Milton Friedman

David Warsh: 'The Economists' Hour' and its hangover



Books like The Economists’ Hour: False Prophets, Free Markets and the Fracture of Society (Little Brown, 2019), by Binyamin Appelbaum, of The New York Times, don’t come along very often. Tyler Cowen, the peripatetic George Mason University professor, says he read the whole thing in one sitting. It took me three days, but the impulse was the same. I picked it up every chance I got. When I had finished, I read its 90 pages of endnotes one after another, as if it were a second book, only slightly less interesting than the first.

Why? Well, Appelbaum is a careful reporter, a graceful writer, and a first-rate story-teller. He joined The Times’s  Washington bureau in 2010 from The Washington Post, and, before that, The Boston Globe, and the Charlotte Observer, to cover monetary policy in the aftermath of the financial crisis. In the book he covers a much broader spectrum of policy developments. He did a good deal of first hand reporting, ingested a huge amount of secondary literature, and did some archival work himself. Mainly, though, I was impressed by his skill as a listener. He possesses a special gift for capsule biography.

Of necessity, the storyteller gets the upper hand. Appelbaum writes:

In the four decades between 1969 and 2008, a period I call ‘‘the Economists’ Hour,” borrowing  the phrase from the historian Thomas McCraw, economists played a leading role in curbing taxation and public spending, deregulating large sectors of the economy, and clearing the way for globalization. Economists persuaded President Nixon to end military conscription. Economists persuaded the federal judiciary largely to abandon the enforcement of the antitrust laws. Economists even persuaded the government to assign a dollar value to human life – around $10 million in 2019 – to determine whether regulations were worthwhile.

Such a “biography” of a “trust-in-markets” revolution needs a central character, and Appelbaum chose his well. His subject is Milton Friedman, who concentrated on research in the first half of his career and became a public intellectual in the second half. In Capitalism and Freedom, which appeared in 1962, Friedman  advocated most of the nostrums that were adopted in one degree or another in the coming decades:  floating exchange rates instead of fixed one, an all-volunteer army instead of one based on conscription, draconian tax reductions, charter schools, industrial deregulation, shareholder hegemony in public corporations,  and one measure that didn’t eventuate – a guaranteed annual income for all citizens, replacing the Social Security retirement system.

In fact all this was a counterrevolution, Appelbaum knows it, and says as much at several points in his story. But he was born in 1978.   He wasn’t there during the four decades that ended in 1969:  the New Deal; the Keynesian revolution; the economists’ triumph as architects of World War II logistics; the Marshall Plan; the “new economics” of the Sixties; and the record-breaking post-war boom of the industrial democracies.

This rise of the “modern mixed economy” after 1933 was viewed at the time as an alternative to the top-down government control that characterized Soviet and Chinese communism. It had plenty of dynamism, but retained enough of the communitarian ethos of wartime (such as fixed exchange rates under the Bretton Woods Agreement) as to seem, by the late 1960s, more than a little confining.  Appelbaum knows all this because he has read widely; he even cites Tony Judt, the leading historian of the postwar decades, in an endnote.  But, like many others, he gives short shrift to the period before his own.

Instead, he starts with something we all know, the Vietnam War.  A brilliant first chapter traces the evolution of a plan for an all-volunteer army from a chance dinner-party conversation between economic professor Martin Anderson and a law partner of Richard Nixon, through its gradual adoption by Nixon 1968 presidential campaign, and its design by University of Rochester economist Walter Oi, to its eventual adoption under the guidance of economist George Shultz, then director of the Office of Management and Budget. A little extra time to end the war had been purchased. The basic inequity of conscription had been solved. A market for soldiering had been established.  But, writes Appelbaum, “War, once an abnormal act of national purpose, has become a regular line of work.”

Appelbaum then works his way through chapters on inflation, taxation, antitrust enforcement, deregulation, cost-benefit analysis, exchange-rate regimes, globalization, and banking. any one of which could warrant  an entire book. These are successively less satisfying. He is forced to take shortcuts:  Robert Mundell wasn’t a baby-faced hero; antitrust enforcement isn’t dead; the story of Venezuela is as interesting as the very different one of Chile. But such are his skills as a storyteller that, by the time he introduces Albert Hirschman, author of Exit, Voice, and Loyalty, in the book’s final pages, Appelbaum’s central point has become indelibly clear: “[T]he defining feature of a market is the freedom to walk away.”

