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The new world economy

The biggest change in the world economy since the early 1970's is that flows of money have replaced trade in goods as the force that drives exchange rates. as a result of the relentless integration of the world's financial markets, differences in national economic policies can disturb interest rates (or expectations of future interest rates) only slightly, yet still call forth huge transfers of financial assets from one country to another. These transfers swamp the flow of trade revenues in their effect on the demand and supply for different currencies, and hence in their effect on exchange rates. As telecommunications technology continues to advance, these transactions will be cheaper and faster still. With uncoordinated economic policies, currencies can get only more volatile.

Alongside that trend is another - of ever-expanding opportunities for international trade. This too is the gift of advancing technology. Falling transport costs will make it easier for countries thousands of miles apart to compete in each others' markets. The law of one price (that a good should cost the same everywhere, once prices are converted into a single currency) will increasingly assert itself. Politicians permitting, national economies will follow their financial markets - becoming ever more open to the outside world. Tis will apply to labor as much as to goods, partly thorough migration but also through technology's ability to separate the worker form the point at which he delivers his labor. Indian computer operators will be processing New Yorkers' paychecks.