal principle of seeking to earn profits acceptable to the owners, usually shareholders. What other mandates are given to a corporation? Obviously, a business must comply with all relevant laws, rules, and regulations despite their cost. If the corporation has a union contract, terms of such agreements should be honored. There are often binding contracts for material purchases and product delivery that impose mandates on a corporation. With all these burdens, corporations often resist other seemingly irrelevant issues such as community problems. Taxation, environmental regulation, and labor “climate” are often among issues addressed by corporations through state and local industry associations, chambers of commerce, and other business-oriented membership organizations. Representatives of local businesses in these organizations have opportunities to discuss among themselves common issues and to undertake joint actions. However, in most cases, these private industry groups do not provide for representation of the community at large. Society at large is the milieu in which private industry must operate. Therefore, it is in the best interests of industry to participate in the improvement of society rather than remaining aloof from it. It is beneficial to industry to contribute to the enhancement of personal incomes among societal members since those members are consumers as well as employees. Industry also benefits from the more equitable distribution of wealth in society for the same reason. The betterment of community socioeconomic conditions can be instrumental in improving the overall business climate and thus contributing to advantageous economic conditions for successful business activities. While there have been notable exceptions, the absence of corporate leadership in addressing socioeconomic issues has created a vacuum that

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government has often been pressured to fill, often inadequately. Surely there is a better way to develop a stable, viable economy, to create and sustain long-term employment, and consequently to foster improved family structures and neighborhood environments. Capitalism, as a system for private enterprise, can be made more humane and egalitarian while simultaneously maintaining individual initiative, efficiency, and profitability. Much greater involvement of corporations in social affairs can provide the impetus and resources in realizing the potential of both capitalism and democracy. THE EVOLVING THIRD MILLENNIUM CORPORATION The vast socioeconomic changes sweeping over the world since World War II continue to accelerate in both scope and velocity. The burgeoning populations of China, India, the African continent, the Arabic regions, and South America, as well as steady population growth in the industrialized nations, provide an enormous challenge to both private industry and government in providing goods and services for nations with widely varying economic resources and societal needs. In attempting to meet rapidly changing market conditions, corporations have undergone major restructuring activities in order to become more responsive in both economic and temporal terms. For the most part, however, these restructuring events have been oriented primarily to cost reductions or strategic advantages deemed to be possible through mergers or acquisitions. Under Third Millennium capitalism, the impacts of capital investment and other major business decisions are focused beyond simply the current financial position of the corporation; rather, its philosophy dictates that decisions should be based principally on the long-term health and potential of the business as well as the effects of business decisions on the affected industry, the communities where corporate facilities are located, and the nation as a whole. Human and Social Orientation Third Millennium capitalism recognizes that a corporation’s long-term profitability is based largely on “people”—its own employees and their productivity, corporate shareholders, customers, consumers, and society at large. Accordingly, businesses should be oriented to the general welfare of people as well as the productivity of their own employees. One method for providing citizen participation in corporate affairs would be to appoint members of the general public to boards of directors as voting members. Of course, it would not be desirable nor necessary to appoint a majority of directors from the general public sector; rather, two or three members perhaps would be sufficient to represent the pub-

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lic interest. This technique would probably be feasible only for larger corporations with boards of directors with perhaps more than 10 members. Universal Market Orientation The Third Millennium corporation does not overlook the value of local, regional, and national markets in the corporate quest for participating in international trade. Similarly, corporations would not be overly influenced by the seeming attractiveness of very low overseas wage rates in plant location and investment decisions. Similarly, preoccupation with participating in global markets would be tempered with realization that domestic business is the most reliable market over the long pull. Corporate involvement with communities where its facilities are located should entail more than simply joining a local chamber of commerce, for reasons cited earlier. Instead, larger companies that employ significant staffs should consider establishing special community affairs councils or equivalent mechanisms to foster effective communications between corporate management and the community. These groups would not, of course, possess any powers directly governing the corporation; however, the groups would provide information, advice, and views from the community that would be of value to the corporation. Similarly, the corporation’s status, options, and plans affecting the community could be conveyed to community representatives, thereby providing means of identifying and resolving issues in a timely fashion. Breaking Away from Wall Street Domination Corporations should be weaned away from the undue influences of the day-to-day financial markets, and focus instead on longer-term profitability for their shareholders. Next quarter’s profits and current securities’ prices would be less important than those over a longer time period. Manipulation of stock prices by corporate managers in cooperation with Wall Street brokers, through such means as announcements of employee layoffs, in attempts to inflate the value of a company’s stock would be discouraged. Perhaps the ethics and procedures rules governing trading of securities should be strengthened regarding insider trading practices and to prohibit interference by securities dealers and fund managers in internal management functions of corporations when such actions might affect share value.

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Corporate Contributions to Social Issues With the recent shift in emphasis from public to private sponsorship of services in the areas of health care, welfare, and education, corporations will likely be called upon to participate more fully in these programs in various ways. In the health care field, private corporations are increasingly becoming the primary providers via their ownership and management of hospitals and clinics. There is also a growing trend for private corporations to own or manage charter schools and other “public” educational facilities. Other facets of society, such as public transportation, security services, and waste management, are becoming increasingly privatized. Corporate downsizing and governmental budgetary cutbacks are having serious adverse impacts on many American families. Laid-off workers not only lose their primary incomes, but they also lose important fringe benefits that their families depend upon in such areas as life insurance, health care, and retirement contributions. Under the Third Millennium corporation, provision of these benefits would be made by the private sector, aided through federal tax incentives. Revamping the federal and state unemployment compensation systems will probably be necessary to augment job termination benefits provided by industry. Notwithstanding the desirability of employee benefits provided by the private sector, government should not require corporations to maintain costly “welfare” programs for their employees and retirees. However, corporations would be given incentives to provide reasonable fringe benefits including health insurance, retirement, savings, child care, disability pay, and adequate holidays and vacations. Continuing innovations in products and services should be encouraged through government policies providing for rapid write-off of research and development and for investment credits related to capital expansion and improvements. Under Third Millennium capitalism, corporations would operate within a socioeconomic and political environment that would provide incentives for innovation, expansion of production facilities, training of employees, long-term profitability, and rewards to their employees for loyal and productive service. Interest rates would be based on preset federal policies concerning: (1) the rate of inflation; (2) the national money supply; and (3) the average unemployment rate of the region where the borrower is located, with areas of high unemployment offering the lowest interest rate as an inducement for corporations to operate in areas where jobs are most needed. As the rate of inflation exceeded a predetermined maximum, the Federal Reserve’s interest rate would automatically rise to a new level. This would discourage borrowing and investment under inflationary con-

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ditions. The unemployment rate would be a major determinant in the Fed’s interest rate; if the unemployment rate exceeded a preset figure, say 5.5 percent, the interest rate would be automatically adjusted downward in an effort to stimulate investment and job creation. Regional variations would be predetermined by the Fed periodically to reflect current conditions. Displacement of employees by technological change would be minimized, or at least buffered, by prelayoff or advance training or retraining efforts. This could be encouraged by tax credits or deductions that would have precedence over tax write-offs or depreciation deductions for introduction of new technology in those firms that contemplate workforce reductions resulting from such technological innovations. To summarize, the Third Millennium corporation will be the centerpiece for capitalism on a global basis. Hopefully, it will be a more enlightened and socially conscious organism than its predecessors and, as a result, will make unprecedented contributions to society.

3 Economic Development Challenges

DEVELOPING LOCAL ECONOMIES IN A GLOBAL MARKET Economic development, in a capitalistic economy, is the process by which businesses are established, wealth is created, and other resources are utilized. Stated another way, economic development is the capacity to produce goods and services. The process involves investments in public infrastructure as well as private enterprises, and entails the participation of capitalists, financiers, and local governmental agencies in a coordinated effort to bring together all pertinent resources in establishing and operating viable private enterprises. Industrialized nations have fostered economic development through an array of financial, technological, and political arrangements evolved over several centuries. The locales for capitalistic enterprises are usually determined by economic factors, that is, sites where economic efficiency is favorable, although political and cultural considerations often play a role in siting decisions. Developing countries seeking economic development are often confronted with formidable obstacles. Lack of a skilled labor supply, inadequate infrastructures, and shortages of investment capital are among the most pressing needs. In the absence of these essential ingredients, many developing nations have sought a faster route to economic development, namely, attraction of established foreign corporations and low-cost loans

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or outright grants from international agencies for development of indigenous industries. Since the Industrial Revolution, economic development has occurred in sequential phases of increasing mechanization, capitalization, and specialization. An Australian economist, Colin Clark, classifies the evolution of economic development in most societies as follows: (1) primary industry phase, in which the economy is supported by specialized and subsistence agriculture, forestry, and mining; (2) secondary industry phase, in which manufacturing enterprises are developed, based on availability of raw materials from primary industries and demands of a developing consumer market; and (3) tertiary industries, consisting of trade and services businesses developed to support primary and secondary producing industries. Economist W. W. Rostow categorizes the economic development process somewhat differently, using the following sequence: (1) traditional industry phase; (2) transitional; (3) “takeoff” state; and (4) mature industry phase. Any of these approaches may be useful in devising economic growth strategies, particularly in developing nations that are in early stages of their economic evolution. In the globalization movement, it may be tempting for corporations based in the industrialized nations to “leapfrog” the process and attempt to establish highly sophisticated manufacturing operations in societies that are not yet equipped to host such facilities. Among the obstacles to be dealt with are unskilled labor, work practices among the native population that are alien to the new business or vice versa, inadequate infrastructure to support large-scale production, and political instability of national or local governments. These issues notwithstanding, most developing nations actively seek investment and employment opportunities provided by foreign corporations. Nations and local communities are confronted with economic development issues related to the formation or attraction of businesses, creation of jobs, tax revenues, corporate and private income, and recruitment of tourism trade. Economic development occurs at the local level, of course; that is where “the action is.” The factors of production are brought together at the local level and mobilized by capitalistic activities. The extent to which communities prosper naturally depends heavily upon their “economic base,” that is, the type and status of the industries located there. Characteristics of local industries largely determine their economic impacts. Labor-intensive industries, such as clothing manufacturing, often employ large numbers of relatively low-wage workers. Chemical plants, petroleum refineries, and other capital-intensive facilities are usually characterized by smaller numbers of high-wage employees. Payrolls, local purchases, and tax revenues generated by these industries may be multiplied three or more times in a community if other service enterprises are able to absorb the industry expenditures and the consumption and savings of

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industrial employees. Thus, the cumulative economic impacts of industrial development may be quite sizable in many communities. It is understandable that local economic development organizations are zealous in their recruitment of new industries and efforts to retain existing ones. In the United States, economic development is a highly competitive endeavor with all 50 states, 3,100 counties, and thousands of local communities seeking business investment through a variety of inducements, advertisements, and/or direct solicitations. Competition for industrial development is becoming increasingly sophisticated in many foreign nations, some of which offer inducements similar to those provided by local governments in the United States. Economic development is fostered at the national level in the United States by the federal government through an array of information gathering and dissemination programs in the Department of Commerce, through the funding support of the Department of Transportation to state and local governments for transportation facilities, and several other federal agencies such as the Department of Energy, the Department of Interior, and the Department of Housing and Urban Development. The State Department also works to aid American industries in their exporting and other relations with foreign nations. While federal agencies usually take a “hands-off” policy in influencing plant location decisions of private industry, policies governed by the Federal Reserve banking system have a pervasive influence on the rate of economic growth on a national scale. For many years in the United States, local economic development efforts have been focused on “smokestack chasing,” that is, recruiting industries from outside an area and assisting them in establishing operations in their communities. The objective of local economic development organizations is to bring new payrolls and tax revenues to their communities under the belief that increased income would spread through an “economic multiplier” and enrich the entire community. In most cases, the market for the manufactured products is outside the community. Therefore, the objective is not primarily to bring the products of the new industry to the community; such products are usually available there regardless of the site of production. Rather, the goal is to bring the direct and induced employment, income, tax revenues, and induced wealth to the area. This basic form of industrial recruitment is still practiced widely in the United States. Often, the competition for an industry seeking a new plant site is fierce, with numerous state agencies and communities vying for a new facility. Some local groups may offer very liberal inducements that they feel are necessary to attract industry, such as low-cost financing for fixed facilities, forgiveness of property taxes for extended periods, grants for access road construction, and subsidized initial training for plant employees. Other incentives have included free memberships for manage-

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ment personnel in local country clubs and social organizations as well as tuition grants for children of managers in local or state universities. Other communities take a more economically based approach, appealing to the candidate firm’s possible requirements for a more skilled workforce by pointing out the educational and cultural advantages of the community as well as the quality of the potential labor pool, available transportation facilities, low-cost utilities, and other useful services. Southern states, particularly Mississippi, pioneered many of the industrial recruitment techniques now in widespread use. Mississippi was the first state to offer tax-exempt municipal general obligation bonds to finance industrial facilities. Under this arrangement, the industry leases the local government facility, which has been constructed to the industry’s specifications, for a period sufficient to amortize the bonds. Financed in this manner, the leasing costs are usually quite low. Many states have adopted similar practices. However, the federal government revised the tax code in recent years limiting this type of financing to revenue bonds and under more stringent restrictions. Over the past four decades, aggressive industrial recruitment activities of some Southern developers have been quite successful in luring industries to their states. Manufacturing industries have relocated or expanded into the Sunbelt in record numbers, bringing hundreds of thousands of jobs and boosting local economies. These industries were usually greeted with a favorable labor climate, lower taxes, and a workforce that proved to be readily adaptable to factory conditions. This development came in a timely manner, since much of the South was undergoing a postwar economic decline due to the faltering cotton industry and other agricultural enterprises. The phenomenal economic growth of high-technology complexes such as the “Silicon Valley” near San Francisco, the “Route 128” beltway near Boston, and the Research Triangle in North Carolina have been held up as examples of New Age economic development. More recently, the remarkable economic boom of the Colorado Front Range surrounding Denver has been attributed largely to growth of high-technology industries such as computers, biomedical, and telecommunications firms. Equally important to Denver’s recent economic upsurge has been the significant industrial diversification that has taken place. Twenty-five years ago, Denver’s economy was based largely on the “boom-and-bust” cycles of the extractive industries (mining and petroleum) and agriculture. Today, it has a diversified economic base and is much less susceptible to national economic swings. At present, virtually every state has some form of below-market financing available for industrial development. More importantly, states and communities have invested heavily in educational, health, transportation, cultural, and other facilities that are becoming increasingly important to

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private industry, especially high-technology enterprises that require skilled employees. While investments by the states in infrastructure has been far from uniform, overall the quality of facilities and services has improved markedly over the past decade. Industrial recruitment as an economic development tool is giving way to a much broader approach in which all the elements of a regional or local economy are coordinated into an integrated system to attract, develop, and support local industries. This implies that broad-based planning is necessary, planning that goes far beyond the old concept of business zoning. Local planners now study the demographics, economic base, and infrastructure of the area as well as potential industrial sites and future residential venues. Industrial sites are often designated well in advance of need and critical utilities and access roads are built. Such communities are in a strong position to attract new industry, other things being equal. Promotion of entrepreneurship is a growing segment of the economic development field. Many larger communities value the creation of new businesses based on local talent. This has led to formation of business “incubators” in which office or manufacturing space and various support services are provided at below-market prices for a preset period during which the new business is getting established. New businesses usually encounter difficulties in acquiring start-up capital, especially from conventional banking sources, since they do not as yet have an established reputation or assets upon which to negotiate financing. Many start-up companies have found financing through small business investment companies (SBIC) or venture capital firms. Usually, these firms provide financing in the form of risk capital, often requiring the new start-up to provide an equity position to the venture capital firm. Despite the best efforts of state and local development groups, numerous communities will encounter economic adversity or even suffer virtual abandonment over time owing to changing conditions in certain industries. This rather unpleasant prediction reflects a realization that population settlements are usually based on gainful employment in nearby businesses. If there is insufficient employment for the town, it will probably decline into oblivion over time. The younger employable citizens must find work elsewhere and will relocate. Remaining older townfolk may be less employable and cannot offer a viable workforce to a potential industry. Unless some windfall occurs, the community’s ultimate demise may be inevitable. This scenario has been repeated many times during American history. Small textile towns of New England, coal mining communities of Appalachia, farming communities throughout the Midwest and South, and gold and silver mining towns of Colorado, Idaho, and other areas of the Rocky Mountains are typical of settlements that were based on a single employer

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or a single industry. When the company ceased operations, hundreds of workers and their families were often left without incomes and without essential services since in many cases the company also owned all the community facilities and sometimes the stores and banks. Industrial recruitment in many of these former one-industry towns may be difficult; the community infrastructure that was sufficient for the former mining or other industry may be inadequate for other industries. How much should a community invest in attempts to resurrect itself and compete economically with other, more prosperous areas? This may be difficult for some community leaders to assess, since subjective factors such as community pride and wishful thinking are usually involved in this kind of soul searching. While these cultural and social factors should be considered, basic economics should have priority in decision making of this type. An economic development official in a small town in central West Virginia once told the author, “Yes, the scenery is great, but you can’t eat it.” Are the community’s prospects for economic revitalization worthy of substantial investments in new community services, or should the community be left to die? With the high degree of competition among states and local communities, private industry has an enormous variety of sites and inducements available to consider in its development plans. Among the favorite inducements and selling points of local economic development officials are that their locations offer low-cost skilled or highly trainable labor (often without unionization worries), low business taxes, good schools and other public facilities, excellent transportation, and a central location within overnight truck shipping distance to half the nation’s population centers. These sales pitches are often coupled to direct financial incentives. Subsidized financing, tax forgiveness, and other financial inducements for attracting industry have been criticized by some who claim that public funds and other benefits should not be provided to new private industry unless existing businesses in the community are afforded similar benefits. These critics claim that the overall merits of a community should be the primary criterion of industries seeking new sites. However, these inducements have become widely available and the private sector has come to expect them, even in highly favorable locations. Local development officials realize the competitive climate in which they operate and are usually prepared to offer such incentives. Consequently, the widespread practice of offering various inducements to private industry as a means of attracting them to communities continues. Future industrial development will require increased sophistication and cooperative public-private planning as the locational requirements become more stringent for certain industries and more flexible for others. Growing land-use conflicts seem inevitable as industry competes for available plant sites with residential and commercial developers and as environmentalists

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continue to press for more open space and reduced industrial pollution. Even some small home-based businesses have encountered opposition from homeowners in some neighborhoods on aesthetic grounds, such as a van with a small business sign parked in a driveway or extra cars of business visitors parked on the street. Urbanization is expected to create a plethora of land-use planning and zoning issues in virtually every major city of the United States and many other industrialized nations. As never before, community-wide and regional planning will become more controversial and more necessary than ever with political, business, and environmental groups all contending for primacy in land-use and development decision making. Laissez-faire advocates will press for reliance on economic and business factors in determining locales for enterprise development, while hybrid capitalists will contend that political and socioeconomic considerations must also be incorporated into economic development decisions. Central planning, even at the regional level, will likely be opposed philosophically by the laissez-faire advocates. Elements of both central planning, including landuse planning and zoning, as well as limited forms of industrial policy will be favored by hybrid capitalist advocates. FOREIGN INVESTMENTS IN DOMESTIC INDUSTRIES Domestic investment in developing nations has been substantial, and has generally succeeded in improving economic conditions among the host nations. Similarly, foreign corporations have established many major industrial facilities in the United States in recent years. These have included giant plants of the automakers Bavarian Motor Works (BMW) in South Carolina and Honda Ltd. in Ohio and numerous electronics, computers, and other manufacturing facilities in many other states. In the aggregate, these foreign-owned facilities employ many thousands of American workers, provide substantial tax revenues, and support large numbers of American suppliers. Labor unions and some politicians have raised concerns that American investments in foreign lands are resulting in the loss of large numbers of existing jobs in the United States. They have not objected to industrial expansion overseas; rather, they have criticized the relocation of facilities that have replaced high-wage jobs at home with low-wage ones elsewhere. They contend that the U.S. government and private industry should refrain from advocating any form of investment in foreign countries that may result in economic hardships in America, just as the U.S. government has been forbidden by statute from providing federal loans or guarantees that involve plant relocations within the United States. With the growth in overseas investments by American companies and the increasing investments of foreign corporations in the United States,

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the question of “native” enterprises is becoming a moot point. Globalization policies of industrialized nations tend to encourage such investments outside their homelands. Community leaders where multinational or foreign corporations have local production facilities may experience a sense of loss of influence since such enterprises are controlled from distant headquarters where corporate managers may not be sensitive to local economic conditions affected by their operations. There are also reports of positive interactions between community officials and multinational corporate managers. A case in point is the automobile assembly plant of Honda built in Marysville, Ohio, a few years ago. The company evidently spent considerable time learning how to engage in labor and community relations in the United States. Reports from the area indicate that the Ohio plant has become one of Honda’s most productive facilities and that its community relations and participation efforts have been well received. WORKFORCE: COMPOSITION AND CHANGING CONDITIONS A major transformation has been taking place over the past three decades in the American labor force. Traditional patterns of employment are changing steadily, brought about by two converging forces: the workplace itself and its new employment requirements, and the demographics of the population and working people. The labor force, of course, is generally defined as the number of persons working and those actively seeking employment. Table 3.1 describes the ethnic makeup of the civilian noninstitutional population in the United States. Among the fastest growing racial groups are Hispanics, Asians, and African-Americans. According to the Bureau of Labor Statistics, Hispanics will soon outnumber African-Americans in the labor force. The Asian noninstitutional population is perhaps the fastest growing, but still lags behind other ethnic minorities in overall numbers. The combined labor force among three ethnic groups (Asian, AfricanAmerican, and Hispanic) now comprises 24.4 percent of the total labor force. By the year A.D. 2005, the combined ethnic cohort is estimated at 27.6 percent of the total labor force. Overall labor force participation rates have increased as more persons enter the job market. As shown in Table 3.2, the national labor participation rate grew from 64.0 percent in 1982 to 66.6 percent in 1994. The Bureau of Labor Statistics projects the rate to reach 67.1 percent by the year 2005, reflecting a continuing increase over the past two decades in two-wage-earner families. As stated in Table 3.2, the American civilian labor force is expected to grow slowly but steadily to 147.1 million by A.D. 2005, representing a 12

Economic Development Challenges • 89 Table 3.1 Civilian Noninstitutional Population—United States (Numbers in thousands)

Source: Fullerton, Howard N., “The 2005 Labor Force: Growing but Slowly,” in U.S. Bureau of Labor Statistics, Monthly Labor Review, Washington, DC: November 1995. (Data includes all citizens not in military occupations.)

percent increase over the 1994 figure of 131 million. A closer look at the makeup of the labor force reveals that there are rapidly changing patterns among the sexes in the labor force. The number of men in the labor force is expected to grow by 8.5 percent over the 1994–2005 period, while the number of women is forecasted to increase by 16.6 percent, almost double the growth rate for men. Although the overall number of men in the labor force will still outnumber women by the year 2005, the participation rates are expected to change significantly. In 1982, the participation rate for women was 52.6 percent, while in 1994 it grew to 58.8 percent. The rate for women in A.D. 2005 is projected at 61.7 percent. These numbers indicate a continuing trend for larger participation by women in the labor force. Participation in the labor force by men, however, is expected to in-

Table 3.2 Labor Force and Participation Rates—United States

Source: Fullerton, Howard N., “The 2005 Labor Force: Growing but Slowly,” in U.S. Bureau of Labor Statistics, Monthly Labor Review, Washington, DC: November 1995.

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crease on an absolute basis but will decrease percentagewise over the same period, with the participation rates dropping from 76.6 percent in 1982, to 75.1 percent in 1994, and estimated to decline further to 72.9 percent in A.D. 2005. The downward trend for male labor force participation began in the late 1970s and was set in motion by the economic recession, which prompted many male workers to take early retirement or to withdraw from the labor force after discouragement in seeking jobs. Other factors affecting the participation rate are the increasing life expectancy and the age characteristics of the labor force. With most workers taking retirement at age 65 and with perhaps 10 or more years in which they could participate in various ways in the labor force, the participation rate may be depressed. The male participation rate for the forecast period also reflects the influence on the aging “baby boomer” generation and the increasing overall age of the labor force. Labor statisticians at the Bureau of Labor Statistics indicate that the male participation rate should begin to stabilize after the year 2005. The ongoing revolution in telecommunications and computer technology is impacting the labor force and economic development in myriad ways. One of the most significant developments, for example, in whitecollar occupations has been the widespread acceptance of “telecommuting” in which much of an employee’s work can be performed at home using personal computers linked through telecommunications to the employer’s company offices. According to Census Bureau data, working at home is an accelerating phenomenon; between 1985 and 1996 the number of people working at home increased from 11 million to 50 million. Experience to date indicates that most employers have noted increased productivity from workers utilizing this system. For the majority of telecommuting workers, job satisfaction has been enhanced. Similar to telecommuting has been the rise of home-based businesses that often require only a minimum of office equipment such as a personal computer, facsimile machine, and a modem for electronic mail. Homebased businesses may be well suited to independent consultants and other professionals as well as numerous other enterprises requiring minimal office space. Since home-based enterprises may provide opportunities for utilizing the skills of handicapped people in the community, LEDOs may be able to capitalize on these potential human assets in their quest for economic development. Telecommuting and other home-based businesses are expected to grow substantially in the future as use of the Internet and related computer technology becomes even more amenable to small business operations. With linkage established to customers or employers via satellite communications, local telephone lines, and the Internet, many homebased businesses may be located virtually anywhere. Within a few years, it seems likely that the worldwide Internet will open

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access to many parts of the globe now untouched by communications technology. Inevitably, economic development will be greatly aided by the expansion of these communications systems. From the standpoint of private industry, these trends will have effects on both sides of the income equation: on the supply side, the greater available labor pool is the source of the individual firm’s workforce; and on the demand side, persons comprising the labor force are also consumers and represent a market to be recognized and served. In summary, the composition of the American labor force is undergoing changes that will have far-reaching implications for capitalism, the economy, and socioeconomic conditions. The labor force is growing older and its participants are becoming involved with different patterns of work, retirement, and leisure—some of which are forced, others voluntary. Women are joining the active labor force in growing numbers and will probably surpass the number of working men by the year 2005. Ethnic minorities are expected to become an even more significant segment of the labor force during the next decade. A rising portion of the labor force involves two wage earners and persons working two or more jobs. URBAN AND RURAL ECONOMIC DEVELOPMENT Urbanization will become an increasingly critical aspect of social and economic development in the new era as the United States population grows from 270 million to a projected 392 million by the year A.D. 2050 and the world population swells from 5.9 billion to an estimated 9.4 billion by the same year. Virtually all of the world’s great cities are expected to undergo great population growth. Among these, Mexico City, Tokyo, Atlanta, Los Angeles, Denver, Chicago, Dallas–Fort Worth, Hong Kong, and many other metropolitan areas will exhibit major expansion in urban and suburban population with a corresponding increase in population density. Medium-sized cities will also experience dramatic growth in many regions. The so-called “population explosion” is being followed by a population “implosion” as increasing numbers of people move to the cities and surrounding areas. Suburbs adjacent to major cities are growing at faster rates than the core cities. Lands previously devoted to agriculture are being converted into vast residential or commercial developments. The public infrastructure in many of these suburban areas is being overtaxed as residential and commercial activities are moving in quicker than the formerly rural governments can accommodate them. Land use planning on a comprehensive scale has been virtually nonexistent in many communities. While zoning practices are in widespread use in the United States, the broader concept of comprehensive community planning is often avoided. However, with the increasing popula-

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tion at home and abroad, and with much of the world citizenry seeking their fortunes in the cities, truly comprehensive approaches to urbanization and land use planning are needed. Economic development must embrace these issues if private sector development is to flourish under these challenging new conditions. Comprehensive planning in a capitalistic democracy is, to say the least, controversial. Private ownership of land and other resources has been held sacrosanct and many attempts to employ the concepts of publicly directed land and resource utilization policies have often been strongly resisted by the private sector. Laissez-faire attitudes regarding utilization of privately owned land and mineral resources have generally been the norm in local economic development. This philosophy perhaps served its purpose in a less crowded and less complex society. Laissez-faire may continue to prove advantageous in some rural areas or underdeveloped nations. However, in an urbanized, industrialized society with increasing population density and rising real estate costs, comprehensive regional and community planning is becoming essential. If private industries are to be assured of favorable economic conditions for their survival and growth in the new era, careful community planning should be conducted as part of local economic development efforts. Among the major components to be included in local planning are: (1) availability and skills of the labor force; (2) commercial transportation systems; (3) equity in taxation; (4) public infrastructure; (5) educational, recreational, and cultural resources; (6) public transportation; and (7) residential housing conditions. Rural development has received much attention in the United States and in developing nations in recent years. The ongoing transition in the United States from an agricultural to an industrial economy has left in its wake an enormous loss of farm employment, the emergence of corporate agriculture, and the rapid decline of family-owned farming. While approximately the same amount of land is under cultivation and grazing today as was the case 30 years ago, only one-third as many people (3.4 million) are required now to operate farms and ranches. Farm ownership has shifted from predominantly individual families to large corporations employing state-of-the-art equipment. This has resulted in a great reduction in the number of farms, which formerly averaged perhaps 200 to 400 acres, due to their assimilation into large corporate farming complexes consisting of thousands of acres. Technological advancements brought about increased economies of scale and new capabilities for large-scale cultivation and harvesting and a requirement for very expensive equipment not easily affordable for many individual farmers. Thousands of communities supported by agriculture have suffered decline over the past three decades. Without other employers to offset job losses from smaller-scale family farming, these towns are struggling to

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survive. Opportunities to attract new industry have been limited due to adverse economic conditions such as remote locations with respect to interstate highways or railroads, small population, and lack of other infrastructure. State and local development groups have made valiant efforts to boost rural development with varying degrees of success. Despite their limitations, many rural communities have succeeded in attracting agribusinesses such as food processing and other manufacturing facilities. These successes have been realized most often where the population base and transportation facilities can adequately support such developments or where rural communities are within commuting distance of major cities. Prospects for future economic development in rural areas appear to be improving as the nation’s metropolitan areas continue to expand outwardly into areas of lower land costs. Former agricultural and ranching areas are being absorbed into metropolitan suburbs at a remarkable rate in some states. In most cases, this expansion into former rural communities has been generally beneficial due to addition of numerous industries with their payrolls and tax revenues. The encroachment of metropolitan growth into agricultural areas, however, is a cause of concern by some agricultural economists and planners who decry the demise of farming and ranching and their outputs of essential foodstuffs for a burgeoning population. Some forecasts indicate that during the next 25 years or so agricultural production in the United States will be severely limited due to rising land and production costs and that the nation will become a net importer of agricultural products. Much of the world’s developing nations may be characterized as rural or semirural although there are numerous cities with growing masses of poor citizens. Except perhaps for subsistence agriculture, economic development in rural areas is particularly challenging due to frequent lack of infrastructure, especially adequate highways and other transportation facilities. Illiteracy and skills training pose other problems for utilization of the local labor force. Nevertheless, by adjusting production techniques to take advantage of local skills and cultural traditions and to enhance communications with workers, successful industrialization in many rural areas of developing nations is possible. FOOTLOOSE INDUSTRIES Industrial relocation, both within a nation and from one nation to another, is a fact-of-life and often a thorny issue in economic development. Developing nations have generally welcomed foreign industrial investment, often with the blessings of the U.S. government. American foreign policy has supported the investment of domestic industries in developing countries for many years as a means of furthering international goodwill,

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and for humanitarian and economic reasons. Government policy has also recognized the contributions to the domestic trade balance made by exports. Mobility of capital and labor is a concept in economics that bears upon local planning for industrial development. In laissez-faire capitalism, the ability to transfer capital (i.e., money, goods, and production equipment) to the most productive environments for its use is a highly desirable concept. To be stymied in the capacity to move capital is a cardinal vice, in the eyes of free-marketeers. In practice, movement of capital takes place daily, involving billions of dollars on the national and foreign securities exchanges, in banking transactions, in regular retail commerce, and in other aspects of international trade. Movement of physical capital assets, in the form of plant and productive equipment, also takes place at the local level where production occurs and where people are employed. Corporate managers want to be able to deploy capital assets in the most profitable manner. This may entail a relocation of assets including building or closure of a plant, resulting in gain or loss of jobs and incomes in the community. Labor is much less mobile than capital; it can relocate over the long term, but in the short run, it is largely fixed. Employees have local family obligations, homes to be sold, and other ties to a community that are not easily broken. Some firms relocate their most skilled workers and management personnel at company expense, thus reducing the trauma associated with most transfers. However, for the most part, most workers are often stranded when a plant closes or relocates. Experienced economic development officials are aware of the risks in bringing in so-called “footloose” industries that are prone to leave a community abruptly when economic or market conditions change. There are countless stories about industries pulling out of a community literally overnight and relocating to another site they consider more favorable. A typical case is a small clothing manufacturer that was located in the New York City garment district. It had an expensive lease in a five-story industrial building and employed around 200 sewing machine operators and cutters working at piece rate wages. This company had been offered less costly facilities in another city along with assurances of a workforce willing to work at minimum wage plus incentive pay. One night, five truck-trailers carried away the entire array of production equipment and moved everything to the new community. There had been no notice given locally of the impending move; former employees discovered an empty building the next morning as they reported for work. Most community leaders are proud to announce the arrival of new industries, particularly those of widely known corporations. These types of businesses are usually considered to be stable, ethical, and committed to the community and thus would be less likely to cease or curtail op-

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erations abruptly. While these factors are important considerations in seeking new industry, the size of the corporation and its financial position do not necessarily provide assurance of its commitment to a community. Colgate-Palmolive Company has promoted itself as a “global” company that sells 70 percent of its $8 billion in products overseas. In 1985, the company decided to close its factory in Jersey City, New Jersey. Some of the long-time employees were offered transfers to Colgate’s Kansas City plant, at their own expense and with loss of seniority. A number of employees felt they should make the move, since comparable jobs in Jersey City were difficult to find, and they had accumulated retirement and other fringe benefits that they thought would be preserved. Nevertheless, those making the move to Kansas City were out of work within two years; a “restructuring” of the plant reduced the staff from 800 to around 200. Meanwhile, Colgate continued to expand its overseas facilities. From 1980 to 1996, the company reduced its American employment by 15,390 workers, from 21,800 to 6,410. Over the same period, the firm added 4,490 employees overseas, bringing its employment in foreign nations to 30,890. Acquisitions are another route to sudden transfers of industrial facilities. One case is that of Gerry Baby Foods, a small manufacturer of baby products in Thornton, Colorado. The firm had been profitable, gradually adding to its workforce over several years. After acquisition of the firm by Evenflo in 1997, the new owner announced the closure of the plant with a loss of 300 jobs. Work done at the plant is being transferred to other Evenflo facilities in Ohio, Georgia, and Alabama. The 380,000square-foot Colorado plant was only 3.5 years old and had been built by Gerry Baby Foods after the community had provided significant tax breaks through a new “enterprise zone” and other inducements. These apparently had no effect in attempts to retain the facility in the community under new management. Relocation of Johns-Manville Corporation world headquarters and technical centers from the New York City–New Jersey area in 1971 was reportedly a case of noneconomic as well as conventional financial considerations becoming involved in a siting decision. After an extensive site search, the company reduced the list of candidate sites to two, Denver and Atlanta. With its proximity to major ski areas and other cultural attractions, Denver was selected. Incidentally, the president of the firm was an avid skier. The retention of local industries is often as important as the successful recruitment of new ones. Local development officials are sometimes preoccupied with attracting new payrolls due in part to political pressures and to the natural tendency to become enamored with something new, especially a prestigious new corporate neighbor. In some areas, existing

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industries are largely neglected by their community leaders. These firms may have been contributing regularly to community economic prosperity for years, and without public recognition. Local firms may become resentful of the special treatment received by new industries attracted to a community such as tax breaks, below-market financing, or other lucrative inducements. These companies may become targets for recruiting overtures by other communities. Efforts to attract and retain industries should be an ongoing mission at the local level. Local development groups should monitor the progress of local industries to discern possible changing conditions that could have adverse effects on the community. This implies maintaining cooperative working relationships with local business managers. “Internal industries development” should be at least as important as industrial recruitment. THE SPECIAL CASE OF INDIGENOUS POPULATIONS What can be done about the true “natives” of the world and their need for economic and social equity? Often forgotten in the official policies of many nations because of their relative lack of political influence and economic power, indigenous populations in most nations remain the “poorest of the poor” and have been largely disenfranchised in national and economic affairs. Estimates of the global indigenous populations vary from around 200 million to over 260 million. Among the regions with large native populations are Latin America (45 million), China (67 million), the Phillipines (6.5 million), the Bedouin region (5 million), the former Soviet Union (28 million), the United States (3.0 million), and over 15 other regions. A significant resurgence in population growth among many indigenous peoples is underway that presents issues in governmental policy regarding economic development. Tribes in Canada, Australia, New Zealand, Mexico and other Central American countries, and the United States are seeking redress from their national governments in their quests for selfdetermination and self-sufficiency. Many tribes seek opportunities for economic development, based on utilization of their natural and human resources, and are welcoming industry from the “outside.” However, many tribes are facing formidable obstacles that inhibit economic development. Many of these problems result from inequitable or obsolete policies of their national governments or the dominant societies. Until recent times, capitalism has not been widely practiced in most indigenous cultures. Rather, forms of communal and subsistence economic systems were and still are operative. Some indigenous groups may seek to retain traditional economic systems and thus may avoid capitalistic enterprises. However, there is a growing movement, especially in the

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United States, toward utilization of capitalism and away from governmental largess. In the Third Millennium, indigenous peoples are likely to seek greater opportunities for development of private enterprise on their lands while simultaneously adhering to some of their most cherished cultural traditions. Many tribes are seeking potential partners or investors and, for the first time, are in a position to offer important incentives that could foster profitable development, such as authority to negotiate their own deals with private industry and to issue tax-exempt financing via revenue bonds. ECONOMIC DEVELOPMENT STRATEGIES FOR THE NEW ERA Free-market economists point to globalization and privatization as the twin components of a worldwide strategy for greater and more equitable economic growth. To a limited extent and over time, these policies will indeed contribute to the socioeconomic well-being of industrialized nations and eventually to developing countries if cultural, political, and economic conditions are favorable. The question is not whether to embrace these doctrines; rather, it is how and to what degree. In industrialized nations, a quantum jump into privatization or nationalization would, of course, wreak havoc on both the public and private sectors. According to the privatization proponents, transfer of publicly owned properties to the private sector would permit them to be utilized more efficiently and to actually turn a profit. However, privatization of many of America’s prized public assets, such as museums, national parks, and monuments, would no doubt result in monopolistic pricing and elitism for the owners and would cause many low-income Americans to be deprived of enjoyment of these resources. The very idea of privatization of these unique treasures is anathema to many. Privatization has been employed by many cities in the United States for many years. These communities have employed private contractors to perform formerly public service functions, such as trash collection, in anticipation of reduced costs. Other communities have moved further into privatization, such as experimenting with operation of the public schools by private contractors, but with varied degrees of success. Some politicians have argued that many federal functions could be privatized, including the national mail system, air traffic control at major airports, and the myriad information and publishing activities of federal agencies, among others. They contend that private industry could perform these services more efficiently and cheaply than federal agencies. On the other hand, others maintain that there are some public functions that private industry should not attempt to perform in view of potential conflicts of interest or national security concerns. However, concerning

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the latter, numerous private contractors are already serving the nation well in a number of areas involving national security such as defense materials and nuclear weapons production. The opposite extreme, nationalization, is built around the concept of socialistic or communistic collectivism in which the “people” own all real property and assets of the producing sector. The obvious examples of nationalization were the former Soviet Union and much of the economy of the present China, although the latter is becoming increasingly privatized as the nation seeks more efficiency and greater participation in the global economy. To a much lesser extent, some of the European nations have nationalized, then denationalized, certain essential industries, such as the coal industry in Great Britain. In Russia, the great leap from communism to a semblance of democracy and capitalism has to date been a sociopolitical disaster resulting in widespread suffering and near-collapse of its government and economic system. Financial mismanagement in government and the unduly influential (and often unlawful) activities of a group of powerful industrialists and bankers known as the “Oligarchs” combined to undermine the Soviet economy. There is growing concern that the patience of the Russian people may be wearing thin as their economic plight continues, possibly giving rise to a possible return to some form of socialism. As a stopgap measure, the International Monetary Fund is expected to provide some interim funding to shore up the failing Russian monetary system. It is unclear whether the Russian financial industry and the manufacturing and commercial sectors can quickly adopt needed reforms before the financial situation further deteriorates. Closer to the United States, the communist takeover in Cuba led by Fidel Castro resulted in nationalization of most industries during the early 1960s. Wide-scale confiscation of American industries by the Castro government in most cases led to inefficient operation of these former privately owned enterprises. Nevertheless, the Castro regime has continued to survive for over three decades despite inefficient economic operations and an American trade embargo. Capitalism will likely continue to compete with nationalistic or protectionistic economic philosophies for the indefinite future. Many nations will probably seek to retain certain key industries under national control in the interest of economic or national security. Even the industrialized countries may find it politically or economically desirable to maintain some semblance of a military-industrial complex or critical natural resource–based industries, such as agriculture, petroleum, coal, and metals, in a state of at least minimal capabilities for continued production, even if they are less than optimally efficient or require some national subsidization. As globalization and privatization continue to make inroads in the

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economies of most nations, capitalism is expected to maintain its position as the most favored means for pursuing national wealth and socioeconomic progress. However, globalization can be a destabilizing factor in the financial status of some developing nations, as evidenced by the 1997–1998 crash of the financial markets. Before globalization can reach its full potential, improved banking and credit systems and some political reforms will be needed in the developing nations. These reforms can bring about the stability and accountability needed to provide assurances to the financial community that the developing nations can underwrite economic development and otherwise manage their financial affairs. Some financial authorities have called for strengthening of the International Monetary Fund and the World Bank or creation of other new international financial institutions to bring greater stability to world currencies. One well-known investor and philanthropist, George Soros, testifying before the Banking Committee of the U.S. House of Representatives, stated that “the global capitalist system, which has been responsible for the remarkable prosperity of this country in the last decade, is coming apart at the seams.” He proposed strong intervention by the United States and others in creating a new International Credit Insurance Corporation. Failing such intervention, he predicted more turmoil in the financial markets. In the New Millennium, economic development in industrialized nations will likely become increasingly sophisticated as local developers face new issues in attracting high-technology enterprises and in maintaining competitive environments in which both new and existing industries can prosper. Burgeoning populations in both developing and industrialized nations will create unprecedented challenges for governments and the private sector in generating employment and income. Except for heavy industries that are dependent on proximity to their bulk raw materials and related service businesses, the location of other industries is becoming increasingly related to the supply, quality, and cost of labor. High-technology and other industries that manufacture products of high unit value are largely “footloose” and are not tied to local or regional markets. Transportation costs as a fraction of product value are relatively low for these industries, allowing such firms to compete in national and international markets and to do so from virtually any location that has a suitable labor supply and other attributes to favor productivity. Consequently, increased competition in attracting industry can be expected to come from Third World nations in their quest for economic development.

PART II Global Energy Resources

4 Energy Demand and Supply in the Global Economy

WORLD UTILIZATION OF ENERGY The future global economy will be critically dependent on the continuing availability of reliable energy supplies. Energy in its mechanical, electrical, and thermal forms has been largely taken for granted in modern society. In industrialized nations, energy is readily available virtually everywhere and affordable by most citizens. Energy is also a universal requirement for business and industry as well as all other forms of human activity; almost every form of endeavor in modern times involves the direct or indirect use of energy in one form or another. Industry is heavily dependent upon electricity, heat, and gaseous and liquid fuels to support manufacture of products and provision of services. Any large-scale disruption of energy supplies for extended periods can wreak havoc on business, communities, and the national economy. Energy usage has increased enormously since the Industrial Revolution, which introduced steam power and subsequent innovations such as the electric motor and the incandescent lamp. The advent of the gasolinefueled automobile brought greatly increased demand for petroleum. A large, complex energy industry of coal mines, oil and natural gas wells, refineries, electric power plants, and pipelines developed around the availability of fossil fuels and the technologies with which to convert them to practical application. Energy requirements are increasing at a steady pace in the industrialized countries. However, in the developing nations, energy demand is

104 • Global Energy Resources Table 4.1 World Energy Usage (Values in Quadrillion British Thermal Units)

Sources: Energy Information Administration, U.S. Department of Energy; World Energy Council.

rising dramatically as their economies are transformed from agrarian, primitive ones into more energy-intensive industrialized economies. Energy demands from a global perspective are growing at a rate that raises questions about the adequacy of energy resources and energy conversion technologies. Table 4.1 illustrates worldwide energy usage in 1997 totaling 380 quadrillion British thermal units and projected requirements in the year 2010 amounting to 505 quads, an increase of almost one-third over the 14-year period. The forms of energy used in society have changed markedly over the past two centuries with the discovery of petroleum and the introduction of new energy technologies. For example, for more than two hundred years, wood was the chief source of energy in the United States, accounting for up to 85 percent of total national energy usage. In the peak year of 1875, wood consumption averaged 4.5 cords per capita annually. Although wood usage was quite significant in the early decades of the nation, its consumption dwindled to only 6.8 percent of the national total by 1925, owing to the combined effects of increased coal use and forest depletion.