Appelbaum writes, “Friedman chose to see the role of individual initiative rather than the context of public support. He celebrated drivers and took roads for granted.” That’s very apt, as far as it goes. And in the end even he gets a sensitive hearing: “Friedman had as large a hand in the [2008] crisis as any man, but it is a mark of the complexity of his legacy that he also left effective instructions for limiting the damage.”

The problem is that plenty of economists have continued to celebrate roads during the last 40 years – as well as government-sponsored retirement systems, health insurance, unemployment insurance, capital budgets, trade agreements, counter-cyclical spending, environmental protection, and, in general, social and cultural entrepreneurship.

For a more balanced view of the stance of the economics profession towards society, you might read The Vital Few: The Entrepreneur and American Economic Progress (1986), by economist Jonathan Hughes.  It is a highly readable history, couched in much the style Appelbaum has written. Hughes, of course, published his account in the halcyon period before the costs of late-stage globalization became apparent.  The Economists’ Hour is a useful guide to those costs. Applebaum writes:

In the pursuit of efficiency, policy makers subsumed the interests of Americans as producers to the interests of Americans as consumers, trading well-paid jobs for low-cost electronics.  This, in turn, weakened the fabric of society and the viability of local governance.  Communities mitigate the consequences of local job losses; one reason mass layoffs are so painful is that the community, too, often is destroyed. The loss exceeds the sum of its parts.

It wasn’t obvious what would happen when Apple chose to manufacture its smartphones in China; or when IBM sold its laptop business to Lenovo.  It was, however, clear enough to corporate executives and their government counterparts what would happen if they didn’t: Chinese companies would inevitably enter the product market themselves and catch up, albeit more slowly than otherwise would have been the case. American policy-makers have been caught flat-footed by the alacrity with which Chinese industry has grown toward the frontiers, and Appelbaum makes much of the ability of Asian nations to carefully manage their economies.  But it’s much easier to know what to do when you are following a leader than when you are trying to stay ahead.

What comes after the Economists’ Hour?  Appelbaum is clearly focused on inequality, and the extent to which money has gained power beyond its proper sphere.  He is 41, and this is his first book. (He is now serving on The Times’s editorial board). It is a sensational debut.  Here’s hoping The Times gets him back on the beat, preferably writing the Economic Scene column that Leonard Silk made famous in the ‘70s and ‘80s. Meanwhile, read his book, as a down payment on the next 30 years.

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New on the Economic Principals bookshelf:

Transaction Man: The Rise of the Deal and the Decline of the American Dream, by Nicholas Lemann (Farrar, Straus)

Free Enterprise: An American History, by Lawrence Glickman (Yale)

Rethinking the Theory of Money. Credit, and Macroeconomics: A New Statement for the Twenty-First Century, by John Smithin (Lexington Books)

Crying the News: A History of America’s Newsboys, by Vincent DiGirolamo (Oxford)


 David Warsh, an economic historian and veteran columnist, is proprietor of Somerville-based, where this column first ran.


David Warsh: Knowledge economy superstars and hollowing of middle class



It is one of the great explications of economics of modern times:  Written in 1958 by libertarian Leonard Read and subsequently performed by Milton Friedman as The Pencil, a couple of minutes of Free to Choose, the 10-part television series he made with his economist wife, Rose Director Friedman, broadcast and published in 1980.

Friedman comes alive as he enumerates the various products required to make a simple pencil: the wood (and, of course, the saw that cut down the tree, the steel that made the saw, the iron ore that made the steel and so on), graphite, rubber, paint (“This brass ferrule? I haven’t the slightest idea where it comes from”).

Literally thousands of people cooperated to make this pencil – people who don’t speak the same language, who practice different religions, who might hate one another if they ever met.

This is Friedman as he was experienced by those around him, sparks shooting out of his eyes. The insight itself might as well have been Frederic Bastiat in 1850 explaining the provisioning of Paris, or Adam Smith himself in 1776 writing about the economics of the pin factory.

