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THE AGE OF DIGITAL CAPITAL
Welcome to the Age of Digital Capital! Over the next twenty years we will witness an unprecedented revolution in the world’s capital markets. The world’s stock exchanges, currency trading, financial centers, banks and investment houses, insurance companies and pension funds will all become so electronically interwined that they will effectively merge into a single organism without a center. Yet they will be engaged in a torrent of free-flowing global capital of such magnitude that the very nature of capital will never be the same.
Capital will flow so effortlessly across national borders that the world will effectively have one currency. The global integration of banks will ensure that interest rates between countries will be no different from those in neighboring cities today. The various world stock markets will merge into a web of automated trading, enabling a home investor anywhere to research, buy and sell stock in a little known shop somewhere far off. The public reporting of companies will have global format making comparison easier. The world’s capital is becoming one.
Originally, capital was defined as any physical item used to produce things-hoes and hammers, horses and carriages, textile mills and inventory. Classical economists have long taught that capital, labor and raw materials form the tripod upon which all wealth is built. Overtime, the term capital has expanded to include any form of wealth or asset –money, stocks, real estate investments that could be used to accumulate more wealth.
Today, the shift away from the physical thing to the investment in the physical thing has become so complete that we’ve lost our connection to the underlying object. Capital is no longer a physical thing but numbers representing wealth in an accountant’s balance sheet or as electronic blips on a computer screen. Ownership in real estate can be converted into liquid cash, with just a few signatures. Ownership of a piece of Shell can be converted into a piece of IBM in microseconds. Electronic transfers allow today’s capital to be moved from place to place so fast that it flies around the world several times in a day. The money float allows cheques to be sent to creditors, with funds wired into the account just before the cheques clears-effectively allowing the same capital to be several places at once. Credit cards and international letters of credit even allow parties to get paid before the money is sent.
THE PLACE OF CAPITAL TODAY
Governments are almost powerless over the flow of capital. When wishing to go undetached, it passes instantly and silently through the fabric of the society. Capital today is what electronic symbols define it to be, high tech and transactional, with a power beyond anyone’s inauguration.
However, as global capital flows, global banks- the pipeline through which capital flows-wield enormous power. Many have become so large as to outstrip the national treasuries of many countries. The financial giants like Citicorp are redefining banking and greatly facilitating our shift into a free-flow of capital. Only a some few years ago, customers in different area could only get local services; going from one branch to another was almost like changing banks.
Citi for example, spent a billion dollars on state-of the-art computer and telecom equipment and melded thousands of branch offices in scores of countries with a single bank. Citicorp was one of the first corporations that went global. Citi’s new global services are for corporations and individual clients as well. Its best customers receive multi currency accounts enabling them to write or cash cheques in any currency. Its 2 million credit cards are valid all over the world, no matter where the holder lives or how he or she is billed. Competitive pressures are forcing banks to go global and integrate branch offices into a single whole. Banks in the twenty–first century will be merging to form a single organism. They will soon share the same global regulations. In the end, while the logos on the bank doors will vary, they will all have effectively merged into a single organism.
But far more has changed them the nature of capital or the institution that manage it. At stake is also the very role of the nation-state. This is an era in which capital has become so fluidic that it can no longer be controlled by individual countries. When capital represented physical things (tractors or inventory), it could be stopped at the border. But when capital is conveyed in electrical impulses, borders become meaningless. For a capitalist in the Age of Everything-Everywhere, nation states exist in the imaginary sense.
John Keynes argued in 1936 that a government could fine0tune its economy by modulating its level of taxing and spending. Later the monetarists further argued that governments could control their economies by regulating the interest rate and money supply. For the last thirty years these were the two levers used by industrialized economies to control their expansion. Fiscal and monetary policies worked somewhat in the 1960s and 1970s when national economies were still closed systems. In the placeless society, they no longer work, like before. Today when the American government wants to change interest roles to regulate its economy, it first goes with hat in hand to the croup of seven(G7) to get them to do the same. If the US lowers interest rates unilaterally, the cheap money is snapped up in the earn a greater return. It no longer stays put.
With digital capital, a nation operating in the world is like a city run in a national setting. A city cannot effectively stimulate its local economy by deficit spending or by lending cheap money to downtown national banks. Yet that is exactly what nations still try to do. The finance ministers and central bankers do not realize that the placeless society offers too many leaks. Digital capital has taken the wind out of some government’s fiscal and monetary policies.
The fluidity of digital capital is a problem for poor countries. Economists estimate that half the cash lent to them in the 1980s left quickly by telex or suitcase as their citizens transferred billions of dollars to other countries bidding higher returns. Regional development economists now realize that getting foreign aid is not sufficient; they must first make their national policies conducive to attracting and holding the investment. Global capital has no flag. Infinitely liquid, it flows to the highest bidder with laser speed.
While the placeless society enables capital to move at unprecedented speed and prodigious amounts, it also brings with it a new irony. Less capital is needed. Entrepreneurs today no longer have to own the tools of production to have access to them. Subcontracting and leasing has become integral in today’s business life. In Nigeria for instance, major oil companies don’t own the vehicles they use anymore. They lease them using day-to-day cash receipt for payment. Most of the Shell vehicles cruising the streets of Port-Harcourt in Nigeria belong to Lambic Technical Limited which leases them with maintenance, insurance and uniformed drivers.
Even when companies choose to own machinery, technology enables them to produce more with less expensive equipment. We all know that low-cost photocopies have replaced expensive lithographic presses, and that the cost of fax machine, computers and cellular phones is plummeting. Manufacturing plants also are able to co-ordinate with customers, suppliers and themselves with such precision that less capital is tied up in inventory. Raw materials arrive “just in time” from suppliers before being cut, drilled, poured, polished, boxed and sent immediately to customers, who pay electronically.
What does the advent of placeless capital mean for the individual investors? A few decade ago, investors were largely restricted to investments in their home countries. Information was scare, investments were hard to find, currencies fluctuated too much and transaction costs were prohibitively high. Global investing was too risky. Today, however, the smart investor discovers that the world has flip popped. It is less risky to invest to invest globally than nationally. This means thinking globally, having a 360o vision of the target customers, and perhaps working locally. The investor of this sort has more investment options than his or her national counterpart, which translate into lower risk because communication and transactional costs have plummeted, and currency fluctuations can be hedged. Since the business cycles of the various economies of the world are not yet synchronized, the global investor enjoys business cycle diversification not found within a single country.
The placeless society has utterly transformed the nature of capital, reducing it to symbols detached from any physical object. Without a home, without a flag, it pulses through the veins of a newly omnipresent world. Hence in this new world, capital has never been more plentiful. Yet, especially in manufacturing, never has no little investment been needed to produce so much. Our fore fathers would not recognize the face of capital today.