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Table 4.2 Energy Production and Consumption—United States, 1996 (Quadrillion British Thermal Units)

Sources: Department of Energy, International Energy Annual, April 1999; U.S. Department of Energy, Monthly Energy Review, September 1997.

Currently, nonrenewable energy resources (coal and petroleum) comprise over 85 percent of the 380 quads of global energy use. This pronounced shift in energy usage from renewable to nonrenewable sources over the past century is leading to grave concerns about the adequacy of the energy supply system and the effects of these expanding systems on the global environment. The leading industrial nation, the United States, also is the largest consumer of energy. Its energy consumption has risen from a mere 2.3 quads in the year 1850 to 94 quads in 1997, an all-time high. While the United States contains about 4.8 percent of the world’s population, it consumed approximately 24.7 percent of the world’s total energy usage in 1997. The vast majority—85 percent—of the total was supplied by fossil fuels. Nuclear energy supplied 7.3 percent and renewables furnished the remaining 7.4 percent. Consumption has been rising at annual rates ranging from 1.3 percent to 4.2 percent over the past decade with usage varying with economic activity. The energy “balance,” that is, production versus consumption, in the United States has shifted from a positive balance that had been maintained until 1975 to a continuing negative one ever since. As shown in Table 4.2, in 1997, the nation’s energy production was about 72 quads while its consumption was 94 quads, a significant deficit of some 22 quads, or a negative balance of 30 percent. Energy consumption patterns within the major end-use sectors has also shifted over the past two decades. Table 4.3 offers data for the end-use

106 • Global Energy Resources Table 4.3 Energy Consumption by End-Use Sector—United States, 1996 (Values in Quadrillion British Thermal Units)

Sources: Department of Energy, International Energy Annual, April 1999; U.S. Department of Energy, Monthly Energy Review, September 1997.

sectors for 1996, 1986, and 1996. The transportation sector exhibited an increase in energy consumption from 19.1 quads to 24.5 quads over the 1976–1996 period. Transportation energy use as a percentage of total national consumption grew from 25.6 percent in 1976 to 27.3 percent in 1996. Increased energy use in the transportation sector reflects increased mobility via automobiles in a growing population. The residential sector also experienced increased energy consumption, with its share of the national total rising from 33.6 percent in 1976 to 36.5 percent in 1996. Not surprisingly, the industrial sector increased its energy use by smaller percentages than the other sectors. Industrial energy consumption grew from 30.2 quads in 1976 to 32.6 quads in 1996, a modest increase of 7.8 percent. Meanwhile, its portion of the national total consumption declined from 40.6 percent in 1976 to 36.3 percent in 1996. Explanations for this decline seem to lie in the extensive energy conservation efforts made by industry as well as the below-normal industrial capacity utilization rates that have prevailed during much of the past 20 years. The United States has become highly dependent on foreign crude oil supplies over the past 25 years. In 1996, the nation’s average demand was 18.3 million barrels of oil per day (BOD) of which approximately 9.0 million BOD and additional supplies of natural gas liquids were imported. Refining capacity in the nation has declined significantly since 1982, from 18.6 million BOD to 15.4 million BOD in 1996. Oil consumption per capita has dropped somewhat in the United States in recent years, from 3.0 metric tons (MT) in 1978 to 2.5 MT in 1997. Decreased usage per capita reflects use of more fuel-efficient automobiles, a switch from oil to coal among many utilities, and energy conservation efforts in industry and residences. As the largest energy consumer, the United States also happens to be the least energy-efficient among the industrialized nations. Its energy con-

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sumption is approximately 26 megajoules per dollar of Gross National Product (MJ/$GNP) as compared with some 14 MJ/$GNP for Germany and more than twice that of Japan’s 12.5 MJ/$GNP. Likewise, other industrialized nations such as Great Britain, France, Germany, Italy, Japan, and China are large consumers of energy in all forms. Energy consumption in the developing nations, although relatively small as compared with industrialized countries, is on the rise, especially in Southeast Asia and other Pacific Rim countries with expanding economies. According to the Energy Foundation’s report, Energy: From Crisis to Solution, the United States spent 10 percent of its GNP for energy in 1989, whereas Japan expended about one-half that amount. Japan and Germany, with their more energy-efficient economies, have around a 5 percent cost advantage in their products over the United States, as stated in the Energy Foundation’s report. Worldwide coal reserves have been estimated at 1.6 trillion tons, of which 46 percent are in China, 15 percent in Russia, and 13 percent in the United States. Smaller coal reserves are found in England, Australia, New Zealand, and numerous other locations. At present-day usage rates, world coal supplies may be adequate for more than 200 to 240 years. However, coal reserves, like other fossil fuels, are not evenly distributed around the world and costs of transporting coal any significant distance are high. Consequently, coal is usually burned near its point of extraction or shipped by dedicated trains to reduce freight costs. Coal can be converted to a gaseous or liquid fuel, but the technology for doing so is cumbersome and costly. Crude oil and natural gas have become the principal fuels around the world over the past 50 years. These liquid or gaseous fuels have significant advantages in energy utilization owing to their portability, ease of storage, relatively high energy content, and moderate cost in most locations. Petroleum is considered a strategic class of energy fuel and, as such, the United States and some other nations have sought to assure the supply of oil and gas against future foreign supply disruptions. The most significant incident of this sort occurred in 1973 when the OPEC organization decided to terminate crude oil supplies to the United States and several other nations. At that time, the United States was importing approximately 13 percent of its petroleum from the OPEC nations. With even this relatively small amount of oil supply being cut off for a few weeks, the United States’ economy was adversely affected for many months even after supplies were restored. Today, the nation imports more than eight to nine million barrels of oil daily, 51 percent of its oil needs, much of which is furnished by OPEC nations. Nations with the largest proved oil reserves include Saudi Arabia with 259 billion barrels, Iraq with 112 billion barrels, United Arab Emirates

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with 98 billion barrels, Kuwait with 94 billion barrels, Iran with 93 billion barrels, Venezuela with 64.8 billion barrels, Russia with 50 billion barrels, Mexico with 42 billion barrels, China with 24 billion barrels, and the United States with 20.2 billion barrels or more. Other nations in the Middle East, such as Turkey, Kazakstan, Azerbaijan, Qatar, Oman, and Yemen, are believed to contain oil deposits totaling over 50 billion barrels. Estimates of potential petroleum resources, including undiscovered conventional resources, reserve growth in conventional fields, and proved reserves, are vastly higher than the above numbers, which are for proved reserves only. For example, proved reserves for the United States are variously estimated at 20.2 to 27.9 billion barrels, whereas total potential resources are projected at 112.6 billion barrels by the U.S. Geological Survey in its 1995 National Assessment of United States Oil and Gas Resources. Reserves and undiscovered resources of natural gas in the United States are estimated at 1,073.8 trillion cubic feet by the U.S. Geological Survey in the report cited above. Total resources of natural gas liquids are given as 29.3 billion barrels. A century ago, the United States was the world leader in oil production. Today, it remains the largest consumer of crude oil, but its domestic production is less than one-half its needs. As mentioned above, it imports more than half its oil supplies. Data from the U.S. Department of Energy for 1996 indicate worldwide oil demand of 68.1 million barrels per day with the United States demand comprising 18.3 million barrels per day, or 26.9 percent of the global total. A huge undeveloped energy fuel in the United States is oil shale, located in western Colorado, eastern Utah, and southwestern Wyoming. Called the “rock that burns” by aboriginal natives, oil shale generally lies in underground geological strata of varying depths and can be extracted either by in situ techniques or by conventional room-and-pillar mining methods. Technically, oil shale is a hydrocarbon called kerogen. As a fossil fuel, oil shale has similar energy and chemical characteristics as crude oil. According to the U.S. Department of Energy, oil shale resources in the nation include over 2,018 billion barrels of oil (BBO) in accessible reserves and more than 27,518 BBO in total resources. Following the 1973 oil embargo, the federal government and some 30 major energy companies accelerated research and development projects for oil shale development. Several large oil shale projects, most notably the proposed Colony Project of Exxon Corporation, were in advanced stages of planning until May 1982 when Exxon dropped the Colony project as not being economic under market conditions of the time. Virtually all other

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proposed oil shale projects followed suit within a few months. Today, the private oil shale industry is largely moribund. Peat bogs are also considered a potential source of energy. However, peat is not a highly concentrated form of energy, typically yielding about 6,000 Btu per pound, as compared with 12,000 for high-quality coal. Peat is found in Maine, Minnesota, Michigan, Florida, and at least a half dozen other states. Accessible resources of peat include 61 BBO with proved reserves of less than 1 BBO. Overall, the United States has a huge energy resource base, especially when taking into account energy resources that are presently undeveloped or underutilized. Estimates by the U.S. Department of Energy are that the United States contains resources with a combined energy capacity equivalent to 657,596 billion barrels of oil. This is termed the “total resource base of energy.” However, as the Department points out, only a relatively small fraction of this amount could be economically utilized due to limitations as to accessibility of the resource or technological barriers. A second term, “accessible resources of energy,” is used to describe only those portions of the total resource base that can be exploited with currently available technology or technology that will soon be available, thus eliminating many remote or speculative resources. Under this definition, the USDOE estimates that “total accessible energy resources” in the United States are approximately 115,103 billion barrels of oil equivalent, an amount sufficient to provide for more than 7,500 years of national energy consumption at the recent annual rate of 94 quads. (See Table 4.4). Still a third term, “reserves of energy,” is used by the USDOE to denote national energy resources. This is the most conservative estimate and consists only of proved reserves of economically available supplies. This estimate is 1,096.2 billion barrels of oil equivalent, enough to provide 72 years of national energy consumption at present consumption rates. Collectively, the United States’ energy resources are diverse and probably adequate to meet economic needs well into the next century. The 72-year national energy supply number can, however, be quite misleading; the nation has quite large reserves of coal, but a much smaller supply of petroleum. Also, as noted above, the most plentiful resources, renewables, are being only minimally exploited. Further, the national rate of energy usage is on the increase, and will rise further unless more stringent conservation measures are taken. Thus, the 72-year figure is probably optimistic if the proved reserves data are utilized. However, it is likely that additional reserves, now categorized as “accessible,” will be confirmed in the years ahead. Perhaps a 100-to-150-year global supply of fossil fuels is more realistic. Reliance on imported petroleum for approximately one-half of the na-

110 • Global Energy Resources Table 4.4 Comparison of Energy Resource Estimates by Resource Type—United States (Values in Billions Barrels Oil Equivalent, Except as Noted)

Note: *Years of consumption based on current consumption rate of 88–94 quads. Source: “Characteristics of U.S. Energy Resources and Reserves,” prepared by the Meridian Corporation for the U.S. Department of Energy, June 1989.

tion’s petroleum needs represents a risk to future national economic and military security. The U.S. government and the petroleum industry have developed the National Strategic Petroleum Reserve to build up reserves of petroleum against future possible supply disruptions. However, the Reserve was slow in developing due to only modest appropriations by Congress. The Reserve has not attained its storage goals. Despite the strategic reserve, a supply stoppage of foreign crude oil could cripple the national economy within a few weeks. At the global level, energy resources in the aggregate are enormous; however, only a small fraction of known or potential resources can be economically utilized, based on present technology. The geographic distribution of energy resources varies widely in both form and known reserves, resulting in some nations being net importers of energy fuels such as petroleum while others are net exporters of various energy minerals such as uranium, coal, and oil. This global disparity of energy resources

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Table 4.5 Electric Generation by Type—United States, 1976, 1986, 1996 (Units in Billions of Kilowatt-Hours)

Sources: Energy Information Administration, U.S. Department of Energy, Monthly Energy Review, September 1997; Department of Energy, International Energy Annual, 1999.

has led to international political confrontations such as the embargo of crude oil supplies in 1973 by the OPEC nations. Achieving equity of access to global energy resources will likely be a continuing challenge in the Third Millennium. ELECTRIC ENERGY IN THE UNITED STATES In the economies of most industrialized nations, a growing portion of overall energy usage is in the form of electricity. Over the past 20 years, overall electric generation has increased from 2,038 billion kilowatt-hours (KWH) to 3,481 billion KWH, a growth of 71 percent. As shown in Table 4.5, the types of electric generation are also changing with increasing use of coal and nuclear energy and reduced use of natural gas and petroleum. Coal-fired power plants now generate approximately 50 percent of the total national electric output. Generation by coal plants increased by 84 percent between 1976 and 1996, while nuclear plants’ output grew by 253 percent. The latter figure can be misleading, however, since no additional nuclear plants have been ordered since 1978. In fact, some nuclear units may be phased out prematurely, as discussed further below.

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Hydroelectric generation remains an important component of the nation’s electric generation situation. While hydropower was a principal generating source in the past, its role now has been reduced as additional reservoir sites are becoming scarce. Total hydropower generation comprises about 9.4 percent of the total. Renewable sources, such as geothermal, wind, solar, and biomass, constitute relatively minor sources of electric generation, although there is great potential for their future utilization. (Note: Hydropower is also considered by some as a renewable resource.) The other source of electric energy mentioned in Table 4.5 is from “nonutility producers” such as industries that generate at least some of their own power. With the recent emphasis on energy conservation and lower costs, many industries are turning to in-house generation or cogeneration. On a per capita basis, electric energy consumption in the United States is by far the highest in the world, averaging 12,700 kilowatt-hours per year per person during 1996. This compares with 6,200 KWH per annum for nations of the European Union and 7,700 KWH per year per capita in Japan. Natural gas usage in combustion and steam turbines for electric generation has grown slightly over the past decade, as noted in Table 4.5, while the use of oil as a power plant fuel has declined sharply. Natural gas–fueled combustion turbines have become increasingly popular in industrial cogeneration and in utilities production for peak demand periods. The relatively low cost of natural gas and the clean-burning qualities of this fuel have been instrumental in this development. An additional advantage has been the ability to deploy these turbines quickly as they have become fairly standardized and readily available. The energy industry is hard to define; in one sense, virtually every sector of the economy is involved in the conversion, generation, or consumption of energy to some extent. Traditionally, such energy-related supply industries as mines, power plants, refineries, and a host of support enterprises have constituted the energy industry. However, many heavy or primary industries are sufficiently energy-intensive to be considered a part of the energy industry. Energy-intensive enterprises such as aluminum smelters, basic oxygen furnaces, and electric arc steelmaking processes consume enormous quantities of heat and electricity. A number of these facilities also generate much of their electrical energy needs. Cogeneration is the simultaneous production or use of heat for more than one purpose and has become increasingly popular in recent years. An example is a large sawmill that uses sawdust and other wood waste to fire a boiler that furnishes steam for a dry kiln while also generating electric power. Another example is a business such as a hotel that requires substantial quantities of hot water for its guest rooms, restaurant,

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and laundry as well as electric power for the entire facility. The Quality Inn in Taos, New Mexico, uses this concept successfully based on a natural gas–fired engine to supply both electricity and heat. Cogeneration can offer large energy savings if plant processes and energy characteristics are compatible. In many cases, industrial cogenerating firms sell excess electricity to the electric utilities. The electric utility industry has historically been at the forefront of energy development. For many decades, electric utilities have generally enjoyed continuous profitable operations in most national markets due to steady population and economic growth. In return for limited market territories, utilities are given exclusive franchises virtually without competition. As a quid pro quo for regulated prices’ and protected service areas, they are guaranteed a reasonable return on their investments, usually around 11 to 14 percent. Investments in electric utility shares have generally proven to be stable and worthwhile for their relative security and stability. The electric utilities, however, are now under great scrutiny, not so much as individual companies being monitored by their public utility commissions, but as large entities that should be subjected to competitive forces in the economy. As regulated “natural monopolies,” the electric utilities have been largely immune from competitive assaults. This favored position may be changing in the near future if various state and federal policy proposals are implemented. These policy changes would likely have far-reaching effects on the economy, some of which are now only dimly perceived. As currently proposed in Congress and a number of state capitals, electric utilities would be required to open up their transmission facilities to potential competitors. Some observers have dubbed this effort “deregulation” due to its similarities to events surrounding the breakup of monopolistic practices in the banking, savings and loans, trucking, airlines, and long distance telephone industries a few years ago. Others contend that the impending changes are far more extensive and thus should be referred to as “restructuring.” Whatever the name given to it, the electric utility industry is already undergoing a major transition, and if predictions hold up, an extensive transformation of this industry is in the offing. Except for rural electric cooperatives, regional federal power marketing administrations, and some municipally owned utilities, the electric utility industry has traditionally been vertically integrated and has conducted the business of generating electric energy, transferring it over transmission lines, distributing power to its customers, and providing related retail services. This “cradle-to-the-grave” monopoly is likely to change significantly under recent policy moves by the state of California and pending policies by many other states. At the federal level, the Federal Energy Regulatory Commission (FERC) recently issued orders 888 and 889, which require electric utilities to provide nondiscriminatory open

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access to their transmission lines and to offer others transmission service comparable to their own. FERC order 888 also allows utilities to recover “stranded costs” associated with customers leaving their current supply arrangements. Stranded costs are those expenses related to a utility’s loss of revenue and investment if customers abandon their customary source of electricity and obtain similar services elsewhere. In such cases, the utility may incur substantial losses on capital investments for generating and transmission equipment, which was originally purchased under the exclusive jurisdiction policy but which now may have only limited, if any, use. Aside from the electric utility industry and its ongoing restructuring, other aspects of the energy industry will likewise undergo changes with far-reaching implications for society. The transportation sector of the United States and most industrialized nations will be transformed in the Third Millennium to the extent that different fuels and energy modes will be needed for the new generation of hydrogen-powered, electric, and hybrid-fuel automobiles. Refineries now operating strictly on crude oil and natural gas to produce gasoline and related fuels may in the future utilize petroleum, seawater, biomass-derived feedstocks, or electricity to produce hydrogen or oxygenated fuels for the automotive industry. Within the next two decades, the energy industry is likely to develop economic and environmentally acceptable methods for producing “synthetic” natural gas or liquid fuels from coal, oil shale, tar sands, and peat. The emerging renewable energy segment of the industry is expected to show steady growth on a global basis over the next two decades. After a shakeout in the solar and wind power industries in the last few years, these technologies are expected to gain increasing financial support and public favor in the future. ENERGY RESOURCES AND TECHNOLOGIES FOR THE TWENTY-FIRST CENTURY Among the world’s energy resources, fossil fuels—coal, natural gas, and crude oil—are being utilized increasingly in both industrialized and developing nations in electric power generating plants, factories, automobiles, and space heating. Two problems are related to increased use of fossil fuels: first, the supplies of these fuels are not unlimited; and second, burning of fossil fuels contributes to air pollution in the form of particulates, oxides of carbon, nitrogen, and sulfur, and other chemicals. Other energy resources, nuclear and renewables, are immense but utilized at only a tiny fraction of their potential. Over the next century, fossil fuel use is likely to be reduced with the growing concerns over global warming and low-level atmospheric pollution. Replacing coal and oil will be a combination of nuclear and renewable energy resources that hold

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great promise for providing adequacy of energy supply and environmental protection. Nuclear Energy Utilizing current fission technologies, nuclear energy is making a significant contribution to electrical energy supplies, particularly in Europe and Japan where public resistance has been less pronounced. Currently, some 421 nuclear power plants are in operation around the world generating 317 gigawatts of electric capacity. In the United States, nuclear power plants produce about 10 percent of the total national energy supplies and roughly 13 percent of total electric generating capacity. In France, however, over 65 percent of the total electric generating capacity is furnished by its 55 nuclear power plants. Currently, 109 nuclear power plants are in operation in the United States; however, about 5 are undergoing decommissioning and some 20 to 30 plants may be candidates for closure during the next decade. No new plants are planned beyond those currently in operation. Many of these plants have almost reached their useful operating limits of 30 to 40 years, while several others are being forced into decommissioning prematurely, in response to citizen referenda. The latter include nuclear reactors near Sacramento and Portland, Oregon. Despite the claims of antinuclear groups, the nuclear power industries in America, Japan, Europe, and other nations where state-of-the-art safety systems and regulations are in place have enjoyed a remarkable safety record with no loss of life nor significant public radiation exposures. The tragic accident at the Chernobyl nuclear power plant in the Ukraine resulted in numerous deaths and massive radiation exposures to thousands of persons in that region. The one serious American accident to date occurred in March 1979 at the Three Mile Island nuclear power station in Pennsylvania. The great difference in these two accidents is that the elaborate safety systems in the Three Mile Island plant prevented any loss of life or serious injury to anyone or even a significant radiation exposure to persons outside the plant boundaries. The Chernobyl unit, one of four at the site, was not equipped with a reactor containment vessel nor an emergency core cooling system as are American and other reactors developed in the Western world. The lack of this system and the different type of reactor core in the Chernobyl plant made it more vulnerable to a serious accident. Safety has been the top priority of American and European nuclear developers. This message needs to be conveyed to and accepted by the public if nuclear technology is to make a meaningful contribution to the global energy industry. Nuclear power technology, both the existing nonbreeding and breeder types, has huge potential for contributing to the global energy resource

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base. Public opposition since the Three Mile Island incident, however, has intimidated the electric utilities to the extent that no additional nuclear power plants have been ordered since 1978 nor are any planned in the United States beyond the current ones. Escalation of capital costs of nuclear plants has been another major factor in electric utilities opting away from nuclear units in favor of coal plants. Unless a quantum change occurs in national policy and industry attitudes within the next few years, the large block of existing nuclear-electric generating capacity in the United States must be replaced with either coal-fired, renewable energy, and/or new types of nuclear energy facilities if utilities are to meet the projected electric load growth. Among these options, the coal-fired one is likely to be preferred in many locations for political if not economic reasons. First, coal is readily available in most geographic areas of the nation. Second, the capital costs of coal-fired plants are at least one-third less than those of comparable nuclear plants and afford comparable overall generating costs, despite the lower fuel costs of nuclear units. In other nations, however, plans are underway for continued expansion of nuclear power generating capacity. France, Germany, the United Kingdom, Canada, countries in the Far East, and other nations have plans to add some 40 additional nuclear plants by the year 2010. As stated earlier, there are no plans for additional nuclear power plants in the United States at this time. Nuclear plants have been shown as competitive with coal-fired plants in many regions. A major advantage of nuclear power is its lack of atmospheric emissions of particulates, hydrocarbons, and other pollutants that are common to fossil fuel plants. This virtue should be increasingly important as concerns over global warming and low-level atmospheric pollution attributable to fossil plants continue to press for resolution. At present, one of the most vexing problems associated with commercial nuclear power is that of high-level nuclear waste management. For more than 30 years, the federal nuclear agencies (the former Atomic Energy Commission, followed by the then Energy Research and Development Administration, and now the Department of Energy) have pressed for Congressional authorization to build permanent underground repositories for disposal of the highly radioactive residues from nuclear reactors. In 1982, the Nuclear Waste Policy Act was enacted, which mandated that at least one repository was to be available by 1998 for burial of highlevel wastes. The private nuclear power industry has been paying handsomely into a federal nuclear waste fund to finance the elaborate site selection and the construction and operation of the repository. However, after more than 15 years of expenditures amounting to several billion dollars and countless scientific studies, there is little chance that a permanent repository will be available before the year 2010 and perhaps

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much later. At best, an interim above-ground repository may be constructed to house the wastes until a permanent facility can be built. With no solution to the waste management issue in sight and waning public support for nuclear power, there are few incentives for utilities to consider building additional nuclear power plants. The economic impacts of a widespread nuclear power shutdown would be vast and pervasive. There are no “substitute” plants that could immediately assume the electric generating duties of these facilities. Nor is there a significant amount of surplus generating capacity that could be enlisted to make up the deficit. Two other nuclear power technologies are potentially important to the global energy equation: the “breeder” reactor, and fusion energy. Breeder technology, so called because it can convert the fertile isotopes of uranium into fissionable plutonium and thus greatly extend the useful life of a reactor’s fuel system, has been under development for almost four decades. In the conceptual design for breeder reactors, spent fuel from conventional nuclear power plants would be reprocessed, extracting the bred plutonium, and recycled into fresh fuel for either conventional or breeder plants. Over time, the system would produce more fissionable material than it would consume, hence the name breeder reactor. Theoretically, a fully developed system of breeder reactors and associated reprocessing plants could be essentially self-sustaining insofar as use of natural uranium is concerned. However, progress on breeder technology has been stymied by the imbroglio of nuclear waste management and an executive order issued during the administration of President Jimmy Carter that in essence halted commercial reprocessing of nuclear fuels on grounds that separation of plutonium from uranium and other fission products could give rise to possible clandestine diversion of strategic materials such as plutonium that could be used in nuclear weapons. The quest for controlled nuclear fusion remains an elusive dream, although substantial research and development is underway and there are indications of progress. In a fusion reactor, copious amounts of energy could be released and converted into electricity through the “fusing” or chemical combining of the nuclei of deuterium or tritium, isotopes of the lightest element, hydrogen. This process is the opposite of current nuclear plants in which heavy elements such as uranium undergo fission, or splitting, into lesser fractions in a fission reactor, thereby releasing energy. One of the great potential advantages of nuclear fusion is that the fuel source can be derived from seawater, a virtually inexhaustible resource. Another major feature is that the fusion reaction does not produce significant amounts of radioactive residues. Fusion technology, however,

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faces formidable engineering challenges due to the temperatures required to initiate fusion and the methods required to stabilize hot gaseous plasmas and to extract usable energy. The “tokamak” magnetic fusion technology and various laser implosion methods now under development show that controlled fusion with a net positive output is indeed possible. However, unless major breakthroughs are seen in the near future, it appears that practical nuclear fusion technology may not become a reality for three or more decades. Coal This fossil fuel is the fuel of choice for an increasing number of electric utilities in the United States. Coal is abundant in many areas of the nation and its cost is often less than that of oil, natural gas, or nuclear power. Coal-fired power plants generally require somewhat less initial capital investment than nuclear plants, although their unit fuel costs are usually higher. Most coal-fired plants utilize conventional high-Btu bituminous or medium-energy lignite coals as fuels in high-efficiency boilers/steam generators. With state-of-the-art combustion and topping systems, these plants can achieve thermal efficiencies approaching 45 percent. This compares with about 33 percent thermal efficiency for most current nuclear reactors. Central-station fossil-fueled or nuclear power plants typically have electrical generating capacities of around 1,000 megawatts, although they can be built in smaller or larger sizes. Plants of this size can provide sufficient electric energy for a city of around one million population. As a versatile hydrocarbon, coal can be processed to produce methane as well as synthetic “natural” gas or liquid fuels. With the large reserves of coal in many nations, including China, Russia, Australia, New Zealand, the United States, and several others, continued research and development on coal gasification and liquefaction processes appears to be warranted. The availability of synthetic fuels from coal could augment or supplant imported natural gas supplies in many nations possessing coal reserves but limited native petroleum supplies. As more fully discussed in Part III, the use of coal in power plants is coming under increasing scrutiny due to the growing concerns over the adverse effects of carbon dioxide and other “greenhouse” pollutants emitted by coal-fired generators. These pollutants being released from power plants, automobiles, homes, and factories at growing rates are believed to contribute to “global warming” and other atmospheric changes. Petroleum Oil and natural gas comprise the largest components of energy production on a worldwide basis. Demand will remain high in industrialized

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nations well into the twenty-first and probably twenty-second centuries. The versatility, portability, and relatively low cost of petroleum products afford significant advantages in their utilization in, for example, electric power plants, space heating, chemical processes, and automotive fuels. While there are potentially competing technologies under development that could eventually supplant fossil fuels, these alternatives are believed to become available on an economically widespread basis only sometime after the year 2020. Until that time, there will be a continuing strong demand for petroleum products. The automotive sector alone will continue to maintain high demand levels for gasoline and diesel fuels. As noted in Table 4.3, energy used for the transportation sector in the United States is growing steadily and now accounts for over 27 percent of energy consumption. Renewable Energy Resources By definition, renewable energy resources are those that are not subject to depletion as is the case with fossil fuels. The term “renewable energy” is often used synonymously with the term “sustainable energy.” Over the past two decades, increased interest in renewable energy resources has come about with the growing recognition that the world’s fossil fuel resources, while great quantitatively, are nonetheless finite and nonreplaceable. Most renewable energy resources also are more benign than fossil fuels insofar as their environmental effects are concerned. Historically, the use of renewable energy in the form of wood was widespread. Wood was largely supplanted by coal and petroleum as these fuels became increasingly available during the last decades of the nineteenth century. Now, with the growing concerns over atmospheric pollution and increasing depletion of fossil fuels, consideration is being given once again to renewables. However, this time, a wide array of renewable energy resources is being evaluated and appropriate technologies being developed to exploit these resources. Biomass This is a category of renewable energy resources that is organic, consisting of plant organisms of various types. Firewood is a familiar form of biomass. Trees, plants, and organic wastes are among the wide variety of biomass materials that may be burned or chemically altered in order to liberate heat for energy purposes or to create an energy fuel such as ethanol. Wood and wood wastes are being used to generate steam or heat for dry kiln lumber mills or to produce electric power. In some municipalities, solid wastes in landfills are being incinerated, producing electric power as a by-product. Municipal solid waste is also a source of methane and is being exploited for this energy source in a number of urban areas.

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Researchers at the National Renewable Energy Laboratory and elsewhere are developing new boiler/burner systems that can make optimum use of wood and wood wastes. Experiments are underway to develop fast-growing species of trees that can reduce the time for replenishment of dedicated forests for power production. Efforts are being made to enhance the energy content and utility of certain biomass materials such as native grasses, corn, barley, sugar cane bagasse, and animal wastes. Production of ethanol from corn has been underway for a number of years in Iowa, Kansas, and neighboring states. Ethanol is currently blended with regular unleaded gasoline and marketed in those areas where oxygenated fuels are required in automobiles during the winter months to reduce air pollution. Ethanol can also be produced from other feedstock materials such as switchgrass. Culture of switchgrass has vast potential in the northern Great Plains where it was a native grass before being replaced by intensive agriculture. Wind Energy The kinetic energy of the atmosphere is an enormous potential source of mechanical and electrical energy. Human use extends back to around 2800 B.C. when the Egyptians made use of wind energy in sailing ships. The Persians began using wind power several centuries B.C. to grind grain. Later, wind power was used for water pumping by the Dutch and in medieval England. In the United States, wind power utilization waxed and waned over the past few decades due to several factors. Wind power for agricultural water pumping came into widespread use prior to introduction of rural electrification and with the availability of small windmills during the 1920s and 1930s. With electrification, however, many windmills fell into disuse and were not replaced. Nevertheless, there are thousands of small individual wind turbines used in localized electric generation or in water pumping located throughout the nation, although the higher concentrations are found in farming and ranching areas of the central and Great Plains. On a commercial scale, wind power attained some significance since the 1970s with development of the large California wind farms at Altamont, Tehachapi, and San Gorgonio where over 17,000 wind turbines are in operation, many for more than a decade. At the international level, there are approximately 21,000 wind turbines with a combined electric generating capacity of over 4,000 megawatts located in Denmark, Germany, United States, India, and 16 other nations. In addition, several thousand small wind turbines generate electric power or pump water at farms and businesses. In the United States, wind power is also being developed at sites in Montana, California, Colorado, Arizona, New Mexico, North Dakota,

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Iowa, Oklahoma, Maine, Minnesota, Vermont, and Wyoming, among others. Planned utility-scale wind projects are designed to produce 10 to 500 megawatts of electric generating capacity at each site with up to 1,000 wind turbines at the larger wind farms. A recently completed wind project at Green Mountain, Vermont, produces 6,000 kilowatts through 11 wind turbines. The project’s initial cost was 11 million dollars. Similar larger projects are under construction or planned in Colorado, Minnesota, Wyoming, and several other states. Wind power technology improvements over the past five years have included more efficient rotor blades, generator transmissions, power controls, and other components that have increased overall turbine efficiency, availability, long-term capacity factor, and cost-effectiveness. Whereas earlier designs generated electric energy at rates up to 15 to 20 cents per kilowatt-hour some 15 years ago, present power costs have been reduced to around 5 to 7 cents per kilowatt-hour for large state-ofthe-art wind turbines. Commercial wind turbines have grown in size and complexity in recent years. For a typical modern 600-kw turbine, the average rotor diameter is around 43 meters. Capital costs are in the range of $300,000 to $450,000, or approximately $500 to $750 per kw, and annual electrical output at a site with average annual wind speed of 15 miles per hour is around 1.5 million kilowatt-hours for each wind turbine of this design. Overseas, wind power contributes to the electric generating systems in Denmark, the Netherlands, Germany, and Great Britain. Wind power projects are also getting underway in India and Japan. Several of the major wind turbine manufacturers are foreign corporations based in these countries, such as Micon, Vestus, Nordtank, and Enercon. Suppliers of commercial-size wind turbines in the United States include Zond Systems, Bergey Windpower, Kenetech, and Carter Systems, among others. One of the virtues of wind power systems is their modularity; that is, individual units can be added readily in a wind farm as needed. Another advantage is their portability; turbines can be quickly taken down and moved. Aside from their reliance on the natural renewable resource— wind—these systems are completely free of environmental pollutants. A drawback of a wind power system is its lack of “dispatchability”; that is, it cannot generate power when the wind is not blowing. Even at the best sites, the wind does not always blow uniformly, neither on a diurnal nor a seasonal basis. Electric utilities point out the lack of dispatchability of wind power as a disadvantage; however, this feature is becoming less troublesome as utilities are developing some experience with wind systems. Recognizing that the energy of the wind is proportional to the cube of the wind velocity, a critical criterion in wind project site selection is determination of the long-term wind characteristics of candidate sites. Wind

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direction and elevation above sea level are also important considerations in site selection. Site elevation can determine atmospheric density, which is also a determinant of atmospheric energy available at a site. Combined with wind direction data and wind speed profiles of each site, this meteorological information is needed for a full resource assessment of a candidate site. Solar Energy Energy derived directly from the sun is generally “solar energy” when it is converted into thermal energy or electrical energy through various collection and storage devices. In a broad sense, solar energy may include biomass and wind since indirectly these resources rely on solar activity. However, for purposes of this analysis, biomass and wind systems are considered separately, and solar systems are categorized as: (1) solarthermal, or (2) direct conversion, or photovoltaic. Solar-thermal systems collect energy from the sun and convert it into heated fluids or steam for subsequent use in space heating and cooling, electric power generation, and some other industrial applications. Numerous residences and industries have installed solar-thermal devices to augment conventional heating systems and reduce heating costs. Largescale solar-thermal electric power plants have been constructed in California and overseas locations in recent years. First-generation solar parabolic trough and central receiver systems are under development in the United States and Europe. These projects have demonstrated the technical feasibility of large-scale solar-thermal power generation. Current goals are to enhance long-term reliability and to reduce electric generation costs to those approaching conventional sources in areas with high insolation within the next decade. At present, these plants are not competitive (nor were they expected to be); however, significant progress in cost reduction and reliability is being demonstrated. Direct conversion is accomplished by photovoltaic cells in which semiconductors and other photosensitive materials collect sunlight and convert the photon energy into electricity. Photovoltaic (PV) systems are being developed that may have enormous long-term potential for both remote and grid-connected applications. Research at the National Renewable Energy Laboratories (NREL) and several domestic and foreign corporations suggest that PV costs are being reduced rapidly with new developments in materials. A few years ago, PV capital costs ranged from $15 to $25 per watt. Costs approaching $5 to $7 per watt now appear to be attainable in a few years. Small PV residential systems are economically feasible in locations where electric power distribution lines are too far away to permit economical connections. Examples of recent successful applications are small, roof-mounted PV systems to supply electricity to more than 500

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individual residences in remote areas of the Hopi and Navajo Indian reservations. Solar energy systems cannot collect and convert insolation into heat or electric energy except during daylight periods and when the sun is not unduly obscured. Small solar installations frequently are equipped with conventional storage batteries to provide energy at times when the sun is not shining. Batteries are kept charged by the solar cells. Geothermal Systems By definition, geothermal energy is heat from the earth and can be categorized into several heat regimes. In the broadest possible analysis, one could hypothesize that systems could be developed to penetrate the earth’s crust and tap the incalculable energy of the core. However, technology that could withstand the intense heat and pressure of deep penetrations into or near the magma does not now exist. Current technologies for geothermal energy extraction and conversion include two types. First, vapor-dominated, high-temperature systems for electric power generation may be warranted in some locales. Second, lowertemperature, direct heat utilization applications are likely to be feasible in many domestic and foreign locations. High-temperature geothermal regimes where vapors on the order of ⬎150 degrees centigrade are available may be suitable for electric power production. At present, there are at least 12 geothermal power plants in Nevada and a series of similar facilities in California. More than 6,000 megawatts-electric of generating capacity is being supplied by geothermal resources in about 20 nations. Approximately 12,000 megawatts-thermal of geothermal energy is being used in numerous direct use applications ranging from greenhouses to hydroponics to residential space heating. The highly site-specific nature of high-temperature geothermal anomalies makes difficult the process of locating suitable sites for energy applications. There is great variability in geothermal resource temperatures, fluid chemistry, flow rates, and pollution concerns among potential sites. Nevertheless, geothermal vapors and fluids are producing electricity and thermal energy in numerous locations around the world and in the western United States. Low-temperature geothermal resources are much more prevalent than high-temperature resources. Many sites have warm springs or elevated aquifer temperatures that may be suitable as heat sources for greenhouse horticulture, space heating, recreational or health spas, silviculture irrigation, aquaculture, soil warming, and a host of other applications. The Duckwater Indian tribe in Nevada, for example, utilizes geothermal water in specially designed cascading pools to raise catfish in an accelerated growing cycle.

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Hydropower Electric and mechanical energy, historically, were furnished by hydropower. Today, hydropower still furnishes a major portion of the electric energy in some regions of the United States. Among these areas are: (1) the Columbia River system where the Bonneville Power Administration markets electricity from a series of large dams; (2) the Tennessee Valley Administration system; and (3) a more thinly distributed system in the West operated by the Western Area Power Administration. Aside from these large hydrosystems, there are numerous smaller reservoirs where moderate amounts of electricity are generated, some for internal industry use only. Aside from their electric generation functions, many reservoirs also support large-scale irrigation systems, recreation, and flood control activities. According to the energy reserve estimates shown above, hydropower resources could theoretically be increased three- to fivefold in the United States if low-head hydro projects are included. However, in view of the growing public resistance to large dams, it seems doubtful that any more than a few macroscale projects will be acceptable unless a dire energy emergency can be demonstrated. Nevertheless, small low-head hydropower projects, in locations where environmental constraints are minimal and public support can be achieved, may be able to make relatively minor contributions to regional and national energy supplies. Multipurpose hydropower projects, such as those that include recreation, flood control, or irrigation components, may be more acceptable to the public than single-purpose projects. Ocean Energy Systems Technologies for utilizing the thermal energy in the temperature differentials of ocean currents are among several systems under development. Ocean thermal energy conversion (OTEC) systems now being developed generally consist of extremely long vertical structures that utilize the upward flow of deep colder water into warmer regimes to capture and supply heat to binary energy systems for electricity production. Another category of ocean energy is tidal flow systems in which periodic tides are harnessed for electricity generation in the manner of conventional hydroelectric power facilities. Sites with large tides, such as the New England coast of the United States, are being considered for this type of ocean energy system. Hybrid Renewable Energy Systems Under proper circumstances, various combinations of renewable energy resource systems may be linked to provide optimized energy utilization. For example, in the northern tier of the United States where

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strong winds but lower stream flows exist during winter months and where the opposite occurs during warm weather, mixed-energy projects of wind turbines and hydroelectric facilities could provide a more uniform electric output as seasons change. Other hybrid renewable systems that can offer continuity and balance of energy output include: (a) systems linked in such a way that the variability of solar or wind systems is balanced by the continuous energy flows and output of biomass, geothermal, or hydropower systems; and (b) coupling of a wind or solar project to a conventional fossil fuel or nuclear plant so that the base-load facility operates continuously, and the wind/solar plant generates during daytime/windy periods, which usually coincide with times of highest energy demand. Examples of the latter are several of the solar parabolic trough plants in California where an oilfired power plant assumes electric generating duties from the solar units at nightfall. Variability of energy production and relatively low “capacity factors” in renewable systems such as solar and wind can be improved significantly through energy storage systems. Small wind or solar systems can be used to charge storage batteries that can be utilized at night or during periods of low solar insolation or low wind speeds. These small systems have been used successfully for a number of years and can be employed in developing nations or remote areas lacking electric grids or other power sources. Development work is underway on large compressed air storage systems that could be filled during periods of excess energy generation by a conventional or renewable energy facility and withdrawn as needed to operate a turbine. Still another method of energy storage is the so-called “pumped-storage” system in which a conventional or renewable power plant would operate in conjunction with a nearby hydroelectric power facility. The power plant would pump water up to the reservoir for storage during periods of surplus electric generating capacity. During the daily peak demand periods, the water would be released into a water turbine for generation of electricity, augmenting that available from the power plant. The water could be contained in a lower reservoir and recycled. Numerous successful pumped-storage projects are now in operation in the United States and elsewhere. Exotic Electric Energy Systems Some space scientists and energy engineers have developed conceptual designs for electric power systems that would use geostationary or other satellites to capture solar energy and convey it to Earth via microwave, laser, or other methods. By using a series of such satellites equally spaced around the earth, sunlight would be collected continuously and converted into electric energy. The main engineering challenge would be the

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energy collection, conversion, and control mechanisms that would focus the energy and guide it to receivers on Earth. Some concerns have been raised as to the risks to human safety if highly concentrated solar or laser energy from the satellites became misguided. An intriguing idea is to determine the feasibility of harnessing electric energy from the enormous magnetic field that surrounds the earth. Under this concept, geo-orbital satellites or other means would move through portions of the magnetic field to capture induced electricity and transmit it to Earth. Such a system could exploit the inexhaustible energy of the earth core and its related magnetic fields without damaging the environment. There are no known serious research projects underway regarding this concept, but the notion may be worthy of study.