There is a problem, though. None of these master explicators have so much as word to say about how the pencil comes into being. Nor, for that matter, does most present-day economics, which remains mainly prices and quantities. As Luis Garicano, of the London School of Economics, and Esteban Rossi-Hansberg, of Princeton University, write in a new article for the seventh edition of the Annual Review of Economics:

Mainstream economic models still abstract from modeling the organizational problem that is necessarily embedded in any production process.Typically these jump directly to the formulation of a production function that depends on total quantities of a pre-determined and inflexible set of inputs.

In other words, economics assumes the pencil.  Though this approach is often practical, Garicano and Rossi-Hansberg write, it ignores some very important issues, those surrounding not just the companies that make the products that  make pencils, and the pencils themselves, but the terms under which all their employees work, and, ultimately, the societies in which they live.

In “Knowledge-based Hierarchies: Using Organizations to Understand the Economy,” Garicano and Rossi-Hansberg lay out in some detail a prospectus for an organization-based view of economics.  The approach, they say, promises to shed new light on many of the  most pressing problems of the present day:  evolution of wage inequality, the growth and productivity of firms, the gains from trade, the possibilities for economic development, from off-shoring and the formulation of international teams, — and, ultimately, the taxation of all that.

The authors note that, at least since Frank Knight described the role of entrepreneurs, in Risk, Uncertainty, and Profit, in 1921, economists have recognized the importance of understanding the organization of work.  Nobel  laureates Herbert Simon and Kenneth Arrow each tackled the issue of hierarchy.  Roy Radner, of Bell Labs and New York University, went further than any other  in developing a theory of teams, especially, the authors say, in “The Organization of Decentralized Information Processing,” in 1993.

But all the early theorizing, economic though it may have been in its concern for incentives and information, was done in isolation from analysis of the market itself, according to Garicano and Rossi-Hansberg. The first papers had nothing tp say about the effects of one organization on all the others, or about the implications of the fact that people differ greatly in their skills.

That changed in 1978, the authors say.  A decade earlier, legal scholar Henry Manne had noted that a better pianist had higher earnings not only because of his skill; his reputation meant that he played in larger halls. The insight led Manne to conjecture that large corporations existed to allocate the production most efficiently of managers, like so many pianists of different levels of ability.

It was Robert Lucas, of the University of Chicago, who took up the task in 1978 of showing precisely how such “superstar” effects might account for the size of firms, with CEOs of different abilities hiring masses of undifferentiated  workers – and why scale might be an important aspect of organization. He succeeded, mainly in the latter, generating fresh interest among economists in the work of  business historian Alfred Chandler.

It was Sherwin Rosen, of the University of Chicago, with “The Economics of Superstars,” in 1982, who convincingly made the case that the increasing salaries paid to managers had to do with the increase in scale of the operations over which they preside (and, with athletes, singers and others, the size of the audiences for whom they perform). A good manager might increase the productivity of all workers; the competition among firms to hire the best might cause the winners to build more and larger teams; but Rosen didn’t succeed at building hierarchical levels into his model.  He died in 2001, at 62, a few months after he organized the meetings of the American Economic Association as president.

Many others took up the work, including Garicano and Rossi-Hansberg.  It was the '90's, not long after a flurry of work on the determinants of economic growth spelled out for the first time in formal terms the special properties of knowledge as an input in production. The work on skills and layers in hierarchies gained traction once knowledge entered the picture.

At the meetings of the American Economic Association this weekend in Boston, a pair of sessions were  devoted to going over that old ground, one on the “new growth economics” of the Eighties, another on the “optimal growth” literature of the Sixties. Those hoping for clear outcomes were disappointed.

Chicago’s Lucas; Paul Romer, of New York University; and Philippe Aghion, of Harvard University, talked at cross purposes, sometimes bitterly, while Aghion’s research partner, Peter Howitt, of Brown University, looked on.But Gene Grossman, of Princeton University, who with Elhanan Helpman, of Harvard University, was another contestant in what turned out to be a memorable race, put succinctly in his prepared remarks what he thought had happened:

Up until the mid-1980, studies of growth focused primarily on the accumulation of physical capital. But capital accumulation at a rate faster than the rate of population growth is likely to meet diminishing returns that can drive the marginal product of capital below a threshold in which the incentives for ongoing investment vanish. This observation led Romer (1990), Lucas, (1988), Aghion and Howitt (1992) Grossman and Helpman (1991) and others to focus instead on the accumulation of knowledge, be it embodied in textbooks and firms as “technology” or in people as “human capital.” Knowledge is different from physical capital inasmuch as it is often non-rivalrous;  its use by one person or firm in some application does not preclude its simultaneous or subsequent use by others.