5 Issues and Options for Energy Development

GLOBAL ENERGY POLICY ISSUES In the industrialized nations, high levels of energy utilization have been a major factor in achievement of high standards of living. However, only recently have energy issues attained much visibility in the formulation of governmental policies. Some industrialized nations and, to a lesser extent, a few developing countries are beginning to realize the importance of employing integrated approaches to energy utilization in overall economic and social development. France, for example, with its limited fossil fuel resources, made a conscious decision some three decades ago to emphasize the use of nuclear energy in its electrification program. Today, more than two-thirds of its electricity is provided by nuclear reactors. Japan’s limited land base and natural fuels have led to an electrification program consisting of fossil-fired plants using imported fuels as well as development of nuclear power plants. China, by contrast, has significant coal, oil, and other resources as well as extensive water resources. It has embarked on an energy program that includes a mixture of nuclear reactors, coal-fired power plants, and hydroelectric projects. One of the latter, the Three Gorges Project, will be among the largest hydroelectric projects in the world and will impound a large river system for electric generation and flood control. However, the project will displace over 1.5 million people and may result in massive ecological disruptions. It seems unlikely that such a massive envi-

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ronmentally questionable project could be built in a noncommunist nation under public scrutiny and environmental regulations. For much of the postwar period, the U.S. government has given not much more than lip service to the subject of energy and then only during a crisis such as the 1973 oil embargo by the Organization of Petroleum Exporting Countries. Following World War II, Congress was euphoric about the great potential of atomic energy and created the Atomic Energy Commission to spearhead national efforts in developing peaceful applications of atomic energy. This agency was quite successful in spawning development of the commercial nuclear power reactor, in aiding the medical and industrial applications of radioisotopes, and in conducting research on advanced nuclear concepts such as the breeder reactor and nuclear fusion. Aside from its efforts in atomic energy, the federal government has done little to foster innovations in fossil fuels utilization and virtually nothing in renewable energy systems until the past decade or two. Following the breakup of the Atomic Energy Commission during the Nixon administration into two independent agencies, the Energy Research and Development Administration and the Nuclear Regulatory Commission, federal efforts continued to concentrate on commercialization of atomic energy with only quite modest investments in other areas of energy research and development, notably the Office of Coal Research within the Department of Interior. Meanwhile, the private sector continued to make relatively small investments in non–nuclear energy research, including coal gasification and liquefaction and solar and wind energy systems. Private research and engineering did, however, produce significant improvements in fossil fuel combustion efficiency, gas-fired turbines, and nuclear reactor design, all of which were instrumental in stretching fuel resources and reducing atmospheric emissions. No significant energy-related events or breakthroughs occurred during the early 1970s to spur federal policy initiatives—until the 1973 OPEC oil embargo, which caused widespread economic disruptions in the United States and Europe. In the aftermath of this crisis, Congress authorized formation of a government corporation, the Synthetic Fuels Corporation (SFC), to spearhead commercialization of coal gasification and liquefaction processes as a hedge against further shutoffs of foreign oil. The SFC’s programs foundered within a few years and were terminated before significant demonstrations of oil-from-coal could be demonstrated. Out of the OPEC crisis also came the establishment of a national strategic petroleum reserve, an emphasis on energy conservation, and the creation of a new Department of Energy that combined several scattered energy-related agencies and that was charged with formulating a National

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Energy Plan. Renewable energy research was given a boost through establishment of a Solar Energy Research Institute, later renamed the National Renewable Energy Laboratory. Energy conservation programs were instigated and proved to be highly effective. In recent times, U.S. energy policy has become more diversified with continued reliance on fossil fuels and nuclear energy but with increased emphasis on renewable energy resources. Goals were established in the mid-1980s to encourage renewable energy systems to become more competitive with fossil and nuclear systems. For instance, a cost goal of 10 to 15 cents per kilowatt-hour was set for photovoltaic solar cells. Additionally, tax incentives were authorized by Congress to aid solar and wind systems to compete more effectively with established fossil and nuclear technologies. Some states also offered tax breaks. Together, these incentives played an effective role in the development of large wind farms in California and numerous smaller solar projects elsewhere. However, most of the federal tax incentives were allowed to lapse and have not been renewed by Congress. Consequently, renewable projects must now compete without benefit of federal incentives. The loss of such incentives notwithstanding, renewable technologies have demonstrated significant economic and operational advances in recent years and some systems, such as large wind projects, can now compete favorably with conventional electrical generation in many locations. The on-again, off-again nature of federal energy policy reflects the complacency that has characterized federal legislative policy, namely, that there is no sense of urgency in Congress toward establishing a coherent energy policy. The attitude of the Congress seems to be that the United States has adequate energy resources and that the private sector will do whatever is necessary to assure the adequacy of national energy needs. This attitude reflects the effectiveness of the major energy lobbying organizations, including the American Petroleum Institute, National Coal Association, Edison Electric Institute, American Gas Association, among others. These industrial lobbying groups, each with a stake in only one or two of the energy sectors, have lobbied against and influenced adversely federal investments in renewable energy technologies, energy conservation, and energy-efficient automotive systems. Renewable energy advocacy organizations, such as the American Wind Energy Association and the Solar Energy Association, are comparatively small and only modestly funded. Nevertheless, they have actively sought more favorable federal and state treatment of sustainable energy efforts. The laissez-faire attitude and affinity of the current Congress for big energy corporations have deterred a truly rational and thorough analysis of energy issues and options in recent times. An example has been the debate in Washington over the ratification of the pending global warming treaty agreed to by some 120 nations at the 1997 Kyoto, Japan, confer-

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ence. While representatives of virtually all potential signatory nations predicted enactment in their countries, U.S. congressional leaders predicted an overwhelmingly negative vote if indeed Senate majority leaders allow the treaty to be considered. One major sticking point in the proposed treaty has been a provision for exemptions from the pollution abatement requirement by many developing nations, while the industrialized countries would be required to implement specific pollution reduction measures. The automotive, coal, electric power, and oil industry lobbying groups lobbied heavily that such exemptions were unfair. Forcing large-scale changes in energy production and consumption patterns as well as in the forms of energy utilized entails establishing new patterns of behavior that may be influenced by incentives, prohibitions or regulation, innovations, and/or combinations of these. Accelerated write-off of new pollution control equipment could make more palatable the matter of investment in such equipment. The threat of financial penalties or criminal prosecution may also be effective in enforcing pollution control regulation. New methods or products could be introduced that could satisfy the policy requirement in ways unforeseen by the policymakers or regulators. Whatever combination of “carrot-and-stick” methods may be utilized, changes of the sort contemplated in the global warming initiative will be vigorously resisted by the entrenched major energy interests. The time element is another major consideration in effective and equitable change. Obviously, small incremental changes may be done relatively painlessly, but massive changes will require considerable investment and time as well as an integrated plan to guide implementation of the transition from a fossil-fuel-dominated system to a more diversified one. Policy issues concerning energy resources are grouped into four areas: (a) energy resource availability and conservation; (b) choice of energy conversion technologies and their economic and environmental effects; (c) potential new transportation, manufacturing, and other energy utilization systems that make more efficient use of energy resources and/or produce less environmental pollution; and (d) roles of the public and private sectors in operating and regulating the energy industry. These issues bear heavily and directly on the global economy during the Third Millennium and apply to both industrialized and developing nations, although the extent of their application may vary widely from country to country. With the great variability in the types and extent of energy resources among the nations, the matter of equity in gaining access to energy resources can be troubling. For example, if a developing nation is deficient in, say, coal and petroleum resources and requires such fuels to support its economic development, what options are available to it? Must it rely

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solely on imported fuels at high cost, or should it attempt to develop indigenous resources, such as biomass, at relatively high risk and expense and with at least moderate potentially adverse environmental impacts? Resource substitution may be a viable alternative for many developing nations if appropriate energy conversion technologies are readily available. Selecting state-of-the-art energy conversion technologies for both thermal and electrical production processes is often strongly dependent on the availability and proximity of energy resources. Coal would be the obvious fuel choice for electric power generation in regions where large coal deposits exist. On a per-pound basis, the value of raw coal is relatively low, requiring means for its transport to the generating plant to be low in cost. Mine-mouth generating plants have become fairly common in the United States, although there are some power plants supplied by distant coal mines via coal slurry pipelines and rail transport unit-trains. Examples include power plants in Texas supplied by coal shipped by unittrain from Wyoming, and a power plant of Public Service Company of Colorado near Pueblo, Colorado, that is fueled by coal shipped by unittrain from northern Wyoming. In Arizona, two slurry pipelines, one more than 88 miles long, transport coal from mines to power plants. Nuclear power plants have become an electric generation method of choice in some nations where petroleum or coal resources are limited, possess below par energy values, or have a high sulfur content. However, as pointed out earlier, nuclear power technology has come into disfavor in the United States owing to public acceptance problems and to the lack of a publicly acceptable national nuclear waste system. The choice of renewable energy technologies will likely be made increasingly in the future as these solar, biomass, wind, hydropower, and geothermal systems become more efficient and cost-competitive and as environmental restrictions on conventional power plants become mandated by national and international environmental protection statutes and treaties, such as the pending global warming initiative. However, selection of renewable as well as conventional energy technologies should be made on the basis of sophisticated resource analyses, economic feasibility studies, environmental assessments, and project development plans, and on a “systems” basis; that is, the regional as well as local energy situation should be evaluated to determine the most advantageous basis for renewable and/or conventional energy project development. In comparative analysis of renewable versus conventional electric power generation, renewable advocates point out that the economics of solar and wind projects should reflect their contributions to pollution avoidance. However, without nationally accepted monetary values established for such avoidance, no economic credits are usually given for such

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externalities in electric energy planning. However, it is possible to determine the cost of pollution abatement as reflected in pollution control equipment added to fossil fuel power plants. Inconsistent treatment of values and costs in evaluating competing energy technologies is a persistent problem that should be addressed in federal policy. Since, in the United States and other industrialized nations, transportation comprises a significant portion of national energy requirements, any future national energy policy should include provisions for energy efficiency and environmental protection related to vehicle operations. (In the United States, automobiles and other internal combustion vehicles utilize more than 27 percent of all energy consumption.) Aside from their energy requirements, automobiles emit copious quantities of particulates, hydrocarbons, and oxides of nitrogen and sulfur despite the incorporation of pollution control devices. In many of the world’s major cities, automobiles contribute up to one-half of the lowlevel atmospheric pollution, including smog and invisible gases. Supplementary or alternative transportation systems, such as urban mass transit and/or alternative fuels for urban vehicles, should be provided for in most major urban centers. The European nations have relied on public transport as an important element in their economies. Some of these, such as the systems in Switzerland, utilize electric-powered trains and thereby reduce urban air pollution. However, most of these systems are heavily subsidized or publicly owned with substantial taxpayer support. The Japanese high-speed rail transit system, likewise, is heavily subsidized by its government. In capitalistic systems, the roles of government and the private sector in formulating and implementing energy policy are usually in a state of tension. In early decades of the twentieth century when the energy industry in the United States was still in its infancy, the public-private patterns of ownership, control, and regulation evolved into two distinct systems: (1) the solid and liquid fuels businesses (i.e., coal mining, oil and gas developers, refineries, etc.) gravitated into the private sector almost totally; and (2) the electric power sector split into two subgroups, with the investor-owned companies concentrating on electric markets in the more populated areas, and the publicly owned electric cooperatives serving mostly rural areas not well served by the investor-owned utilities. However, a number of cities and towns developed and still operate their own local electric power systems. With the recent emphasis on greater privatization of economic activity, including energy services, the roles of the private sector are expected to receive increased attention via-a`-vis the public arena. Already, policy initiatives are being pushed that would increase competition and decrease regulation of the electric utility industry. Properly designed and executed,

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increased privatization could enhance competition, decrease consumer prices, and improve overall energy utilization efficiency. However, without built-in provisions for electric service reliability, generation resource portfolio standards that would require balanced consideration and use of renewable as well as depletable resources in generating electricity, and strict enforcement of safety and environmental protection measures, restructuring of the electric power industry may fall far short of expectations. Large-scale electricity outages could ensue in an open competitive system since it is possible that intricacies of the transmission system fed by multiple, competitive generators may not be fully integrated and balanced unless mandated by government policy. The output of individual generators must be integrated and balanced against transmission line capacities and other considerations. Loss of generating capacity by one or more independent power producers (IPP), together with lack of compensating capacity from other sources, may be more likely under a competitive electric supply system than a system based on monopoly supply, since a monopolistic utility usually has its own standby sources that may not be deemed cost-effective by the participants of an open competitive system. Thus, oversight and regulatory roles of state and federal energy and environmental agencies are highly desirable even under a highly privatized electric energy economy. On the global scale, energy planning has consisted of periodic fragmented approaches to examining multinational economic and environmental problems. While several multinational organizations, such as the World Bank, the International Monetary Fund, and the International Atomic Energy Agency, among others, are involved in various aspects of global and regional energy issues, there is no single global energy organization with a mandate or authority to conduct broad-scale energy planning in cooperation with the world’s governments. Therefore, whatever global energy planning has been done to date has been ad hoc and usually as an adjunct to consideration of other issues, such as nuclear proliferation or global warming. The great diversity and uneven geographic distribution of energy resources around the world makes the matter of comprehensive global energy planning quite difficult, if not impossible. National sovereignty and economic issues often militate against long-term multinational cooperation on global energy as well as other issues. Nevertheless, some forms of international energy cooperation have been relatively successful, such as OPEC. However, energy-related environmental issues that transcend national boundaries, such as global climate change, may become the avenue through which energy policies are addressed.

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FOSTERING OPTIMUM ENERGY RESOURCES UTILIZATION Under ideal circumstances, energy resources would be utilized in sustainable ways that maximize their potential contributions to society with minimal adverse environmental impact. These resources would not be wasted unnecessarily, and the technologies selected to optimize their use would be appropriate as to efficiency, scale, and costs. Unfortunately, several factors often come into play to limit the best use of energy resources. Among these are the nonuniform geographic distribution of energy resources, especially fossil fuels; the lack of availability of stateof-the-art technologies in some developing countries; and the political maneuverings of certain nations that possess abundant supplies of petroleum that are in demand elsewhere. The geographic distribution and concentrations of energy sources around the world vary widely. Some regions are well endowed with petroleum, while others possess coal, biomass, wind, or geothermal resources. For instance, the Middle East contains by far the largest reserves of oil and natural gas, while Russia, China, and the United States possess the world’s largest coal resources. Less well known and researched are regions where renewable energy resources dominate, although it has been established that virtually every region has some form of renewable resource that may be utilized under appropriate conditions. For example, the vast forests of Africa, Southeast Asia, India, and South America could produce sufficient biomass energy as well as solar and wind power to support greatly increased industrialization without resorting to widespread use of fossil or nuclear fuels. In view of mounting environmental problems and the apparent lack of concern among the general public over future energy shortages, environmentalists decry America’s profligate energy consumption and call for strong conservation measures to curtail energy usage. Environmental groups have been instrumental in forcing regulatory changes in energy facility operations that reflect environmental protection values. It is widely recognized that energy-related mining, refineries, power plants, smelters, and heavy manufacturing operations are among the major “point-sources” of pollution. These energy-related facilities have been required to adopt costly pollution control techniques that also may reduce energy efficiency and resource conservation. Nevertheless, environmental protection is an established regimen especially in the energy and manufacturing industries and is expected to continue to be so even with the large-scale transition from a fossil fuel economy to one balanced between depletable and renewable energy resources. Over the long term, achieving optimum use of world energy resources will require unprecedented cooperative planning at the national and in-

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ternational levels. Nations will cooperate if only out of a sense of necessity to survive under Third Millennium conditions of rapid population growth and diminishing availability of natural and other resources. If idealized international cooperation could be achieved and maintained for any length of time, it might be possible to develop a global system of energy resource allocation based on local availability of energy resources and demonstrated need such that supplies are traded equitably and not hoarded. Hopefully, energy supplies and prices will reflect some semblance of global free-market operations. Lacking such utopian ideals, a more realistic scenario is that each nation will continue to exploit its own energy resources and employ appropriate energy conversion technologies. Under this strategy, now in vogue, the capitalistic market system will continue to allocate resources. However, there could be perturbations to this purely market approach that could alter the normal patterns of energy development. One of these could be the implementation of the proposed global climate change (or global warming) treaty, which could impose restrictions on fossil fuel use in industrialized nations but mandate lesser or no such restrictions in developing nations. Another type of perturbation could be political; supplies could be disrupted by energy-rich countries against target nations for political or economic reasons. A case in point was the 1973 OPEC oil embargo against the United States. Regional multinational alliances may be an effective mechanism for developing energy supply systems across national boundaries. These could take the form of energy supply guarantee programs in which countries deficient in a particular energy fuel could be assured of adequate supplies in exchange for currency or other commodities desired by other nations in the alliance. These alliances could have both positive and negative effects, depending upon their constitution and operating policy. Alliances such as OPEC could be formed elsewhere to control the price and supply of energy from member nations in sales to nonmember countries. Contiguous nations with mutually compatible markets and energy resources could undertake development of common electric supply systems. Such alliances could provide for long-range cooperative planning in environmental protection as well as energy development. This approach may work well in densely populated regions, such as Europe, where compatible economic infrastructures exist. The extent to which restrictions are placed on fossil fuels under a proposed global warming treaty will greatly influence the choice of energy technologies for electric power production as well as types of automotive vehicles utilized. While such choices cannot be accurately predicted at present due to possible changes in treaty provisions, it is likely that a large number of older coal-fired power plants may be retired early rather

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than undergo expensive rebuilding required to conform to new emission restrictions. Other plants may be required to be retrofitted with expensive pollution control equipment. One controversial option would be to impose a “pollution tax” on industries that emit excessive amounts of greenhouse gases. Still another method to encourage use of renewable energy technologies would be to provide some combination of special tax credits, production bonuses, and “pollution avoidance” credits. Some utility representatives have said that electric power rates would increase by more than 50 percent under the proposed treaty restrictions. These statements are no doubt selfserving and are probably excessive, although it appears likely that electric power costs would increase by perhaps 10 to 20 percent. Proponents of the global warming treaty state that alternative energy systems such as nuclear and renewables could readily supply any energy lost through retirement of coal-fired power plants. This is highly misleading; while it is true that the technology exists now to utilize nonfossil resources, the time, financial, and institutional constraints are not so easily resolved. While wind or solar power plants can be built rather quickly at most sites, they cannot completely supplant “base-loaded” coal-fired plants designed for continuous operation, since wind power units are entirely dependent upon natural wind flows and solar projects are at the mercy of sunlight unless elaborate and presently unavailable energy storage systems are employed. Nuclear power, a logical option to replace coal-fired units, has its own limitations including higher initial costs and a very long licensing approval and construction cycle, typically 12 years in the United States and somewhat less elsewhere. The rather negative public acceptance issue in some regions may also preclude rapid expansion of nuclear power. And the present lack of a high-level nuclear waste management system will continue to plague nuclear power in the United States until a reasonable solution is found. The question of the future use of electric power technologies based on atmospheric pollution considerations is important to the overall energy-environment debate. An equally challenging question is that of the transportation sector and its high degree of dependence upon petroleum. As mentioned earlier, in the United States the transportation sector comprises 27.3 percent of the nation’s total energy consumption. The automobile contributes up to half or more of the low-level air pollutants in Los Angeles, Houston, Denver, New York, Atlanta, Phoenix, and a host of other cities. In addition, autos contribute to the buildup of carbon dioxide and other greenhouse gases in the upper atmosphere. Urban traffic congestion, relatively low auto fuel economy, lack of adequate mass transit systems, and high rates of auto emissions are compelling reasons to seek new transportation systems, especially for urban

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areas. Among the ideas advanced that would attempt to address these concerns are: (1) the electric vehicle; (2) the hydrogen vehicle; (3) the hybrid electric–liquid fuel vehicle; (4) the natural gas vehicle; and (5) urban mass transit systems. The electric vehicle is in very limited use in the United States, Japan, and Europe and has the advantage of no combustion products and exhaust. However, it is costly, requires heavy batteries that reduce passenger and cargo space, and is limited to only 100 to 150 miles before overnight charging. The hydrogen economy is a concept proposed a few years ago in which hydrogen, a combustible gas, would be utilized in lieu of gasoline and diesel fuel for automotive use and as a substitute for fuel oil and natural gas in homes and industry. The purported advantage is that hydrogen can be easily produced from an inexhaustible source, water, as well as natural gas through chemical or electrolytic methods. Thus, a sustainable fuel supply could be developed. Moreover, combustion of hydrogen produces only water vapor with no chemical pollutants. The third system, the hybrid vehicle, is approaching commercialization in Japan in the near future and perhaps in the United States within a few years. The hybrid vehicle, according to the National Renewable Energy Laboratory, will couple a small conventional internal combustion engine with a system of batteries and an electric motor to energize vehicles. The internal combustion engine will use conventional unleaded gasoline or other low-polluting fuel to run an electric generator that will charge a bank of batteries. An electric traction motor will drive the automobile’s wheels using the batteries’ electric charge. NREL officials indicate that exhaust pollution will be reduced significantly and fuel economy will greatly exceed that of present automobiles. Still another hybrid vehicle, one using fuel cells to charge batteries, is under development. While operating costs are expected to be quite low, initial costs for the first generation of hybrid cars may be quite high, ranging from $40,000 to as much as $150,000. The natural gas economy refers to a national energy system that would utilize compressed natural gas (CNG) in automotive and other transportation systems as well as industry and electrical generation. Its advantage would be reduced atmospheric pollution. There is, however, some question as to the economics and long-term availability of natural gas to serve most of the nation’s needs. At present, there is an ample supply of natural gas from both domestic and Canadian sources that has kept prices low for several years. Nevertheless, the extent to which the United States can rely on foreign sources of natural gas over the long run is bothersome. Energy conservation and environmental quality goals can be enhanced in many urban areas of the world via mass transit systems. European and Russian mass transit systems are important models; however, it must be

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recognized that these are public systems operated by national and urban governments at great expense. In the United States, several urban transit systems are often cited as models. These include the New York City subways, the Chicago system, the METRO in Washington, DC, Bay Area Rapid Transit (BART) in the San Francisco area, and newer developing systems in Portland, Oregon, and Denver. Mass transit systems can take any of several forms depending upon local circumstances. Population density, alternative transportation systems, and many other factors defining the “market” for mass transit will, of course, largely dictate the form and technologies utilized. Whatever technology is selected, i.e., subways, light rail, elevated rail, and so forth, energy utilization can be optimized and atmospheric pollution can be minimized vis-a`-vis conventional transportation modes. The initial capital costs for most modern mass transit systems are enormous and should be weighed against all relevant alternatives. In some instances, it may be more desirable from the standpoint of socioeconomic development as well as energy use and the environment to discourage overly dense urban populations in some cities and, instead, to foster development of satellite or dispersed communities. Optimum utilization of energy resources must consider the larger questions of economic development and environmental survival. As the best possible mix of energy resources and technologies is considered that will satisfy all relevant criteria, it becomes evident that virtually all energy technologies will continue to play important and changing roles. The major change will likely be a gradual transition from reliance on depletable fossil fuels to inexhaustible energy resources over a time span of perhaps 30 to 50 years. The United States has enjoyed an adequate and reliable energy system throughout the modern era. Only during World War II, when fuel rationing was imposed, and during the OPEC oil embargo of 1973 have widespread shortages or rationing been experienced in the nation. However, there are periodic electric power outages, often occurring in major cities during hot weather when air conditioning loads are great, thus straining electric generating capacity, or when transmission or other facilities are overly burdened. This is a far cry from experiences in some other nations such as Russia where antiquated power systems are extant. In many developing nations, fuel and electric power systems are grossly inadequate, limiting opportunities for economic growth. ENERGY CONSERVATION Following the 1973 OPEC oil crisis, the energy industry embarked on a program of energy conservation in the United States as a hedge against

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future energy supply shortages. Federal and state energy conservation programs were implemented to reduce energy consumption in industry, transportation, and residential life. Through a series of tax incentives, technical assistance activities, and governmental mandates, energy conservation efforts included: (1) enhanced building insulation; (2) installation of energy-efficient lighting, heating, cooling, and other appliances; (3) use of passive solar energy systems in residences; (4) fuel economy standards for passenger vehicles; and (5) use of “integrated resource planning” and “demand-side management” techniques by electric utilities and their industrial customers to reduce unnecessary energy consumption and to make optimum use of existing electric generating facilities. To date, energy conservation in the United States has been a resounding success. Since the mid-1970s, conservation measures have been instrumental in reducing the rate of growth in domestic energy consumption from the pre-1973 crisis rate of over 7 percent per year to less than 4 percent annually. However, most energy analysts contend that most of the potential conservation opportunities have already been completed and that the new conservation practices now in effect will stabilize, but not further reduce, the rate of growth in energy consumption. Therefore, expansion of the nation’s energy supply resources will be required to sustain further economic growth. Conservation measures can be cost-effective in developing as well as industrialized nations. Technical assistance to citizens in developing countries in such areas as building insulation and design, energy-efficient appliances and lighting, passive solar heating systems, cogeneration systems, and use of wind power and solar units could be instrumental in improving the quality of life and economic development. District heating systems offer another energy conservation opportunity in compact communities where housing and commercial establishments have compatible heating or cooling requirements. District heating has been employed for many years in some urban areas of the United States and Europe. In these cases, nearby power plants pump steam into district piping networks for distribution to users. Many of these systems may be considered cogenerators in that they generate electric power and make secondary use of the heat. However, most central-station power plants built in the past 30 years are located away from densely populated urban centers in the interest of aesthetics and environmental considerations and thus offer little opportunity for district heating since it is usually not feasible to pipe hot water or steam over long distances. Conservation of vital coal and petroleum reserves can, of course, be fostered through expanded and appropriate deployment of renewable energy systems. To date, renewables have been considered competitors rather than augmentors to conventional fuels. This is unfortunate since the time is rapidly approaching when both renewable and depletable

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resources must be utilized to satisfy national and global energy, economic, and environmental goals. TRANSFORMATION OF THE ELECTRIC UTILITY INDUSTRY Just as deregulation swept through the telecommunications, trucking, railroads, natural gas, airlines, and financial services industries over the past two decades, the 170 principal corporations of the electric utility industry in the United States are poised for similar transformations. This $208 billion per year industry is being targeted as the next candidate for introducing competition into a formerly regulated enterprise. Already, the Federal Energy Regulatory Commission, via FERC Orders 888 and 889, has ordered deregulation of interstate transfers of electric power by allowing competition in access to electric transmission lines. The FERC rules are only two of numerous proposals for restructuring the electric utility industry. Congressional officials have introduced a number of bills that would modify the way the electric utility industry does business. It seems likely that additional legislative proposals will be considered in the next session of Congress. Among the issues being considered by state and federal agencies regarding electric utility restructuring are: (1) wholesale access by competitors to utility transmission facilities; (2) retail access to distribution lines; (3) stranded costs and their incorporation in electric rates; (4) electric generation portfolio standards that would require utility generators to include renewable energy and other “nonpolluting” facilities within the mix of generating sources; (5) “green pricing,” which would provide for a premium or subsidy to be paid by consumers for preferred renewable energy projects; and (6) rate unbundling, or the disaggregation of consolidated electric rates into their basic components of generation, transmission, distribution, and retail services. Electric utility restructuring is not yet a fait accompli but sufficient momentum has been developed to virtually assure that most of the issues mentioned above will be addressed in pending federal and state legislation. What are the likely impacts of this massive industrial change on the American economy? Much speculation has attended this question and a host of others and some answers are beginning to emerge. On the question of the extent to which competition will become commonplace in the electric utility industry, there has been a rash of mergers and acquisitions in the industry during the past few years and many more are expected. Major utilities across state lines have merged, in effect expanding their service territories, a practice that has been difficult if not impossible heretofore in many states. Mergers also often bring greatly

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expanded financial resources that may be used to undermine competition and to spur corporate growth. This was the case with the merger of Public Service Company of Colorado and Southwestern Public Service Company of northern Texas. A new entity, New Century Energies, was formed from the merger. Earlier, PSCO acquired an English electric power company, Yorkshire Electricity Group PLC, in a joint venture with American Electric Power Company. In late 1997, Boston Edison, a large New England utility, sold a dozen power plants to Sithe Energies, Inc. in a move to develop a large generating presence in the area. Sithe announced plans to double the output of the plants to 4,800 megawatts. The deal was an initial step in electric utility deregulation after enactment of an electric utility restructuring statute in Massachusetts in November 1997. Sithe is a jointly owned subsidiary of Compagnie Generales des Eaux of France and Marubeni Corporation of Japan, which also serves as its management. Sithe is reportedly the third largest energy producer in the United States, and also one of the 10 largest producers worldwide. Still another recent development was the $6.6 billion merger of American Electric Power Company, Inc., which serves 2.9 million customers in seven central and eastern states, with Central & South West Corporation, which covers 1.7 million customers in four south-central states. This merger reportedly will save over $2 billion over 10 years for the two firms but will result in initial layoffs of 1,300 workers. The rise of independent power producers (IPP), which was given impetus in the Public Utility Regulatory Policies Act (PURPA) of 1978, may be further enhanced by the Energy Policy Act of 1992, the recent FERC rules, and probable future legislation at the state and federal levels. Independent power producers may generate their own power and negotiate arrangements with the electric utility to transmit or “wheel” this power to the IPP’s customers usually on the wholesale level. IPPs may also generate power for sale to the local electric utility, if they meet certain federal requirements such as generation from “qualifying facilities.” Under this arrangement, an IPP may enter into a sales contract with negotiable rates and conditions, or it can establish an agreement with the local utility for sale of all or part of its output at the utilities’ “avoided costs,” usually the utilities’ marginal cost for adding new generating facilities. These allowable arrangements under federal and state law are changing rapidly. It seems likely that most states will open competition at the wholesale level first, then gradually open the door to retail competition. Of course, advocates of utility restructuring point to the possibilities for price competition and lower cost of electricity. Critics, however, warn of possible power outages, less reliable service, potential overcapacity, and

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environmental issues that must be addressed as restructuring issues are hammered out in the state and national capitals. In California and several other states, the emerging pattern for restructuring is for power generation to be opened to full competition, for transmission facilities to be owned and operated by an “independent system operator,” and for retail distribution and sales to be handled via continuation of monopoly by franchised utilities or through regulated competition. The current consensus among utility analysts is that the generation component of the industry will be deregulated as to rates, but the transmission function, especially transmission involving interstate power transfers, will continue to be rate-regulated by the FERC. One scenario foresees a proliferation of privately owned independent power producers that acquire many existing power plants or build a large number of small or medium-sized plants that have a high degree of modularity and relatively low operating costs, such as the newer generation of high-efficiency gas turbines. Other growing sources of electric supply are industries that generate their own power or otherwise use various cogeneration systems and that may have excess energy available to sell from time to time. Another scenario is for a continuation of the mergers and acquisitions among electric utility firms in order to become better positioned to compete against the growing number of rivals entering the industry. Utilities are facing loss of monopolistic franchises in their existing territories and are seeking opportunities for business in other markets. In all probability, electric utility restructuring will entail both fragmentation of some segments of the industry and consolidation of others. It is likely that even the major manufacturers of power equipment may enter the electric generation or transmission market. In the near term, electric utilities with a number of central-station power plants of optimum generating capacity will have a decided advantage over newcomers in the market, owing to the economies of scale afforded by large power plants with significant sunk costs. However, independent power producers that have access to low-cost natural gas may be able to compete favorably with the major utilities, using combustion turbines. Over the longer term, however, large fossil and nuclear plants may not offer the flexibility, speed of construction, modularity, and other siting advantages of smaller power plants of advanced design. Fuel cells, for instance, are becoming increasingly attractive as gas-fired power plants that can be sized to accommodate neighborhood and regional markets. These plants are quiet, small, and environmentally benign. As the market for fuel cell technology develops, retail-oriented power producers may evolve. Under this concept, it would be possible that, in concentrated local markets, the transmission function will give way to a combination

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of only generation and distribution since the fuel cell power plants would be located in or near their final markets. The massive electric utility industry has experienced steady revenue growth over the past four decades, and official forecasts by the U.S. Energy Information Administration indicate further demand growth of nearly 30 percent between 1996 and the year 2015. The industry has maintained growth despite declining electric energy prices and widespread electric energy conservation measures. With continuation of the nation’s robust economy, the electric utility industry is expected to enjoy continued expansion for the foreseeable future. This economic climate provides substantial incentives for seeking new methods for competition in a presently heavily regulated industry. Some observers have compared energy industry restructuring to the deregulation of the telephone industry a fews ago. They contend that lower prices, much wider choice of suppliers, and many technical innovations that resulted from the telephone industry shakeout will likewise occur in electric utility restructuring. Others emphasize that the two industries are not directly comparable, since the infrastructure requirements for electric power are much different, more complex, and are fraught with numerous land use, environmental, and other issues not considered to be critical to the telecommunications industry. In the United States, the private sector has largely dominated the energy industry. Even the highly regulated electric utility industry is overwhelmingly controlled by the private sector. Investor-owned utilities (IOU) have generally enjoyed fairly steady revenue and profit growth over the past several decades, owing in part to the use of “cost-plus” pricing and the benefits of guaranteed rates of return. Under regulation of state public utility commissions (PUC), and under the FERC for interstate power transfers, utilities are under scrutiny for natural gas and electric power prices, assurance of adequate energy supplies, reliability of service, and land use and environmental impacts of energy facility operations. Much of this public oversight could be diminished as restructuring is phased in. Under pending state legislation, the PUCs could be ordered to cease reviewing and approving energy tariffs in favor of allowing competitive market forces to determine consumer prices. Similarly, under a new regulatory regime, PUCs could no longer require utilities to furnish proof of adequacy of energy supply and delivery systems. Instead, owners/managers of the high-voltage transmission systems or natural gas pipelines would have a dominant position in the new regime, at least in the near term. Energy sellers would negotiate for available capacity in transmission lines and pipelines owned by the established utilities or, in the case of California, an “independent system operator.” In large markets, it is likely that numerous producers or brokers would attempt to

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compete to supply energy via existing transmission systems. Owing to the availability of multistate transmission networks, electricity may be generated and “wheeled” (transmitted) great distances to a local distribution company, and then delivered to the ultimate customer. Similarly, natural gas may be delivered to end-users through interstate and local pipeline networks if allowed under the new restructuring policies. In the ongoing debate regarding electric utility restructuring, opportunities and issues related to renewable energy need consideration. One issue concerns the use of “resource portfolios” in which public policies and/or other promotional efforts are undertaken to foster greater use of renewable energy resources in the overall mix of energy facilities. With open access, energy from multiple sellers may be intermixed so that the transmitting utility and the customer cannot distinguish energy generated by fossil-fired or renewable energy facilities. Under a resource portfolio mandate, certain portions of the electricity entering the transmission and distribution systems would be required to originate from renewable energy facilities. Proponents of green pricing and resource portfolio mandates for renewable resources point out that, although these measures may cause initial increases in overall electricity prices, the incentives for expanded utilization of renewable energy resources would be sufficient to spawn further innovations that would ultimately drive down generating costs and help displace polluting power plants. Others contend that technologies for electric generating systems should be allowed to compete freely without imposition of “artificial” incentives or overly strict environmental penalties. At present, electric power rates are based on production and other costs, which include a mixture of older, high-cost power plants as well as newer, more efficient facilities. Costs of older and newer plants are usually “rolled in” to the overall rate base from which average costs are determined and final tariffs are derived. However, under deregulation, this current system would be replaced by energy supplied by individual power sellers, each with its own price schedule. This arrangement would favor the lowest-cost generating technologies and could discourage use of renewable technologies for the foreseeable future. Another topic related to promotion of renewable energy is “green pricing” in which a higher price is paid by the customer to defray the increased cost of such facilities. This practice is being tested in several locations to determine the extent of public support. One such project is the Ponnequin “Windsource” facility under development by Public Service Company of Colorado. The project will have an initial generating capacity of 10 to 15 megawatts produced by some 15 to 25 wind turbines and is being financed by utility customers and state and federal energy conservation grants.

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Utility customers were given the option of buying blocks of energy in 100 kilowatt-hour increments at $2.50 per block above current residential rates. However, all customers will benefit whether or not they have signed up for the voluntary renewable energy premium, since electricity generated by the wind project will be blended with other sources. Industrial customers are also participating in the project. This form of green pricing is advertised as being designed to foster direct participation of customers in renewable energy projects. However, perhaps a more plausible goal is having selected customers pay for the slightly higher cost of renewable projects. Some advocates of renewable energy, however, object to this form of pricing, indicating that renewables as well as all other projects in an electric utility’s portfolio should reflect the usual average “rolled in” cost of generation and that all customers should pay the same price for electricity regardless of its sources. Under deregulation with its likely disaggregation of generating sources into multiple individual sources, there will be greatly reduced opportunities for averaging the higher costs of older conventional plants and renewables with lower costs of newer conventional generating plants. Under these conditions, green pricing and resource portfolio mandates may become unworkable. In order to make renewables more competitive in the short run, tax breaks and/or production incentives and credits may be better alternatives. Private enterprise will probably find participation in the coming electric industry restructuring a formidable challenge in some regions and a great opportunity for capitalistic advance in others. Although it is unclear how this transformation will finally evolve, it seems likely that there will be increased opportunities for small businesses and independent power producers in various sectors of the industry. The recent surge in the number of independent power producers (IPP) was facilitated by the Public Utilities Regulatory Policy Act enacted a few years ago, and was further enhanced by the National Energy Policy Act of 1992. With issuance of the FERC 88/89 orders and numerous pending policy actions in Congress and the states, IPPs will have an open door to fully compete with the traditional electric utilities in many states. There are some downsides to deregulation/restructuring that concern many observers. First, the possible rapid expansion of numerous competitors among energy sellers, some of which may be located far away from customers, may result in price manipulation and periodic service cutbacks that would not be in the best interests of customers. Second, without strong state oversight, possibilities for overbuilding of costly generating or transmission facilities may result in higher, not lower, energy prices. Third, reliability of service may be jeopardized in view of the multiple generators or brokers that utilize regional transmission lines. At the retail level, customers may be hounded with offers for electric service but

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with little assurance that such service can be provided reliably over extended periods. A fourth concern is the lack of incentives for utilizing renewable energy resources under a purely economic regime of competition unless some combination of tax or production incentives, green pricing, or provisions in resource portfolios is provided. Lack of financial incentives will likely deter increased use of newer and more competitive renewable energy technologies. In 1998, Congress did not extend the federal production incentive of 1.5 cents per kilowatthour for wind power projects. Prior to that, these incentives were said to be instrumental in expansion of numerous wind plants. Further development of wind projects in California, Minnesota, and elsewhere is being delayed. Earlier, several states also offered tax credits and other incentives for renewable energy projects, but these have been dropped in the past few years as a result of political pressure from conventional energy interests. Fifth, there is some fear that state environmental protection standards may be compromised in the name of economic progress. Already, the most polluting of the electric generating technologies, coal-fired and oil and gas plants, are generally associated with fairly low-cost electric power (except for a few hydroelectric projects). Adding multiple new generating sources to existing transmission systems is likely to entail use of lowestcost fossil fuel generators. In the short run, most generators will probably use natural gas–fired combustion turbines (CT), since natural gas is relatively inexpensive now and these units can be purchased “off-the-shelf” resulting in rapid deployment. Depending upon which type of generating source they would displace, CTs could provide lower-cost electricity in some areas. Cogenerators would be another likely source of low-cost electricity. In the longer run, if generating cost is the primary criterion, coal-fired power plants would continue to be favored since their generating cost is somewhat lower than CTs at present. However, several years are required for the permitting and development of a coal-fired plant. On the negative side, atmospheric emissions of coal-burning plants are somewhat different and more serious than those of CT units. Small businesses may not be able to enjoy some of the benefits of restructuring to the extent that major corporations would. Large corporations often can negotiate volume discounts for power purchases, whereas the same may be difficult for small firms. A possible solution would be for groups of small firms to form buying alliances and negotiate with providers on a group basis. Electric consumers in remote locations, including Native Americans on reservations, may be bypassed in the restructuring process. Presently, many of these ratepayers already pay higher-than-average utility prices,

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particularly if they are served by investor-owned utilities and are not within the service area of a public power agency or cooperative. On average, low-income households pay much higher portions of their income for energy than do higher-income groups. Families with annual incomes of less than $15,000 pay around 6 percent to 24 percent of their incomes for energy, while households with incomes of over $35,000 pay less than 2 percent for energy. In many areas, state public utility commissions have encouraged regulated utilities to offer special assistance to low-income ratepayers, handicapped, and other consumers who may find it difficult to pay their electric bills in a timely fashion. Some utilities offer assistance with home insulation in the form of credits, low-cost loans, and installation services. State PUCs have allowed some of these costs to be incorporated into utilities’ rate bases. Utilities also receive donations from ratepayers and charitable organizations to help defray program costs. Under restructuring, there will be little if any incentive to continue these services, since competing producers will likely be promoting their sales on the basis of strictly low prices, not public benevolence. Efforts to reduce duplicative energy resource development while simultaneously assuring adequate energy supplies have been underway for more than a decade in most states. State PUCs have mandated that utilities undertake “integrated resource planning,” for example, coordinated demand-side and supply-side planning, to encourage low-cost energy generation and utilization. From most reports, these efforts have been quite effective. However, integrated resource planning (IRP) is jeopardized greatly by open competition. An out-of-state producer would have scant incentive for engaging in IRP with other potential competitors within or outside the state to be served. Only under a governmental mandate or a strong industry alliance would such coordinated planning be feasible. In a competitive nonregulated environment, there will be pressures to cut costs. Among the victims of cost cutting will likely be several important functions now performed by the regulated utilities, namely, consumer energy conservation programs and efforts to improve energy efficiency in commerce and industry. Numerous states and cities have established energy conservation programs including special assistance to low-income citizens. Any energy price raises under deregulation will no doubt seriously affect low-income families. In addition, “funding for energy assistance may decline as competition discourages industry support of these programs,” according to Karen Brown, Executive Director of the Colorado Energy Assistance Foundation. Under restructuring, cost minimization efforts will no doubt be effective in reducing apparent electricity prices, at least in the short run; however, problems arise in the treatment of relevant environmental and

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societal costs that may not be internalized in competitors’ energy prices. Without effective governmental standards to establish a “level playing field” for competition, opportunities for environmental abuse and cutthroat cost competition are likely to ensue. Historically, the goals of most electric utility systems have included the ability to earn a fair profit under supervision of a public utility agency in return for providing electric service to all customers in a given franchise area with emphasis on reliability and adequacy of service and fair prices. Further objectives have been to make efficient use of energy resources, comply with relevant environmental protection measures, and assist customers in utilizing electricity in cost-effective ways. Most of these “public goods” activities, as they are called by economists, have been mandated by state and federal regulatory measures. Unfortunately, public goods efforts provided under the current regulated utility system may be abandoned as “uncompetitive” in an open-market, laissez-faire electric supply system. Restructuring will accelerate efforts by many electric and gas utilities to broaden their base of operations, both geographically and functionally. In the past, utilities have made periodic attempts at diversification and with mixed results. Some have branched out into real estate, while others have ventured into light manufacturing or retail appliances. A number of these ventures were unsuccessful, resulting in reentrenchment by the utilities. Many regulated utilities have been restricted by their state franchises from diversifying into nonrelated ventures while others have been able to circumvent these limitations or those imposed by the Public Utility Holding Act. Nevertheless, diversification seems inevitable under restructuring. Recently, a new venture was announced in Pueblo, Colorado, that will offer electric and natural gas service, local telephone, building security systems, and Internet access, singly or as a package. In summary, proponents of electric utility deregulation point to the benefits of open-market competition, which may include lower energy prices and diversification of supply sources. Critics contend that the present regulated system is serving the public adequately and that the potential problems associated with widespread restructuring will result in higher, not lower, energy prices in the long run. Moreover, they criticize the possible inequities to various energy consumers that could result from concentration on high-density power markets and the probable loss of many public-oriented services. Further, potential adverse environmental effects of multiple new competitive energy supply sources may be serious in some regions. Electric utility restructuring is already underway in the United States and in a somewhat different pattern in the United Kingdom and a few other industrialized nations. Hopefully, it will be executed in an orderly

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manner in which social and environmental as well as economic goals can be achieved. GLOBAL ENERGY DEVELOPMENT AND SOCIOECONOMIC PROGRESS Capital requirements for future global energy development in the Third Millennium will be enormous. Energy investments have accounted for an ever-increasing fraction of the total national expenditures for all plant and equipment, growing from about one-quarter of the total in the 1970s to some 40 percent in 1982. Energy expenditures as a percentage of Gross National Product grew from around 2.5 percent to 4 percent during this period. According to forecasts in The World in 1998, published by The Economist, global energy demand will double by the year 2020, requiring investment of $3 trillion in new electric generating facilities. Similar predictions have been made by the U.S. Department of Energy and other organizations usually under assumptions that “business as usual” conditions will be experienced and that energy consumption will increase markedly in developing nations. Meanwhile, it is expected that domestic energy consumption will continue to increase overall but that per capita energy usage in the United States will continue to decrease, perhaps by 20 to 40 percent over the next few decades as conservation and new energy-efficient systems continue to be developed. In the developing nations, economic and social progress will be linked closely to timely and orderly development and utilization of energy resources. Historically, there has been a close correlation of energy use and GNP. In most developing nations, energy use is quite low—around 0.5 to 2 kilowatts per capita annually. It has been estimated that increasing per capita energy use by 50 to 100 percent could greatly facilitate the provision of food, clothing, shelter, employment, and health care to impoverished citizens. For example, in Latin America where the per capita GNP is around $640 and annual per capita energy consumption is 1.1 kilowatts, estimates by Jose Goldemberg suggest that living conditions could reach the level of “basic human needs” by increasing electricity use to 1.7 kw per capita per annum. For Africa, Goldemberg estimates that current energy use is approximately 0.7 kw per capita and that the basic human needs level could be reached by growth in energy use to 1.4 kw. By simply extrapolating these moderate increases on a per capita basis to the very large and rapidly growing populations of the African continent and other developing nations, it becomes evident that energy development requirements are becoming immense if standards of living are to be raised in these nations.

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Since some developing nations are already vulnerable to economic and sociopolitical disruptions, it seems prudent for these countries to carefully develop their indigenous energy resources and to reduce their dependence on imported oil to the extent possible. Financing energy development will be challenging for most developing nations, necessitating consideration of a variety of sources, such as government financing, government-guaranteed loans, international bank syndicates, and consortia of private lenders. Raising the economies of many developing nations from their current subsistence levels to the next level, basic industrialization, will entail substantial investments in energy production infrastructure—power plants, mines, refineries, energy transportation networks, and myriad supporting facilities. At the same time, efforts to assist businesses and citizens in the efficient and cost-effective utilization of energy supplies will be essential to avoid wasteful and polluting practices. Goldemberg states, “For developing countries, our . . . analysis shows that it is feasible with final energy use of 1 kw-year per capita—roughly the same as the present level (in developing nations)—to provide enough energy services not only to satisfy the basic human needs of the whole population but also to raise their standard of living to the level of western Europe.” He also states that structural changes and energy efficiency measures in industrialized nations may make possible reductions in average per capita energy use by about 50 percent, from 4.9 to 2.5 kw, while continuing to support domestic economic growth, including increased GDP by 50 to 100 percent. While these are encouraging statistics, if they can be realized, it should be mentioned that Goldemberg’s estimates of domestic energy demand are considerably more conservative than many others. His estimate of global energy service requirements for the year 2020 is 10 to 11 terawatts (tw) whereas most other conventional forecasts suggest global demand of 20 to 40 tw. SYNOPSIS OF FUTURE GLOBAL ENERGY CONCERNS Caution should be exercised in viewing global energy-related issues as static and stable. To the contrary, these concerns should be considered in a dynamic context and subject to changing socioeconomic and political conditions in various parts of the world. Nevertheless, the issues discussed herein have been raised by many experts and should become a part of the international and domestic agendas for economic and social development. It is clear that the world’s conventional energy supplies are finite and subject to depletion over the next few decades or perhaps two centuries at the latest. Fossil fuels in the forms of coal and petroleum are essential to the operation of capitalistic enterprises until such time as renewable

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energy resources can be developed through utilization of new technologies. It is also apparent that continued reliance on fossil fuels as a primary energy source will place growing burdens on environmental quality. In the near future, an international consensus and regional strategies are needed for forging a grand transition from dependence on fossil fuels to economies based on sustainable energy resources that are both costeffective and environmentally benign. Briefly, the major energy-related issues and options are as follows: • Assuring adequacy of energy supply through both domestic programs and cooperative initiatives with neighboring nations that take into account availability of indigenous energy resources and those supplies that must be imported or traded; • Development and use of cost-effective renewable energy conversion technologies, such as solar, wind, biomass, hydropower, geothermal, and ocean energy systems; • Development and use of advanced pollution control devices for fossil-fueled power plants as an interim means of reducing greenhouse gas emissions pending widespread deployment of renewable energy systems; • Assistance to developing nations in energy development and conservation; • Fostering of energy conservation in residential, commercial, and industrial applications; • Restructuring and increased privatization of the energy industry while avoiding creation of monopolies and cartels through prudent governmental oversight and equitable protocols; and • Establishing and executing national and international strategic energy plans, including appropriate public oversight and regulatory roles, that provide a balanced approach to assuring both adequacy of energy and environmental protection.

This is a formidable list of tasks for the world community. However, each task is deemed essential to future economic and social progress and to environmental quality. In most nations, the private sector will be expected to be the principal contributor in meeting needs for energy in an efficacious and environmentally sound manner. Government involvement, however, will be essential in fostering and regulating energy development and utilization to assure that national security and other domestic needs are satisfied.

PART III Managing Global Environmental Resources

6 World Environmental Concerns

THE GLOBAL ENVIRONMENTAL CHALLENGE The quality of Earth’s natural environment is in great jeopardy, according to many ecologists and environmental advocates, and measures must be taken immediately to combat increasing pollution, if the planet is to survive as we know it for more than another century. However, laissezfaire advocates contend that we need not concern ourselves with nature—it will take care of itself—and that we should continue exploitation of natural resources in the interest of progress. A third philosophy favors a middle-of-the-road approach, characterized by concern for the environment but not at the expense of economic growth. As mankind enters the Third Millennium, the issues of exploding population growth, global industrialization, and attendant socioeconomic concerns will bring to the forefront the need to address global environmental protection. As stated by Geoffrey Lean in Atlas of the Environment, “All life exists in a thin layer wrapped around the globe, caught between the molten heat of the earth’s interior, and the cold immensities of space. The biosphere, the only part of the entire universe known to support life, stretches from the depths of the ocean to the highest point, some 15 kilometers up in the atmosphere, at which living things have been found. Proportionately, it is no thicker than the shine on a billiard ball.” Mankind has grown increasingly aware of his dependence and influences on the natural environment. Despite this awareness, the quality of the environment has deteriorated alarmingly in many places around the

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world. Most industrialized nations have instituted environmental protection and pollution abatement efforts that are beginning to show positive results. Nevertheless, environmental quality remains elusive in many regions, and rapid population growth threatens to overwhelm global environmental resources unless mitigative measures are taken over the next few decades. Although ancient peoples of the earth had a keen awareness of the weather, as did farmers of later eras, only during the past half-century have the influences of human activity on the environment become better if not perfectly understood. We have learned that human activity can affect individual elements of the ecosystem not only on a local scale but also on much larger regional and perhaps global environmental systems. Well-known environmentalist Barry Commoner called for recognition of two points about the natural environment: first, he said, “there is no such thing as a free lunch,” and second, “everything affects everything else.” These are simplistic but profound notions and they stress the importance of the interconnectedness of the air-water-land-biomass interfaces in the biosphere. The discrete elements of the natural environment cannot be isolated; interactions of the land and vegetation with the atmosphere and water resources are dynamic and interdependent. Large-scale deforestation, for example, has obvious localized effects such as soil erosion, loss of timber, and disruptions to wildlife habitat, but it also causes a loss of sources of oxygen that often has adverse effects far beyond the sources of pollution. Further, clear-cutting of timber reduces the absorptive qualities of trees in removing carbon dioxide from the atmosphere. The earth’s surface is categorized into “biomes,” regions with similar climatic, geological, latitude, and other natural resources that together determine what types of plants and animals can thrive. Ecologists have identified some 14 major biomes, as well as 5 climatic regions and 8 zoogeographical zones, around the earth. Together, all biomes support approximately one trillion metric tons of vegetation. Forests make up about 75 percent of the vegetation. Tropical rain forests contain about one-third of the earth’s plant matter, although they cover only 7 percent of the surface. Human activity has become increasingly disruptive of natural ecological processes especially during this century. Industrial and energy production, widespread use of automobiles, open pit mining, urbanization with its massive requirements for human and other waste disposal, and intensive agriculture have all contributed to stresses placed on the environment. A growing consensus among scientists holds that, on a global scale, the worldwide population explosion, left unchecked or without adequate

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conservation and pollution control measures, could eventually exhaust natural resources and lead to widespread ecological disasters as well as economic collapse. There have been various estimates of the world’s environmental carrying capacity, based chiefly on differing assumptions about population growth, agriculture, industrial production, energy availability, and urbanization. However, the assumptions made in these calculations vary widely and render analysis difficult at best. For example, no one has been able to predict the innovations that could be introduced over time to increase food production without possible adverse environmental consequences. Deforestation is a mounting problem. One thousand years ago, forests covered one-half of the earth’s surface; now only 20 percent of the surface is forested. Reduction in forest and other vegetative cover is resulting in growing rates of desertification in many regions. One-third of the land surface is threatened by expansion of deserts. More than 6 million hectares of productive land are being lost each year beyond recovery, and another 21 million hectares are so impoverished that growth of crops or animal grazing is nonproductive. Despite current efforts, animal species are becoming extinct at 20,000 times their natural rate. Given the recent concerns about the world population increase and its implications for the natural environment, some fast-growing nations such as China have implemented birth control policies, which may have a significant effect on population growth over time. Many planners have assumed that “demographic transition,” the concept that as the global population becomes more properous people will have fewer offspring, will occur on a widespread basis. However, this transition has not occurred in many nations. Kenya, for example, has seen fertility rates rise as incomes increase, from 7.5 per woman in the 1950s to 8.12 in the 1960s and 1970s. Women of Mexican descent in the United States have more children than they had when they were less prosperous and living in Mexico. It seems possible, but extremely difficult, to instigate comprehensive fertility control in view of the religious and cultural mores regarding contraception and abortion that prevail in many nations. The great fear among planners is that the burgeoning population will overwhelm foodproducing capabilities as well as global air and water resources and bring about worldwide collapse of the natural ecosystem, resulting in starvation, disease, and deaths on a massive scale. The present world population of 6 billion is expected to swell to 10 billion to 12 billion over the next 50 to 60 years, according to various forecasts. Assuming that world environmental resources are finite and that unlimited population growth is to be avoided, is it possible to reach a worldwide consensus regarding population management before an ec-

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ological disaster strikes? Should there be a worldwide population ceiling and protocols as to how population limits should be allocated among the nations? Roderick Nash, noted environmentalist and author of Wilderness and the American Mind, predicts a 50 percent loss of world biodiversity by the year 2050 unless draconian corrective measures are undertaken in the immediate future. He adds that the environment cannot sustain a global population of more than 1.5 billion by the end of a few centuries ahead. This would represent an incredible 74 percent reduction in the current population estimated at 6 billion! One ultralong scenario offered by Nash would be development of not more than 500 “islands” of population, presumably high-technology urban areas consisting of about 3 million people each and surrounded by natural wilderness. Three-fourths of the global population is living in developing countries that are seeking economic and social advancement. These nations are also the locations for much of the world’s population growth. As their economies expand and industrialize, increasing energy use and natural resource exploitation is occurring. Increased environmental pollution is also taking place as greater use is made of fossil fuels, chemical fertilizers, and other nonbiodegradable materials. The rapidly growing nations in Africa, Asia, and other regions, with their largely subsistence economies, have begun to burden their natural resources through inefficient use of firewood for heating and cooking, lack of reforestation, overgrazing of pasture lands, and overuse of croplands by monocropping and by lack of crop rotation. In many areas, lack of appropriate conservation measures in croplands and forests has led to increased desertification, as well as loss of wildlife and aquatic habitats and increased water pollution. Thus, in some countries where increased food supplies are critically needed, the natural ecosystems that support food production are under great stress. Industrialization and mechanization of agriculture can cause major shifts in the utilization of natural resources and technology, sometimes with serious consequences. Open-pit mining, for example, can alter surface water and aquifer patterns leading to soil erosion and water pollution as well as disturbances to wildlife habitat. Large-scale timber harvesting using tree-cutting and slash burning methods, such as that being conducted in the dense forests of Brazil and Southeast Asia, can spawn similar local ecological effects in addition to regional atmospheric pollution. Governmental environmental protection systems are largely nonexistent in most developing nations. Governments in these countries cannot afford to pay for expensive environmental protection programs especially in view of their more pressing needs to serve their citizens with basic health and nutrition services. Another factor that militates against envi-

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ronmental improvement efforts in some developing nations is the lack of knowledge and management skills to utilize modern environmentally benign methods in agriculture, forestry, and manufacturing. Efforts are underway at the national and international levels to address environmental concerns such as global warming, ozone depletion, acid precipitation, deforestation, water pollution, hazardous materials management, human and animal wastes, and solid waste disposal. These are active concerns in virtually all industrialized nations, and are just beginning to be addressed by developing nations. With continued economic and population growth, environmental issues are taking on greater importance. An unprecedented degree of international negotiations and debate has been underway for the past few years regarding worldwide environmental issues, ranging from global warming and acid rain to protection of marine mammals. Recent debates over the global warming issue suggest that nations of the world are realizing increasingly that environmental issues must be dealt with at both the national and international levels. ATMOSPHERIC RESOURCES AND POLLUTION With continued economic growth in industrialized nations and rapid population and industrialization in developing nations, concerns are being raised increasingly about the quality of the world’s atmosphere. Air quality deterioration is occurring on a worldwide basis, particularly in major urban areas. Massive efforts to improve air quality are underway in the United States and other industrialized nations, and with some beneficial results. However, the problem is growing in many developing nations and in some of the nations of the former Soviet Union where privatized industrialization is taking place. Regional Low-level Air Pollution Many of the air quality problems are related to intranational or local effects, such as low-level atmospheric pollution attributable to industrial production, power generation, and automotive energy consumption. Pollutants of concern include particulates, sulfur dioxide (SO2), nitrogen oxides (NOx), ozone (O3), and hydrocarbons (HC). Excessive levels of these pollutants are said to contribute to increased incidence of respiratory disease as well as deleterious effects on agriculture and animal life. From an aesthetics viewpoint, air pollution has been instrumental in reducing visibility and the quality of experiences for tourists and visitors in many scenic areas such as the Grand Canyon. Emission controls for automobiles, power plants, and major industrial sources have been the principal mitigating measures to date. Catalytic

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converters, mandated increased fuel economy, and use of oxygenated fuels have been among the measures instituted to reduce air pollution by automobiles. Major “point-sources” of air pollution, such as coalburning power plants, have been required to install emission reduction equipment such as particulate filtration, electrostatic precipitators, sulfur removal, and other equipment. Global Climate Change Some forms of air pollution transcend national boundaries and become concerns in neighboring nations. At the multinational level, air pollution issues have included: (a) acid precipitation; (b) ozone depletion; and, more recently, (c) global climate change, or “global warming.” These types of pollution involve upper stratospheric transport of pollutants and are to be distinguished from low-level air contamination that usually affects localized environments. Global warming has been hotly debated for a number of years among scientists and government leaders of more than 160 nations. Perhaps the most controversial environmental issue ever debated among the nations, the global warming issue has been raised based on concerns that the atmosphere is showing signs of increasing temperatures and that continuation of such increases could lead to major climatic alterations most of which would be deleterious to human activity. Among the postulated effects are rise in sea levels and attendant coastal flooding stemming from melting of glaciers, increased frequency and severity of storms, and radical changes in weather patterns that could lead to crop failures, drought, floods, and other disasters. Warming is believed to be caused by increasing atmospheric concentrations of “greenhouse gases,” which include carbon dioxide, methane, chlorofluorocarbons (CFC), nitrogen oxides, and others. Among these gases, carbon dioxide (CO2) is believed to be the most significant contributor to global climate change. Sources of greenhouse gases include burning of fossil fuels in power plants and heavy industry, deforestation, automobiles, agriculture, and miscellaneous other natural and human activities. Coal-burning power plants are said to account for almost half of the CO2 emissions in the United States. Tropical deforestation, transportation, industry, and miscellaneous natural and human sources account for the remainder. According to studies by Edward S. Rubin, annual worldwide CO2 emissions are approximately 21,800 million metric tons. As shown in Table 6.1, CO2 emissions in the United States are expected to increase from 5,537 million metric tons in 1988 to 6,391 MMT in the year 2000. The principal contributors are electric power plants burning coal. Their emissions constitute 40 percent of the total in 1988, and are

World Environmental Concerns • 161 Table 6.1 Sources of Carbon Dioxide in the United States (Carbon dioxide volumes in millions of metric tons)

Sources: U.S. Energy Information Administration; Congressional Research Service.

projected to increase to 45.7 percent by 2000. Other major sources are the industrial sector at 17.7 percent in the year 2000, and the transportation industry, which is the second largest emitter of atmospheric CO2. Interestingly, the residential sector is expected to show lower emissions despite overall growth. This is due to improved conservation measures in residential dwellings. Normally, much of the CO2 is absorbed by oceans and green living plants. However, unabsorbed CO2 is persistent in the atmosphere, remaining there for up to a century. Reduced availability of plants through deforestation and declining agriculture, coupled with substantial increases in fossil fuel emissions, is believed to be the principal causative factor in increased CO2 concentrations in the atmosphere. As an example of the carbon-absorbing qualities of biomass, a single corn plant contains approximately 364 grams of carbon. To fix that amount, a single corn plant must deplete 3.1 tons of air of its carbon. An acre of corn would remove the carbon from 18,600 tons of air. Other high-consuming plants such as sunflowers could deplete the CO2 supply over a large area in two years. Nations whose per capita CO2 emissions were highest in 1992 were the following; as reported by the Carbon Dioxide Information Analysis Center, Oak Ridge National Laboratory: United States ⫽ 19 metric tons per capita; China ⫽ 2 per capita; Russia ⫽ 14 per capita; Japan ⫽ 9 per capita; Germany ⫽ 11 per capita; India ⫽ 1 per capita; Ukraine ⫽ 12 per capita; Britain ⫽ 10 per capita; Canada ⫽ 15 per capita; and Italy ⫽ 7 per capita. Concentrations of CO2 during the preindustrial era have been estimated at around 275 parts per million (ppm) in air. Some scientists have estimated that concentrations are about 25 percent to 30 percent higher in 1997 than those in 1860. Data on growth in greenhouse gases in the

162 • Managing Global Environmental Resources Table 6.2 Growth in Atmospheric Greenhouse Gases

Note: units are as follows: ppm ⫽ parts per million; ppb ⫽ parts per billion; ppt ⫽ parts per trillion. Source: World Resources Institute, Oxford University, 1990.

atmosphere is shown in Table 6.2, as compiled by the World Resources Institute, Oxford University. Approximately 5,537 million metric tons, or 25.4 percent of the global total, originate in the United States. China is ranked second in total emissions, but its per capita emissions were considerably less than the 19 metric tons emitted by the United States. Despite its dense population and highly developed economy, Japan’s emissions have been less than one-half those of the United States, on a per capita basis. The global average annual temperature over the period 1961 to 1990 was 61.7 degrees Fahrenheit. Recent reports from the National Oceanic and Atmospheric Administration indicate that 9 of the past 10 years have been among the warmest ever recorded. Temperatures vary significantly around the world and have risen about 20 percent faster on land than on the ocean surface. The year 1997 was the warmest on record, rising about three-fourths of a degree above normal. Even a one-degree temperature rise can, if maintained, have major effects on rainfall, sea level, and overall climate. NOAA officials have joined a growing number of scientists who are convinced that global warming is indeed a phenomenon that requires immediate attention. Evidence of ongoing glacier melting has been observed in Montana’s Glacier National Park, a popular tourist attraction, apparently due to elevated summer temperatures for a protracted period. Park officials fear that the melting will accelerate and thus destroy some of the most attractive features of the Park by the year 2030 if melting continues at the present rate. Glacier melting has also been noted along portions of the Alaska Pacific coast where glaciers have retreated up to 10 miles during the past decade. Scientists there have observed increased air and water temperatures of several degrees.

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Rapid deforestation of major rain forests in Brazil and Southeast Asia has raised concerns over depletion of sources of photosynthesis in trees and other plants. In the Amazonian forests of western Brazil, 5,800 square miles on average are being deforested each year. In addition, another 4,200 square miles are thinned annually through logging beneath the forest canopy. Total forest area in 1850 was 60 million square kilometers; it is now around 20 million sq. km. Clear-cutting, a controversial forest harvesting method, now constitutes roughly 1.7 million sq. km. annually. Oceans and forests are large absorbers of CO2. Forests are also producers of atmospheric oxygen (O2) due to photosynthesis processes. Large-scale timber harvesting and slash burning in these and other forests such as in Indonesia have caused recent problems due to heavy smoke concentrations. Continuation of current deforestation activities where slash-and-burn techniques are employed will result in substantial increases in CO2 emissions, loss of CO2 absorption, loss of O2 sources, loss of animal habitat, and a variety of other air, water, and surficial environmental disturbances on a massive scale, often reaching far beyond national boundaries. While CO2 is the major pollutant of concern in global warming, other greenhouse gases, such as methane, CFC, and nitrogen oxides, also contribute to the phenomenon and should be subject to mitigation efforts. Among the various issues in the global warming controversy have been the degree, timing, and costs for reduction of greenhouse gases. Indeed, while there appears to be a growing consensus among most atmospheric scientists that a global warming phenomenon is occurring, there are a number of skeptics in both science and industry who contend that the so-called problem is overblown or perhaps not even a reality, at least not at present. They point to the periodic swings in regional atmospheric temperatures that they say are natural phenomena. To date, the evidence is limited but intriguing; however, the prudent course seems to be to initiate activities to forestall major atmospheric disruptions. Potential costs for reducing emissions of greenhouse gases are, of course, a concern to both private industry and government regulators. However, these concerns over cost are usually focused on the possible required installation of pollution abatement equipment on fossil-fueled power plants, loss of revenues attributable to reduction in electric power generation, and regulatory costs. Less has been discussed about the potential pollution reduction possible through use of more energy-efficient technologies and appliances in homes, industry, and transportation as well as increased use of nuclear and renewable energy sources to eventually replace fossil-fuel power plants and automobiles. At a meeting in Bonn, Germany, in June 1992, delegates from some 150 nations attending the United Nations Conference on Environment and Development reached broad agreement to pursue reduction in

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greenhouse gases. Later, the International Panel on Climate Change, involving over 2,200 scientists from 150 nations in a series of studies, determined that air temperature could rise by 1.8 to 6.3 degrees Fahrenheit by the year 2060 at current rates of emissions. The IPCC developed a proposal for an international treaty that would seek to reduce greenhouse gas emissions through a number of measures, principally reduction of emissions of carbon dioxide and other pollutants from power plants, heavy industry, and automobiles. The IPCC recommendations were considered at the International Framework Convention on Climate Change held in 1997 in Kyoto, Japan. Although the United States under the Clinton administration has favored reductions of greenhouse gas emissions over time, the President’s recent plan differed from that proposed by the international community at that conference. A proposed treaty was agreed upon by the delegates, but the United States has held out for some amendments before ratification. In essence, the treaty would require industrialized nations of Europe to reduce emissions by 8 percent by the year 2012, by 7 percent in the United States, and by lesser amounts in remaining industrialized countries. Developing nations were largely exempted from this requirement except for a requirement to monitor their emissions. American business and labor organizations have strongly opposed a global warming treaty of this type, arguing that there is insufficient scientific evidence to support a massive global warming initiative. More vocal has been their concerns over potential increased production costs associated with required new fees, permits, pollution control equipment, and the possible loss of revenues and jobs due to possible cutbacks in industrial production and electric power generation. Critics of the proposed treaty have pointed out that naturally occurring emissions from such events as volcanos can produce far more pollution than the combined emissions of all fossil fuel sources. Of course, this argument misses at least part of the point, that greenhouse gas emissions are ongoing, controllable, and increasing, while natural vents from volcanos are intermittent and are usually of short duration. Opponents to the proposed far-reaching treaty point to the potential for loss of sovereignty by individual nations to a United Nations or similar international bureaucracy that would be required to enforce it. U.S. Senator Chuck Hagel (R–Neb) opposes any agreement that “would require nations to meet legally binding targets for greenhouse gas emissions.” Some developing nations also said they may opt out of the treaty since their emissions are so low as to be inconsequential and that participation in the program would impair their economic development efforts and might jeopardize their national sovereignty. Officials of the United Kingdom and other European nations have criticized the United States for its laggardness in greenhouse gas emissions

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reduction and its lack of enthusiasm for the new treaty. John Gummer, former U.K. environmental official, stated that the European nations were offended that “after the 1992 Earth Summit in Rio de Janeiro the United States did almost nothing while Britain took action that will put our emissions about 6 percent below 1990 levels by 2000. If we had not acted, our emissions would be 18 percent above 1990 levels by the end of the decade.” Gummer also said that through privatization and revitalizing of the United Kingdom’s coal and electric power industries and increased use of energy efficiency measures, carbon dioxide emissions have been reduced by half. Further reductions were made possible by increased use of nuclear energy and renewable energy sources. Significantly, the large and fast-growing nations of China, Mexico, and South Korea were able to achieve exemptions from treaty provisions. Incidentally, China possesses the world’s largest coal reserves and plans to build numerous coal-fired power plants in the next decade with an expected fourfold increase in coal consumption. Opposition to the 1997 treaty comes from both American political parties, with U.S. Senator Joseph Lieberman (D–Conn) taking the position at the Kyoto conference that a binding agreement among nations was vitally needed and that the Clinton administration’s proposal was worthy of praise. Senator Chuck Hagel and other conservatives claim that the treaty was not needed in that there is no convincing proof of global warming and that the mitigation measures proposed would threaten economic growth in the United States and elsewhere. Acid Precipitation The discovery of increased acidification in lakes and forests of the upper Midwest, Northeast, and Rocky Mountains of the United States and several provinces of eastern Canada over the past decade has spurred cooperative efforts of the two nations in a large-scale mitigation and restoration program. Acid rain may occur when sulfur or nitrogen compounds are released into the atmosphere and combine with water vapor to form dilute concentrations of sulfuric acid or nitric acid. When sulfur and nitrogen emissions occur in large quantities or over extended time periods and are released from tall stacks, they can be transported over great distances and later descend to Earth in rainfall. Acid precipitation often results in injury to vegetation, fish, and other elements of the ecosystem as well as degradation of concrete structures, stone sculptures, and increased corrosion in various metals. Corrosive effects of acid rain have been found in many historic buildings in Europe during the post–World War II era. Even in the relatively pristine American Southwest, the effects of acid rain have been seen as far north as the Rocky Mountain National Park in

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Colorado where numerous high-altitude mountain lakes and forests have shown signs of acid fallout. Sources of this pollution have been traced to coal-burning power plants and copper smelters in Arizona and Utah. The areas of greatest concern originally were in the upper Midwest of the United States and the eastern provinces of Canada, which were found to be the recipients of much of the acid rain. Sources of acid rain in the upper Midwest have been large coal-fired power plants, steel mills, and other heavy industry stretching from Cleveland and Detroit to Chicago. Heavily forested areas in Canada, New York, and parts of New England have suffered significant tree losses, and some fish species have been decimated. Fortunately, efforts to reduce SO2 and NOx emissions from power plants and heavy industry in the upper Midwest are exhibiting promising results. Progress in reducing acid rain and the regional haze that has become an issue in parts of the Rocky Mountain region, however, has been quite slow. The electric utilities have resisted installing additional pollution reduction equipment. State and local officials are concerned about the possible negative effects of increased air pollution, including visibility, on tourism as well as the ecosystem. Ozone Depletion in the Stratosphere The discovery of large “holes” in the ozone layer high above the polar regions was a cause of concern a few years ago. Ozone is believed to provide protection on the earth’s surface from ultraviolet and other solar radiation. Further depletion of ozone was feared as a potential cause of increased skin cancer (melanoma) in humans. The culprit singled out for mitigation measures was a family of chemicals known as chlorofluorocarbons (CFC), which were widely used as refrigerants in industry and home appliances and as propellants in a wide variety of aerosol sprays. CFCs were determined to be migrating into the upper atmosphere where they interacted with sunlight and caused a breakdown in ozone. A few years ago, CFCs and related chemicals were banned in the United States and a few other industrialized nations. Ozone depletion has apparently not been mitigated despite the ban on CFCs. Recent scientific observations indicate a very large hole in the ozone layer over the Antarctic. Atmospheric scientists continue to exhibit concern about the ozone issue and have called for further measures to combat the problem. Atmospheric Lead and Other Metal Contaminants Metallic particulates, such as lead, zinc, cadmium, and others, are emitted to the atmosphere in many metal mining and smelting operations.

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In the United States and most other industrialized nations, controls to minimize these emissions have been in place for a number of years. However, in some rapidly growing developing countries, the lack of environmental controls and inefficient manufacturing processes have led to serious health concerns owing to large rates of emissions of such contaminants as lead. Elevated levels of airborne lead in Thailand, for example, have contributed to retardation of mental acuities by at least four IQ points in children under age 7. According to Andrew Steer and Jocelyn Mason of the World Bank, exposure to airborne lead in Mexico City may account for some 20 percent of the cases of hypertension. Suspended particulate matter (SPM), indoor air pollution, and lead are major concerns in reducing health effects on a global basis. The World Health Organization has established standards for SPM that, it says, if followed in some 50 of the cities in developing countries with the highest SPM levels and with combined populations of 1.3 billion, would avert 300,000 to 700,000 premature deaths. Unfortunately, most developing nations have not adopted WHO standards and have only nominal environmental health programs. Automobile Emissions Exhaust from internal combustion engines in automobiles is a major source of air pollution in most of the world’s major cities. Among the principal chemicals emitted are carbon monoxide (CO), CO2, hydrocarbons, lead, and various trace chemicals. Efforts to reduce automotive air pollution have centered on three approaches. First, late model autos are required to have elaborate pollution reduction equipment such as catalytic converters. In some states such as California, gaseous hydrocarbon capture systems at the gas pump are also required. Second, federal policy has mandated that auto manufacturers improve fuel economy on passenger cars according to a long-range schedule. The Corporate Average Fuel Efficiency (CAFE) system was instigated to set national standards for autos. To date, the American auto industry has been largely successful in reaching its CAFE mileage goals. The third strategy is use of unleaded gasoline, replacing the leaded fuels of a few years back. In a few metropolitan areas in the United States where unusual atmospheric conditions exist, such as Denver, oxygenated fuels have been used during winter months for a number of years. Oxygenated fuels are unleaded gasolines that have been blended with ethanol or ether-based additives in order to improve combustion in high-altitude markets where air density is lower. A new trend is being established in the auto industry that threatens the CAFE system of gradually improving fuel economy, namely, the great increase in the number of light trucks and sport utility vehicles placed in

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service during the past few years. These vehicles have been given favored treatment insofar as CAFE standards are concerned and now may compromise the goal of improved fuel economy and lower air emissions. Estimates by the U.S. Environmental Protection Agency indicate that carbon dioxide emissions from light trucks, which now comprise about 34 percent of all vehicles, will surpass emissions from passenger cars in 1997 and grow rapidly from about 150 million metric tons in 1997 to over 310 million metric tons by the year 2020. During the same period, carbon dioxide emissions from passenger vehicles are projected to grow but less rapidly, from 140 million metric tons in 1997 to approximately 165 million metric tons by 2020. This large projected increase in emissions will make more difficult the matter of achieving national air quality goals. Clearly, the environmental effects of automotive use will challenge the ingenuity of industry and government over the next several decades, particularly in the United States where only minimal mass transit systems are available in a relatively few cities. The introduction of new electric or hybrid vehicles could be a boon to urban air quality improvements but there are questions as to whether these innovations can be accomplished in a timely manner. The gradual transition from fossil-fuel power plants to nuclear energy and renewable energy systems will also contribute substantially to the reduction in CO2 and other greenhouse gas emissions. With an accelerated conversion program, it may be possible to accomplish such a transition over a 40-to-50-year time span. It is likely that a global warming treaty could provide the impetus for fostering this transition. WATER RESOURCES The oceans cover 71 percent of the earth’s surface, with additional inland areas occupied by fresh water resources in the form of lakes and rivers. Overall, there appear to be adequate fresh water supplies to support reasonable population growth. However, contamination of fresh water supplies in many locations and the widely variable geographic distribution of water supplies complicate the matter of supplying pure fresh water in many areas. Industrial use often diverts water from traditional applications, sometimes resulting in significant resource losses. For example, an electric generating plant, using the conventional steam cycle, requires large quantities of cooling water for its steam condensing system. A coal-fired plant of 1,000 megawatt generating capacity involves evaporative losses of some 10,000 to 12,000 acre-feet of water annually. This water vapor is released via the plant’s cooling tower and diffused in the atmosphere. In this system, water in liquid form is converted to vapor and thereby is effectively “lost” for other local uses.

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Water storage projects, such as impoundments with large surface areas, usually entail massive evaporative losses, especially in arid climates. These projects may be developed for such purposes as irrigated agriculture, urban water supplies, flood control, or hydroelectric power generation. Many large dams were constructed in earlier eras when environmental effects were often neglected or were not weighed against the assumed economic benefits. The large systems of dams constructed by the U.S. Corps of Engineers on the Columbia, Tennessee, and Arkansas river systems generate electric power, regulate river flows to minimize downstream flooding, and provide irrigation water in many locations. The federal system of hydropower projects on the Columbia River and its tributaries possesses a combined electric generating capacity of 19,604 megawatts in 31 reservoirs. The largest of this series is the Grand Coulee Dam, built in 1941 and with a generating capacity of 6,187 mw. With the new sensitivity of the environmental public to the potential adverse effects of large water impoundments, it is doubtful that many of these projects could be built today in their present forms. The Columbia River hydroprojects have been largely responsible for dramatic reductions in the number of anadromous fish, such as the steelhead trout and various salmon species, over the past four decades. Seasonal runs of some aquatic species such as the Coho and Chinook salmon have been reduced to a trickle despite the presence of fish ladders at the dams and other mitigation measures. Loss of fishing has been detrimental to a number of Indian tribes in the region, which have treaty-protected fishing rights. Water is a precious commodity anywhere but especially in some arid developing nations and in the American West where legal battles are continuing events and “shooting wars” over water rights are not unknown. All major cities in the West are endowed with large contingents of water lawyers making their living in water disputes. State water laws vary, but most of them provide strong positions for “first-in-line, first use” water users with upstream users often in a position of favor. Growing metropolitan areas in arid or semiarid areas, such as Denver, Phoenix, Tucson, and Albuquerque, among others, face challenging obstacles in securing water supplies for the Third Millennium. Communities around and including Denver have attempted for years to build several new reservoirs, including the controversial Two Forks project to be located in the foothills of the Rocky Mountain Front Range. Environmentalists have been successful to date in pointing out the ecological problems associated with this proposed large municipal water project. As a consequence, state and federal agencies have withheld approval. Water supplies are shrinking rapidly in the American Great Plains where cultivation of the bulk of the nation’s wheat and other grain crops depends heavily on underground aquifers. The Oglalla Aquifer, a vast underground water system extending for hundreds of miles up and down

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the Front Range of the Rocky Mountains eastward into Kansas, Nebraska, and Oklahoma, is experiencing receding water levels in many locations. Replenishment of this aquifer is considered to be impossible, since it was built up over geological time from gradual water movements from the Rocky Mountains into deep geological formations under the Plains. Farmers as well as numerous cities in this region are facing the need to find alternative water sources. Impoundment of major rivers in the West has been an ongoing development for almost a century. In earlier times, state and Congressional officials often regarded any unimpeded river that flows to the ocean as a monumental waste in terms of lost opportunities for opening up arid lands to farming, for urban development, for electric power generation, and for recreation and tourism. The quest for means to retain water for such developments has resulted in construction of over 600 dams, such as the huge Glen Canyon and Hoover Dams, since the turn of the century. These impoundments have harnessed the Colorado and other rivers, providing the basis for former small agricultural communities such as Los Angeles and Phoenix to become major metropolitan areas. As mentioned earlier, the huge Three Gorges project in China, now under construction, is planned to produce prodigious quantities of electricity and provide irrigation water and flood protection. However, this project will displace over one million people, destroy thousand of acres of rice paddies and farmland, and cause major changes in the river system and dozens of tributaries. Although many observers have pointed out the negative “cost-benefit” ratio shown in the Three Gorges project, the communist government of China apparently intends to complete this development without substantial changes that might improve the negative environmental impact. As is often the case in developing nations, economic development has taken precedence over environmental preservation. A recent and quite controversial proposal in the United States is for removal of the Glen Canyon Dam located near the Arizona-Utah border. This 710-foot structure impounds the Colorado River to create Lake Powell, a huge reservoir providing hydropower, irrigation, and drinking water for Phoenix and Tucson as well as numerous farmers, and recreation for 2.5 million visitors annually. The proposal for removal was made by the Sierra Club, a national environmental conservation group, which maintains that large dams impede the natural water flow and alter the local ecosystems, resulting in large-scale waste of water resources due to evaporation and siltation that occurs behind dams. When this proposal was first announced, most observers indicated that it was just a gesture and not a serious one. However, Congressional hearings have been held on the subject, lending some legitimacy to it. It seems quite unlikely that removal of the Glen Canyon Dam will be real-

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ized in the foreseeable future due to entrenched downstream political interests. Communities in four states rely upon the Glen Canyon hydropower for portions of their electric supply as do numerous water users. Nevertheless, there seems to be a growing effort to remove small, older dams that cause more environmental problems than they produce in benefits. Several such removal projects are already underway in Butte Creek, a tributary of California’s Sacramento River. Proposals for similar removal projects are under consideration in Oregon and Washington, where several small dams have destroyed salmon fisheries with little compensating electric power benefits. Industrial pollution of water resources is widespread. A few decades ago, pollution of surface waters around major industrial centers such as Cleveland and Pittsburgh received much attention. The heavily polluted Cuyahoga River, which empties into Lake Erie, became largely devoid of fish or plant life due to the chemical pollutants released by numerous steel mills, foundries, power plants, and other heavy industry. On numerous occasions, the river caught fire from the flammable materials floating on the surface. Today, however, the river has been largely cleaned up in a remarkable restoration program. Another form of water pollution that threatens aquatic life stems from oil spills from ocean-going tankers. The highly publicized oil spill in 1989 in Alaska involving the tanker Valdez has done much to focus on the need for protective measures and emergency response related to oil tanker spills. Tankers chartered in the United States are now required to take a number of measures to reduce the likelihood and severity of oil spills. Many new tankers have been built with double bottoms to reduce the consequences of oil spills during any accidents involving physical contact with the tankers. Water contamination by the petroleum industry extends also to oil and natural gas pipelines, tank farms at refineries, and thousands of individual gasoline service stations, which have been sources of spills of oils, grease, solvents, and other chemicals as well as locations for fires and explosions. Many of these incidents have resulted in widespread contamination and property damage. Among these sources, underground storage tanks have been major sources of localized aquifer contamination. Leaking underground storage tanks, so-called “LUSTs,” have been targeted by the U.S. Environmental Protection Agency (EPA) and state environmental agencies for identification and remedial action. New standards were instituted a few years ago requiring noncorrosive materials for such tanks. Thousands of these tanks are being replaced by industry at great expense to conform to the new standards. Water pollution sometimes has international ramifications, requiring resolution by treaty or similar protocol. A case in point is the water pol-

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lution emanating from hundreds of manufacturing plants on the Mexican side of the Rio Grande River, which borders the United States at the Texas boundary for several hundred miles. Little, if any, pollution control measures are in effect on the Mexican side, and pollutants released by Mexican industries are in violation of American pollution standards. The problem has not been resolved. Management of liquid wastes from urban and suburban sources is a chronic issue in industrialized countries and a growing one in developing nations. Among the usual methods for disposing of municipal liquid wastes are: (1) use of deep injection wells; (2) evaporation in surface impoundments; or (3) chemical treatment and release into watercourses. In any disposal system, great care is required in site selection and design and operation of waste management equipment to minimize the likelihood of surface and groundwater contamination. LAND, VEGETATION, AND WILDLIFE Large-scale disruption of natural land surfaces and related vegetation, water sources, and wildlife continues to be a major issue in both industrialized and developing nations. Changes in land use associated with urbanization and other population settlements, intensive agriculture, mining, or timber harvesting are occurring with increasing frequency and are precipitating multiple environmental effects. Wildlife habitats are being greatly reduced in many areas, often resulting in undesirable closer contact between humans and animals, to the detriment of both. Burgeoning urbanization is also creating massive waste disposal problems, mainly solid wastes from households and businesses. Mountains of trash of all kinds are building in landfills of major cities of America and to a lesser extent in other industrialized nations. The “use-and-discard” mentality is pervasive among consumers and is often encouraged by product development, marketing, and packaging concepts promoted by private industry. “Planned obsolescence,” a term first applied to automobiles, is now applicable to virtually the entire spectrum of consumer goods. As a consequence, rapidly growing quantities of solid wastes are filling up landfills at increasing rates. Already there is a shortage of landfill sites, and unless the rate of disposal is reduced through recycling or new disposal methods are found, a national solid waste management crisis is likely within two or three decades. Some American cities have gone to desperate lengths to dispose of municipal waste that could not be accommodated in their own landfills. A few years ago, a New Jersey city hired an ocean-going tug to take bargeloads of its wastes to any city that would accept it, of course for an appropriate fee. The waste was taken to a number of cities; no city would accept it, and the waste was returned to its origin. Similarly, trainloads

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of municipal waste from several eastern U.S. cities were readied for shipment to sparsely populated areas in the West, but no places were found that would accept the refuse. In earlier times, a large portion of municipal solid waste was disposed of by incineration. However, with the advent of air pollution controls, incineration has fallen from favor except in a relatively few areas where incinerators have been equipped with emissions controls and designed to generate electricity. Deforestation is becoming a major ecological concern. While its effects are most heavily felt at the local and regional levels, deforestation on a large scale, such as that occurring in Brazil and Indonesia, appears to be causing widespread adverse health and ecological impacts. Persons near timber-cutting and slash burning areas in these countries have complained of eye irritation, breathing difficulties, increased asthma attacks, and other physical disorders. Smoke has reduced visibility near major airports in Southeast Asia and is believed to have been instrumental in a commercial airliner crash. In the longer run, deforestation on a large scale can disrupt the ecological balance at the earth-water interface as well as in the oxygen–carbon dioxide balance within the atmosphere. Destruction of trees and other vegetation reduces the amount of oxygen released to the atmosphere, while also reducing the absorption of carbon dioxide, a greenhouse gas and contributor to global warming. Clear-cutting, as being practiced in Southeast Asia and Brazil and to a more limited extent in the Pacific Northwest of the United States, is also a source of soil erosion and watershed pollution. Loss of habitat for wildlife species is another adverse impact of large-scale deforestation. Shifting agricultural practices from traditional subsistence methods to modern intensive systems often results in: (a) greatly increased productivity; and (b) substantial increases in overall resource consumption, when energy and materials used in implements and fertilizer are accounted for. For example, according to studies by Jeremy Rifkin in Entropy: A New World View, a peasant farmer in a developing country working by hand and with a horse can produce 10 calories of food energy for each calorie of human labor expended. By comparison, a modern farmer produces 6,000 calories of food using the same amount of human energy as the peasant farmer. However, counting the energy of the machinery and fertilizer used, the farmer could produce a can of corn containing 270 calories by expending 2,790 calories. In this example, increased productivity comes by use of energy-intensive technologies (farm appliances, fuel, chemical fertilizer, etc.) that in themselves consume natural resources such as ores and crude oil for the metals, plastics, and gasoline used in the farm implements. Among the principal causes of environmental degradation in many de-

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veloping nations have been: (1) inefficient use of firewood for cooking and other applications; (2) overgrazing of pasture land, leading to increased desertification; and (3) overuse of agricultural land through monocropping and lack of soil preservation measures. Firewood gathering is often done with little consideration to long-term resource conservation. Consequently, firewood sources nearest to the point of use are often overharvested, leaving inadequate biomass for future growth. Overuse of pastures and farm lands is often attributable to efforts to maximize food and milk production in areas where malnutrition is widespread. While such efforts may be worthwhile for a short time, food production often suffers in the long run. Use of chemical fertilizers and other modern agricultural methods may greatly increase food production on these lands; however, optimum land use dictates a balanced approach to food production and soil preservation. The roles of animals in the global environment may need to be reexamined as the human population continues to multiply and encroach upon former wildlife habitats. In the United States, an awareness that the national bird, the bald eagle, and other species were rapidly becoming extinct led to passage of the Endangered Species Act, which called for preservation of numerous animal species. This law has been largely successful, with many species such as the bald eagle, whooping crane, and others showing signs of flourishing. In some other nations, however, the track record of preserving wildlife is not so laudable. In India, the tiger is on the brink of extinction, and in China the panda is threatened. The African elephant is a candidate for extinction unless illegal hunting is stopped. Certain marine animals such as the sperm whale continue to be killed at excessive rates, although some progress is being made through international protocols in convincing Russian and Japanese whalers of the necessity for preservation. The manatee, a marine mammal whose only known habitat is the Florida rivers, is threatened by increasing boating and fishing. Until about two decades ago, the American bison was threatened with extinction by overhunting and loss of forage lands. Today, the bison, or buffalo, is thriving in the American West after several decades of restoration efforts. Another American animal, the wolf, is being brought back to native habitats in the northern Rockies after dwindling rapidly because of poaching. Reintroducing the wolf to some habitats is being hotly opposed by sheep and cattle ranchers who fear loss of grazing animals by predation. Animals play important roles in regional ecosystems—ranging from rodent and insect control and water regulation to distribution of seeds for vegetation, aside from some species being sources of meat and the contributions of fur-bearing animals to human use. Their roles are often not appreciated until their demise. The extent to which the preservation of

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animals will be accorded a place of importance in public affairs will likely vary widely among the nations. Cultural traditions and economic factors have to date been the primary criteria for treatment of animals. Equally important, ecological and, indeed, moral factors should become major considerations in the human treatment of animals. Still another recent concern was the widespread use of certain insecticides and pesticides in agriculture and populated areas, which were having serious unexpected effects on wildlife as well as the intended impacts on the “targets,” mosquitos, flies, and other insects. It was found that large-scale use of the insecticide DDT was over time causing a number of adverse effects on such birds as the bald eagle, golden eagle, cranes, wild ducks, and Canada geese. One troubling impact was the thinning of eggshells to the point that eggs would often break before chicks were mature enough for hatching. Until the government intervened, the populations of some birds and other wildlife declined seriously. Eventually, DDT was banned as an insecticide, and other pesticides were placed under strict controls. As a result, wildlife habitats are gradually being restored to sustainable levels in many areas. In other nations where control of malaria is a problem, use of DDT may be an effective mitigation measure. However, alternative eradication techniques should be sought where possible in view of the adverse effects on wildlife. ENVIRONMENTAL PROTECTION AND MITIGATION Measures to preserve environmental quality among the industrialized nations have generally followed two basic strategies: avoidance or mitigation. In the avoidance approach, outright prohibition of proposed projects has been a frequent tactic where it can be shown that the project may have unavoidable, serious adverse impacts that outweigh consideration of the project even with utilization of substantial mitigation measures. Environmental regulatory agencies often use “cost-benefit” analyses and other techniques such as environmental impact assessments to determine the extent of probable adverse impacts of proposed projects. Mitigation may include numerous approaches to minimize adverse environmental impacts. Either of two fundamental mitigation strategies is employed, depending on the type of project, the “source term” (i.e., the type and extent of the pollution source), and the ambient environment that may be impacted. The first general strategy is “dilute and disperse,” which has been widely employed in certain industries. The other strategy is “concentrate and confine” and applies to pollutants that are both toxic and chemically dangerous. In actual practice, many large projects may utilize both strategies, depending upon the specific process or product involved.

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Most large mining, electric power generation, and heavy industrial projects are subject to predevelopment environmental reviews by cognizant federal and/or state agencies. In the United States, most large industrial projects must await issuance of applicable governmental permits prior to construction and operation. During the usually extensive review process, various mitigation measures are considered, depending upon the applicability of multiple environmental statutes and regulatory standards. It is not uncommon for large industrial projects to be subject to 30 to 50 individual federal, state, and local permits. Mitigation options depend largely upon the nature and extent of the postulated environmental impact and the applicable state or federal standards. In a typical coal-fired power plant, for instance, mitigation of air pollution is a major concern. Requirements of the federal Clean Air Act and many state laws require extensive tests of ambient air quality followed by pollutant dispersion modeling to determine which pollutant source controls would likely be effective in the proposed airshed for satisfying air pollution standards. Emission control measures for a coal-fired power plant typically include the use of baghouses, electrostatic precipitators, and various filtration devices to reduce particulate emissions. In addition, sulfur and nitrogen oxide emissions must be held within regulatory standards. Use of low-sulfur coal and flue gas desulfurization equipment are among techniques for minimizing SO2 emissions. In the American West, widespread water quality and related problems have been associated with the mining industry, especially surface mining. Gold mining, using modern heap-leaching techniques, has sometimes resulted in surface and groundwater contamination stemming from the use of dilute cyanide as a leaching agent. Clay or plastic liners beneath the leach pits have often failed allowing cyanide to reach streams or aquifers. Similar problems have occurred in heap leaching of uranium. In these cases, the mitigating agents, supposedly impermeable clay or plastic liners, failed to provide adequate protection to the environment. Newer types of liners now being employed in most heap-leach operations appear to be more effective in providing needed protection. In these cases, the “concentrate and confine” approach has been employed with varying degrees of success. Nuclear power plants are examples of the “concentrate and confine” approach taken to elaborate lengths, followed by utilization also of the “dilute and disperse” strategy. In an operating nuclear reactor, hightemperature steam is produced as water is injected into the reactor core. This steam is transferred to a secondary steam generator, which in turn drives the turbine-generator. After passing through the turbine, the spent steam is routed to a condenser and the resultant water is recycled in the reactor.