My guess is that “Knowledge-based Hierarchies: Using Organizations to Understand the Economy” will mark a watershed in this debate, the point after which arguments about the significance of knowledge will be downhill. “If one worker on his own doesn’t know how to program a robot, a team of ten similar worker will also fail,” write Garicano and Rossi-Hansberg. The only question is whether to make or buy the necessary know-how.

What’s new here is the implication that as inequality at top of the wage distribution grows, inequality at the bottom will diminish less, as the middle class is hollowed out.

[E]xperts, the superstars of the knowledge economy, earn a lot more while less knowledgeable workers become more equal since their knowledge becomes less useful.  Moreover, communications technology allows superstars to leverage their expertise by hiring many workers who know little, thereby casting a shadow on the best workers who used to be the ones exclusively working with them. We call this the shadow of superstars.

For a poignant example of the shadow, see last week’s cover story in The Economist, Workers on Tap.  The lead editorial rejoices that a young computer programmer in San Francisco can live like a princess, with chauffeurs, maids, chefs, personal shoppers.  How? In There’s an App for That, the magazine explains that entrepreneurs are hiring “service pros” to perform nearly every conceivable service – Uber, Handy, SpoonRockert, Instacart are among the startups. These free-lancers earn something like $18 an hour. The most industrious among them, something like 20 percent of the workforce, earn as much as $30,000 a year.  The entrepreneurs get rich. The taxi drivers, restaurateurs, grocers and secretaries who used to enjoy middle class livings are pressed.

Work on the organization-based view of economics is just beginning:  Beyond lie all the interesting questions of industrial organization, economic development, trade and public finance.  Much of the agenda is set out in the volume whose appearance marked the formal beginnings of the field,  The Handbook of Organizational Economics (Princeton, 2013), edited by Robert Gibbons, of the Sloan School of Management of the Massachusetts Institute of Technology, and John Roberts, of Stanford University’s Graduate School of Business. Included is a lucid survey of the hierarchies literature by Garicano and Timothy Van Zandt, of INSEAD.

The next great expositor of economics, whoever she or he turns out to be, will give a very different account of the pencil.

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Andrew W. Marshall retired last week after 41 years as director of the Defense Department’s Office of Net Assessment, the Pentagon’s internal think-tank. A graduate of the University of Chicago, a veteran of the Cowles Commission and RAND Corp., Marshall was originally appointed by President Nixon, at the behest of Defense Secretary James Schlesinger, and reappointed by every president since. He served fourteen secretaries with little external commotion.

A biography to be published next week, The Last Warrior: Andrew Marshall and the Shaping of Modern American Defense Strategy (2015, Basic Books), by two former aides, Andrew Krepinevich and Barry Watts, is already generating commotion. Expect to hear more about Marshall in the coming year.

David Warsh, a longtime financial columnist and economic historian, is proprietor of

David Warsh: They want a 'Fourth Revolution' in the West


When he was 18,  before entering college, John Micklethwait toured the  U.S. for a year with a friend, traveling on Greyhound buses. When they arrived in San Francisco, they spent a memorable evening with expat British businessman Antony Fisher, founder of London’s Institute of Economic Affairs, and his downstairs neighbor, Milton Friedman.


They talked about the possibilities now that Margaret Thatcher had become  prime minister and Ronald Reagan president of the United States. The conversation made a deep impression on Mickelthwait. Then it was back to Magdalen College, Oxford, and an eventual career in journalism.


Today his companion is a major general, but Micklethwait commands many more battalions as editor-in-chief, since 2006, of The Economist. His new book is The Fourth Revolution: The Global Race to Reinvent the State, written with longtime collaborator Adrian Wooldridge, management editor of the magazine. They argue that the West should complete the revolution of the ’80s that Friedman started.

It won’t be easy, the authors acknowledge. Both the welfare state and democracy itself must be reined in, the former by redefining and reducing expectations of it; the latter by consensually imposing a series of self-denying limits: global budget caps, monetary targets, earmarked taxes, co-payments, borrowing ceilings, sunset provisions and the like.