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Although the water inside the reactor is only slightly radioactive, it and the fuel core are tightly confined inside a pressure vessel to prevent any possible loss of coolant to the core and any atmospheric release. Small amounts of slightly radioactive gases and liquids are produced as irradiation by-products in most nuclear power plants. These wastes are accumulated in sealed holding tanks and released periodically after being highly diluted. In this way, releases of radioactive materials to the air or water can be held to well below regulatory standards. Solid radioactive wastes produced by nuclear power plants are generally of two types: (1) low-level wastes, consisting of small quantities of solids or sludges trapped in filters in reactor water systems, which are quite low in radioactivity; and (2) high-level wastes consisting of spent fuel rods removed from reactor cores at refueling. High-level wastes are extremely radioactive and must be shielded from operators in heavy casks and kept under water until temperatures and radiation levels are reduced. Low-level wastes are packaged and shipped to licensed burial grounds. High-level wastes are being held in temporary engineered storage facilities. Plans call for all such high-level wastes to be permanently buried in a deep underground repository by around 2015. RECYCLING: A TENET OF THE NEW ENVIRONMENTALISM Reducing pressures on rapidly filling urban landfills and conserving natural resources have been the driving forces behind recycling. For some products such as aluminum cans, recycling meets these objectives while also realizing substantial cost savings in manufacturing. A discarded aluminum can, when recycled, is made into a new one for only one-tenth the electric power required for producing an original can. Numerous other products, such as old newspapers, plastic and glass containers, and steel products, can be recycled at reasonable cost. Unfortunately, incentives for recycling have declined in recent years for some materials, such as plastics and newspapers. Decreased demand for newsprint and other recycled products in some urban areas has reduced prices earned by waste management companies and consequently has affected their profitability in collecting wastes for recycling. Consequently, increased landfill dumping of these waste materials has resumed where market prices have fallen. The real value of waste materials used in recycling is rarely reflected in prices. Economic savings gained from reuse of costly materials, reduction in disposal costs and use of land for disposal, and other resource conservation values are usually considered as exogenous variables and thus not accounted for in the economics of recycling. Rather, the local market price governs the demand and supply. If these externalities could

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be incorporated into public policy and business decisions, it is probable that a much higher overall societal value for recycling would be shown. Closely related to the concept of recycling is the principle of secondary use of energy and materials. As discussed in Part II, secondary utilization of steam in power plants and other industry is becoming fairly common via cogeneration systems. Collection of methane gas from municipal landfills is also being practiced in some urban areas where there is a nearby market for natural gas. Sugarcane bagasse, which formerly was disposed of through open burning, now is being used as biomass feedstock in several facilities for electric power generation. These and other multipleuse systems can contribute significantly to the goals of resource conservation while reducing adverse environmental impacts. One of the renewable energy technologies, biomass, utilizes organic materials such as wood, grass, straw, and other plants or waste products from animal feedlots or municipal landfills as feedstock for liquid fuels or combustion in steam-powered electric generators. By cultivation of biomass in a manner that coincides with regional energy and other industrial needs, reforestation can be attained with minimal permanent environmental disruption. Public policies regarding recycling vary widely with most of the decision-making powers residing at the state and local levels. Increasingly, public agencies are encouraging recycling and thereby discouraging landfill disposal through a variety of incentives or regulations, ranging from increased “tipping” (dumping) fees to rebates to consumers for recycling. In most cities where recycling programs are underway, waste management companies under contract to municipal governments perform curbside collection of recyclable wastes that are usually segregated into metals, plastics, and paper by the consumer. To date, the majority of these programs are believed to be successful. Recycling is largely an unknown concept in most developing nations. Indeed, even the provision of central sanitary landfills is rare in many areas except in the largest cities. Development of appropriate waste management systems will be a major challenge in many developing nations and one that should receive high priority as economic development proceeds. GLOBAL ENVIRONMENTAL POLICY ISSUES The burgeoning world population is placing increasing stress on the natural environment. The full effects of this stress are only beginning to be understood. Much of the population growth is expected to be in or near major cities of the developing nations such as Mexico City, Sa˜o Paulo, Shanghai, Calcutta, Buenos Aires, and Rio de Janeiro. One of these, Mexico City, will experience a population growth of more than 8 million

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between 1985 and 2000, to more than 25.8 million. Death rates have declined in many nations due to improved health programs, but birth rates are climbing. For example, a typical woman in one of the nations of the Middle East or Africa will likely bear six to eight children, whereas her counterpart in an industrialized nation will bear two. Population growth is expected in the nations that are least equipped to cope with it. In large and fast-growing nations such as China, India, Mexico, Brazil, and a host of smaller countries in Africa and Asia, great pressures will be placed on natural resources to support food production and urbanization as well as increased mining and other industrial developments. Unless major commitments are made by these countries to environmental protection, widespread ecological disasters could occur with devastating consequences to human population and the natural environment. While research continues regarding effects of “mankind’s footprint” on the environment, there are many uncertainties about the great complexities of global and regional ecosystems. The discussion above concerning the debate over global warming is one case in point. The consensus among most atmospheric scientists seems to be that the global warming phenomenon is indeed a fact and should be addressed as a matter of international policy. Other scientists, however, are skeptical and are calling for a “wait-and-see” approach. Industrialists generally oppose global warming initiatives as far too expensive and, in their views, unnecessary. In any event, the potential for adverse global climate change stemming from continued profligate use of fossil fuels appears to be of such magnitude as to warrant immediate attention. Prudence and environmental responsibility demands concerted action on the part of both industrialized and developing nations. Draconian measures are probably not justified at this point. Nevertheless, efforts to foster a gradual transition from fossil fuels to more environmentally benign fuels and electric power generation methods should be taken on a worldwide basis without delay. Other environmental issues may have more localized impacts but have international ramifications. One of these is water contamination from oil and chemical spills by foreign ships utilizing domestic waterways and seaports. Foreign as well as domestic vessels carrying these cargoes should be equipped to prevent such spills and to respond adequately when such accidents occur. Deforestation on a large scale can have international as well as local environmental consequences, as discussed earlier. Efforts should be made to preserve critical forests while simultaneously providing for the legitimate economic uses of these resources. Management of solid wastes is a pressing concern in industrialized nations and an emerging one in developing countries. Even more critical in some developing nations is the matter of controlling sanitary waste.

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The lack of adequate sanitary waste facilities has contributed substantially to disease, reduced life spans, and other chronic health problems in many countries. Food production has faltered in many regions following some growth in output in previous years. Today, over one-fifth of the world’s population are undernourished or starving. Food production and consumption can be increased significantly with only minimal additional adverse effects on the environment, if modern cultivation and harvesting practices are observed, and if equitable food distribution systems can be devised. As the developing nations face the challenge of fostering orderly economic development, the problems of maintaining satisfactory levels of environmental quality become increasingly important. The arguments that economic growth and environmental quality are incompatible are clearly not applicable and reflect a callous and uninformed point of view that often focuses only on quite selfish motives. Developing nations need not trade a wholesome natural environment for economic development. In their rush toward industrialization, some nations may be tempted to utilize shortcuts in environmental protection as cost-saving devices or as inducements to attract outside investment in industrial facilities. Environmental protection programs may be relatively expensive, but developing nations should make every effort to inaugurate them at early stages of industrialization; they are usually much more expensive later on if “backfitting” is necessary to catch up with emerging development projects. To what extent should the wealthy industrialized nations subsidize poorer developing countries in their quest for economic growth and environmental quality? Laissez-faire economists and many capitalists contend that global economic progress and environmental equity is achieved best by the globalization of national economies, in that free trade will lead to greater industrialization in developing nations and will provide the capital for public infrastructure and relevant environmental protection efforts. However, this becomes a question of “chicken and egg.” Unless developing nations have at least minimal environmental protection standards in place prior to industrialization, environmental degradation could become serious, undermining any economic growth they may have enjoyed to this point. Corporations from the industrialized nations that build facilities in developing nations have a special obligation to ensure that best environmental practices are observed, whether or not the host country requires such measures. Unfortunately, some “runaway” industries seek havens in developing countries where environmental protection and employee safety laws are weak or nonexistent. In their eagerness for industrial investment and jobs, officials of these countries may be willing to forgo environmental controls.

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The question of the desirability of international environmental law is a thorny one, since there are inherent tensions between the desire for sovereignty of individual nations and the emerging recognition that many environmental issues are truly multinational in scope and importance and may best be addressed accordingly. Numerous treaties address in whole or part certain environmental concerns and often provide methods for their resolution among cooperating nations. One of these restricts killing of whales and has been fairly effective in rebuilding whale pods that had been greatly diminished due to overkilling. The proposed international treaty on global warming is perhaps the most contentious of proposed agreements in recent times. Regardless of the outcome of the current treaty proposal, it seems inevitable that international cooperation in environmental protection issues will attain a more important role in global affairs in the Third Millennium. What roles should the industrialized nations, developing countries, and international organizations play in fostering global environmental quality? Would it be in the interests of industrialized nations to subsidize or otherwise assist their potential competitors and trading partners in developing countries in environmental protection efforts? The relative degrees of responsibility and participation among the nations and their industries in environmental affairs will be hammered out over time as political and economic factors come into play. One of the points of contention in the proposed global warming treaty is the degree of participation by the developing nations. As currently proposed, only the industrialized nations will be required to institute greenhouse gas emission reductions over the next decade. The developing nations have been exempted from pollution reduction actions. Even the largest nation, China, with its vast coal deposits that it plans to exploit, has been exempted. Achieving equity among the nations in environmental protection and pollution control remains an elusive issue. Developing nations will need increased technical and financial assistance in dealing with their indigenous environmental problems. Industrialized nations have the expertise and other resources to provide much of this help. How can such assistance be mobilized to assist the developing nations? To what extent can international bodies such as the United Nations provide this aid? What roles can the private sector best play in assisting developing nations to achieve environmental quality and equity?

7 Capitalism and the Environment

EVOLUTION OF THE ENVIRONMENTAL ETHIC Classic economic theory includes the concept of scarcity in its consideration of supply-and-demand forces that operate in an economy. To a large extent, the same idea holds in environmental science, namely, that natural resources and the physical environment are finite and subject to certain physical laws and interactions that determine productivity, quality, and sustainability. As a major human activity, capitalism exists within the natural environment, utilizes its wealth, and is largely responsible for its continuing quality. The same is true of socialistic systems except, of course, for the ownership of resources. In theory, socialistic systems should be more amenable to environmental protection than capitalism in that all resources would be owned and controlled by the state and thus would be subject to regulatory mandates without opposition. However, actual experience in the major communist nations, China and the former Soviet Union, has been far from the theoretical ideal. Some of the worst cases of massive environmental contamination have occurred in these countries. Capitalism has a proclivity for maximizing utilization of its resources. Indeed, this is one of the tenets of the economic system, that is, to seek maximum efficiency and use of available economic resources, natural or otherwise. However, maximum use is not always optimum use. To a large extent, the rate of resource utilization is determined by the price of the

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final product. Higher prices usually result in higher production rates. This is particularly true in the extractive industries. Optimum resource extraction is usually at less than the maximum rate, since it takes into account the value of resource conservation as well as future costs of reclamation. In many cases, overproduction has led to haphazard development and undue disruption of land surfaces, resulting in soil erosion, water pollution, loss of wildlife habitat, and fugitive dust emissions, not to mention adverse health effects to workers and offsite populations and sometimes undesirable socioeconomic problems in nearby communities. In capitalism, the private sector owns much of the environmental resources and has direct control concerning their use. A corporation may purchase land to build a business or factory. It then “owns” the land and facilities as well as any water or mineral resources under that land, unless of course mineral or water rights are retained by others. A mining company may decide to lease lands owned by others and to pay production royalties to the landowner. In either event, the corporation has the opportunity to utilize natural resources in efforts to produce a profit. The corporation also bears certain legal and moral responsibilities for any consequences of its activities that may harm the environment, employees, or neighbors. The Industrial Revolution brought with it rapid growth in coal and iron ore mining, coking ovens, steelmaking, foundries, and heavy manufacturing. Beginning in England and Europe and later reaching the United States, the Industrial Revolution was also responsible for dramatic increases in environmental pollution including great concentrations of smoke with an array of noxious soot and chemical pollutants. Without effective emission controls, dense industrial smoke often obscured visibility and caused outbreaks of respiratory illnesses. In the major steelmaking centers of the United States, such as Pittsburgh a couple of decades ago, dense industrial smoke sometimes reduced visibility to just a few yards even in daylight hours. Water contamination likewise became a serious health risk in major industrial centers. Whether or not it is bound by statutory requirements, the corporation or other business that discharges pollutants is responsible for any adverse environmental effects of its activities that impinge on persons or property inside or outside its own boundaries. It is this latter activity that has brought about environmental degradation and assaults on human health in many places since the Industrial Revolution. Economic expansion during the 1950s and 1960s brought with it widespread air, water, chemical, and hazardous waste pollution in the United States and most of the industrialized nations. Environmental groups became active in the public media and in legislative circles arguing that pollution must be abated and that responsible parties in industry must be held accountable. Moreover,

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they lobbied for federal and state environmental protection laws with enforcement provisions including criminal penalties and fines. Meanwhile, industry contended that proposed environmental regulations would entail massive new investments in pollution control technology. Costs of doing business would increase dramatically and thus render their products less competitive in foreign markets, they argued. Even today, with a wide array of environmental statutes in effect and over 30 years of experience with these laws, industry has resisted implementation of environmental programs on the basis that they are not needed, at least in their present form, or that the trade-offs between environmental protection costs and economic benefits are often negative. Until the advent of environmentalism in the late 1960s, many corporations displayed a callous attitude concerning their roles in environmental protection. There were few environmental laws in effect, and the affected communities seemed virtually powerless to influence corporations in pollution cleanup. The attitude of many industrialists seemed to be, “If it happens beyond my property line, it’s not my problem.” Corporations had little if any provision in their accounting systems for externalities such as offsite pollution impacts. And since there was no legal requirement to control pollution, the societal cost resulting from pollution was not necessarily borne by the responsible parties. Consequently, pollution control efforts were minimal at best, and pollution continued unabated, sometimes for decades. In the United States, environmental protection took on importance as a matter of public policy with the passage of the National Environmental Policy Act (NEPA) in 1972. This landmark legislation for the first time recognized environmental quality as a national goal, provided measures for evaluating predicted environmental impacts from proposed major industrial developments, and set forth a decision-making, licensing, and enforcement process to govern environmental effects of such projects. NEPA requires the preparation of environmental impact reports and statements (EIS) to be approved by cognizant federal and state agencies prior to issuance of authorizing permits and licenses. Electric industry officials have stated that the preapproval environmental reviews and pollution control hardware have added 30 to 40 percent to the capital costs of a new power plant and often require up to three additional years for review and approval of the multiple permits. Other federal environmental legislation with far-reaching effects on business and industry was enacted during the last two-and-one-half decades. These statutes include the Clean Air Act; Clean Water Act; Comprehensive Environmental Response, Compensation, and Liability Act (Superfund); Endangered Species Act; Hazardous Materials Transportation Uniform Safety Act; Toxic Substances Control Act; Federal

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Insecticide, Fungicide, and Rodenticide Act; Safe Drinking Water Act; Resource Conservation and Recovery Act; and others as well as amendments to existing ones. Collectively, these laws constitute a formidable array of “weapons” in the environmental protection arsenal. Virtually every aspect of environmental protection is covered by these and related statutes. State governments have also enacted similar and usually compatible statutes. In most cases, states carry out much of the implementation and regulatory roles of the federal statutes pursuant to federally approved compliance plans. In those states where federal delegation has not been given, the federal EPA retains compliance authority. Environmental compliance costs for many industries have been considerable. Capital expenditures for pollution abatement equipment and ongoing costs for environmental management personnel, training, and equipment operation have become incorporated into the cultures of many corporations. A large array of environmental consulting, training, and engineering companies have sprung up to provide specialized services to industry. Manufacture of pollution control equipment and supplies has likewise emerged as a sizable industry. Private industry in the United States has learned to accommodate the plethora of environmental regulations, and, by and large, has come into compliance with them. Of course, there are numerous violations each year, but the great majority of citations are for relatively minor infractions. Overall, the “environmental ethic” has been widely adopted, albeit reluctantly, by the corporate world. Until recently, American environmental laws were focused largely on pollution effects at the local or regional level. However, as corporations become more globalized, they will likely confront differing attitudes regarding environmental values among the developing nations as well as a growing awareness of environmental concerns on a global scale by the international community. A case in point is the ongoing debate over global warming discussed earlier in which the developing nations have sought exemptions from greenhouse gas emissions control while industrialized nations agreed to pursue aggressive emissions reduction. Among these developing nations, China, with its enormous potential for greenhouse gas pollution, was exempted. While pollution abatement has become institutionalized in the industrialized nations, it is only beginning to be considered in most of the developing countries. Nevertheless, one of these, Brazil, recently announced plans to implement a comprehensive program to control timber harvesting and reforestation in its Amazonian rain forests. Aside from increased timber harvesting for the export market, Brazil has until recently encouraged population settlements in its northern regions. However, the nation may be forced to moderate the rapid population growth in that region in view of the burgeoning environmental problems.

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Corporations may argue that much of their incentive for investing in developing countries is the potential for lower operating costs, including lower labor and environmental protection expenses. This may appear to provide adequate justification for a siting decision in the short term, but the apparent cost differentials may be more elusive in the long run. Other direct costs, such as marketing, distribution, and transportation, may be considerably higher in many developing nations due to low consumer purchasing power, underdeveloped infrastructures, and lack of supporting industries. Thus, avoidance of environmental protection costs should not be a major factor in facility siting decisions for overseas development. The environmental ethic seems to be well entrenched in most industrialized nations. Private industry, working in tandem with the governments of industrialized nations and the international community, should exercise leadership in advancing environmental pollution prevention efforts in the Third World nations. In the Third Millennium, the corporate world is expected to become more enlightened as to its responsibilities and provide the financial and technical resources to address global as well as more localized environmental issues. ENVIRONMENTAL RESOURCES CONSERVATION Tactics and Methods Conservation is another facet of the environmental ethic that has been stressed during the past decade. Among the ways that conservation has been practiced are: (1) reducing natural resource materials requirements through more efficient utilization in manufacturing; (2) recycling of materials; (3) utilization of energy-efficient motors, appliances, lighting, and building insulation; and (4) promoting fuel efficiency in automobiles. Collectively, these measures are having a profound effect on energy utilization in the industrialized nations. Energy consumption in the United States totaled about 88 to 90 quads in 1996, as discussed in Part II. The rate of growth in energy consumption was reduced significantly over the past two decades as conservation efforts took hold following the oil crisis of 1973. Projections of the previous growth rates suggest that, had these measures not been in effect, the national energy consumption would have reached perhaps 110 to 120 quads by 1997, some 25 to 36 percent higher than actual consumption. These are very large numbers and reflect a massive savings of energy and energy fuels in industry, transportation, and residential buildings. Energy has been the main focus of government conservation efforts, recognizing that considerable financial savings as well as environmental pollution benefits can be realized through a number of measures to improve efficiency and reduction of use of fossil fuels in heating, cooling,

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transportation, electric power generation, and myriad industrial and residential activities. While numerous industries inaugurated energy conservation on their own initiative following the rise in energy prices and the oil crisis, government agencies such the U.S. Department of Energy and the Environmental Protection Agency sponsored several programs in cooperation with industry and the states to promote energy conservation. One of these, the EPA’s Green Lights program, has fostered use of lowenergy compact fluorescent lighting in homes and industry. Conservation in Homes and Industry Eli Lilly & Company joined the Green Lights program although it already had initiated an energy conservation effort. In a cooperative effort with EPA, the company achieved savings from energy-efficient lighting of $3 million annually, three times more than anticipated. Eli Lilly is also participating in EPA’s Energy Star Building program to minimize production of waste heat from lighting and other building utilities. Other conservation activities of the DOE and EPA have included such initiatives and promotional activities as: low-volume showerheads; energy-efficient electric motors; CFC-free and energy-efficient refrigerators; and energy-saving residential and industrial building design. An energy-efficient new home that meets today’s best design criteria consumes 50 percent less energy than a poorly designed alternative. A typical home built 15 years ago can be upgraded to save 20 percent of energy use and return a financial savings in the process. U.S. industries consumed some 38 to 40 percent of the nation’s enduse energy over the past decade. Two-thirds of the sector’s electricity consumption is for electric motors with industrial motors accounting for the use of over 20 percent of all national electric energy generation. The industrial sector produced some 33 percent of U.S. CO2 emissions in recent years. A small number of major manufacturing groups—primary metals, petroleum refining, chemicals, and pulp and paper—consumed about 70 percent of the overall industrial energy use. These heavy industries are natural targets for reducing energy consumption and emissions to the environment. Means for reducing energy consumption in industry are widely varied, ranging from enhanced product and waste materials recycling, fuel substitution, innovative transportation programs, and more energy-efficient electric motors and conservation in energy-intensive manufacturing processes. Building space heating, cooling, and lighting systems that are more energy-efficient are also of importance in heavy industries. Using the traditional “carrot-and-stick” approach, consisting of a series of voluntary initiatives, regulatory controls, and tax incentives, the U.S. government has taken an activist role in environmental protection for the

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past 25 years. The DOE has used mostly a “carrot” in its dealings with industry through efforts to develop new energy conservation technologies and to transfer technical knowledge to industry. While EPA also uses incentives and technical information to foster implementation in industry, its most powerful “ammunition” is its statute-based regulatory powers. Together, these two federal agencies in cooperation with industry and state governmental energy conservation offices have been instrumental in achieving noteworthy advances in energy conservation and environmental protection. Transportation Conservation Innovations in transportation technology can contribute substantially to energy conservation and reduction in urban air pollution. The CAFE fuel efficiency standards developed by the EPA have been instrumental in the development of more fuel-efficient automobiles. The rise in gasoline prices following the 1973 oil crisis also played a prominent role in fostering higher-mileage cars. However, as discussed earlier, very recent trends in the automobile industry, such as rising sales of sports utility vehicles and light trucks, suggest the possibility that fuel conservation trends of the past two decades may be reversed. Also, gasoline prices in the United States generally have stabilized or even been reduced during the past two years, taking away some incentives for fuel conservation. However, in 1999, gasoline prices rose again due to foreign supply cutbacks. Increased gasoline prices are a function of the basic prices as furnished to the retailer and an array of federal and state taxes, some of which have been imposed to curtail fuel use. At present, federal taxes on gasoline total some 18.4 cents per gallon, while state taxes vary. In Georgia, state gasoline tax is 7.5 cents per gallon, while in Connecticut the tax is 29 cents per gallon. Incentives to reduce automotive use and availability of energy-efficient, low-polluting urban transit systems are among the array of options being considered to enhance urban atmospheric environments. President Clinton’s administration has proposed additional governmental initiatives, which include carpooling and vanpooling, increased financial aid for urban mass transit, promotion of telecommuting, emission-based fees for automotive licensing, and a set of incentives for reduced urban parking of commuter vehicles. Over the longer term, development of alternative vehicles for private passengers and public commuting is expected to contribute substantially to energy/fuel conservation. Although major strides have been made in internal combustion engine technology in recent years, resulting in improved fuel economy and lower emissions, alternative systems based on

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fuels other than hydrocarbons are superior in limiting pollution. These are briefly discussed in Part II and include: (1) the battery-powered electric vehicle; (2) the hydrogen vehicle with an internal combustion engine; (3) a hybrid vehicle using hydrogen fuel, fuel cells, and electric motor; and (4) some combination of these non-fossil-fueled systems. Prototypes of these vehicles show promise; however, at present their range of mileage before recharging is quite low—on the order of 100 miles or less— and costs are prohibitive except for affluent consumers—on the order of $40,000 or more. Widespread implementation of electric or hybrid vehicles will, of course, depend upon their economics and practicality. Performance and reliability must be perfected in these systems and the costs must be reduced, perhaps by one-half if the average citizen is to utilize this technology. Mass transit systems, now confined to a relatively few cities in Asia, Europe, and the United States, hold great promise in conserving energy and in urban air pollution abatement through displacement of conventional gasoline-powered vehicles, especially for commuting in large cities. These systems, however, are expensive and often must be subsidized. Despite their high cost, urban mass transit will likely become the norm in many metropolitan areas in the next century. Biodiversity This term has come to mean preservation of ecosystems that contain complementary elements necessary to sustain vegetation and animal life in their natural states. Major alterations of ecosystems by human activity or massive natural events can disrupt the often delicate balance of sustaining elements and render the system unable to support certain species of animal or plant life. As global population growth continues in the Third Millennium, increased attention is needed toward preservation of biodiversity. This mandates the careful application of land use technologies in agriculture, industry, and urban development to preserve critical ecological interactions among wildlife habitats, soils, vegetation, water sources, and human activity. Developing nations, in particular, may find it politically difficult to preserve many critical ecosystems in light of the growing pressures of population expansion and economic growth. Nevertheless, with technical assistance from industrialized nations and the international community, the tenets of biodiversity can be implemented by developing nations without undue loss of economic development benefits. Forests and Land Management Vast land areas in the American West are under government ownership since acquisition of lands from Spain and France. Most states west of the

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Great Plains contain large blocks of federal lands administered by agencies such as the Bureau of Land Management, Bureau of Reclamation, U.S. Forest Service, National Park Service, and others. Federal ownership ranges from about 40 percent of the land area in Colorado to over 85 percent in Nevada. State governments and Indian tribes also have large land holdings in the West. While federal, state, or other agencies manage these lands, timber and minerals are taken periodically under leases or acquisition contracts by private industries. There have been many abuses in managing and exploiting these lands over the past, and reforms are being developed. Federal policies for hard-rock mining, especially, have been at odds with sound minerals conservation and environmental protection. Much of the present situation stems from the 1872 mining law, which Congress enacted on the basis that it would encourage settlement of the West. Under this law, anyone identifying a parcel of federal land that may have socalled “hard rock” minerals—gold, copper, silver, platinum, and so forth—can apply to “patent” a claim and, when approved, can acquire the mineral rights for the ridiculously low sum of $2.50 to $5 per acre. In 1994, one company in Nevada paid $9,765 for an area that later proved to have a gross mineral value of over $10 billion. According to one report, between May 1994 and September 1996, land with almost $16 billion in minerals was acquired by industry for $19,190. This outdated law has encouraged industry to wreak havoc on the landscape in many western states. Since this law had no environmental restoration requirement, many mining companies opened mines and later abandoned them without proper reclamation. Abandoned mines were susceptible to erosion and acid mine drainage, resulting in contamination of nearby streams. The Western Governors Association estimates that more than 3,000 miles of streams have been polluted by hard-rock mining wastes. The 1872 mining law also lacked any provision for payment of royalties on minerals extracted, unlike other minerals taken from federal lands. Attempts to amend this old law have proved to be futile; the hardrock mining industry has successfully defeated every effort to bring it up to date. Consequently, many abandoned mines still await reclamation and watercourses remain polluted. Environmentally sound use of public lands is also an issue in cattle and sheep grazing in the American West where private ranchers are paying grazing fees averaging $1.20 per cow, or about the same for five sheep per month. This compares with $11.20 per animal per month on private lands. According to Green Scissors, a coalition organization of environmentalists and free-market economists, grazing fees cover only about onethird of the $77 million cost to manage the federal program. Subsidized grazing covers over 270 million acres of federal land in the western states, an area the size of California and Texas combined. The main concern of range specialists is that the low fees now charged

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on public lands encourage overgrazing, which often leads to denuding of vegetation, loss of topsoil through water and wind erosion, and altered wildlife habitats. Rangelands that reach such a depleted state are often difficult to reclaim. A third area of concern is the proper harvesting of timber and reforestation. The great original forests of America are largely depleted through overharvesting, lack of reforestation, and encroachment of population settlements. Second- and third-growth timber in significant stands is still found in the Southeast and in parts of the upper Midwest. Perhaps the largest reserves of timber are in the Pacific Northwest where timber harvesting continues at a rapid pace. The practice of clear-cutting in the Northwest and elsewhere has come under criticism recently as the effects of this harvesting method are becoming better known. Timber companies point to the difficult logistics in harvesting where only selective cutting is permitted. Environmentalists decry clear-cutting as a method that promotes soil erosion and loss of wildlife habitat. One endangered species, the spotted owl, became the focal point for debates regarding elimination of clear-cutting and other environmental practices of the timber industry. As a result, protective measures are being taken concerning the spotted owl, including reduction in clear-cutting. As discussed earlier, conservation of forests and other large vegetative masses is vital to the absorption of atmospheric CO2 and the generation of oxygen (O2) on regional and global scales. Through selective harvesting and timely replanting, forests can be conserved in a sustainable manner. Achieving sufficient forest resources on a worldwide basis in view of the great pressures to clear the land for population settlements and for wood utilization is a challenge confronting governments around the world, especially the developing nations. One idea in which forestation and energy resources could be harmonized is through the development of “biomass energy farms” consisting of forests that serve as the source of biomass fuels for ethanol refineries or steam-electric power plants. Such energy farms could begin with existing forests and be augmented by forest plantations in such a way as to become self-sustaining. Harvests would not exceed forest plantation growth. Biomass energy complexes of this type could produce fuels or electricity from renewable energy materials while simultaneously conserving forest and other terrestrial resources. INDUSTRIAL POLLUTION CONTROL The energy supply industry, including electric generating plants, mines, and refineries, constitutes a major source of low-level air pollution as well as greenhouse gas emissions. Presently, air pollution control in elec-

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tric power generation is confined to reduction of atmospheric concentrations of particulates, SO2, NOx, and a category termed “air toxics.” Control is being achieved through use of low-sulfur coals, pollution reduction equipment, or both. Control of greenhouse emissions imposes a different challenge. Reductions in emissions may be realized via: (1) curtailment of operations; (2) use of as-yet-unknown pollution control techniques, especially for CO2 removal; (3) accelerated energy conservation efforts that would reduce requirements for electricity and fuel production; and (4) utilization of alternative nonpolluting energy conversion technologies, such as renewable energy resources. To date, the preferred options by the U.S. government have been reduction in energy demand by promoting energy conservation measures and by “emissions trading,” a concept permitted under the proposed global warming treaty. PRIVATE INDUSTRY ROLES IN ENVIRONMENTAL PROTECTION In the free world, the private sector largely owns and manages the majority of natural resources. The private sector is, however, far from monolithic, consisting of countless independent and individual corporations and other business organizations that own countless stores, factories, shops, and other businesses. Every business has some degree of environmental impact, the extent and type of impact depending upon the nature of the business and the degree of environmental control exercised by the business. The point here is that since much of the environmental concerns emanate from activities in the private sector, it is incumbent upon private industry to respond to the challenge of environmental management. After several decades of experience with governmental environmental regulation, private industry has for the most part accommodated the plethora of standards, regulations, pollution control equipment, and array of related activities to its ways of conducting business. According to government reports, the overwhelming majority of businesses in the United States are in compliance with applicable environmental laws and regulations. Nevertheless, government proposals to limit greenhouse gas emissions and particulate concentrations and to regulate numerous additional toxic or otherwise hazardous materials have been viewed by industry as unnecessary and further costly intrusions into its domain. With continued industrial innovation, myriad new products will be developed, many of which will be toxic or hazardous with some potential for injury to employees, customers, or the environment. At present, there are more than two million substances listed as “hazardous” by EPA, and over 700 that are classified as “extremely hazardous.” The lists grow sub-

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stantially each year. As industry develops these new products, it has the duty to provide reasonable assurance concerning their efficacy, safety, and environmental effects. The environmental industry is now a far-flung series of enterprises, consisting of firms performing environmental assessments, designing pollution control systems, providing a variety of products and equipment for pollution abatement, conducting periodic environmental audits for clients, and offering a wide variety of related professional and technical services. Much of this industry emerged over the past three decades as federal Superfund, RCRA, and other legislation was enacted. Over the next several decades, the chief environmental issue facing industry will likely be the troublesome question of how to deal with greenhouse gas emissions in efforts to forestall further global warming and its potentially catastrophic effects. Since the two principal components of greenhouse emissions, carbon dioxide and methane, are derived from combustion of coal and petroleum, industries utilizing fossil fuels will likely become targets for corrective action. Among these industries, coal-burning power plants, automobile manufacturing, and other heavy industries may be especially subject to regulatory control and possible major transformation. These industries may find it necessary to effectuate costly pollution control measures or to switch to environmentally benign energy sources. Such transitions may entail enormous capital investments in new nonpolluting energy sources. There will no doubt be continuing opportunities for the private sector to develop new products and services for environmental protection. Out of the current environmental initiatives at the national and international levels, an environmental ethic seems to be emerging. To date, it has been largely confined to debates and discussions among world governmental officials, major industrial representatives, and environmental advocates. The current globalization movement among the industrialized nations will no doubt add impetus to the development of a global environmental ethic.

8 Toward a Sustainable Global Environment

THE ENVIRONMENTAL GOAL: MEETING HUMAN NEEDS Supporting a worldwide population of perhaps double the present 6 billion is cause for alarm among many social and environmental scientists. Is it possible for mankind to exercise enlightened stewardship regarding global natural resources and to apply appropriate technologies to ensure that within the next five decades 10 to 12 billion people can be fed, housed, clothed, and have a reasonably decent quality of life above the basic subsistence level? Obviously, that is a formidable challenge, especially when considering that a large number of the present world population is already underfed, in poor health, and otherwise poverty-stricken. Ironically, it is in some of these poor nations that the birth rate is the highest. Population growth is occurring in these areas at unsustainable rates. According to the United Nations and the World Commission on Environment and Development, grain production increased from 700 million metric tons in 1950 to over 1.8 billion metric tons in 1986. However, great inequalities in production, distribution, and consumption led to persons in industrialized nations eating 30 to 40 percent more calories than their basic needs, while poor nations received only 90 percent or less of theirs. The United Nations has recommended an average daily food intake of 2,400 calories, with 3,000 calories suggested for persons in cold climates, and around 2,000 calories for those in tropical regions.

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The data on caloric intake in developing nations may be misleading; there are wide variations in food consumption among them. For example, the poorest 40 percent of persons in Kenya receive only about 75 percent of the minimum daily requirements. Over 1 billion people, about 20 percent of the world’s total population, do not get enough food to live productively, and over 800 million receive less than 80 percent of the recommended basic needs. By contrast, persons in prosperous nations of North America, Europe, Japan, and a few others have an average daily food intake of over 3,200 calories. It is not surprising, then, that obesity is becoming a national epidemic in the United States. Availability of safe drinking water and access to sanitation facilities are serious problems in many developing nations. In Afghanistan, more than 95 percent of the population has no access to sanitation facilities. In numerous nations in Africa and Southeast Asia, lack of safe drinking water is evident among 50 to 90 percent of the population groups. With little if any money to buy food, poverty-stricken persons in the poorer developing nations are hard pressed to acquire food from local producers. Landowners often resort to cultivating cash crops such as cotton, coffee, tea, sugar, and tobacco, doing little to alleviate the need for food among the poor. Wealthy landowners sometimes exert pressure on subsistence farmers to sell fertile farms and move onto less desirable lands. Overgrazing and overcultivation of lands in many developing nations are understandable in view of the dire need for food. Optimum agricultural practices are not being followed out of ignorance in some cases and sheer necessity in many others. Consequently, many lands are losing their fertility and becoming useless deserts, often beyond restoration. Desertification is occurring at an alarming rate with about one-third of the earth’s surface threatened. Six million hectares of productive lands are being lost to the desert annually, and another 21 million hectares are already too depleted to be productive. The total land surface of the earth is about 13.1 billion hectares, of which only around 11 percent, or 1.4 billion hectares, are arable. An additional 13 percent may be useful but only at considerable expense and effort. With no pun intended, someone once said, “We are losing ground.” This is literally true in view of the loss each year of approximately 26 billion tons of topsoil to erosion. Greater production and more equitable distribution of food are vital twin goals to sustain the global population. Tragically, most of the world’s hungry today will never live to see any appreciable improvement in the situation. It is doubtful that hunger and disease can be eradicated within the foreseeable future. It is not that the global food supply is inadequate. To the contrary, surpluses frequently exist in the United

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States and other industrialized nations. Among the problems are lack of funds among the poor nations to acquire such foods and grossly inadequate transportation and distribution systems for delivering foodstuffs to needy citizens. Unfortunately, there are frequent incidents involving theft or diversion of foods by corrupt local officials resulting in significant portions of these supplies never reaching their intended recipients. STRATEGIES FOR GLOBAL ENVIRONMENTAL PROTECTION Three broad strategies have been advanced for preserving the natural environment: (1) reducing potential stress by limiting population growth and thereby decreasing mankind’s “footprint” on the environment; (2) regulating pollution at the sources; and (3) increased efficiency in utilizing energy and other resources. Specific strategies that could be positive factors in environmental preservation are suggested below. Atmospheric Resources Protection Earlier discussions dealt with the current emphasis on pollution control by regulating emissions at their origins. This approach is based on the establishment of standards limiting the types and rates of emissions, and vigorous enforcement. Another aspect of this approach is creation of standards for ambient air quality in various regions, such as Class I, II, and III air quality zones, including “nonattainment” areas. Use of ambient environmental standards coupled with regulation of emissions has been quite effective in reducing air and water quality pollution in many regions of the United States. Regulations, however, are subject to change and are often made to reflect improvements in technology and knowledge. The recent tightening of the standards concerning particulate emissions, in which the U.S. Environmental Protection Agency lowered the minimum particle size subject to regulation from 10 microns to 2 microns, was implemented to express concerns over fine particulates inhalation and their contribution to respiratory ailments. In addition to the goal of minimizing air pollution from sources already under government regulation, such as particulates, SO2, NOx, and toxic pollutants, reduction in greenhouse gas emissions is needed on a sustained basis. At present, the chief constituents of greenhouse gases— carbon dioxide and methane—are not subject to government regulation. Placing these pollutants under regulation may be difficult to achieve, politically as well as technologically, in view of the entrenched industry interests that will seek to continue utilization of fossil-fueled power plants, refineries, and automobiles. Nevertheless, timetables, incentives, and disincentives can be negotiated such that pollution reduction goals

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of industrialized nations and objectives of an international global warming treaty can be achieved without overly disrupting the energy industry. Concurrently with efforts to reduce greenhouse gas emissions, reforestation is needed to restore global carbon sinks and the oxygen–carbon dioxide balance in the atmosphere. The latter is discussed below. Acid precipitation and ozone depletion are issues requiring continuing vigilance in industrialized nations. Heretofore, acid rain and ozone depletion concerns have been limited largely to portions of the United States, Canada, northern Europe, and some Asian nations. As industrialization accelerates in developing countries, the adverse effects of these pollution sources will become evident unless stringent emissions control measures are implemented. Energy Efficiency Increased efficiency in energy utilization has been proposed by many analysts as an avenue for environmental protection that has been overlooked or underutilized. They point to the vast opportunities for additional energy conservation that might be utilized cost effectively without undermining the global economy. A new energy strategy for environmental protection has been advanced by the U.S. Department of Energy and other federal agencies that calls for, among other things, increased energy conservation. Similar proposals have been made by other groups such as the Energy Foundation. While continued attention is given to energy supply in the government proposal, greater focus is on energy savings. In the past, energy planners stressed the need for increasing supply options with little attention to the end-uses of energy resources. Following the oil crisis of 1973, the U.S. government rushed into place such initiatives as the ill-fated synthetic fuels development program, a national Strategic Petroleum Reserve, expedited licensing for nuclear power plants, and incentives for accelerated oil drilling—all designed to increase energy supply. At the same time, a little-publicized program of federal and state activities was instrumental in fostering energy conservation in homes and businesses that yielded more net available energy than the highly touted supply programs. Equally important, the energy conservation efforts resulted in more beneficial effects on the environment by avoidance of pollution. Economic benefits were also considerable as many businesses and homeowners experienced major savings in outlays for unneeded electricity, fuel oil, and natural gas. Substantial improvements in energy efficiency, while already making impressive gains over the past decade, can be achieved over time with committed efforts and use of state-of-the-art conservation technologies.

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Inherently, two energy conversion systems, the steam cycle used in most power plants and the internal combustion engine in automobiles, are quite inefficient in converting their fuels into useful energy. Electric power plants generally have a thermal efficiency of 30 to 40 percent, and automobiles have an efficiency of around 25 percent. Residential and commercial establishments show a much higher 73 percent, and heavy industry’s energy efficiency is around 76 percent. Overall, the energy industry in the United States has an energy efficiency of 44.5 percent. These numbers reflect both older energy facilities still in operation and newer, more efficient ones. Another method for stretching energy reserves and utilizing energy more fully is development of multipurpose energy facilities. For example, a typical coal-fired power plant must discharge to the environment up to 60 percent of the heat from its boilers because of the inherent low thermal efficiency of the steam cycle used in electrical generation. Expensive systems are required to cool the water before it can be released to the environment. However, this hot water or steam may be piped to a nearby energy-intensive industry or a residential neighborhood resulting in enormous energy savings and other advantages to both producer and enduser. Systems in which the electricity and heat from a power plant or other large energy source are utilized in multiple end-uses are referred to as cogeneration. Electric utilities and other energy-intensive industries have made increasing use of cogeneration systems in recent years. Only a small fraction of the potential of cogeneration, however, is believed to have occurred to date. The new energy efficiency ethic will require that energy industries employ multiple-use opportunities whenever possible. Annual energy consumption on a worldwide basis is expected to grow from about 380 quads in 1997 to some 505 quads in the year 2010, a 33 percent increase. Meanwhile, according to various forecasts, the global population is estimated to increase by 27 to 36 percent during the same time period. Without effective energy conservation measures, an enormous number of new energy facilities will be required, possibly taxing the world’s fuel supply as well as adding substantially to greenhouse gas and other emissions. Energy efficiency analysts contend that major reductions in per capita energy use are both possible and necessary in industrialized nations. They point to the differences in energy consumption between the United States and Japan as examples of how cultural and technological practices can play major roles in energy use. The United States has a per capita electric energy consumption of almost 13,000 kilowatt-hours per person annually, whereas Japan’s electricity use is approximately 7,700 kwh per person each year, slightly more than one-half that of the United States. Notwithstanding its lower energy con-

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sumption, Japan produced more Gross Domestic Product per capita than the United States in 1997: $35,906 in GDP per person in Japan versus $31,230 for the United States. Developing nations will require massive increases in energy capabilities over the next few decades with growth in economic development. Per capita energy use in these nations at present is quite low, averaging only around 10 percent of that of the United States. If energy usage in developing nations increases proportionally to their populations, however, major increases in greenhouse gas emissions can be expected. By implementing energy efficiency efforts while or before economic development projects are carried out, excessive energy use can be avoided and pollution minimized while much-needed jobs and other economic and social benefits can be attained. Economic development need not be sacrificed at the expense of energy resources. Two of the world’s most populous nations, China and India, have large coal deposits, which are expected to be used increasingly in their energy and economic development efforts. These countries are now considered to be developing nations and have been exempted from limitations on greenhouse gas emissions as proposed in the international global warming treaty. Since emissions from the expected growing number of coalfired power plants are likely to be considerable, these nations should be encouraged to participate fully in the global warming treaty. A third area of concern in energy efficiency is, of course, the automobile. The inherent inefficiency of the internal combustion engine and the noxious exhausts of such vehicles are twin reasons for developing alternative automotive power systems. In the short term, say the next 20 years, the internal combustion vehicle will probably continue to dominate the transportation industry. During this period, efforts to improve fuel efficiency and to reduce exhaust emissions will be continuing objectives. There are persistent rumors out of Detroit that fuel usage of 100 miles per gallon with virtually zero emissions is achievable within the foreseeable future. Automakers should be encouraged to pursue these goals. There are, however, compelling reasons to also pursue alternative power systems for automobiles such as electric, hydrogen-powered, and hybrid systems. Promotion of energy efficiency, reduction of atmospheric emissions, and national energy security are among these reasons. Preservation of Terrestrial Resources The growing problems associated with desertification and deforestation, discussed earlier, are often multinational in scope and should require cooperative actions on bilateral and multilateral bases. Losses of topsoil, vegetation, and wildlife habitats are altering underground and

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surface water supplies, increasing siltation of rivers and lakes, and, most importantly, reducing the amount of arable and grazing lands for food production and forestation. Concerted efforts by soil scientists and ecologists will be required to assay lands that are still productive but that may be threatened with desertification, and to devise means to conserve topsoils and vegetation. Wherever possible, these efforts should be performed under sponsorship of the host nation. However, in some instances, it may be necessary to establish multinational coalitions to accomplish these tasks. Restoration of major forests to productive growth will be a challenging task when considering the pressures in some developing nations to remove trees for timber production, population settlements, farms, and urban growth. Reduction of greenhouse gas emissions is, of course, a major initiative in regulation of global warming. However, reforestation is another major facet of the atmospheric resources protection effort. Population Growth Regulation Another strategy is the highly controversial and difficult matter of population control. At present, nearly three-fourths of the world’s citizens reside in developing nations where high birth rates are common. Some Third World countries have attempted population growth control through information and education, provision of contraceptives, free abortions, and, in some cases such as China, outright forced abortions. To date, some of these programs have achieved a measure of success. Birth rates have dropped slightly in some developing nations, but not sufficiently to stabilize overall population growth. Contrary to the intentions of some governments, birth rates have actually risen with growing personal incomes. The so-called “demographic transition,” in which birth rates decline with rising incomes, has applied in most industrialized nations, but apparently is not always applicable in Third World nations. Population growth is guided by cultural and religious traditions, socioeconomic conditions, social and familial influences, and government fiat. In nations with large and fast-growing populations, where limitations on population growth are most needed, and where domestic resources may be strained to cope with such growth, options for population growth control include increased contraception and supervised abortions. The latter is being done in China pursuant to its “one-child per family” policy, but is likely to be highly controversial in other nations. Providing public information and education regarding contraception will be a major undertaking, requiring continuing efforts by public health officials in the host nations.

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Utilization of Renewable Energy Resources Renewable energy technologies, discussed in Part II, are becoming increasingly cost-competitive and should make growing contributions to the world’s energy supply in the future. Renewable energy resources vary widely in extent and utility among the biomes of the world. Some regions enjoy abundant sunlight while others possess extensive wind or biomass resources. Geothermal and hydropower resources are highly site-specific but may be excellent energy providers under proper local conditions. Wind and solar energy systems are free of atmospheric or other pollutants, while geothermal and biomass systems may emit varying degrees of air pollutants, depending upon local conditions and the systems employed. All five types of renewable energy technologies utilize inexhaustible resources to produce electricity or energy fuels. Most developing nations as well as industrialized countries are endowed with one or more renewable energy resources that are largely unutilized. Properly exploited, these resources can supply a large portion of the energy needs of developing and industrialized nations. Critics point to the fact that solar and wind energy systems for generating electricity are not “dispatchable”; that is, they cannot always be turned on exactly when desired. Rather, they can operate only when their primary energy source is available. In the case of solar systems, energy is available only during daylight hours, and wind systems can only generate electricity when sufficient windflows occur. However, solar and wind systems can be integrated with “base-load” power plants to assure continuous electric power supply to the grids. Moreover, new energy storage technologies are being developed that promise to make more effective use of wind and solar system capabilities. Renewable energy systems have the great advantage of “modularity” in that they can be developed in modules and sized to coincide with local or regional energy demands, whereas the economies of scale of most fossil-fueled power plants dictate large units. The somewhat larger capital costs of wind or solar energy modules are offset by the absence of fuel costs. The economics of biomass, geothermal, and hydropower projects are highly site-specific due to the great variability in energy resources, energy conversion processes, and other conditions at project sites. Expansion of the world’s energy supply system will likely entail the gradual phaseout of conventional fossil-fuel facilities and increased reliance on nuclear energy, multipurpose energy projects, and renewable energy technologies. The transition process, however, may be cumbersome in most democratic nations as privatization and public power interests struggle for dominance. In the United States where investorowned utilities dominate the electric power industry, privatization and electric utility restructuring efforts may resist rapid deployment

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of renewable energy projects except where clear-cut cost advantages and/or tax incentives can be shown. As a means of encouraging renewable energy technology utilization, the federal government should restore previous inducements such as investment tax credits and production incentives as mentioned in Part II. Over a period of perhaps two to three decades, renewable energy resources can make significant contributions toward a cleaner atmosphere, improved land utilization, and stretching the world’s finite fossil fuel resources.

PART IV Capitalism in Transition

9 Convergence and Synergy

CONVERGING FORCES IN THIRD MILLENNIUM CAPITALISM The seemingly disparate and independent topics of energy, environment, and economic growth are expected to become increasingly convergent during the Third Millennium. Capitalism will likely experience new challenges from various forms of collectivism and autocracies as the industrialized nations reach socioeconomic plateaus and Third World nations undergo explosive population growth and experience immense demands for economic and social security. Capitalistic enterprises, when mobilized appropriately, have shown their capacity to create and respond to emerging markets. However, business involvement in social issues has been generally spotty and often confined to actions designed to minimize business tax burdens or other impediments to profits. On the other hand, some corporations have viewed their participation in social concerns differently; they may offer services or money out of purely altruistic motives or they may perceive such actions as enhancing their public image. More importantly in the long run, corporations may become engaged increasingly in provision of social services on a for-profit basis. To date, however, corporate contributions to larger social needs have been at best tenuous and fragmented. Is capitalism capable and ready to address the challenges of the next millennium in view of its current narrow focus on short-term financial gains and its lack of long-range humanitarian goals? Will the enormity of

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global needs overwhelm the private sector and usher in a renewed emphasis on public approaches to meeting social and environmental needs? Some of these same questions can be raised with respect to the public sector. While governments ostensibly have certain welfare responsibilities, where do these duties begin and end? In the socioeconomic arena, some public ventures have been highly successful in accomplishing objectives that might have otherwise been difficult under private ownership. For instance, the vast hydroelectric power systems of the Bonneville Power Administration along the Columbia River system or the Tennessee Valley Authority have provided lowcost electricity, flood control, and associated economic developments over large multistate territories that would have been nearly impossible to develop under private corporate auspices. Of course, exercise of the right of eminent domain by these government agencies in land takeovers was a major factor in these developments. Other examples of successful public sector ventures include the Amtrak railroad passenger system, the U.S. Postal Service, and the national aerospace program. While these are publicly sponsored enterprises, much of the accomplishments are attributable to the expertise provided by private corporations serving as contractors to government agencies. These ventures were established by Congress in recognition of a national need that transcended the business market and that required collaboration by competent private sector participants and government agencies. In these cases, there was a melding of the public and private interests that mobilized expertise and resources in the private sector and applied them in achieving national objectives. Convergence denotes the coming together of physical things as well as human ideas. In our highly specialized society, opportunities for discussion and resolution of issues are often hindered by sometimes arbitrary divisions of specialized labor among occupations and organizations. Consequently, multifaceted societal issues are often addressed “in a vacuum” with a narrow focus and without consideration of the spillover and downstream effects of options offered for their resolution. This problem has been long recognized in industry where interdisciplinary task groups are often formed to effectuate communications and integrate all relevant factors into product development. Of course, private industry has the great advantage of an autocratic hierarchy permitting top management to order such cross-cutting efforts. Holistic approaches to problem solving in private industry are becoming widespread although these methods are often avoided as being too costly or time-consuming. In the public sector, fragmentation of efforts is still pervasive with government agencies usually focused on narrow bureaucratic objectives. Some governments, however, have devised means to correlate related efforts among different agencies and to collaborate with the private sector in addressing social and other problems.

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Capitalism will be a focal point for the convergence of the public and private interests in addressing world needs. There will be other focal points as well: Governments at all levels will have major roles in providing frameworks and incentives for private initiatives, in assuring fairness in private sector activities, in offering basic public protection, and in providing services for the indigent. If the private sector is to become a principal avenue for meeting global needs, its concepts of markets must be broadened to encompass humanitarian as well as purely economic objectives. This will require new thinking concerning long-range corporate strategies and a departure from the emphasis on next quarter’s earnings, share prices, and treatment of employees as expendable factors of production. Convergence of various economic and other societal elements will occur at an increasing rate in the century ahead. These converging elements will have far-reaching impacts on corporate affairs and out of these will evolve some new forms of private sector initiatives. Increasingly, publicprivate consortia will become important approaches to address issues and development goals that may be beyond the purview and financial resources of individual organizations. Multicorporate alliances, joint ventures, and other business and governmental arrangements will be required for addressing complex development ventures or social services that were previously offered only by government agencies. There are other areas of convergence that will effect the private sector, for better or worse. In either event, in the long run, they may be shaped into opportunities for gain by business and industry. Convergence and Integration of National Economies The advent of NAFTA, the European Union, and other multinational alliances has opened a bewildering array of marketing opportunities as well as economic problems. These alliances are predicted by some to lead to establishment of a truly global economy, replacing national economies through integration of currencies, abolition of trade tariffs, and equalization of economic and commercial policies. The ramifications of an emerging global economy are truly astounding and not without cause for concern. NAFTA, for instance, involves removal of trade barriers among Canada, Mexico, and the United States. During the extensive debates prior to effectuation of NAFTA, well-known industrialist and former presidential candidate Ross Perot voiced his objections, stating that (if the new accord were passed)—“there would be a great sucking sound” (of jobs and money heading south out of the United States). Early indications are that this prediction may become reality: The new policy has to date displaced thousands of American jobs due to growth in lower-cost imports from

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Mexico where wages rates are frequently one-tenth of American wages for comparable work. This disparity is made quite clear when comparing wages on each side of the Mexican-American border at the Rio Grande River. U.S. workers typically earn around $10 per hour, whereas their Mexican counterparts earn some $1.25 per hour for similar work. The textile industry of North Carolina and South Carolina has been seriously affected by the maquiladora industries that have sprung up on the Mexican side of the U.S. border, mostly since the advent of NAFTA. During the period 1995–1998, textile employment in the Carolinas dropped from 108,900 to 70,900, according to Chuck Hayes, chairman of the Guilford Corporation, a leading textile producer. The maquila industries of Mexico have blossomed as a result of the provisions of NAFTA and special incentives of the Mexican government, which have included duty-free importation of foreign raw materials and components that are fabricated in Mexico into final products for export to the United States. To date, most of the maquila production has been related to the textile, electronics, and automotive parts industries. Economic theory holds that dissimilar wages and prices for comparable work will converge over time. This “one-price principle” usually results in lower wages or prices for the higher-priced article, not in higher income or prices for the cheaper product. Applying this principle to the NAFTA wage disparities, it is likely that the wage rate for the higher-paid worker in the United States will come down, but the lower-wage worker in Mexico cannot expect any appreciable raise in pay. Convergence in wages on a more equitable basis is more likely within a given geographiceconomic area with similar cultures, labor markets, and economic activities. Therefore, at least in the short run, a continuation of downward pressure on American wage rates can be expected for much of the bilateral trade involving these two nations. Integration of the economies of European nations took a large forward movement with establishment of a common currency, the euro, in 1999. However, the euro currency will not be placed into full circulation until 2002. To a significant extent, the economies of these nations are already integrated. Joint industrial-national ventures, such as the development of supersonic and jumbo jet aircraft by France and Britain, will intensify in efforts to compete in the global aerospace and other key industries. With increased opportunities for collective action, industries in the European Union will present formidable competition to other nations of the industrialized world. To date, multinational joint ventures in other regions are just beginning to evolve. It seems likely that some of the major Asian countries, such as China, Japan, and Taiwan, will eventually develop alliances in order to compete vigorously in world markets. Multinational alliances

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across continental boundaries are also likely over the next decade. Brazil, Argentina, and other Latin American countries may also be candidates for multilateral industrial alliances. Convergence in Technological Innovation Over the past 50 years, we have witnessed the introduction of innovations on an unprecedented scale. The staggering array of new products, processes, and techniques flowing from the research laboratory (or garage workshop) into mainstream society defies description. Innovation has spawned countless new industries, created millions of new jobs, and provided great wealth for innovators and investors not to mention the convenience, labor-saving, and productive benefits of these innovations to society. Technological innovations in industrial nations are becoming integrated in ways that may provide synergistic advances in society. For example, television, digital computers, and telephony were developed and have been employed as independent, free-standing innovations. Later, the vast Internet system was put in place. In the near future, integrated computing-communications systems are expected to revolutionize the applications of these three technologies. Television sets will be integrated with computers and telephones and linked with the Internet and other communications media to provide a wide array of information, entertainment, and educational services—all in one unit. Other technologies may tend to converge as their applications evolve over time. Electric power generation is finding increased use of so-called “combined cycle” systems in which steam cycle turbines are integrated with gas turbines to enhance fuel efficiency and power output. In the near future, we will witness the introduction of hybrid fuel/power systems in automobiles, employing various combinations of storage batteries, fuel cells, and high-mileage internal combustion engines. Convergence of relevant technologies in these and numerous other applications may bring about higher end-use efficiencies and other synergistic benefits that may not be attainable in using the individual technologies independently. Perhaps the most important innovations expected in the New Era will be in the arena of health care, encompassing preventive and therapeutic drugs as well as an array of surgical and physical therapy techniques. These developments will continue to make great contributions to life extension and general health of the world population. However, as is the case in other aspects of society, the availability of such innovations and services will not be uniform around the globe.

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Convergence of Cultures The great expansion of population throughout the world during the past century brought many formerly separated cultures into contact, often with unfortunate results. The clash of cultures has often spawned hostilities that are still extant today in many parts of the world. Among the most persecuted have been the indigenous peoples in virtually every region. In the United States, there are some 3 million or more American Indians (or Native Americans, as they are often called) who are at the very bottom of the income ladder. Similarly, the indigenous peoples of Brazil, Mexico, China, Philippines, and other nations are generally desperately poor and subject to political oppression by their “dominant” societies. Notwithstanding the low economic standing and oppressed political status of indigenous peoples, there has been some degree of convergence among them within their host nations and across national lines as evidenced by a growing recognition of native cultures and the formation of international organizations for the purpose of enhancing communications and development of coalitions to combat political oppression and to seek ways toward self-determination and economic advancement. By and large, assimilation of cultures is occurring in industrialized nations on a large scale and generally without major conflicts. While cultural convergence will continue on a large scale in many regions over the next century, there are indications of an emerging opposite trend, tribalism or divergence of ethnic cultures, that will likely continue concurrently. Examples of divergence are the resistance to assimilation shown by many American Indians and the resurgence of the reservation system. While more than half of the American Indians have been assimilated into the dominant society, the remainder reside on reservations where they seek to preserve tribal cultures and societal traditions while also endeavoring to develop their economies. Indigenous tribes in Canada have won recent legal battles strengthening their reserve system and self-determination goals. Native citizens of the Chiapas region in Mexico are also gaining some support in their long-standing battles for political recognition and economic progress. Similarly, other indigenous peoples seek opportunities for survival and self-determination within larger, more dominant societies. Differences in ethnic origins, religious beliefs and practices, and lifestyles have been profound among the American peoples for over two centuries. Often referred to as the “melting pot,” the nation has opened its borders to people of every race and origin. Immigration continues with large contingents arriving regularly, especially from Mexico and Asia. With continuation of present trends, Mexican-Americans will comprise the largest non-Anglo ethnic group in America in two to three decades.

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In some cities, such as Denver, cultural celebrations for Spanish-speaking citizens, such as Cinco de Mayo (Mexico’s defeat of the French), have become larger holidays than St. Patrick’s Day or American Independence Day. Convergence of Economic Power A hallmark of capitalism is the convergence and concentration of diffuse sources of capital into focused systems of investment, which may take many avenues in the economy, one of which is the securities market. Here, numerous individual investors direct their capital into specific common ventures in the anticipation of economic gain. Profitable production from such ventures results in broad societal benefits as well as gains for the participants. As discussed earlier, wealth is being concentrated increasingly into a smaller fraction of the American population. Although the number of wealthy persons in the United States has multiplied greatly during the past decade, the distribution of wealth has been far from uniform. The so-called trickle-down concept has simply not worked. Economic power has become more concentrated through monopolistic practices, cartels, corporate takeovers, and manipulation of stock prices. Reductions in taxes on personal income and capital gains taxes have also benefitted wealthy Americans but have not improved the lot of lower and middle income citizens. It can be argued that the economies of scale of many industries are growing and that only large, heavily financed corporations are capable of efficient, profitable production in a competitive global market. A case in point is the shrinking national defense and aerospace industries, which only a few years ago were highly competitive with hundreds of industrial participants. Today, only two major aerospace corporations remain, primarily Boeing-McDonnell-Douglas and Lockheed Martin. Mergers were seen as the solution to financing high-risk, high-cost space and weapons systems within a declining market. In this case, concentration of industrial powers has been accomplished with governmental sanction and due largely to changing national defense needs. The epidemic of corporate takeovers and mergers that began a decade ago continues, and now it has infected the financial as well as other industries on a large scale. In early 1998, three “megamergers” were announced in the financial services sector. These included the merger of Citicorp and Travelers Group in a $70 billion deal, the NationsBankBankAmerica merger involving $59 billion, and the merger of BancOne and First Chicago NBD at $30 billion. These mergers represent the largest on record in the financial industry. The U.S. Public Interest Research Group and some other consumer advocate groups protested that these

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giant consolidations will result in reduced consumer choices and customer services as well as higher fees. The companies involved contend that these transactions will reduce cost and allow the merging firms to cooperate in expanding customer services via joint use of marketing and financial data. To date, the Justice Department has not indicated that it would challenge these mergers on grounds of potential monopoly. Mergers and merger proposals reached record numbers in the United States during 1998, according to federal and trade sources. During 1998, federal antitrust agencies processed roughly 11,000 merger cases. Aside from the financial industry mergers mentioned above, five of the largest industrial mergers entailed outlays or equivalents totaling $274 billion. These included mergers of Exxon and Mobil Corporation ($80 billion), Ameritech and SBC Communications ($62 billion), Bell Atlantic and GTE ($52 billion), AT&T and Telecommunications Inc. ($32 billion), and British Petroleum and Amoco ($48 billion). On the whole, the convergence of economic power via mergers and acquisitions has contributed to a booming stock market even before the national economy experienced a remarkable turnaround beginning in 1995. As a result, there was further concentration of wealth among corporate officers and shareholders while employee wages stagnated. After a long drought, wage rates began to rise slightly during 1998. Convergence of the economic and technological prowess of corporations in joint ventures is often necessary when complex undertakings are launched. The blending of expertise of two or more joint venture partners is seldom easy to accomplish, however, as corporate cultures often clash in implementation. Nevertheless, in the Third Millennium, multicorporate ventures are likely to increase with growing economies of scale and capital requirements. Joint ventures, on a project-by-project basis, may be preferred options for undertaking industrial ventures in developing nations. The risks of political instability, labor unrest, lack of capitalistic traditions, and other potential problems, such as the possibility of outright confiscation or nationalization, in certain developing countries may require superior financial strength afforded by joint venture arrangements. The current “bigness is best” mentality that has characterized the nation’s economic policy and corporate planning for decades may not always be the most cost-effective strategy in the long run. While economies of scale often dictate bigness in some industries, there are limits to this increasing scale of operations after which point diminishing returns are reached. Of course, such limits vary with each industry and each firm. Aside from the cost-reduction or marketing goals that may be achieved in mergers, the economy will not be served if increasing concentrations of financial power induce anticompetitive activities. Increased vigilance by governmental antitrust agencies is called for.

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The rise of multinational corporations presents growing problems for antitrust regulatory agencies, which have limited jurisdiction regarding foreign operation of domestic industries. Since globalism as presently defined promotes the concept of “footloose” industries that are encouraged to locate their production facilities and concentrate their markets where they have economic advantage, the notion of homegrown industries loses much of its meaning in terms of domestic loyalty. Multinationals are becoming truly “international” in that they may hold allegiance to many nations and, indeed, may exert considerable political influence in more than one nation. However, this works both ways: there may be growing tendencies among multinationals to become truly footloose with little interest in making long-term commitments to any nation. At the international level, there is at present no governmental institution that is authorized or equipped to exert oversight or regulatory powers over multinational corporations. Of course, to the laissez-faire capitalists, this is as it should be. They contend that capital should be free to move where it will be afforded the greatest opportunity for gain and without political interference. To those concerned about the importance of national sovereignty or security, the question of appropriate governmental regulation at the national and international levels is more complex but compelling. Convergence of Markets Just as convergences of technologies, occupations, labor markets, and cultures are expected in the decades ahead, so is convergence occurring in the marketplace. Consumer demand led to the integration of copying, facsimile, scanning, and printing functions into one or two office machines instead of separate machines for each function. Savings of office space for individual machines as well as cost savings and convenience of operation were motivating factors in combining these functions. With the advent a few decades ago of the shopping center came the decline of the individual retail store in several segments of consumer markets. Instead of the time-consuming shopping in times past at small dispersed stores, shoppers now make many of their purchases at regional shopping centers or megamalls where small specialty stores are clustered together and where larger supermarkets or department stores carry a wide variety of consumer goods. Convenience and competitive prices provide incentives for the consumer, leading to the economic success of shopping centers. Convergence has also come to pass in the financial markets. Over the past few decades, the mutual funds industry has grown tremendously, reflecting the popularity of this method for many investors. A huge array of mutual funds is available today, each with its own financial risk and

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growth objectives. By pooling stocks of individual corporations into a common investment fund with specified goals and investment strategy, investors may enjoy several advantages as compared with investing in shares of individual corporations. First, it is a convenient and less timeconsuming method of selecting investments. Second, depending on the mutual fund selected, financial risks may be reduced since risks are spread over numerous individual corporate shares. Third, most mutual funds are managed by highly experienced financial specialists who are diligent in monitoring the value of funds. Mutual funds will no doubt continue to be popular as an investing medium. As mentioned earlier, the European Union represents a potentially strong alliance of both consumer markets and coordinated production, offering increased competition for nations outside the Union. The nascent North American Free Trade Agreement (NAFTA) encompassing Canada, Mexico, and the United States likewise is an illustration of the growing trend toward market convergence at the multination regional level. Convergence of Adverse Environmental Effects No longer are simply the localized effects of pollution the main concern in environmental protection. As discussed earlier, air pollution in the form of acid rain, ozone depletion, and greenhouse gas emissions are spreading far beyond points of origin and now threaten the atmospheric quality of the entire planet. Environmental convergence occurs when seemingly independent environmental pollutants or intrusions combine to produce adverse effects within larger aspects of the biosphere. Convergence of separate environmental insults can have synergistic effects such as occurs when increasing carbon dioxide emissions combine with reduction of natural carbon absorption by forests to increase global atmospheric temperatures, resulting in increased melting of glaciers, inundation of shorelines, and widespread climate change. These effects may combine to endanger human health as well as natural resources. This is already occurring in densely populated cities such as Mexico City where increasing emissions from leaded gasoline-fueled vehicles have been responsible for elevated lead levels in many children, reducing mental capacities in numerous cases. Air pollution problems in Denver, Houston, Los Angeles, and other fast-growing cities are well known and are being addressed aggressively but at significant cost in terms of higher fuel prices and restrictions on certain activities such as wood burning. Environmental effects can be exacerbated by natural phenomena or human activity that may interact under certain conditions. One recent example is the massive forest fires that devastated several southeast Asian

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countries in 1997. Timber harvesting and burning of wood waste became the source of forest fires and a thick pall of smoke that covered a vast region. Drought conditions in the forests, coupled with a stagnant air mass over the area, prevented quick fire suppression and dispersion of the smoke. As a result, thousands of people contracted respiratory illnesses, and several hundred died. In the American West, hundreds of miles of streams have been polluted by acids from abandoned mining operations resulting in decimation of native fisheries. Moreover, mine wastes have destroyed vegetation and wildlife habitat. Restoration of these areas is expected to be costly and time-consuming. Convergence of Political-Economic Systems A pronounced trend toward capitalism among many nations has been evident during the past decade. The dissolution of the former Soviet Union and its replacement of communism with a form of free enterprise was perhaps the most notable of these. A shift toward reduced governmental domination of the economy was seen in Britain with the privatization of many industries. In Sweden, tax reductions on industry were implemented as one of several measures to foster expansion of private enterprise and to decrease the burden of “welfare statism.” Nations with primarily capitalistic economies (the United States, Germany, Japan, Taiwan, South Korea, among others) have experienced average economic growth over the past two decades far surpassing most countries that are primarily socialistic. Central governmental planning, a tenet of socialism, has declined sharply in many countries, being replaced by privatization in many cases. Even in China, most of the nation’s state-owned industries are being privatized in the interests of economic efficiency. Not all elements of central planning have been terminated, however. Monetary systems are still unified and regulated even in capitalistic nations. The demise of central planning usually is accompanied by increased privatization, thereby transferring economic decision making to individual private businesses. A Russian economist, Ira Lieberman, once offered a “convergence hypothesis,” stating that capitalistic economies will become increasingly socialistic, while centralized socialism will become more reliant on market forces. While this could be the case over the long run, the recent evidence is that socialism is increasingly converging with and giving way to capitalism. In view of the swings in political and economic thought over the past three centuries, it is possible that major elements of capitalism and socialism could converge and become integrated to a considerable degree.

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SYNERGISM IN CAPITALISM The cumulative effects of the interactions of two or more elements sometimes are greater than the sum of the individual elements. Known as synergism, this effect can occur in chemical reactions or in various physical processes. Synergism also occurs in human interactions such as corporate capitalism. By combining the right mix of labor and capital in an advantageous environment, innovation and economic progress can be attained that may not otherwise be possible. Synergistic processes are not, however, easily accounted for in classical economics, since the combining of economic elements often is qualitative, not quantitative in nature. Corporate management is a case in point. While we might deduce, for example, that increasing the compensation of top corporate officials might result in increased productivity and profits, it is often difficult to correlate the relationship of management compensation and company profitability. There are usually other important elements that might bear equally or more heavily than management acumen on profits, namely, workforce productivity, effectiveness of marketing, and product innovation. However, it is possible that changes in one variable, such as management, may bring about a beneficial synergistic effect. The key to economic progress within a company is not necessarily the strength of any one factor of production; rather, it is the favorable interaction of all factors. Synergism can also result from the merger of businesses. One of the motivations for mergers is the prospect for greater market share that might ensue from combining the technologies or product lines of two or more companies. Mergers often bear risks of failure, especially if the “chemistry” between the merging organizations is incompatible. Chemistry is generally defined as intangible elements such as management style and philosophy, worker practices, and other policies that have a bearing on productivity and labor-management relations. Merger of business organizations can exhibit favorable synergism when the proper combinations of the factors of production as well as the intangible “x factor” (synergistic compatibility) are present. Countless successful mergers and acquisitions of American companies in recent years attest to the beneficial results of synergism. Continuing growth in capital requirements for creation of new manufacturing, energy production, agriculture, and other industries will probably entail complex new arrangements for financing and corporate management. Increasing economies of scale for some industries will dictate greater use of joint ventures and modified corporate structures as means of spreading the risks and asserting adequate management control. Synergism may be achieved in many of these new ventures when

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visionary corporate leadership is coupled with enlightened workermanagement relations to provide continuing motivation and prospects for rewards. Economic development is often linked to synergistic processes that occur among local industries. Examples include the famed Silicon Valley near San Jose, California, where high-technology industries have mushroomed over the past three decades. Many of these computer-based and electronics firms were started on a shoestring by technical entrepreneurs who were employees of other firms but had ideas for innovation that they could not implement in their former firms. Similar high-technology developments are underway in Denver, Austin, Research Triangle, North Carolina, Boston, and other cities where industry- and university-based research and development and other supportive business functions are readily available. The cross-fertilization of ideas that occurs in these environments has spawned many successful industries. Development of industrial complexes or high-technology centers seems to have several common characteristics. First, they usually involve a “critical mass,” a certain minimum number of entrepreneurs who may be competitors or in dissimilar businesses and who have beneficial professional or business interactions among neighboring firms. Second, the centers have ties to one or more local research-oriented universities that foster continuing education and innovation. Third, industries developed in these areas are “footloose” in that they have no requirements for raw materials or minerals that tie them to a specific site; rather, their principal requirements are for highly skilled employees and favorable business and living climates. Synergism often occurs when a favorable environment for innovation is present. What are the essential ingredients to foster synergistic processes in capitalistic organizations? Business economists, more so than classical economists, recognize that synergism often takes place in a given business and provides impetus to its success. However, there are no widely accepted quantitative indicators that attempt to evaluate the presence of synergism. Industrial psychologists and industrial engineers have attempted to apply the “x factor” in such functions as design of business organizations, operations research, and productivity analysis. But these analyses ultimately become highly specific as to a particular organization; they are difficult to generalize as applicable to all businesses. The x factor is almost like the proverbial “black box”; its functions are indeed real, but we don’t know exactly what it looks like! It is known, however, that synergism occurs when the x factor is palpable in an organization. Often, it centers around a favorable change in the general climate of the working environment, brought about by perceptions of employees that management is genuinely interested in their personal worth and their contributions to the business. The widely pro-

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moted concept of “management by walking around” appears to have much merit in promoting this kind of perception among employees. The work team concept is another technique advocated by many firms. This approach has been successful where complex interactions in product development and manufacturing are necessary among workers. By clustering workers into teams that have interrelated functions, productivity and teamwork is often enhanced. In the United States, various organizational structures have been attempted employing the team concept. These include the Type X organization and the Japanese Type Q concept as well as “quality circles,” all of which are variants of the team approach. Many of these have been quite successful. The utilization of semi-independent corporate subsidiaries or divisions is still another approach to enhancing the x factor. In some cases, corporate structures become complex and unwieldy to the point that they are virtually unmanageable. The span of control may become too broad and the layers of bureaucratic supervision become too numerous to permit orderly and timely management. By breaking the corporation into smaller units, management can often be made more effective and productivity can likewise be increased. This is particularly effective when employees of each operating division are made to feel more relevant to the success of the business. Decentralization of business operations is one way in which synergism might be enhanced. Nevertheless, decentralization is not an obvious answer for all industries; the type of industry, characteristics of the workforce, and other factors will dictate the extent to which business functions should be decentralized. Synergistic benefits can be achieved regardless of organization size; it is not the size that counts. Rather, it is the quality of the working environment that matters. Under favorable conditions, synergistic forces will work to enhance the dynamism of capitalistic economies. In large measure, synergism is the product of the operating environments of individual companies that have favorable workforce morale as well as enlightened management. The results are innovation and enhanced productivity. Consumers can both benefit from and contribute to synergism in the economy as they develop confidence and trust in the collective actions of the private sector and government.

10 Energy, Environment, and Economic Growth

ECONOMIC GROWTH: DEPENDENCE ON CAPITALISM AND ENERGY Our main thesis is that capitalism will continue to be the principal economic system for furthering human welfare in industrialized nations, and possibly in developing countries as well. Despite its weaknesses and abuses, capitalism is likely to be the instrument by which economic and social progress is achieved in partnership with democratic governments. A secondary theme is that economic growth in the Third Millennium must be linked more closely with enlightened environmental protection and energy utilization. This applies to emerging nations as well as the industrialized societies that already are heavily engaged in these efforts. Economic development during the Third Millennium will be highly dependent upon enlightened capitalism to bring about rising employment and incomes as well as socioeconomic equity. Economic growth is needed to sustain expanding populations, especially in Third World nations where populations are increasing most rapidly and where enhanced standards of living are sorely needed. All too often in recent times, economic development has been viewed as anathema to environmental quality or vice versa. Energy production, vital to economic development, has likewise been decried as a major source of environmental degradation, often with justification. These views are becoming obsolete: new energy systems and pollution control measures, coupled with effective land use planning and

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natural resource conservation, can support greatly expanded economic development with minimal adverse environmental impacts. However, this potential has not been realized. Hopefully, new attitudes in the private sector and enlightened public policies will provide for appropriate levels of economic growth utilizing state-of-the-art energy production and conservation systems. Economic growth will continue to be energy-intensive although the forms of energy production are expected to gradually shift from conventional fossil-based systems to renewable and less-damaging fossil fuel options. Classical economists usually consider energy production and utilization as a “given” in economic analysis and forecasting. Energy is simply one of many elements supporting economic activity, in their view. This view is anachronistic and simplistic: industry in industrialized nations is dependent increasingly on reliable and economic energy supplies in several forms: electricity, natural gas, crude oil, and various petroleum fuels. Global petroleum resources, while presently adequate, are finite and are increasingly in the hands of foreign suppliers. The lessons of the OPEC oil crisis of 1973 should remind industrialists and national planners that there are risks to national security when excessive dependence on foreign energy sources occurs. At present, many European nations, Japan, and the United States continue to be highly vulnerable to arbitrary cutoffs of petroleum supplies by foreign producers. Environmental quality has been another domain that has been largely overlooked by classic economists. They often treat the subject as an “externality” in economic analysis since environmental issues are often nonquantifiable in monetary terms and are subject to highly subjective judgments. While attempts to quantify the purely economic aspects of environmental issues are often fraught with a wide range of opinion and thus are subject to criticism, there is a growing body of acceptable knowledge concerning the costs and societal impacts of environmental degradation. In view of the burgeoning environmental challenge posed by global population growth, industrialization, and urbanization, it behooves global leaders in industry and government to develop policies and systems that will provide for ecologically acceptable economic development. ENERGY CONSERVATION MANDATE In industrialized nations with their high per capita energy consumption, energy conservation must become institutionalized to the point that per capita energy use can be reduced substantially without negatively impacting economic output. The present consumption of electric energy

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in the United States of 12,700 kwh per capita per year—the highest in the world—can be reduced, perhaps by one-third over time, approaching the per capita consumption in Japan of 7,700 kwh year or the 6,200 kwh year among the nations of the European Union. Through energy conservation and employment of environmentally benign energy resources, world reliance on fossil fuels can be greatly reduced during the next century. Consequently, significant reductions in greenhouse gas emissions can be achieved without sacrificing essential energy supplies. However, this view is actively opposed by entrenched fossil fuel advocates in the electric utilities, automotive, petroleum, and coal mining industries, which could suffer substantial revenue losses owing to aggressive energy conservation and a rapid shift to renewable energy technologies. Fossil fuel interests have been among the most vocal opponents to the global greenhouse gas reduction treaty. Their substantial political influence is seen in the lack of action on the proposed treaty by the U.S. Senate. Energy conservation will not necessarily place limits on economic growth. The American Council for an Energy-Efficient Economy estimates that energy efficiency improvements consistent with an attainable 2.4 percent annual reduction in national energy intensity could create 1.1 million new jobs in the United States by 2010. The Council further notes that by shifting economic activity away from energy supply and by saving consumers and businesses money that will be reinvested in the economy, energy efficiency improvements will result in a net increase in employment and personal income as well as enhancing competitiveness in global markets. The 2.4 percent annual reduction in energy efficiency appears a bit high given the conservation measures that have already taken place over the past two decades. Nevertheless, a serious national commitment to energy conservation can no doubt continue to provide widespread economic and environmental benefits. ENERGY REQUIREMENTS IN DEVELOPING NATIONS A different situation exists in Third World nations. Energy requirements in developing nations will grow significantly with increased industrialization and mechanization of agriculture. At present, developing nations are becoming more dependent on petroleum, most of which is imported. Per capita petroleum use in developing countries increased from 0.25 metric tons per person annually in 1978 to 0.3 metric tons predicted for 1998, quite a low figure reflecting the primitive state of economic development. By comparison, U.S. oil consumption per capita has declined slightly, from 3.0 metric tons in 1978 to 2.5 MT in 1998, still more than

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8 times higher than Third World countries. European countries consumed an average of 1.25 MT during the same period, one-half the rate for America. With expanded economic development in Third World countries, energy consumption will be increased significantly, but not necessarily to the extent that the fourfold to ninefold difference between these nations and the United States or Europe would suggest. With conscientous use of conservation practices and with appropriate application of conventional and renewable energy technologies, increased energy consumption in Third World nations of perhaps threefold would probably suffice over time. Even this could be cause for alarm by environmentalists who seek a cap or reduction on atmospheric pollutant emissions. However, increased energy supplies in Third World nations need not be based solely on fossil fuels. Renewable energy technologies are well suited for many Third World regimes and can be readily employed as primary or secondary energy sources. Use of indigenous resources such as biomass, solar, geothermal, hydropower, and wind energy could assure native economies of unlimited energy supplies free of dependence on costly imported crude oil and with minimal pollution. Under “normal” economic evolutionary processes, Third World nations would undertake economic development in stages, beginning with a transition from subsistence to more sophisticated agriculture and cottage industries and gradually advancing to full-scale industrialization. However, many of these countries are attempting to leapfrog into industrial economies based on labor-intensive enterprises and export markets. The rapid growth of such industries is placing large new demands for electric power and petroleum. Many developing nations can employ renewable energy systems on a cost-effective basis utilizing present technologies. Further refinements are expected over the next few years that will offer additional cost and operational advantages. Aside from the pollution-free features of wind and solar energy systems, these technologies offer the advantages of relatively low economies of scale, modularity of design permitting ease of expansion, and relatively simple operating and maintenance requirements. Each of these features should bode well for utilization in Third World nations where ample labor supplies exist but where skilled workers are often not available. Some Third World nations have the great advantage of possessing indigenous petroleum resources, but most do not. Those without crude oil reserves would be well advised to avoid overreliance on imported oil in the interest of national security and economic self-sufficiency. Instead, development of biomass fuels such as ethanol or biodiesel, utilizing renewable organic materials such as wood, wood wastes, grains, or other vegetation as feedstocks, may be viable options.

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One of the arguments during the 1997 Kyoto conference on the global warming treaty was that the developing nations should not be required to reduce their greenhouse gas emissions since their needed economic growth is dependent upon energy resource expansion and since their contributions to atmospheric pollution are presently insignificant. Hence, developing nations were exempted from the requirement for emissions reduction, while industrialized nations were not. While this may be an acceptable temporary political expedient, it is not a desirable policy for the long term. Each nation should observe atmospheric protection treaties on an equal basis.

11 Capitalism in the Third Millennium

A NEW CAPITALISM PARADIGM Capitalism, as discussed earlier, is a system characterized by private ownership of economic assets with freedom to conduct its affairs with limited governmental interference, and with opportunities to take risks in seeking financial gain. Since the founding of the United States, capitalism has been the predominant economic system. In Europe and Asia, capitalism has undergone a gradual transition from feudalism a few centuries ago to its present state, which for the most part resembles capitalism in America. While today the virtues of capitalism versus its alternatives in socialism or fascism are widely accepted, there is a wide array of opinion concerning the relative degree of participation and influence of capitalistic enterprises and government in democratic societies. Over the past few years, the New Right in American politics has attempted to use its majority powers in Congress and many of the state capitals to press for diminution of government and greater privatization of the economy. To date, the New Right has been only partially successful, with the aid of a centrist Democratic president, in reducing the federal budget deficit and outlays for many social programs. However, it should be recognized that much of the federal fiscal progress over the past few years has been due to a booming national economy and attendant increased tax revenues as well as streamlining and cutbacks in federal agency programs, not to a quantum jump from centrist to conservative political philosophies.

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The national economic boom of the late 1990s in America attests to the inherent strength of the private sector when given sufficient incentives for growth. Capitalism, however, is not prospering uniformly around the globe. Japan is struggling with a recession as are several European nations. Germany and France have experienced double-digit unemployment rates for several years, and Britain has only recently shown signs of economic improvement. Economic problems also plague several South American countries. The recent economic “melt-down” in Indonesia and other southeast Asian nations that are struggling for economic progress suggests that the inherent strengths of capitalism are sometimes offset by a number of weaknesses and instabilities that can wreak havoc on national economies. The economic fortunes of capitalism are often short-lived and vary with time and circumstances. Business cycles and volatility of securities markets still haunt capitalistic nations despite various stabilizing measures introduced into the monetary system and the banking and securities markets some years ago. Stability in economic systems has been a long-sought goal in capitalistic countries, but has yet to be achieved and sustained over long time periods. Historically, the Federal Reserve Board utilized its monetary policy powers to manipulate interest rates and money supply in its efforts to stabilize prices and inflation. These actions have been fairly effective in regulating the private sector. Equally important in stimulating or suppressing the economy have been the economic activities of the federal, state, and local governments in their expenditures for grants, contracts, entitlements, and services—the so-called fiscal policy approach. Another policy arena that has grown substantially over the past few decades is regulatory policy, which includes a wide array of governmental regulations on business, ranging from antitrust to occupational safety to environmental protection. The private sector has borne substantial costs in complying with these regulations. Thus, there are three primary domains of government policy that influence the national economy: monetary policy, fiscal policy, and regulatory policy. The recent economic boom in the United States has confounded many economists, primarily because the improvement has not followed some of the traditional formulae used to predict economic performance. One such indicator is the relationship between inflation and employment. According to conventional economic theory, when full employment is approached, inflation will increase. This has not happened so far during this boom: unemployment fell to 4.4 percent (virtually full employment) in early 1999 while the inflation rate remained quite low at around 2 percent. National productivity has shown a robust growth of 2.2 percent over the past few years. How long can this economic growth be sustained? Indeed, is this an

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optimum rate of growth for the nation? What should be national goals and policies that will encourage appropriate rates of economic growth with minimal inflation and unemployment? What kinds of innovations and market dynamics will evolve during the Third Millennium that will require major changes in capitalistic and governmental processes? Purists of the free-market school of economics would argue that no national goals should be established, especially those set by government edict. Rather, they press for freedom of the market to seek its own level of economic activity in the belief that it would accomplish social as well as economic objectives more efficiently than public schemes for socioeconomic advancement. The revolution in information technology, worldwide communications, materials science, pharmaceuticals, and medicine is stimulating enormous advances in health care, education, and economic growth that are being made available for the first time on a global basis. These same advances are also presenting formidable issues in the areas of human bioethics, intellectual property, and other proprietary matters that should be addressed on a global basis if private industry is to proceed in fully employing these innovations. At present, the capitalistic system possesses no effective mechanism to address these issues. The virtues and vices of capitalism have been analyzed since time immemorial by economists, political scientists, and capitalists. Those of liberal or centrist views continue to point to the shortcomings of free markets and their tendencies toward monopolistic actions and creation of inequities in the economy. Centrists usually call for some degree of government influence in the economy to moderate economic cycles and to foster more equitable distribution of wealth. Economist Robert Heilbroner, in his book 21st Century Capitalism, raises questions about the ability of pure capitalism to address social inequities and the societal value of many investments made by capitalistic businesses. He notes that a continuing problem of modern capitalism is that of assurance to workers of secure employment and adequate income. Heilbroner calls for a “new kind of social contract among labor, management, and government” (a` la Germany) to deal with these issues. He adds another concern: “the growing tension between the imperatives of global economic integration and the counter-imperatives of its political compartmentalization.” Another economist, Joseph Schumpeter, author of Capitalism, Socialism, and Democracy and other works, questions the very survivability of capitalism on the grounds that it has destroyed the moral authority of many of its institutions, and will ultimately turn against its own, paving the way for a gradual transition from capitalism to democratic socialism. Still another well-known economist, John Kenneth Galbraith, has advocated more governmental involvement in capitalistic economies. In his book Economics in Perspective, Galbraith addresses the issue of inter-

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national competition, among other things, which he says can adversely affect established industries in the industrialized nations. He points to the problem of aging industries and the loss of competitiveness. He foresees the likelihood of older nations turning over production to cheaper foreign competitors, generating growing socioeconomic problems for these older, industrialized nations. Noted futurist John Naisbitt, in his book Global Paradox, points to an emerging trend that he says will characterize future capitalism; namely, the “larger the world economy, the more powerful its smallest players.” By that, he means that entrepreneurship will be the foundation of the global economy. He adds that many giant corporations are attempting to reorganize themselves into networks of semi-independent enterprises in efforts toward improved innovation and efficiency. Relatively small population groups in many areas of the globe that have survived attempts at assimilation into larger cultures are increasingly active in reasserting tribal identities and economic independence. Termed “tribalism” by Naisbitt and others, this movement is counter to the prevailing notions that assimilation of ethnic and cultural minorities follows economic progress. Tribalism, on the contrary, places priority on cultural traditions and ethnic identity followed by economic independence. Notable examples are the resurgence of ethnic and cultural movements in parts of the former Soviet Union, in Bosnia and Albania, and in Central and North America where indigenous tribes have asserted their cultural heritage and efforts toward economic independence. In their book The Global Trap: Globalization and the Assault on Democracy and Prosperity, Hans Peter-Martin and Harald Schumann deal with the sweeping social problems to be ushered in by unchecked globalization. They cite the “horrendous” pace of (technological) change that could wreak havoc on the stability of families and communities. Their report of a recent conference in San Francisco attended by leading industrialists and government leaders provided some insight into future economic and employment problems stemming from rampant globalization. One conference speaker, Jeremy Rifkin, author of The End of Work, stated his “20:80” principle, which holds that only 20 percent of future job seekers are enough to produce all the commodities and services that the world society can afford. The balance (80 percent) will not be able to find work. Some of the business leaders attending that conference agreed that in the future many people in industrialized nations will again be “sweeping the streets for next to nothing or finding a meagre [sic] shelter as household help.” The authors call for a number of policies (mainly European) that would work toward stabilization of world currencies and economies and thereby ameliorate adverse social impacts of globalization. Misgivings about the social virtues of capitalism cited above are at odds