The successful construction and adoption of such a fiscal constitution would amount to a “Fourth Revolution” in the nature of government in the West, they say.  Previous revolutions they associate with three philosophers who at intervals wrote influentially on the role of the state. This catechism, a familiar device from their magazine, is designed to buttress the case for what they hope will happen next.


Thus, Thomas Hobbes described the fundamental purpose of the nation-state as the creation of law and order, thus the overwhelming force necessary to maintain  the nation-state known ever since, at least to Hobbesians, as “Leviathan.” John Stuart Mill, who lived in a more prosperous time, imagined the state as a kind of “night watchman,” dedicated to free trade, social rights (of women in particular),  and education.   And Fabian Society socialist Beatrice Webb conjured a ”welfatre state” in the 20th century in which government influence extended into every sphere of production and consumption.


The authors are then off on a round of breathless reporting: to California, which they say illustrates everything that is wrong with modern democratic government, until, miraculously, under Gov. Jerry Brown, the state begins to straighten itself out; to Singapore, to see Lee Kuan Yew, founding father of  a new model of national development, adopted in some ways by China, “that is in many ways leaner and more efficient than the decadent Western model”; to Sweden, where a wave of privatizations has reduced government spending in  20 years from 67 percent of GDP to 49 percent.


Along the way, we meet many of the usual suspects. Clayton Christensen, of the Harvard Business School, is “perhaps the world’s most respected writer on innovation,” who thinks  that the public sector will be upset by what he calls “mutants”  -- new organisms that may spin out from unexpected directions. (Their esteem is not  universally shared.) Peter Theil, a prominent venture capitalist, laments that technology has so far failed to change the public sector.

Devi Shetty, an entrepreneur, “whom American surgeons may one day remember the same way that American engineers think of Kiichiro Toyoda,” has a production line of  40  cardiologists who perform 600 operations a week in Bangalore.


There is a peroration in the book:


"The Fourth Revolution is about many things. It is about harnessing the power of technology to provide better services. It is about finding clever ideas from every corner of the world. It is about getting rid of outdated labor practices. But at its heart it is about reviving the power of two great liberal ideas.  It is about reviving the spirit of liberty by putting more emphasis on individual rights and less on social rights. And it is about reviving the spirit of democracy by lightening the burden of the state.''


One indication that history may not be tending in this direction is that the subject of climate change comes up nowhere in the book.  This is odd because the weekly Economist does such a good job of reporting on the growing scientific consensus that global warming is becoming a serious problem.


Another contraindication is to be found in the authors’ proposal to “leapfrog over the muddle of Obamacare,” borrowing equally from “Old Europe and New Asia.” Why not combine a European-style single-payer health care system, featuring an independent medical board to evaluate the cost-effectiveness of medicines, devices and procedures, with means tests and a Singapore-style stream of earmarked taxes pay for it.  That might strike Tea Party fundamentalists as socialism, they write, but  it is precisely the kind of transparency-inducing global cap that  they advocate in other connections, including Social Security.


It is not fair to place so much weight, as the authors do, on Milton Friedman’s shoulders. The Chicago economist, who was 94 when he died, in 2006, was a deeply consequential 20th Century figure whose role is not yet well understood. He may be fruitfully compared to John Maynard Keynes. Both men were authors of clarion wake-up calls. Keynes argued that government had a role in stabilization policy that it must not shirk; Friedman, that there are many economic ways to address a problem (including, presumably, the threat of global warming). Neither man was much concerned in his day with the finer points of economic analysis,  but each commanded the attention and, ultimately, the agreement of his age.   Other theorists, notably James Buchanan and Friedrich Hayek, have been more concerned with the idea of fiscal constitution.


At one point in their roundup, the authors quote Michael Bloomberg, the billionaire financial analytics entrepreneur who served three successful terms as mayor of New York City before returning to civilian life.  Among other things,he oversees Bloomberg BusinessWeek, which he bought while he was mayor. Running a city is different  from running a business, Bloomberg says.


''People are motivated by different things and you face a much more intrusive press.  You cannot pay good staff a lot of money…. In business you experiment and you back the projects that win. The healthy bits get the money, and the unhealthy bits wither. In government the unhealthy bits get all the attention because they have the fiercest defenders.''