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with the rhetoric of the current right-wing political coalition, which advocates devolution, privatization, diminished government, and globalization. Advocates of laissez-faire economics have become vocal and influential in national politics in recent years. Conservative politicians and some academic economists have called for increased freedom and economic power for private enterprise and reduced government influence on business and the economy. Their proposals are based on the conservative premise of efficiency; that is, private industry is inherently more efficient than government in utilizing capital and other factors of production. Conservatives also contend that the free-market system, with its potential for self-correction, is the better method for allocation of wealth. Proponents of hybrid (mixed) capitalism point to the failures of a market economy under pure capitalism, especially the inability of the market to allocate wealth equitably. They contend that capitalism needs to be augmented by governmental involvement to address the inequities problem. The mixed capitalism economists generally admit that private industry is far more efficient in creating wealth. It is in the distribution of wealth that they find fault. The terms “democratic capitalism” and “capitalist democracy” are often used synonymously, but inaccurately. Democracy as a system of government implies equal political power to all citizens. Capitalism, on the other hand, seeks to concentrate political and economic power toward creation of monopolies or cartels. Thus, the two terms denote systems that are inherently in conflict. American democracy, if it can be called that, has always recognized that property owners have special rights that are represented in state and federal legislatures. Property rights are represented in the upper legislative bodies, the federal and state senates, while representation of the “people” is found in the lower houses. Theoretically, capitalism can exist without democracy, and democracy can function utilizing socialistic as well as capitalistic economies. Capitalism, by definition, cannot operate in an entirely socialistic economy. However, it can (and did) function quite well in a capitalistic slave economy in nineteenth-century America. Prior to that, the precursor to capitalism—feudalism—exploited human labor while enriching the landlords. In industrialized countries, capitalism has evolved and thrived within various forms of representative governments such as republics, democracies, and parliamentary systems. Private corporations have also fared well in many less democratic regimes in Third World nations where favorable treatment was offered, sometimes requiring kickbacks or bribes. Given favorable conditions short of outright socialism, capitalism can operate successfully in a wide variety of political environments. Therefore, it does not follow that capitalism must have a democratic government as its progenitor nor that democracy must have a capitalistic

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economy. Future evolution of global economies may be influenced significantly by shifts in the forms of individual governmental systems among various trading nations. This factor may become especially important in creation of policies related to further development and regulation of global markets. Emerging economic and social concerns indicate that in the next century private enterprise will encounter an array of issues and business opportunities unprecedented in scope and complexity. Problems related to the social and economic needs of a burgeoning population are virtually overwhelming and call for solutions involving great skill, financial resources, compassion, sensitivity, and commitment. Among the possible sociopolitical avenues to address these issues—socialism, fascism, autocracy, libertarianism, anarchy, and democratic capitalism—only the latter appears to be able to muster the resources and dedication to achieve its goals in a manner that preserves human dignity. If capitalism and democracy are the twin solutions to the world’s socioeconomic and political problems, through what means can the resources of capitalism best be marshalled and appropriately applied? Private industry has generally taken a self-serving view of its ventures; if the profit motive cannot be adequately served, the venture is usually deemed not worthy of investment. The organization’s survival depends upon profits. And business asserts that the public will be served if the business’s private objectives are achieved. In the political atmosphere of the late 1990s, capitalism has attracted highly vocal champions in the New Right who have espoused the virtues of free markets and unrestrained competition on both the national and global levels. Globalization of markets and competitive pursuits have been touted as solutions to the balance-of-trade problems as well as high unemployment and stagnant economic growth, which until recently persisted in the United States for a decade and in parts of Europe and Japan for almost as long. Right-wing political leaders claim that economic progress is being impeded by too much regulation and taxation of private industry by an overgrown government bureaucracy. Despite the remarkable economic recovery in the United States during the late 1990s, free-marketers still clamor for less government and more freedom for the private sector. Actually, government expenditures as a percent of Gross Domestic Product are at the lowest level since World War II. On Wall Street, the Dow Jones Industrial Average has climbed sharply during the past few years, reaching an all-time high of around 11,000 in early 1999. Current government taxation does not present a serious drain on the national economy. Personal and corporate income taxes have been reduced to their lowest levels in more than four decades. Personal incomes, especially among the wealthiest Americans, have risen sharply, although the low and middle income groups have fared poorly

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by comparison. And welfare reform appears to be working. Despite these improvements, the call from the conservatives is for less government and lower taxes. In seeking more equity of economic opportunity among the citizens of America, and indeed the world, there must be a balance in recognizing the legitimate objectives and roles of the public and private sectors. The Preamble to the Constitution of the United States describes one of its goals as “promoting the general welfare” of its citizens. This broad term has many connotations that are often interpreted along political lines. Generally, it has meant that there is a public purpose to be served in fostering the physical and social needs of the populace. The actual implementation of this objective, however, remains controversial with conservatives usually taking a position of minimal governmental activism and liberals favoring more direct government involvement. Conservatives generally favor a “top-down” economic strategy in which business is free to conduct its affairs with minimum interference by government and to create as much unlimited wealth as possible. They view this approach as contributing to the general welfare through the economic success of business that manifests itself in creation of employment in the private sector, accumulation of profits, and through tax revenues for governmental and other public purposes. Under this strategy, the private sector is the driving force of the economy, and government’s roles are limited to basic public safety and defense. Through operation of the “economic multiplier,” wealth created in the private sector “trickles down” and is disseminated within other elements of the economy. Liberals prefer a “bottom-up” policy that stresses the need for jobs and basic human services provided by either government or industry. Liberals acknowledge the desirability of free enterprise so long as basic human economic needs are met. Under their philosophy, government should be the “employer of last resort” if the national economy cannot sustain adequate levels of employment via the private sector. Under the Third Millennium paradigm, these basic tenets will of course remain unchanged; however, new responsibilities may be thrust upon private enterprise in addressing the great problems of society—economic advancement, environmental protection, poverty, and disease. Responsibilities of the new capitalism paradigm extend both inward and outward. First, private industry has obligations to its own shareholders, employees, and customers; and second, corporations need to become more involved and supportive of external community and societal concerns. Historically, private industry has stressed the production and delivery of goods and services, often overlooking the great value of public health, public education, and other needs of society. Unfortunately, the attitude of some capitalists has been that all investment in profit-making enter-

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prise is worthwhile, while nonprofit or public-oriented work has been considered unproductive unless such public works support or provide a framework for profitable private sector activities. The private sector simply has not discovered methods to turn a profit from many of these “public” activities, except for certain contractual services such as waste management. The new capitalist paradigm will continue to focus on the creation of wealth; however, its new dimension, hopefully, will be an enlightened view of its responsibilities in the more equitable distribution of wealth and in contributing directly to the public interest. This is not to say that some arbitrary wealth allocation system should be established and administered by government or private industry, and that government’s role in social equity will be greatly diminished. Rather, the new capitalism model will provide for an active role for government in social equity as well as in providing an economic infrastructure and “business climate” that fosters private enterprise. The new model will offer inducements to private industry in maintaining a stable workforce with improved job security and in providing adequate employee health insurance, retirement, child care for working mothers, and other benefits. Private industry will increasingly serve as a conduit for provision of “public goods” and services, replacing some of these functions provided by government. Corporate philanthropy will likely become a more important factor in addressing social problems, although its limitations are obvious. One example of the emerging forms of corporate philanthropy is the recent action of Ted Turner, well-known telecommunications entrepreneur, who announced plans to furnish about one billion dollars to finance environmental and social projects of the United Nations. According to various new reports, this gift would constitute approximately one-fourth of his assets and would be one of the largest single gifts ever from the private sector. The application of the new capitalism model of necessity will vary in scope and content, depending upon regional or local socioeconomic conditions. In industrialized nations, the patterns are largely established with many of the private and public institutions already in place to implement the public and private functions of society. However, the intensity and scope of these functions will likely change over time. For example, entry requirements for many occupations will change with technological advances. Consequently, the curricula of colleges and schools will require refinement with increased frequency as occupational skill requirements evolve. Governments can influence the emerging capitalistic paradigm through an array of policy incentives, direct investments, regulation, and taxation devices. Of most concern to the private sector would be those govern-

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mental mandates that restrict business activity or add to its costs of operation. Perhaps more controversial would be creation of an “industrial policy” in which government would favor certain industries in the national interest through various measures such as beneficial tax treatment, subsidies, or suspension of restrictive regulations as well as possible direct government investment. To the extent possible, private sector involvement in social programs should be encouraged via incentives, not through punitive taxation or regulation. Innovation should be encouraged to foster efficiency and to liberate the genius of private industry in public affairs. Bureaucratization would be avoided in favor of holistic approaches to the provision of public services. Governments can also shape social and economic conditions through direct spending on education, infrastructure, health, research and development, welfare, and programs for the elderly. The roles for government and the private sector in these social arenas are evolving rapidly. One current concern is the future of the Social Security system and whether greater participation by the private financial industry in administering the program would be in the best interests of the nation. Developing nations will require more focused attention since many of the basic economic and public institutions required for economic growth are not yet established. Nevertheless, these countries can accelerate economic growth by engaging the private sector in cooperative ventures with their governments in the development of public infrastructure needed by industry. These nations may also become direct partners with private industry in developing profit-oriented commercial ventures. CHANGING CONDITIONS AND OUTLOOK FOR GLOBAL CAPITALISM The phrases “global capitalism” and “global economy” may be exaggerations; not all of the world’s economies employ capitalism, and it is unlikely that the so-called world economy will become universally capitalistic. Despite the recent rhetoric regarding a global economy, many national economies are not yet sufficiently established and integrated to participate fully in a globalized system. Remnants of socialism and dictatorships may be extant for some time despite efforts to diminish them. However, capitalistic economies of the free world now dominate the global scene. There has been a remarkable convergence toward capitalism over the past three decades as seen in the dissolution of the former Soviet Union, economic growth in Asian nations, and the strengthening of economic bonds among other industrialized nations via international trade pacts.

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Emerging Socioeconomic Trends Two quite different socioeconomic trends are believed to be underway in the world that will have major impacts on capitalism. First, the populations of industrialized nations are expected to continue to grow, but at declining rates, over the next century. Further, aging of the populations of developed nations is becoming pronounced due to declining birth rates and increased longevity. Population growth in the United States, western Europe, and Japan may begin to level off, followed by central Europe. Indeed, the populations of Belgium and several Scandinavian countries have already declined slightly. Meanwhile, America’s neighbors, Canada and Mexico, are expected to continue to exhibit substantial population growth. Populations in industrialized nations as a whole are predicted to increase at reduced rates through the year 2100. In 1990, industrialized countries comprised 1.2 billion population, or 22.6 percent of the world total. By 2100, industrialized nations are expected to have a combined population of around 1.4 billion, with their share of the world’s total population declining markedly to 13.7 percent. By contrast, developing nations are projected to grow from 4.1 billion in 1990 to about 8.8 billion in 2100. At that point, the populations of the present developing countries will constitute 86.3 percent of the global total. The leveling-off of population growth in the industrialized world is expected to be accompanied by major changes in the age of the population. As birth rates decline to barely the replacement level, and life expectancy increases significantly, the average age of the populations of industrialized countries will increase substantially. These trends should send a strong message to the private sector, namely, that the market expansion in these nations is not unlimited despite continued growth in disposable income, and that the character of the consumer market will change. The present emphasis on youth markets must be broadened to accommodate a growing market cohort of retired, second career, and aging citizens. A quite different picture is seen in the explosive population growth in many developing nations. In two of the great developing nations—China and India—population growth is expected to increase dramatically. Overall, world population, according to various forecasters, is likely to reach 10 billion to 20 billion within the next century. One forecaster, Herman Kahn of the Hudson Institute, predicts that over the 200-year period 1976 to 2176, world population will grow from 4.1 billion to 15 billion, with the great majority of this increase occurring in the developing nations. He also predicts that gross world product will rise from $1,300 per capita to $20,000 per capita during this period. Therefore, gross world product would grow from $5.5 trillion in 1976 to $300 trillion by the year 2176.

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Kahn and others point to at least two divergent views of the future. One view, the Malthusian outlook, suggests that global population growth will outstrip food supply and lead to mass starvation of the poor. The Malthusian analysis is often accompanied by a pessimistic view of the continued availability of natural resources due to steady depletion. The polar opposite view is that technological advances will discover ways to ensure adequate food supply and other material needs of society. This optimistic view holds that continued growth is both attainable and manageable. Neither of these views satisfies the data presented in other chapters of this volume. When considering the needs for improving the lot of most citizens of the world via economic development as well as the constraints imposed by environmental degradation and energy requirements, there must be a “middle ground” position that will provide a framework for cooperative strategic planning such that the resources of the private sector and governmental entities can be mobilized in addressing these massive societal issues. The mounting costs of medical care and education, especially higher education, in America may present formidable problems for the next several younger generations. At some point during the next several decades, the college-age population will begin to reach a plateau. Unless costs of higher education are contained, tuition and fees for the average college student may be double or triple the current amounts. Likewise, costs of medical care have been increasing at double-digit rates over the past decade. While some cost containment has been achieved through rigorous efforts of the insurance industry and through the development of health maintenance organizations (HMO), overall medical costs continue to rise sharply. The burgeoning needs of the senior-age population will present the health care industry with massive challenges in the areas of preventive care as well as treatment of illness. The financial dilemma concerning the future of Social Security will require resolution within a few years in order to thwart the possible financial collapse of the system, predicted by many analysts to occur within 30 years. A large percentage of Americans rely on Social Security as a major element of their retirement incomes. The extent to which the system can be made actuarially sound in view of the expected demographic changes is an open question. Alternative federal or privately sponsored retirement systems will likely be considered as the debate over Social Security continues. This brings up the larger question of financial planning for retirement among the current and future working generations. According to many economists, Americans have a tendency to overconsume and undersave in recent years. Citizens in other industrialized nations save more of their discretionary incomes than Americans. In Japan, personal savings rates

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have ranged from 16 percent to more than 20 percent over the past several decades, about three times the savings rate of Americans. In fact, the American savings rate dropped to under 1 percent during 1998. In considering the uncertainties regarding Social Security and higher future costs for medical care, education, and housing, increased savings and investments should become a more important aspect of financial planning and management by the average American. This may require new attitudes among many working people regarding the need for deferral of unnecessary consumption and the value of systematic savings. Increased savings and investment would also have beneficial effects in national economies by providing capital for business expansion, job creation, and attendant private sector activities. Properly selected and managed, private investments can often create wealth at rates faster than the general economic growth rate or average rate of inflation. The private sector will require enormous amounts of capital investment during the Third Millennium, most of which is expected to be raised via sale of corporate securities and borrowing. Increased savings and investments by private individuals will be essential to this capitalization. Capitalism and Developing Nations Among many developing nations, capitalism is only beginning to be employed as an economic system. It is the great socioeconomic plight of the developing nations that will confront capitalism as a major challenge during the new era. This challenge is particularly formidable as we consider that capitalism offers perhaps the best option for creation of wealth in developing nations, while simultaneously, it does not always provide the most equitable system for allocation of wealth. Nevertheless, given sufficient incentives and support of host governments, private industry should discover ample opportunities to deploy its technological and financial resources for the betterment of many developing nations. Many developing nations are characterized by poverty, high infant mortality, subnormal life expectancy, and lack of most of the amenities of the industrialized world. Some of the impediments to economic growth in Third World countries are: (a) rapid population growth; (b) low per capita income; (c) lack of usable minerals and other natural resources, in some nations; (d) low capital-to-worker ratios; (e) religious or cultural traditions that may be alien and unfriendly to capitalism; (f) primitive or obsolescent technologies; (g) lack of democratic governments; (h) corrupt or unstable political systems; (i) lack of savings and investment capital; and (j) lack of skills and educational facilities. To this list can be added the persistent problems of poor health, disease epidemics, famine, and mass starvation in some nations. A prerequisite to the introduction of capitalism in many developing

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nations is fundamental land reform. Present cultural practices in some nations preclude land ownership by individual citizens except under feudal or tribal systems. Wealthy and politically powerful landlords control the most desirable agricultural or grazing lands as well as transportation corridors and village properties. As a result of this oppressive system, entrepreneurship and innovation have been stifled and creation of wealth has been confined largely to the landlords. Land reform is being attempted in Mexico, parts of South America, and elsewhere, but it is a fairly recent event and has been only partially successful to date. Among the remedies proposed for these problems are the following: • Reform land and natural resources ownership; • Develop public infrastructure to support private enterprise; • Control population growth via reproductive education and contraception; • Improve government services; • Develop educational and skills training systems; • Encourage savings and investment; • Encourage investment by foreign corporations; • Develop indigenous enterprises; • Develop health care systems; • Foster entrepreneurship and leadership development; and • Reform management of natural and environmental resources.

This list is, of course, a rather generic and daunting one for many Third World nations. Realization of these objectives will take committed efforts for decades in most cases. In order to be effective, these activities must be tailored carefully to the needs and cultures of individual nations and timed to coincide with national priorities as well as global political and socioeconomic conditions. Many of these needs are related to the development of public infrastructures that support the activities in the private sector. Obviously, these actions are long-term in character and do not specifically address critical problems such as political upheavals, famine, and mass starvation that strike some countries periodically. However, some actions from the list above would provide the basis for improvements in socioeconomic conditions that could reduce the probability of national crises in Third World nations. As personal incomes and populations rise in Third World nations, potentially enormous markets for goods and services will likely materialize. Due to presently low personal incomes, the consumer markets of many developing nations are largely confined to foodstuffs and other essential goods. As their economies develop more fully and disposable incomes are increased, they will be able to acquire more sophisticated consumer

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items. Also important is the matter of encouraging personal savings and investment. So long as personal incomes remain at the subsistence level, the concept of savings and investment may be foreign and irrelevant to most impoverished citizens. However, as incomes rise, the virtues of savings and investment may be introduced into the economies of developing nations, providing further stimulus to economic growth. With markets in many industrialized countries reaching steady-state conditions in the next century and with massive potential markets developing in Third World nations, private industry in the industrialized realm will naturally become increasingly oriented to trade relations with developing nations. Indeed, economic expansion in the United States and elsewhere will continue to be highly dependent upon a thriving export market. Third World countries will likewise continue to seek expansion of export markets in industrialized nations. PRIVATE INDUSTRY AND THE PUBLIC SECTOR Predictions of the demise of capitalism seem contrary to recent economic developments; trends around the world point toward the expansion of capitalism. Nevertheless, the debate continues: What are the proper roles of private enterprise and government in a democratic, capitalistic economy? Is there too much or too little freedom given to industry in a democracy? To what extent should government be limited? What steps are desirable to enhance the effectiveness of private enterprise in meeting societal needs of the Third Millennium? What is the “public interest” vis-a`-vis corporate capitalism? The thrust of the arguments set forth by political conservatives is that capitalism will prosper and provide maximum social benefits when its prerogatives are unimpeded by governmental controls and taxation. The New Right has proposed measures to further limit government influence and to enhance the freedoms of the private sector in meeting competition in global markets. Among the proposed regulations to be eliminated or drastically reduced under the New Right proposals are those related to international trade, environmental quality, endangered species, occupational health and safety, consumer protection, and deregulation of electric utilities and perhaps other industries with natural monopolistic features. Reductions in corporate income taxes and capital gain taxes are also proposed, as well as the possible replacement of these taxes with a so-called “flat tax,” a national sales tax, or a “value-added” tax. These tax changes would lower the tax burden on private corporations significantly, but the proposed reduction in taxation of individuals would be much less, if any. Centrists and liberals counter that business interests are inherently selfserving and that monopolies, market manipulations, and unfair employee

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practices are endemic to many private corporations, leading to maldistribution of wealth and other abuses in society. The moderate-liberal camp calls for regulating roles by government to minimize such abuses and for generating sufficient tax revenues to finance governmental social programs and public infrastructure. Another economic role of government under the moderate-liberal Keynesian school of thought includes temporary economic stimuli or restrictions as necessary during periods of recession or inflation, respectively, by government fiscal or monetary policies. A fundamental objective of private business organizations is to seek economic gain by investing capital, labor, and other resources in productive enterprise. Maximization of profits is sought through efforts to minimize costs and maximize revenues in the production and delivery of goods and services. According to its advocates, capitalism encourages free markets through which the forces of demand and supply may operate to establish optimum prices among competing firms. In this manner, economic efficiency can be optimized since a free market is said to be selfcorrecting over time. In sharp contrast, socialism or other systems dominated by governmental fiat intervene to restrict operation of a free market. Prices and market quantities are set by government directives, not free economic forces. However, socialistic economies are said to be more equitable in allocating wealth and resources among national priorities including citizens who may have basic economic needs but little wherewithal to pay for such necessities. Theoretically, command economies can effectuate social equity as well as economic adequacy; however, experience to date indicates that these systems are just as prone to corruption as capitalism, and economic efficiency suffers from suboptimal utilization of financial and other economic resources. The private business organization (in the form of a proprietorship, partnership, or corporation) is the foundation of capitalism. The private firm is given considerable freedom to utilize its own or borrowed capital, labor, land, and other resources to engage in lawful economic activities that are intended to produce economic gain. Owners and managers of private firms are free to decide the type of business in which to engage, products and services to be manufactured or provided, employees to be utilized, markets to be served, location of business, and virtually every other important aspect of their businesses. Private firms, if successful, provide social benefits through consumers’ use of products and services, through the incomes earned by employees, through purchases of materials and supplies, through generation of profits gained in business activities, and through the beneficial effects of the economic multiplier. Private industry also supports public and government services through payment of federal, state, and local taxes and fees.

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The genius of democratic capitalism is that, while many individual participants may not enjoy equally the fruits of economic gain, the economy as a whole receives widespread benefits, tending to provide gains to all participants in the long run. Although myriad businesses operate independently and are focused on their own individual economic goals, their collective efforts constitute numerous symbiotic relationships that work to advance economic growth. Still, at its core, the private business organization is fundamentally a self-serving institution. Its service to nonowners is achieved through the sale of goods and services in the marketplace. Any social benefits other than the sale of goods and services, the employment of workers in the enterprise, and payment of taxes and fees is incidental to its basic operations. The question of social responsibility is at the heart of the debate concerning the relative roles of government and business in a capitalistic democracy. Businesses receive licenses and permits and, in the case of corporations, a charter granting rights to conduct lawful business. (In many cases, businesses must also acquire permits for regulation of environmental, safety, and other concerns.) The expectations of society are that businesses will conduct their activities in an ethical and lawful manner and that they will make contributions to the economic and social well-being of society. Corporations are given great freedom to operate their businesses, to expand or close them, and to make decisions unilaterally regarding the essence of their activities. In return for these privileges, corporations have certain legal but no compulsory moral or ethical responsibilities concerning society at large. Many corporations do, however, exhibit some moral responsibilities as demonstrated in their fair treatment of employees, customers, and community neighbors and in their charitable and cultural contributions. Other corporations, as we have discussed earlier, continue to express contempt for any actual or implied moral responsibilities toward many of their affected stakeholders other than primary shareholders. Indeed, many do not acknowledge any reason to be socially conscious; they contend that their pursuit of economic success is the end of their “moral” and social responsibilities. Attitudes regarding social responsibilities of business vary widely, largely depending upon the philosophical framework chosen. The views of libertarians and other extremely conservative capitalists generally advocate minimal roles for government and maximum freedom of private industry. Some libertarians seek to limit the roles of government to national defense and enforcement of law and order. All other functions would be performed by private industry, if performed at all. Under this form of capitalism, even roads, highways, and all “public” facilities would be under private ownership.

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At the extreme opposite is socialism/communism with its ownership of most economic assets by the state. Capitalism, by definition, could not function under “pure” socialism. However, some variants of capitalism may be able to function under some modified forms of socialism, such as that now being attempted in China. The fundamental characteristics of a constitutional democracy or republic provide a generally favorable political environment for capitalism. One of the most important elements of a democracy is its freedom of enterprise. Businesses are free to engage in any lawful activity, and citizens, as consumers, are free to acquire goods and services without governmental interference. Operations of free markets, through the forces of demand and supply, establish prices and determine what and how much is sold. It is possible, although highly improbable given the state of development of the American economy, that major elements of laissez-faire capitalism could be implemented under democratic or republican governments. Regulatory controls could be repealed, taxes could be reduced, and basic worker and consumer protections could be rescinded. Beyond that, public property could be sold to the highest bidder and put under private ownership without covenants or restrictions as to future use. Public thoroughfares could become privately owned toll roads. The probable result: economic and social chaos, and a virtual abandonment of generally accepted social standards and civil order. Adoption of socialistic maxims to any appreciable extent could likely have similar results. The private sector could be regulated to the point of bankruptcy, incentives for savings and investment could vanish, large blocks of privately owned property and industrial facilities could be forcibly placed into government ownership, consumer freedoms could vanish, and entrepreneurship could be virtually abolished. The plausibility of these scenarios may be open to debate; however, if one considers recent events, such as the dissolution of the former Soviet Union, it must be admitted that dramatic political and economic revolutions are within the realm of possibility and could happen swiftly. The present political-economic systems of the industrialized nations may be characterized as centrist-moderate-liberal on the political spectrum. One of the more liberal nations, Sweden, until recently imposed heavy taxes on private industry in order to pay for its expensive “cradleto-grave” welfare programs. Its taxes have recently been reduced as the nation adopts a somewhat more conservative fiscal stance. Similar efforts are being made in Britain, Germany, and other European countries as part of their economic retrenchment efforts. The present system in the United States is similar except for its more conservative philosophy regarding welfare and employment. The public sector under democratic capitalism consists of a wide array

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of institutions and functions that often clash with the aspirations and activities of the private sector. Within the public sector are: (a) governments at the federal, state, tribal, and local levels; (b) public educational institutions; (c) quasi-governmental agencies that perform certain public services; and (d) a large and growing nonprofit sector, consisting of charitable and philanthropic organizations and various social services agencies. Many governmental activities impinge on the freedom of action of private industry, and are resented by many capitalists because of the restriction, extra effort, and costs of doing business imposed by governmental agencies through their regulatory powers. Private industry often opposes governmental regulations that it deems unnecessary or overly restrictive and that may result in higher costs. Moderates and liberals generally advocate governmental action to address social issues for which private industry claims little responsibility. The pressing and widespread social concerns of the Great Depression ushered in a new era of governmental activities related to unemployment, poverty, public accommodations, and financial reform. Major precedents were established during that era that are still extant. Later, during the Lyndon Johnson presidency, numerous additional governmental programs were initiated under his Great Society strategy. Many of these initiatives were strongly advocated by the liberal branches of politicians and economists. According to Ralph T. Byrnes in Economics, federal governmental agencies in the United States grew from just 5 in 1900 to 22 by 1940. During the 1970s, however, the number grew to 56. Today, it remains at about this number. Current efforts to limit the size of the federal bureaucracy have been effective in holding the number of agencies to these levels while reducing substantially federal employment. Aside from the federal bureaucracy, state and local governments impose major additional regulatory requirements and costs on private industry. The United States and other industrialized nations that employ the capitalistic system have gradually developed a balance between the legitimate rights and responsibilities of the private sector and those related to the public interest. This balance was not easily established and it is not easy to maintain. None of the political factions are entirely satisfied with this equilibrium; incremental changes are being attempted continously. What has evolved is a compromise between the private and public sectors, a balance of powers among the branches of the federal government that was established by the nation’s Constitution, and a balance of rights and powers among the federal government, the states, and Indian tribes. This complex mixture of public and private functions continues to be modified as changes occur in societal needs and with further development of private enterprise. Often referred to as a “mixed economy,” “blended economy,” or “hy-

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brid economy,” the present capitalistic system in the United States and similar systems in other nations provides for active roles of government in fostering and regulating private enterprise while maintaining the public interest and general welfare. This system has performed adequately most of the time, but not without its shortcomings. Some of the abuses of unchecked capitalism, monopolies and corruption in the marketplace, for example, still occur periodically. Abuses in the workplace, such as age and gender discrimination, unwarranted job termination, cessation of employee benefits, and other acts of unfairness, still are experienced in the absence of equitable policies or government regulation. Corporations wield great financial power in politics as well as the economy. Heavy financial donations related to political campaigns and use of former congressmen as lobbyists are widespread practices by large corporations. These tactics are quite effective in enactment or blockage of legislation and in promulgation of federal regulations. At the state and local levels, corporate influence is also ubiquitous with thousands of corporate lobbyists exerting heavy pressures and providing financial support to legislators. Studies of corporate crime also indicate that the excesses of corporate power often go beyond society’s moral and ethical standards and that outright illegal acts are performed with adverse consequences to society. In his book Corporate Crime and Violence: Big Business Power and the Abuse of the Public Trust, Russell Mokhiber documents 36 of the more egregious cases of corporate crime and violence. Other works, such as White Collar Crime, by Edwin Sutherland, and Illegal Corporate Behavior, by Marshall Clinard and Peter Yeager, review cases involving a wide array of corporate law violations. The latter book reports its findings of 1,554 crimes among 582 corporations over a two-year period. These and other studies indicate that corporate crimes have encompassed a wide spectrum, including environmental pollution, patent infringement, thefts of other intellectual property, unlawful collusion to defraud consumers, child labor, wage and hour laws, outright burglary, deception in advertising, failure to disclose required information in financial and securities transaction, and numerous other offenses. A March 13, 1998, television show, 20/20, described abuses of Chinese women recruited to the island of Saipan, a U.S. territory, to work in a number of garment factories on the promise of coming to the United States for employment. These women never reached the United States. Working conditions were described as virtual involuntary servitude in that employees worked illegally long hours, often 14 hours continuously, at low pay and were forced to live in squalid company-furnished barracks without adequate sanitary facilities. Some women were forced to have abortions when they were discovered to be pregnant. There were no provisions for fringe benefits or vacations.

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The factories were under U.S. legal jurisdiction but operated without fear of regulation and violated many U.S. labor and safety laws until recent federal enforcement actions. Garments bearing the “Made in USA” labels made them salable in the United States and were purchased for sale by many of the major garment companies such as Disney, J. C. Penney, and Fila. Consumer advocates and others have called for more stringent laws and sanctions to curtail corporate crime and moral lapses. Mokhiber has proposed numerous measures to improve corporate accountability including, among others, granting persons rights to directly sue corporations as well as individuals within corporations, and allowing legal punitive sanctions to be imposed on corporations, including revocation of their corporate charters. At present, corporations are chartered by individual states, not the federal government. There are no uniform requirements for incorporation among the states. Many corporations have selected the state of Delaware since its chartering requirements are quite modest. One alternative would be to enact federal legislation imposing minimum uniform standards, including an ethics and human rights code, for corporate charters and business licenses administered by the states or by federal agencies. Hybrid capitalism is not a utopian solution to the dilemma of modern society. Neither are idealistic approaches such as laissez-faire capitalism or socialism. Hybrid or blended capitalism can make best use of the private and public interests and resources in providing for economic growth and social progress within a democratic governmental framework. Inevitably, there will continue to be tensions between the private and public sectors. Doubtless, there will be periodic failures within the politicalgovernmental sector or the private sector. There may be large swings in political influence or government actions that can be unsettling to business activities or investment. Instability in either government or industry socioeconomic practices can have serious and lasting effects on society. Capitalism in the Third Millennium should be engaged in efforts to aid society in adapting to changes stemming from technological innovation and economic upheavals. The accelerating pace of change and the greatly enlarged scope of national and world needs will impose difficult and challenging conditions on private enterprise. As agents of technological innovation, private industries should bear much of the responsibility for conditioning affected societies to the beneficial and adverse effects of these innovations. Industry is usually eager to extol the virtues of its new products, but it is reluctant to address the social downside of its activities such as job terminations, plant closures, or loss of investments by shareholders. A corollary issue is whether governments address the needs of their constitutents adequately. Although it may be argued that there are ample

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opportunities for the voting public to force accountability on the part of elected and other officials, the democratic system is vulnerable to special interests that effectively dilute the political influence of the general public. Politically powerful special interests such as labor unions, trade associations, and individual major corporations have great influence on the enactment of laws and regulations affecting capitalistic activities. Thus, accountability of public officials is often compromised. Nevertheless, the system works at least in the long run, since officials must stand for reelection periodically. Public polls over the past few years indicate that the general public strongly favors the free enterprise system even during the period of high unemployment and stagnant personal incomes that prevailed until 1996– 1999. At the same time, polls reflect an abiding faith in government as the peoples’ representative and as the watchdog for ensuring social fairness and preservation of the public interest. These surveys do not necessarily contradict the limited government advocacy of the New Right. Nevertheless, they do suggest that there is a legitimate public interest to be served that includes direct participation of the people in key aspects of public affairs. Capitalists have historically feared a strong voice of the people in government. This concern goes back to the formulation of the U.S. Constitution, which provides for a mixture of democracy with restraints provided by a representative form of government. In America’s formative stages, capitalists dominated the infant nation and there were concerns that a popular democratic government might allow the populace to overthrow the plantation owners and merchants and confiscate private property through a “mob rule” referendum or outright confiscation. Another view held by capitalists at the time was that only the “landed gentry” was capable of self-government. Further, many plantation owners were slaveholders in those days. Populist concepts of government were viewed with disdain or great caution by the dominant upper class. It would seem that society and government have progressed to the point that these anachronistic views are no longer relevant. However, even today, there is an undercurrent of fear among some capitalists that a populistic movement could result in massive legislative changes or that an uprising could overturn private enterprise. The probability of such a dramatic political event seems remote in the United States and other industrialized nations. But as we look at demographic and economic trends that may materialize during the next few centuries, we cannot preclude such possibilities. If the income gap continues to widen between the wealthy capitalists and the lower and middle income classes, interclass animosities could escalate into an uprising and mass assault on the capitalistic system.

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THE CORPORATION AS A HUMAN INSTITUTION As we have discussed, a corporation is, strictly speaking, a legal “person,” an entity largely devoid of any obligation to society except for conforming to applicable laws and beholden only to its stockholders. Yet the corporation is one of the private institutions in which a capitalistic economy is dependent for its survival and vitality. Although there are thousands more small businesses (proprietorships and partnerships) than large ones, corporations employ about one-half of the total private sector labor force and contribute much more revenues to the national economy than small businesses. Corporations engaged in “basic” production (mining, manufacturing, and agriculture) constitute the economic foundations for the existence of myriad service industries. The corporation, oddly, is a human institution with an impersonal character. Larger corporations often are quite impersonal entities in that interpersonal relations are of necessity often confined to an employee’s immediate workforce colleagues. Many employees have never met nor even seen the chief executive officer of their corporations, much less benefitted from personal conversation. The numerous layers of corporate bureaucracy provide effective barriers between top management and most workers. Communications between top corporate management and employees are usually limited to quarterly newsletters or an occasional memorandum on the departmental bulletin board, sometimes supplemented by verbal messages passed down to an employee’s immediate supervisor. Many corporate CEOs recognize the need for enhanced communications and have taken steps to improve them, such as meetings with groups of workers after hours or taking occasional walks through the plants to exchange a few words with workers. This has been referred to as “management by walking around.” These measures have proven effective in most instances. However, these practices are still the exception, not the rule. Communications of this sort, however brief, often improve morale and do much to “humanize” the institution. Top corporate managers indicate that their principal focus is toward achieving profits for corporate owners, the shareholders. Naturally, those shareholders represent one group of people who have a major stake in the corporation and its status. However, the makeup of this group changes frequently as corporate shares are bought and sold in the securities market. In many companies, shares turn over frequently with little continuity of ownership. Nowadays, large institutions such as insurance companies and mutual funds are owners of an increasing number of corporate shares. To a large extent, individual share owners have been supplanted by institutional and mutual fund owners who have little interest in the long-term affairs of a given corporation. Rather, they are

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interested in the most recent quarterly financial reports and anything else that affects immediate share value. This trend has effectively dehumanized corporate shareholder relations to the point that many top managers have a growing degree of communications with a relatively few institutional investors and stockbrokers and correspondingly less contact with representatives of other shareholders through their corporate boards of directors. Aside from the impersonality and legal character of a corporation, in actuality virtually every aspect of corporate affairs affects large groups of stakeholders—those who are directly or indirectly affected by corporate activities. Therefore, a corporation should logically take a keen interest in its interactions with people and their welfare. Shareholders, employees, lenders, customers, suppliers, neighbors, and other stakeholders are affected by corporate activities and therefore should be factored into management plans and decisions. Employees are often the stakeholders who contribute to and are most dependent on the fortunes of the corporation. Many workers have longevity with companies exceeding that of top management. Given the opportunity, many employees remain loyal and productive with the company until and after retirement. Unfortunately, many corporations do not acknowledge the value of loyal productive longevity and terminate workers when the slightest downturn occurs or when some action is needed to impress shareholders or fund managers that management is taking “positive” steps in cost reduction. This practice has been used with increasing frequency over the past two decades as corporations have taken steps to reduce costs through layoffs, reduction in health insurance and other benefits for employees, cessation (where lawful) of retirement benefits, use of temporary employees who may be hired without receiving normal fringe benefits, and “outsourcing” work to contractors that was formerly performed in-house. The declining influence of labor unions in recent years has allowed corporations to take personnel actions unilaterally in most cases. In the absence of other collective bargaining organizations, workers have had little recourse but to accept terminations without challenge even when they felt they were unfairly treated. Recent experiences with large-scale layoffs have left countless thousands of workers with apprehensions about the future viability of the capitalistic system. Nevertheless, without many options available, they have returned to work, often to less lucrative jobs, as economic conditions permitted. Efforts to enhance a wider array of participation in corporate decisions should include employee and community representatives on corporate boards of directors. Although this idea may be resisted by some firms, the value of such representation could be significant in the long run by

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serving as an avenue of two-way communications between the corporate boardroom and the shop floor and communities where corporations have major facilities. The humanitarian goals of many corporations have been virtually nonexistent. Nevertheless, it is fair to say that many companies have laudable achievements in their efforts to provide long-term employment and job satisfaction. However, as mentioned above, the trends over the past decade or so have been in the direction of more callous treatment of workers. The often arrogant attitudes of Wall Street toward the plight of downsized employees has been documented in several recent reports, including a documentary on the PBS television network. In these reports, several stockbrokers and fund managers were asked if they had any concerns about the effects of their efforts on laid-off workers. One prominent broker said, “I couldn’t care less about that; my only interest is increasing share value.” Another broker admitted that he often pressed companies to “do something to boost stock value,” including the option of downsizing, to influence potential buyers. Too often, money managers are interested only in the near-term vacillations of share prices and ways to accomplish price maximization, regardless of the longer-term ramifications on a given company or industry. While it is understandable that money managers constantly seek maximum share value, it is not in the best interest of the economy when the production potential of a company is thwarted due to some temporary condition of the financial market that compels a money manager to pressure a company to make unwarranted changes in its production capabilities. This has happened repeatedly in recent years. The need for a review and updating of rules of the Securities and Exchange Commission is long overdue. The critical issues of insider information, conflict of interest, and undue pressures by money managers on corporate managers are growing in importance as the volume of financial transactions increases at geometric rates. In Part I, we briefly discussed a related matter that occurs with increasing frequency in corporations with top managers who have large stock holdings or stock options in their own companies. Often they are given options as performance incentives, which they may desire to exercise when share prices reach favorable levels. A potential problem may arise when the corporate manager decides to order a layoff to effect an increase in share value. His decision may be made on his own, or he may have been pressed to do so by a stockbroker. He may decide to exercise his stock options just before the price rises, realizing a handsome profit. Since he has utilized “insider information,” he may be in violation of securities regulations. The manager also may be accused of a conflict of interest in that he may be acting to enhance his own wealth while work-

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ing against the long-term interests of the company by, for instance, reducing its labor resources below the needs of its business. Corporations should adopt enforceable codes of ethics and operating rules that deal with managers’ relations with securities dealers, buying and selling of stock options, and other matters in which potential conflicts of interest may exist. Corporate ethics codes should also provide policy guidance to managers regarding community relations, socioeconomic impacts of major corporate decisions, and foreign trade. Socioeconomic and demographic changes expected in the United States and other industrialized nations will have substantial impacts on the available workforce and national markets, which will likely reach steady-state levels within a few decades. No longer will a constantly growing labor pool provide opportunities to suppress wage levels and other compensation. Another changing feature of the potential labor force is its average age, which will increase markedly. It may become necessary to provide incentives to encourage employees to continue to work beyond the traditional age 65 while retaining optional retirement at present age levels. Increasing life expectancy and improving health of older workers will make this option viable. Privatization of humanitarian and other public institutions is occurring with increasing frequency. The transition from the welfare state to private initiatives is already underway in the fields of health care, urban transportation, waste management, and education. Until the past decade, many of these functions were performed by governmental organizations. Now, many of these services are in the hands of private industry, either as independent commercial ventures or as contractors to local governments. In the United States, further privatization is expected in the electric utility industry under restructuring programs underway or planned. Similar privatization efforts are underway in the United Kingdom and other European nations as well as in China. Among the future challenging assignments to be undertaken by the private sector would be to extend the concepts of globalization and privatization to include humanitarian and technical services to developing nations in their quest for economic and social advancement. The question immediately arises: how will these poor nations be able to finance the work of foreign private corporations: through internal funding sources, grants or contracts from international humanitarian organizations, multinational consortia, or donated services from private corporations? It seems likely that external funding would be necessary until such time as the economies of these countries become self-sustaining. Free-market capitalists would argue that developing nations would best be served by internal development of domestic industries, perhaps stimulated by foreign capital, and not by “charitable” contributions of outside business or governmental organizations. No doubt many foreign corpo-

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rations building facilities in developing nations may be able to establish profitability without major investments in social overhead; however, this may be the exception rather than the rule. It appears doubtful that most corporations can operate in “exquisite seclusion” in Third World countries in view of the increasing connectedness of markets and political alliances, burgeoning population growth, and attendant social needs. IMPROVING ACCOUNTABILITY IN THE PRIVATE AND PUBLIC SECTORS Capitalistic businesses tend to view the extent of their responsibilities as being limited to their owners, customers, and lenders. However, accountability for corporate actions should extend to the greater community affected by such actions. Corporate accountability to shareholders, lenders, and government agencies is required by law insofar as financial matters are concerned. Businesses are likewise accountable for complying with various federal, state, and local environmental, safety, and other requirements. What has been lacking are socially minded attitudes and mechanisms that foster accountability by corporate or governmental institutions for actions that may have wider social impacts. Since the inception of capitalism, decision making in the private sector has largely excluded consideration of social effects of business operations; social impacts are usually considered as exogenous variables that do not relate to the core of business. George Soros, in his book The Crisis of Global Capitalism, states the growing problem of “anonymous market participants [that] are largely exempt from moral choices as long as they play by the rules.” He adds that the amorality of markets has undermined social values and that the rules governing markets should incorporate acceptable social values. Mechanisms to enhance accountability could provide guidance in corporate and public decision making and in enforcement of relevant public policies. Ideally, private corporations would voluntarily conduct analyses of potential societal impacts as an integral component of planning and major decision making. To the extent possible, corporate leaders would consult with community and other government leaders as a part of the decision-making process in efforts to ascertain in advance potentially positive or adverse socioeconomic impacts of major business events such as a plant development, closure, relocation, or merger. In concert with regional governmental leaders, a corporation could implement appropriate mitigation measures related to worker layoffs, tax revenue losses, and a host of other socioeconomic issues. Such measures should go beyond the usual provision of temporary severance pay for laid-off workers; they should perhaps encompass financial aid for local school districts and other essential services that have been provided by communities in sup-

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port of corporate operations and that may be seriously affected by plant closures or large-scale layoffs. While the socioeconomic effects of business events are most immediately felt at the local level, we should not overlook the fact that, in a collective sense, numerous individual business changes throughout an economy may either reflect or stimulate synergistic conditions that can accelerate national economic changes. Corporations should acknowledge their accountability also to the greater national economy that has provided the basis for their foundation and success. To what extent should the private sector consider national financial and socioeconomic issues as it anticipates participation in the accelerating globalization trend? Understandably, industry is reluctant to undertake comprehensive analyses of potential societal effects of its actions, particularly if it not required to do so and if its decisions may result in negative “press.” Nevertheless, there may be instances where large-scale business changes have economic and societal impacts beyond a single community, such as multiplant closures and relocations overseas involving layoffs of thousands of workers and related impacts on families, suppliers, and support businesses, not to mention loss of taxes for local schools and other activities. Such events can also have negative effects on the national balance of payments and other wide-ranging economic factors. These social effects should be addressed in corporate decision making and reasonable efforts should be made to cushion any hardships created by such decisions. In the public sector, accountability in stewardship of national economic and social conditions is widely assumed as a basic governmental duty, yet much of governmental decision making escapes public scrutiny. Critically important issues such as currency valuation, interest rates, regulation of financial markets, antitrust cases, and foreign trade are among areas in which a very small number of federal officials wield great influence with quite limited public accountability or participation of the general public. Among these agencies are the Securities and Exchange Commission, Federal Trade Commission, Antitrust Division of the Justice Department, Federal Communications Commission, Federal Reserve Board, and several others. Their efforts often profoundly influence national and, indeed, international economies, affecting workforce utilization, national economic output, money supply, securities values, interest rates, inflation, housing, prices, and consumer purchasing power. Unfortunately, there is no known arrangement whereby an adequate degree of accountability can be accomplished on a voluntary basis, either by private industry or by governmental bodies. Several reasons for this come to mind. First, conducting an adequate socioeconomic accountability assessment would require time and money. No organization would want to perform such analyses unless every competitor did likewise. Sec-

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ond, in the absence of uniform guidelines, the scope and depth of such analyses would vary widely in their relevance, comprehensiveness, and subsequent usefulness. And third, government agencies would likely resist reviewing such documents in the absence of a clear mandate to do so. It seems obvious, then, that the voluntary approach to assessing and mitigating socioeconomic impacts of major industrial and governmental actions will not be practical. The logical, but probably not the most popular, alternative would be evolution of national policies that require consideration of socioeconomic effects in decisions by government and industry that may affect large numbers of people or otherwise significantly alter regional or national socioeconomic factors such as employment, investment, tax revenues, currency, international trade, community viability, or other major facets of the economy. Federal policies addressing these issues would include all relevant cabinet-level departments and regulatory agencies. Likewise, private industry would be required to evaluate socioeconomic impacts in its planning related to major corporate actions such as acquisitions and divestitures, mergers, facility closures and relocations, and large-scale layoffs and would submit reports to cognizant federal agencies prior to final action. In several respects, this process would be similar to the current requirement under the National Environmental Policy Act (NEPA) in which industries contemplating developing major new facilities subject to federal environmental permits are required to conduct studies of potential environmental effects, develop mitigation options, and submit an Environmental Impact Statement (EIS) prior to governmental approval. The EIS process provides for public scrutiny via disclosure of plans, public hearings, and opportunities for comments. Under this proposal, there would be a requirement to develop what we might tentatively term a “Socioeconomic Impact Statement” for those large pending business events or governmental actions that may have significant impacts on communities and regions, and possible effects, positive and negative, on national economic interests. For industrial projects at the local level, the SIS could be a companion of the EIS in that the SIS would assess societal effects of business events while the EIS would consider environmental effects of a facility. Private industries would focus on the direct and indirect implications of their decisions, while their counterparts in government would be required to assess socioeconomic effects of: (1) national and international policy developments within their jurisdictions; and (2) regulatory decisions related to proposed projects in the private sector. In developing a suitable SIS process, considerable efforts would be required in establishing the criteria, thresholds, and methodology for conducting such assessments, analyzing options, and determining an ap-

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propriate review and approval process. No doubt the private sector would object strongly to such measures as being costly and an impingement on private prerogatives. Corporate leaders would likely fear that public disclosures of plans would impair their ability to negotiate business deals in a timely fashion, especially those that employ confidentiality. Within the public sector, one of the most obvious uses of an SIS process would be in the review by federal agencies of proposed corporate mergers and in considering changes in federal monetary and fiscal policies that would likely have widespread socioeconomic and financial implications. At present, federal antitrust agencies are only required to examine the effects of proposed mergers on competitiveness in a given industry. No consideration is required to be given to the direct and indirect socioeconomic consequences of proposed mergers or major federal monetary or economic actions. Among methods to establish such reviews would be amendments to the Sherman Antitrust Act, Clayton Antitrust Act, or related legislation or enactment of a new statute that embraces the SIS concept. GLOBALIZATION AND CAPITALISM Globalism as an ideal promotes the concept of free exchange of goods and currency among the world’s economies, unrestrained by arbitrary quotas, tariffs, and other restrictions. Under globalism, protectionism is to be avoided, although it still exists to some extent. Although globalism does not specifically rule out participation of command economies in global markets, it clearly favors capitalistic enterprises since they are inherently more efficient and thus might contribute more favorably to worldwide market performance. Thus, globalization has been advanced as an ideal that would complement the promotion of privatization of economies and limited government. A remarkable increase in international trade has occurred over the past decade that has benefitted numerous nations. However, only a relatively small segment of global society has profited from this trade so far. While relevant data are not readily available, a reasonable estimate is that less than 15 percent of the world’s population has received tangible benefits from this trade. The remaining 85 percent represent an overwhelmingly large potential market for the world’s goods and services. However, at present most of this population is poverty-stricken and without means to participate in the global market. In his book The Future of Capitalism, well-known economist Lester C. Thurow states, “For the first time in human history, anything can be made anywhere and sold everywhere. In capitalistic economies that means making each component and performing each activity at the place on the globe where it can be most cheaply done and selling the resulting prod-

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ucts or services wherever prices and profits are highest.” This concept is the essence of globalized capitalism. However, the purely economic dimensions of globalization do not account for the larger societal and political implications of international trade. Social conditions are being improved in some nations and undermined in others as a result of increased globalized transactions. Contrary to the rhetoric of the free-market advocates, globalization will not be a utopian solution to the world’s socioeconomic needs in the next century. As an economic philosophy, globalism is touted as both a panacea and inevitable; it is said to provide unlimited economic benefits via unfettered capitalism operating in a favorable global business climate. Globalists also claim that multinational enterprises, coupled with burgeoning worldwide communications and capital movements, will usher in a heretofore unattainable era of prosperity. However, much of the freemarket advocacy seems to be based on desires of political conservatives for diminution of public roles in national economies and replacement of anything remotely akin to popular democracy or socialism with laissezfaire capitalism. The financial crises of 1997–1998, which affected many of the world’s economies in varying degrees, should provide insights as to the frailties and risks of the current global financial system. Starting in Malaysia and Indonesia and subsequently infecting Japan, Hong Kong, and other Asian nations as well as South America, the financial “meltdown” had worldwide repercussions in securities markets. In the United States, the Dow Jones Industrial Average dropped from an all-time high (as of that date) of 9,337.97 in mid-July 1998 to 7,640.25 by September 4 of that year. Later, the Dow recovered to around 9,400 by the end of 1998 in the belief by Wall Street that the crisis was largely stabilized. However, the economic and financial collapse in Russia, which followed the Asian crisis, dealt globalism a second test in 1998. These and other developments regarding foreign economies have led to growing skepticism that the socalled global economy is capable of long-term viability. In one of her columns, Trudy Rubin, writer for the Philadelphia Inquirer, summarized the recent problems with globalization. She noted that “globalization is not irreversible” and that the “best way to keep globalization on track is to figure out how to spread its benefits—and offset its downsides. That means no more pretense that state social safety nets aren’t needed. It may mean rethinking whether a little protectionism here and there might be necessary to prevent the onset of a massive wave.” While it may be argued that the desire for participation of domestic industries in foreign markets is an inexorable trend, the free-marketers often fail to acknowledge the pitfalls and possibly counterproductive results that could emanate from overreliance of a national economy on

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export trade and dominance by foreign corporations. There is also a certain naivete ´ exhibited by some free-marketers regarding the roles of international and national government agencies in monitoring and facilitating global trade. Free-marketers advocate elimination of most nationalistic trade policies to the extent that all import and export tariffs and capital investment restrictions would be eliminated. Further, they contend there should be no restrictions regarding the conditions under which production and trade are made, regardless of the humanitarian and environmental impacts of such trade. Globalization is being facilitated by the rapidly expanding worldwide communications systems, such as the Internet and satellite systems. These systems are revolutionizing international business interchanges, offering instant communications in such areas as marketing, finance, purchasing, business negotiations, and other information transfers. Mobility of information exchange has been accompanied by another critical component of international business, namely transfer of capital. It is now possible to transfer vast sums of money (on account) instantly by way of the worldwide telecommunications systems. To a large extent, the 1997–1998 crises in Asia, Russia, and South America were financial rather than fully economic events. As always, of course, the economies suffered when debt and currency problems ensued. Exports needed to be increased but inflation kept prices too high to compete. Debt service on international loans became burdensome in several of these nations. Currency was devalued in several countries to enhance exports, but caused rampant internal inflation. The lack of uniform standards for international lending and financial accountability led to slipshod management of funds borrowed from numerous foreign banks and the International Monetary Fund. Globalization is now on trial. As an economic and political concept, it offers promise for economic and social advancement in the Third Millennium. Developing and industrialized nations alike should be able to participate in a globalized system that provides opportunities for betterment of economic and societal conditions in an equitable manner. This system should recognize the opportunities, limitations, resources, and cultural distinctiveness of all participants and develop means by which these attributes and needs are addressed in mutually beneficial relationships. Failing to demonstrate substantial progress toward more equitable globalization within a reasonable time period (say 10 years), the proponents of globalized capitalism may encounter serious difficulties in economic and political relations with emerging nations and larger countries such as China and India. Russia is a particular concern since its economy has virtually collapsed and its people are suffering more than they were under a communist regime. Some observers fear that unless substantial progress is made in the Russian economy in the near future, a popular

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or military uprising could ensue that could overturn the current capitalistic-democratic system and replace it with a socialistic government. Moreover, the instability in Russia gives rise to concern regarding its management of the still-existent intercontinental nuclear weapon system. These pitfalls notwithstanding, evolution of an equitable globalized economic system is worthy of ongoing commitments by the private sector and the world’s governments. A few of the issues to be addressed include the current instability of the financial system, unchecked mobility of capital, the types and extent of regulatory mechanisms, and the means by which social and cultural values can be incorporated into international financial transactions. GLOBAL GOVERNANCE The inherent conflict between capitalism and democracy has been accommodated historically via limited governmental actions in which the private sector has been required to acknowledge certain humanitarian values of its employees and civil rights of citizens. Despite these accommodations to democratic principles, capitalist enterprises generally are autocratic in their philosophical outlook and internal governance. The private sector seeks one thing—to maximize financial gain. Everything else is secondary or irrelevant. Government is viewed by the private sector as an impediment to its progress. Secondary economic, social, and environmental effects of corporate operations are considered to be extraneous variables that are omitted in decision making or business activities, except where required by law as in the case of environmental permits. The private sector seeks to eliminate or minimize consideration of “nonessential” issues that it regards to be outside of its direct economic interests regardless of the relevance of these issues to actual events and effects. And it abhors government interference of any kind. While private enterprise seeks autonomy and exclusion of outside interests in its economic quests, democracy seeks equality and pluralism in furthering participation of its constituents in society. In industrialized democracies, the conflicts between capitalism and democracy have been reconciled gradually as populism rose during the past century. The rise of labor unions and more liberal governments brought a measure of political power to constituents of democratic societies as manifested in enactment of laws regarding worker safety, job discrimination, environmental protection, and a host of others designed to improve the human condition. Private industry for the first time was required by law to acknowledge some responsibilities for humans outside the corporate boardroom. Political and economic influence in the United States has shifted back

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toward more capitalistic priorities in recent years as conservative, business-oriented legislators have come into political power. Many labororiented and environmental regulations have been repealed, and less public participation has been afforded in governmental processes. Similar political shifts have occurred elsewhere, although a few nations, such as the United Kingdom, have elected more liberal or centrist government leaders in recent times. These political shifts reflect the periodic swings in the balance of conservative and liberal politics that occur when the electorate senses the need for change. During the coming era of dramatic demographic shifts and economic globalization, the issue of governance takes on growing importance. What kinds of governance will be required at the national and international levels to encourage orderly economic advances while fostering social equity and preserving environmental resources? Conflicting schools of thought concerning governance are still extant and will remain so in the Third Millennium. The first is the idea that government is most effective when it is closest to those governed. This concept applies especially to state and local governments, which are most sensitive to the changing needs of constituents by virtue of their knowledge of local conditions, proximity to points of need, and pressures from citizens. At the national level, governance implies roles in facilitating and regulating economic and societal affairs as well as national security. These duties apply to democracies as well as authoritarian governments; the principal difference is how public policy is developed and implemented. However, the recent dialogue about the desirability of “limited government” has raised questions about the scope of governmental duties. Libertarian and conservative politicians have advocated diminution of many current governmental functions such as social programs and replacing them with privatized governmental activities. To date, these advocates have not been successful in implementing their case, although in the United States and several other industrialized nations governmental functions have been reduced substantially in scope. Globalization raises concerns regarding the rules governing trading nations and their industries. Through various private sector trade organizations, multinational alliances established by treaties, and statutes at the national level, the present morass of international trade is conducted in patchwork fashion. Regional consortia such as NAFTA and the European Union will probably proliferate elsewhere over the next decade as trading nations attempt to seek new outlets for exports. The growth of multinational trade arrangements will signal a need for international trading regulations that go far beyond present requirements. Such regulations should encompass the onerous issue of “dumping” as well as product safety standards and fair trade pricing practices. The issue of global monopolies should also be factored into trade policy.

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There should also be provisions for favoring products that are manufactured in accordance with humanitarian and equitable labor standards and environmental codes. Another possible factor in establishing global trade policy could be the extent to which exporting nations engage in oppressive human rights abuses or environmental degradation. This will likely be a contentious political issue, `a la China and a few African nations, but it should be a major consideration in policy development. While private industry associations and other quasi-public organizations, such as the World Trade Organization, should play central roles in establishing international standards of corporate behavior, whatever standards are adopted should be promulgated by official international governmental agencies and participating nations that are equipped for effective enforcement. In considering the kinds of governmental structures that may arise during the Third Millennium, the current tendency may be to favor democracies or populist republics in view of the demise of communism in the former Soviet Union and the emerging revisionist socialism in China. Along with democratization of nations is the notion that the most logical economic system would be capitalism. However, we must not forget that capitalism can thrive in governmental frameworks other than a democracy—for example, the American slavery system of the eighteenth and nineteenth centuries. A principle of political science holds that governmental apparatus should be sufficiently authoritative and robust to accomplish its mission, but only barely so. In a democracy, this implies that governmental entities have specific duties to perform but ultimately they must be accountable to their constituents. This rather obvious principle does not always apply in various governmental agencies. Some are overworked, others lack authority to accomplish their intended goals, and still others become anachronistic and should be abolished. These conditions are prevalent in many populist or representative governments. At the international level, governance is largely nonexistent although several multinational agencies exist by authority of the United Nations or groups of individual nations to accomplish specific objectives. The extent to which truly comprehensive international governance should or can be established is questionable. Nevertheless, some nations engaged in global commerce may find themselves inexorably drawn toward increasing degrees of international standardization, finance, monetary policy, and other economic conditions that may gradually undermine their independence and sovereignty. As a result, national leaders could respond by increased protectionism and nationalism, thereby largely defeating many virtues of enhanced globalized trade. As we consider the extremely long time frame of the Third Millennium,

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we must recognize the possibilities, however remote, of cataclysmic events that could overturn governments, societies, and economic systems. Benevolent national governments and international organizations could, of course, work to prevent or mitigate such events via diplomacy and other cooperative actions. Accordingly, there is a tendency to favor international governmental structures devoted to world peace and harmonious commerce. A candidate for such roles is, naturally, the United Nations. However, the intricacies in regulating trade under burgeoning globalism suggest that an independent international agency, largely detached from international diplomacy and politics, be given responsibilities for trade regulation. An international trade commission could serve the regulatory functions among trading nations, utilizing universal standards, a code of ethics, and broad enforcement powers. It could issue licenses independently; alternatively, individual nations could continue to issue their own trading licenses but in accordance with the adopted international standards. In either event, the commission could be empowered to exercise oversight jurisdiction for all major trading operations. This system would largely replace the essentially voluntary, nonenforceable global trading system that now exists. The commission could bring needed uniformity and equity to most international commerce, and it could promote long-term stability in global trade. The agency should be accountable to its constituents, either the United Nations or another competent oversight body. This unit should also be required to conduct socioeconomic impact analyses related to proposed major policies within its jurisdiction. In addition to the suggested international trade commission, another critical element of global commerce is finance, or more specifically financial institutions that engage in international finance. The financial crises of 1997–1998 involving the Southeast Asia nations, Mexico, Brazil, Russia, and, to a lesser extent, Japan and other nations were precipitated by instability and volatility of foreign currencies, political and private sector corruption, and improper management of large foreign bank loans. According to some observers, the crises in Southeast Asia were exacerbated by loan conditions by the International Monetary Fund and other lending institutions, which were unnecessarily burdensome on borrowing countries with tenuous economies. Several of these emerging nations, Indonesia and Russia for example, defaulted when their economies sagged and devalued currencies could not support the heavy foreign debt service load. Many calls for international finance reform have been made in recent times. One proposal offered by George Soros calls for formation of an International Credit Insurance Corporation, which would provide loan guarantees for “peripheral nations,” presumably those emerging nations

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whose financial track record is not sufficient to support conventional lending policies but which exhibit prospects for economic success. This proposal has some appeal since it could help forestall recurrence of the recent financial dilemmas in the nations cited above. It could provide reasonable assurance to the financial community that its lending to emerging nations need not be jeopardized, and it could offer encouragement to borrowing countries in pursuing promising economic developments. As an alternative or companion to the international credit insurance concept, formation of an international development bank could be considered as a method for lending to developing nations. Under this system, major banks, insurance corporations, and other lenders could participate in international lending through pooling arrangements. By pooling loan funds, risks to individual lenders could be reduced significantly. An international development bank could serve as a coordinating mechanism among existing organizations such as the IMF and World Bank in implementing lending programs in developing countries and in direct underwriting for loans that do not meet the traditional lending criteria of current agencies or conventional banks. Lending policies of the international bank would be managed by a board of directors representing participating financial institutions and major industrialized nations. The proposed bank would not supplant the IMF or the World Bank; rather, it would augment existing international financial institutions. CAPITAL FORMATION AND MOBILITY One of the tenets of classic economics is that capital should be invested in enterprises where it can obtain the highest possible rate of return, given other considerations. Since capital formation is essential to economic growth, developing nations especially are dependent on the influx or accumulation of capital resources. Similarly, because time is often a critical factor in seizing upon opportunities for economic gains, the ability to transfer capital, particularly financial capital, quickly is crucial. Among the factors of production, only financial capital has the ability to move quickly. With the increasing mobility of capital made possible by computerized worldwide communications systems, capital flight is a burgeoning issue, especially for some developing nations. Naturally, investors desire to move their funds quickly in order to capitalize on investment opportunities and to minimize losses on deteriorating investments. The recent problem of capital flight from developing nations has been triggered largely by adverse changes in currency values and interest rates when incomes from exports from those nations declined sharply. Foreign investors and lenders saw the value of their investments dwindle and

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quickly moved their money to “greener pastures.” Large-scale capital flight has left many developing nations with large debts, inflation, and depressed economies. Alternative remedies for stemming the outflow of capital from these economies are often drastic, ranging from currency revaluation and interest rate changes to outright seizures of foreign capital. The latter has been done rarely but it may be used for political as well as economic reasons. An example is the confiscation of Iranian funds by the United States during the Iran-hostage crisis, an event that has resulted in retention of these funds for many years. In the future, developing nations will require enormous amounts of capital for economic expansion and public infrastructure purposes. Much of this financial capital must be acquired from foreign sources and/or international financial institutions. Nevertheless, internal sources will assume growing importance as these countries begin to accumulate capital from domestic industrial operations. As domestically produced capital reaches significant levels, developing nations must adopt measures to encourage savings and growth of capital for reinvestment while simultaneously utilizing foreign capital as necessary. Minimizing outbound capital flows from developing countries will likely entail continuing measures to provide a favorable overall business climate and state-of-the-art banking and other financial institutions.

Conclusion

Entering the Third Millennium, the United States is experiencing a period of unprecedented economic growth and euphoria as unemployment and inflation rates are at postwar lows and personal incomes are rising for the first time in a decade. Federal revenues and expenses have been brought into balance and annual surpluses are foreseen for the next decade. In Europe, a protracted economic recession is still underway but prospects for improvement are bright. A lingering recession in Japan clouds the Asian scene, but the nation has underlying economic strength that should produce positive results over time. Socioeconomic conditions in Southeast Asia and Russia remain bleak but there are recent signs of some improvement in their financial and fiscal affairs. Brazil, although still struggling with inflation and other economic problems, has experienced some recent progress on the economic front. Nations of the Third World are plagued with cultural, political, and economic problems that represent continuing obstacles to increased international trade as well as humanitarian progress. Nevertheless, these countries constitute enormous opportunities for capitalistic enterprise over the next few decades. Capitalism will likely face its greatest challenges to date in addressing the requirements of a burgeoning global society and the underlying markets of the Third Millennium. Globalization of markets is touted by freemarketers as the economic salvation of both industrialized and Third World nations; however, thus far less than one-fifth of the world’s pop-

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ulation has received substantial net benefits by participation in such trade. While increasing globalization seems inevitable and probably beneficial in the long run, there are inherent dangers for many developing nations in overdependence on imports or exports, reliance on foreign capital for their economic development, and possible loss of political independence and national sovereignty attributable to their linkage with foreign entities. Even industrialized nations may not always benefit from expanded globalized trade. Rapid changes in currency values among trading nations are becoming serious problems in international commerce, often resulting in swift capital movements in or out of nations as they manipulate their currencies. Enormous demographic shifts are occurring in industrialized nations that will yield major population growth of older citizens in relation to total population. This portends changes in the future constitution of the labor force, new and growing financial requirements for retirement and entitlements, and a changing consumer market orientation from youthful consumers to older buyers. In Third World nations where most of the expected global population growth will occur, birth rates are projected to remain high and death rates will decrease, resulting in explosive growth. The global population of some 6 billion in 1999 may reach 10 billion to 15 billion by A.D. 2060 or earlier. A major fraction of global citizens will not receive significant benefits from increased global trade and will remain in poverty unless dramatic and continuing efforts are undertaken by industry and government. A recurring theme of this treatise is that capitalism can and should be a liberating and uplifting force for the world society. Only in a few nations is capitalism being practiced in ways that bear some remote resemblance to social equity and human benevolence. Why do capitalistic enterprises continue to exploit human and natural resources in the pursuit of wealth for a relatively few beneficiaries? How can a reasonable degree of social and economic equity be achieved based on the capitalistic system? Social and humanitarian goals of global society remain elusive. To date, capitalism has been largely aloof from these concerns. Its motivations continue to be the creation of wealth and accumulation of economic and political power. The current trend toward corporate bigness through mergers and acquisitions rather than internal growth reflects the desire to grow quickly at whatever expense is necessary and regardless of adverse socioeconomic costs to society. Whether this strategy will continue to hold up under Third Millennium conditions is subject to political as well as economic forces. During recent years, governments have taken a relatively passive stance regarding most mergers and have allowed a record number to proceed. As a result, there are concerns that increasing monopolization of some industries will ensue. Governments may be com-

Conclusion • 267

pelled to assume more active roles in reviewing proposed mergers and in minimizing potential monopolies. We have offered proposals toward increased participation of employees and the public in corporate affairs as one means of enhancing corporate social consciousness and responsibility. We have also suggested that large business and government organizations adopt a more explicit process for including socioeconomic implications in their decision making. And proposals for enhancing international financial systems to foster global economic development on a more orderly and equitable basis have been set forth. Collectively, we believe these suggestions could work to improve the dynamics of capitalism and effectuation of its social and humanitarian responsibilities. Energy production and consumption is a major facet of capitalistic enterprise but is often taken for granted by economists and planners; this can no longer be the case; conventional energy resources, such as petroleum and coal, while currently adequate in supply and presently low in cost, are finite and will grow more costly as reserves are diminished and as the adverse environmental effects of fossil-fuel burning become more severe. Sustainable or renewable energy resources, such as solar, wind, biomass, and geothermal, are virtually unlimited in availability and are environmentally benign. Renewable energy technologies such as wind power are being deployed increasingly in many American locations as well as Europe. These and other renewable technologies lend themselves to application in many parts of the world. Industrialized nations that are heavily dependent on petroleum and coal should adopt more definitive policies that foster increased use of renewable energy resources and that provide for a gradual phaseout of fossil-fueled electric power plants. More long-term and technically difficult is the issue of phasing out gasoline-fueled vehicles and replacing them with electric, hydrogen, or hybrid-fueled vehicles in efforts to reduce greenhouse gas emissions and urban air pollution. Efforts to develop inherently safe and environmentally clean controlled nuclear fusion power should be encouraged. This is a long-term possible option; to date the commercial feasibility of controlled fusion still eludes researchers. However, the enormous energy potential from this technology warrants continued research. Restructuring of the electric power and natural gas industries taking place under state and federal deregulation mandates may radically change energy production patterns and consumer use. Advocates contend that deregulation will bring increased competition and ultimately lower energy prices. On the downside, there are fears that the merger frenzy taking place among major electric and gas utilities may have the opposite effect, resulting in monopolistic practices. Further, energy supplies may be threatened as low-cost competitors undercut major suppliers and then

268 • Third Millennium Capitalism

cut supplies when their costs rise above the competition. Reliability of energy supplies may be jeopardized. As a part of energy industry restructuring, state and federal agencies should consider establishing “resource portfolios” that would specify minimum requirements for incorporating renewable energy technologies into the overall electric generation “mix.” Tax and production incentives could also be offered to encourage renewable technology utilization. Environmental conditions are deteriorating in many regions of the world, and efforts to mitigate adverse effects are seriously inadequate especially in some Third World nations. The issue of global climate change is worrisome and controversial. Increasing greenhouse gas emissions emanating from coal-fired and petroleum power plants, refineries, vehicles, and a host of lesser sources are believed to be causes of increased global atmospheric temperatures that are resulting in the retreat of many glaciers and precipitation and other climatic changes, all with long-term implications for agriculture, public health, and urban life. A global warming treaty, already signed by more than 100 nations, is in the United States Senate where lobbyists from the mining, automotive, and energy industries have been successful in stopping its consideration. The implementing details of the proposed treaty perhaps should be amended to provide for more equitable treatment of emissions reductions by industrialized and Third World nations, and the treaty or a better one should be adopted at any early date. Convergence of energy, economic, and environmental forces will become more apparent and important in capitalistic economies. Growing convergences are also expected among cultures, technologies, regional and international markets, and human settlements as increasing population density, transportation, and communications systems attempt to adapt to a rapidly growing global citizenry. Management of these vast interacting systems in socially acceptable ways will present perhaps the most challenging assignment to capitalism and the public sector in the Third Millennium.

Bibliography

The works cited below are among the principal ones that assisted the author in formulating or supporting the ideas expressed in this book. However, information drawn from many other books, periodicals, papers, and personal communications was also instrumental in developing early drafts of the manuscript.

BOOKS Bisio, Attilio, and Sharon Boots. Encyclopedia of Energy and the Environment, Vols. 1 & 2. New York: Wiley, 1997. Byrnes, Ralph T., and Gerald W. Stone. Economics. New York: HarperCollins, 1993. Clinard, Marshall Barron, and Peter C. Yeager. Illegal Corporate Behavior. Ann Arbor: Inter-university Consortium for Political and Social Research, 1983. Drucker, Peter F. Post-Capitalist Society. New York: HarperCollins, 1993. Energy Information Administration, U.S. Department of Energy. Annual Energy Review. Washington, DC: U.S. Government Printing Office, 1993. ———. International Energy Annual—1997. Washington, DC: U.S. Government Printing Office, 1999. ———. International Energy Annual—1995. Washington, DC: U.S. Government Printing Office, 1996. Flavin, Christopher, and Nicholas Lenssen. Power Surge. New York: W. W. Norton, 1994. Friedman, Milton. Money Mischief: Episodes in Monetary History. New York: Harcourt Brace, 1992. ———. Tyranny of the Status Quo. San Diego: Harcourt Brace Jovanovich, 1984. Galbraith, John Kenneth. Economics in Perspective: A Critical History. Boston: Houghton Mifflin, 1987.

270 • Bibliography Gipe, Paul. Wind Energy Comes of Age. New York: Wiley, 1995. Goldemberg, Jose. Energy for a Sustainable World. New Delhi: Wiley Eastern Ltd., 1988. Greider, William. One World, Ready or Not. New York: Simon & Schuster, 1997. Harvey, Hal, and Bill Keepin. Energy: From Crisis to Solution. San Francisco: The Energy Foundation, 1991. Heilbroner, Robert. 21st Century Capitalism. New York: W. W. Norton, 1993. Houghton, J. T., G. J. Jenkins, and J. J. Ephraums, eds. Climatic Change: The IPCC Scientific Assessment. Cambridge, UK: Cambridge University Press, 1990. Kahn, Herman, William Brown, and Leon Martel. The Next 200 Years: A Scenario for America and the World. New York: William Morrow, 1976. Keynes, John Maynard. The General Theory of Employment, Interest, and Money, Vol. 7. Cambridge, UK: MacMillan Cambridge University Press, 1936. Kidder, Rushworth M. Reinventing the Future. Cambridge, MA: MIT Press, 1989. Kuttner, Robert. Everything for Sale. New York: Alfred A. Knopf, 1997. Lamm, Richard. Megatraumas: America at the Year 2000. Boston: Houghton Mifflin, 1985. Lapp, Ralph E. The Logarithmic Century. Englewood Cliffs, NJ: Prentice-Hall, 1973. Lean, Geoffrey. Atlas of the Environment. Austin: Raintree Steck-Vaugh, 1993. Lieberman, Ira W. Mass Privatization in Central and Eastern Europe and the Former Soviet Union: A Comparative Analysis. Washington, DC: World Bank, 1995. Marx, Karl. Capital. New York: International Publications, 1967. Meadows, Donella H. Limits to Growth: A Report for the Club of Rome’s Project on the Predicament of Mankind. New York: University Books, 1972. Miller, E. Willard. Energy and American Society. Santa Barbara: ABC-CLIO, 1993. Mokhiber, Russell. Corporate Crime and Violence: Big Business Power and the Abuse of the Public Trust. San Francisco: Sierra Adult Books, 1988. Naisbitt, John. Global Paradox: The Bigger the World Economy the More Powerful Its Smallest Players. New York: William Morrow, 1994. ———. Megatrends 2000. New York: Avon Books, 1990. Nash, Roderick. Wilderness and the American Mind. New Haven, CT: Yale University Press, 1967. Office of the President. Economic Report of the President. Washington, DC: U.S. Government Printing Office, 1997. ———. Economic Report of the President. Washington, DC: U.S. Government Printing Office, 1999. Peter-Martin, Hans, and Harald Schumann. The Global Trap: Globalization and the Assault on Democracy and Prosperity. London: Zed, 1997. Rifkin, Jeremy. End of Work–The Decline of the Global Labor Force and the Dawn of The Post-Market Era. New York: G. P. Putnam Sons, 1995. ———. Entropy: A New World View. New York: Viking Press, 1980. Sandia National Laboratory. U.S. Geothermal Resource Development. ART-336AX6887–1, Albuquerque, NM, U.S. Department of Energy, 1993. Schumpeter, Joseph A. Capitalism, Socialism, and Democracy. New York: Harper and Bros., 1942.

Bibliography • 271 Smith, Adam. Inquiry into the Nature and Causes of the Wealth of Nations. Buffalo, NY: Prometheus Books, reprint 1991. Soros, George. The Crisis of Global Capitalism. New York: PublicAffairs, 1998. Sutherland, Edwin Hardin. White Collar Crime. New Haven: Yale University Press, 1983. Thurow, Lester C. The Future of Capitalism. New York: Penguin Books, 1996. Toffler, Alvin. Future Shock. New York: Bantam Books, 1970. Treble, Fred C., ed. Generating Electricity from the Sun. New York: Pergamon Press, 1991. The World in 1998. London: The Economist Group, 1997. World Resources 1990–1991. Oxford, UK: Oxford University Press, 1990.

ARTICLES Carbon Dioxide Information Analysis Center. “Estimates of CO2 Emissions from Fossil Fuel Burning.” Oak Ridge National Laboratory. Oak Ridge, TN. NDP030R, 1995. Flavin, Christopher, and Seth Dunn. “Climate of Opportunity: Renewable Energy after Kyoto.” Issue Brief No. 11. Washington, DC: Renewable Energy Policy Project, 1998. Hagel, Chuck. U.S. Senator (R–Neb.). Denver Post, December 3, 1997. Klann, Susan. Energy column. Denver Post, July 21, 1997, p. F2. Lehr, Ronald L., Esq. “Electric Industry Restructuring Overview,” presented at a conference in Santa Fe, NM, October 1996. Marlow, Joe. “Changing the Bottom Line.” SBC Sunday School Leader. Atlanta: Southern Baptist Sunday School Board, October 1997; p. 17. Middlesex News. Middlesex, MA, December 13, 1997. Murr, Andrew, and Sharon Begley. “Dams Are Not Forever.” Newsweek, November 17, 1997, p. 70. Public Service Company of Colorado. “Update on the Ponnequin Windsource Project.” Denver, CO, August 1997, pp. 1–3. Retallack, Simon, and Peter Bunyard. “We’re Changing Our Climate: Who Can Doubt It?” The Ecologist 29, no. 2 (1999): 60 (4). Sloan, Allan. “How Much Is Too Much?” Newsweek, 1997, pp. 40–42. Steer, Andrew, and Jocelyn Mason. “Global Environmental Change, Population, and Economic Growth.” In The Wiley Encyclopedia of Energy and the Environment, Vol. 2, Attilio Bisio and Sharon Boots, eds. New York: Wiley, 1997, pp. 948–960. U.S. Bureau of Labor Statistics. Monthly Labor Review. Washington, DC, 1995– 1998. U.S. Geological Survey. “1995 Assessment of United States Oil and Gas Resources.” Circular 1118, 1995. Worsham, James. “The Big Switch.” Nation’s Business, September 1997, pp. 18– 26. Wright, Andrew G. “Green Firms Find Gold in Utility Deregulation.” Engineering News-Record, August 11, 1997, pp. 36–38.

Index

Acid precipitation, 160, 165; acid rain, 165; acidification, 165 Acquisitions, 69 Agriculture, 35 Air quality deterioration, 159 Allocation of wealth, 34 American Association of Retired Persons, 6 American Council for an EnergyEfficient Economy, 223 American Electric Power Company, 141 American Gas Association, 129 American Petroleum Institute, 129 American Telephone and Telegraph (AT&T), 15, 70 American Wind Energy Association, 129 Antitrust, 70; laws, 14; monitoring, 23 Antitrust Division (U.S. Department of Justice), 71 Araskog, Rand, 67 Atlas of the Environment, 155 Atomic Energy Commission, 116 Atoms for Peace, 25 Autarky, 19

Autocracies, 232 Automotive air pollution, 166–68 Baer, George F., 13 Basic industries, 35 Bavarian Motor Works (BMW), 87 Bell Atlantic Corporation, 61, 70 Biodiversity, 190 Biomass, 119–20 Boomers, 32–33 Boston Edison Company, 141 Botero, Rodrigo, 40 Bottom-up policy, 233 British Telecommunications PLC, 70 Builders, 32 Bush, President George, 16 Business cycles, 34 Business “incubators,” 85 Business organization, 58 Byrnes, Ralph T., 244 Canada, 30 Capital gains tax policy, 23 Capitalism, Socialism, and Democracy, 229 Capitalist paradigm, 234

274 • Index Capitalistic system, 13, 40 Capitalization, 13 Cartels, 11 Castro, Fidel, 99 Central planning, 24–25, 217 Challenger, Gray, & Christmas, 71 Chappell, Tom, 63 China, 30 Clark, Colin, 81 Clean Air Act, 23, 185 Clean Water Act, 23, 185 Clinard, Marshall, 245 Clinton, President Bill, 71 Club of Rome, 1 Coal, 105; power plants, 118; reserves, 107 Coca-Cola, 68 Cogeneration, 112 Colgate-Palmolive Company, 96 Collectivism, 207 Colombia, 2 Commerce, U.S. Department of, 51 Commoner, Barry, 156 Comprehensive Environmental Response, Compensation and Liability Act, 185 Comprehensive planning, 93 Conglomerates, 69 Conservation of matter and energy, 7 Consumerism, 12 Contract with America, 28 Convergence, 208–17; of adverse environmental effects, 216; of cultures, 212; of markets, 215; of national economies, 209; of politicaleconomic systems, 217; in technological innovation, 211 Coolidge, President Calvin, 13 Corporate Crime and Violence: Big Business Power and the Abuse of the Public Trust, 245 Corporate welfare, 26 Council on Productivity, 24 The Crisis of Global Capitalism, 252 Critical path method (CPM), 43 Deficit spending, 16 Deforestation, 157, 179

Delta Air Lines, 61 Demand and supply, 36 Demand-pull, 18 Demographics, 33; demographic changes, 6; demographic transition, 201 Deregulation, 15, 28, 71, 113 Developing countries, 37 Devolution, 29 Discrimination, 64 Disney, Walt, 246 Diversification, 69 Downsizing, 62, 79 Dutch East India Company, 12 Eastman Kodak Company, 63 Economic Report of the President, 17 Economic units, 20 Economics, 244; economic development, 81–87; economic environment, 13; economic multiplier, 83; economic recovery, 17 Economics in Perspective, 229 The Economist, 149 Ecoterrorism, 54 Edison Electric Institute, 129 Eisenhower, President Dwight D., 25, 32 Eisner, Michael, 68 Electric energy industry restructuring, 140–49 Electric generation, 111 Electric vehicle, 137 Eli Lilly & Company, 188 Employee health and safety, 23 The End of Work, 230 Energy, 103–4; conservation, 138–40; production, 105; resources, 109–10; usage, 103–4 Energy, U.S. Department of, 48, 83 English East India Company, 12 Entrepreneurship, 85 Entropy: A New World View, 173 Environmental degradation, 4 Environmental protection, 175–77 Environmental Protection Agency, U.S., 188 Environmental regulation, 185

Index • 275 Erlich, Paul, 1 Ethiopia, 2 Ethnic minorities, 57 European Union, 31 Evenflo Inc., 96 Everything for Sale, 40 Externalities, 5, 24 Exxon Corporation, 70 Factors of production, 43 Federal Energy Regulatory Commission. See Energy, U.S. Department of Federal Insecticide, Fungicide, and Rodenticide Act, 185 Federal Trade Commission, 71 Feudalism, 11 Feuerstein, Aaron, 63 Fila, 246 Flat tax, 26 Forbes, 27 Franklin, Benjamin, 22 Free-market capitalism, 38 The Future of Capitalism, 255 Future Shock, 2 Galbraith, John Kenneth, 229 Gantt, Henry L., 13 GATT (General Agreement on Tariffs and Trade), 20, 30 General Electric Company, 68, 73 The General Theory of Employment, Interest, and Money, 14 Geothermal energy, 123 Gerry Baby Foods, 96 Gingrich, Newt, 28 Glacier melting, 162 Global climate change, 4, 160 Global Crossings Ltd., 70 Global Paradox: The Bigger the World Economy the More Powerful Its Smallest Players, 230 The Global Trap: Globalization and the Assault on Democracy and Prosperity, 230 Global warming. See Global climate change Global warming treaty, 129, 131, 164

Globalization, 4, 18 Goizueta, Roberto, 68 Goldemberg, Jose, 149–50 Golden parachutes, 67 Governance, 259 Great Depression, 13–14 Green Lights program, 188 Greenhouse gases, 164. See also Global climate change Greider, William, 74 Gross domestic product, 17, 62 GTE Corporation, 51 Guilford Corporation, 210 Gummer, John, 165 Hagel, U.S. Senator Chuck (R–Neb), 164 Hayes, Chuck, 210 Hazardous Materials Transportation Uniform Safety Act, 185 Heilbroner, Robert, 229 Hock, Del, 63 Honda Ltd., 87–88 House of Representatives, U.S., 100 Housing and Urban Development, U.S. Department of, 83 Hudson Institute, 236 Humanitarianism, 5 Hybrid capitalism, 39–40 Hybrid renewable energy systems, 124 Hydrogen economy, 137 Hydropower, 124 Illegal Corporate Behavior, 245 Income gap, 2, 46 Independent power producers, 141 India, 2 Indigenous peoples, 97 Industrial policy, 25–26 Industrial recruitment, 83–85 Industrial Revolution, 12 Industrialized nations, 81 Inflation, 15–16 Information industry, 35 Infrastructure, 6, 12 Innovation, 42 Institutional investors, 66 Interest rates, 79 Interior, U.S. Department of, 83

276 • Index International Monetary Fund, 51, 99 Investor-owned utilities, 132 ITT Corporation, 67 Japan 2, 31 J. C. Penney, 246 Johns-Manville Corporation, 96 Kahn, Herman, 236–37 Kennedy, President John F., 2 Keynes, John Maynard, 14, 37 Keynesian economic theory, 14 Kuttner, Robert, 40 Labor “climate,” 76 Labor force participation rates, 88–91 Labor unions, 60 Laffer curve, 15 Laissez faire, 13; laissez faire capitalism, 19, 24, 37–38 Lamm, Richard, 7 Land use planning, 92–93 Lean, Geoffrey, 155 Lieberman, Ira, 217 Lieberman, U.S. Senator Joseph (D– Conn), 165 Limited government, 5 Limits to Growth, 1 Lockheed Martin, 64 Lovins, Amory, 1 Malden Mills, 63 Maldistribution of income and wealth, 46 Malthusian outlook, 237 Management, 44 Management-labor relations, 65 Manufacturing, 35 Market economy, 5; market system, 43 Mass transit, 138 McCormick, Richard, 68 MCI, 70 McNamara, Robert S., 40 Meadows, Donella, 1 Megatrends 2000, 1 Mergers, 69–70 Mexico, 30–31 Microsoft Corporation, 70

Mining, 35 Mixed economy, 40 Mobil Oil Corporation, 70 Mokhiber, Russell, 245 Monopolies, 44; regulated natural, 113 Morgan, J. P., 11 Multinational corporations, 5, 21 Multinationalism, 4 Mutual funds, 65 Naisbitt, John, 1, 230 Nash, Roderick, 158 National Coal Association, 129 National Energy Plan, 129 National Environmental Policy Act (NEPA), 23, 185 National Renewable Energy Laboratory, 120, 129 National sales tax, 26–27 National security, 5, 49 National sovereignty, 4 National space program, 25 National trade deficit, 19 Nationalization, 99 Natural gas. See Petroleum Natural monopolies, 113 New Century Energies, 63, 141 New Right, 227 New York Times, 63 Nordby International Inc., 68 North American Free Trade Agreement (NAFTA), 30 Northwest Airlines, 61 Nuclear energy, 115; breeder reactor, 117; fusion energy, 117; power plants, 115; waste management, 116– 17 Nynex Corporation, 70 Occupational Safety and Health Act, 23 Ocean energy systems, 124 Oil consumption. See Petroleum Oil shale, 108 One World, Ready Or Not, 74 Organization of Petroleum Exporting Countries (OPEC), 19

Index • 277 Outsourcing, 60 Ozone depletion, 16, 166 Participatory democracy, 12 Peat, 109 Per capita income, 2 Perot, Ross, 209 Peter-Martin, Hans, 230 Petroleum: consumption, 105; future use of, 118–19; production of, 105; resources, 108 Philadelphia Inquirer, 256 Photovoltaic cells, 122 Pitofsky, Robert, 71 Pollution abatement, 186 Pollution control, 185, 192–93 Pollution tax, 136 Population: explosion, 92; implosion, 92; shifts, 7 Private sector, 34 Privatization, 5, 42 Productivity, 17, 91 Program evaluation and review technique (PERT), 43 Protectionism, 18 Public policy, 23 Public sector, 34 Public Service Company of Colorado, 63, 70, 141 Publicly-owned electric cooperatives, 132 Quality of life issues, 6 Quayle, Vice President Daniel, 24 Raytheon Company, 61 Reagan, President Ronald, 15 Recycling, 177–78 Reengineering, 62 Regional planning. See Central planning; Comprehensive planning Renewable sources, 112, 119 Resource Conservation and Recovery Act, 185 Restructuring, 62. See also Downsizing Rifkin, Jeremy, 173, 230 Rightsizing, 62

Rockefeller, John D., 11 Roosevelt, President Franklin D., 14, 32 Rostow, W. W., 82 Rubin, Trudy, 256 Rural development, 93 Safe Drinking Water Act, 185 Schumann, Harald, 230 Schumpeter, Joseph, 229 Scientific management, 12 Securities markets, 17 Service economy, 35 Shareholders, 58–59 Sithe Energies Ltd., 141 Smith, Adam, 12 Social overhead, 6. See also Infrastructure Social Security, 7 Socioeconomic Impact Statement, 254 Socioeconomic trends, 236 Solar energy, 122–23 Solar Energy Association, 129 Soros, George, 100, 252, 261 South America, 22 Southwestern Public Service Company, 63, 141 Soviet Union, 29 Sprint International, 70 Stakeholders, 59, 76 State, local, and tribal governments, 23 Storage Technology Corporation, 64 Stranded costs, 114 Sturm, Donald, 70 Subsistence agriculture, 12 Superfund, 23 Supply-push, 18 Supply-side economics, 15, 36 Sutherland, Edwin, 245 Synergism, 218–20 Synthetic Fuels Corporation, 128 Taylor, Frederick W., 13 Teamsters Union, 60 Technological change, 3, 42 Telecommunications, 70 Telecommunications Inc. (TCI), 70

278 • Index Terrorism, 54 Thurow, Lester C., 255 Toffler, Alvin, 2 Toms’s of Maine, 63 Toxic Substances Control Act, 23, 185 Tribalism, 230 Trujillo, Sol, 57 Trusts, 11 Turner, Ted, 234 21st Century Capitalism, 229 Unemployment, 62 United Nations, 6, 195 UPS (United Parcel Service), 60 Urbanization, 92 U.S. West, 57, 68, 70

Welfare statism, 217 Welsh, Jack, 68, 73 White Collar Crime, 245 Wilderness and the American Mind, 158 Wildlife habitats, 174–75 Wind energy, 120–21 Wind turbines, 120–21 Works Progress Administration, 14 World Bank, 51 World Commission on Environment and Development, 195 World financial markets, 73 The World in 1998, 149 World population, 2–3 World Trade Organization, 42 WorldCom Inc., 70

Value-added tax, 58 Walt Disney Company, 68, 246 Water pollution, 171–72 Wealth, 44; creation of, 34 The Wealth of Nations, 12

X factor, 218–19 X Generation, 32 Yeager, Peter, 245 Yorkshire Electricity Group PLC, 141

ABOUT THE AUTHOR WYATT M. ROGERS, JR. is President of III Sigma Company, an economic and engineering consulting group. He has served as an economist and engineer in the fields of economic development, energy production, and environmental protection. Among his earlier positions are Executive Director of the National Committee on Oil Shale, Executive Director of the Western Interstate Energy Board, Director of the State of West Virginia’s Technology and Economic Development Division, and Vice President of York Research Corporation.