Doubtless so.  But that doesn’t mean that governmental processes are not being improved, mainly along the lines advocated by Micklethwait and Wooldridge.  Perhaps it is familiarity with the details that makes Bloomberg BusinessWeek so consistently interesting when it arrives along with The Economist each week.  Hardly a week passes that I don’t compare the one to the other. In coverage of the Fourth Revolution, most weeks I think that the Americans are getting ahead.


A 14-page article, The Biden Agenda: Reckoning with Ukraine and Iraq, and keeping an eye on 2016 by Evan Osnos, in the current issue of The New Yorker, signals the vice-president’s willingness to contest the Democratic presidential nomination with former Secretary of State Hillary Rodham Clinton. For both the politician and the journalist it is an impressive outing (Osnos, recently returned from China, is author of Age of Ambition: Chasing Fortune, Truth and Fraith in the New China). The article would seem to promise a spirited campaign.


David Warsh, an economic historian and a longtime financial journalist, is proprietor of economic


George Borts, 1927-2014

George H. Borts, 86, a distinguished economist, writer and editor, died May 2 in Providence.

Professor Borts was born in New York City on Aug. 29, 1927, and educated at Columbia University, where he earned an undergraduate degree at 19 and worked on the student newspaper, The Spectator. He received both his master’s degree (1949) and Ph.D. (1953) from the University of Chicago, where he studied under Milton Friedman, the famed libertarian economist – an experience that profoundly influenced his thinking about economics and other aspects of society for the rest of his life.

Professor Borts spent 63 years at Brown University, where he joined the Department of Economics in 1950 at 23. During his long and distinguished career, he served as chairman of the Department of Economics at Brown and led its rise to prominence as one of the leading departments of economic teaching and research. He was also the managing editor of one of the economics profession’s pre-eminent journals, the American Economic Review, for more than 10 years.

His career gave him the opportunity for travel, research and other learning as a visiting professor/research fellow at Hokkaido University, the London School of Economics and the National Bureau of Economic Research. He retired last year as the George S. and Nancy B. Parker Professor Emeritus of Economics.

Professor Borts was an expert in international finance, industrial organization, regulation and transportation. His legacy as an economist includes not only his books and dozens of scholarly papers, but the many lives he touched as a colleague, teacher, friend and adviser. Over more than six decades at Brown, George Borts had instructed and mentored thousands of undergraduate and graduate students. He supervised dozens of senior theses and doctoral dissertations and until last year, he was teaching undergraduate courses on international finance and on the welfare state in America, as well as leading several independent studies on a variety of topics.

His intellectual curiosity and professional interests allowed him to analyze complicated issues without pre-judgment. He led discussions about political, economic and social issues in ways that were clear and engaging for undergraduate seminars and senior colleagues alike. Generations of Brown students, economics majors and non-majors alike, discovered the intellectual creativity of economics through his classes.

His interest in promoting excellence in education was also demonstrated by his leadership of Brown’s Phi Beta Kappa chapter for many years.

He gave frequent testimony before U.S. and Canadian regulatory agencies and commissions and served on many boards, including those of the Rhode Island School of Design, Dartmouth’s Amos Tuck School of Business, Rhode Island Blue Shield, Junior Achievement of Rhode Island and Temple Beth-El in Providence. And he advised political candidates of both parties on economic and tax policy and provided commentaries for The Providence Journal. In 1990-91 he was the editor of the Brown World Business Advisory.

The managing editor of that publication, who became The Providence Journal’s editorial-page editor, Robert Whitcomb, called Professor Borts a “joy to work with’’ over the two decades of their occasional projects together. “He combined intellectual rigor with great humor and congeniality, including when we didn’t agree on a specific issue. I particularly enjoyed his often amusing application of the law of unintended consequences to many societal situations at our numerous pleasant meals together.’’

Although he was a tireless advocate of the free market, he viewed political issues through an economic lens that was fair and open-minded. He valued greatly his relationships with both Keynesian and Monetarist economists. His closest personal relationships were with such prominent advocates of alternative points of view as Hyman Minsky, Phillip Taft, and Jerome Stein. Further evidence of this non-ideological approach was his pronounced belief in the need for immigration reform.

He is survived by Dolly, his wife of 65 years, three sons, three grandchildren and many friends and admirers around America and beyond.