movements, and production abroad. In fact, there is the World Bank study which points out that the countries that have done the best are actually the countries which have nothing -- no raw materials, no water power, no large agricultural land, no oil, no other kind of special natural geographic endowments. All they needed to do well was a very well-trained and smart labor force and a very good management. And so these are the states that have really moved more and more in a virtual direction, similar to corporations.

Q: As part of this trend, you also talk about government downsizing of territorial-based production as one aspect of the logical emancipation from the land.

A: My argument is that if you just look at returns on land, as compared to the returns on manufacturing capital or the returns on services -- at least in recent years -- the returns to land have been lower since World War II than the returns to manufacturing. And the returns to manufacturing have, since 1970, been lower than the returns to high-level services. So actually, in moving up this scale, if that is what it is, many countries have benefited from not focusing on manufacturing, which is something that no one seems to have realized. Of course, manufacturing matters. But I don't think it matters nearly as much as it did in the past, and it will probably matter even less in the future. I think there is a very important trend in this; a trend that emphasizes high-tech and focuses on very important additions to the productive process, even though you don't necessarily carry them out in your own country. You are still designing the products, still doing the R & D and providing the technological know-how that you are contributing to the productive process.

If you look at the poundage of American exports, it has never been lower. That is because the information content of American exports is now just very, very high. You can now get hundreds of millions of dollars of exports in a single 747. So that suggests again that the knowledge or technological content is the important thing.

Q: Can you more clearly delineate what the characteristics of the virtual state might be, how it operates and what its differing priorities are?

A: Basically, the virtual state has learned either to be small or to think small. The key thing is the mastering of international flows rather than production at home -- sort of controlling flows of purchasing power and capital, labor, technology and so on from one country to another that will earn the highest return. It is not just trying to maximize the stocks that are located in one place. The countries that have done this are really doing surprisingly well. Take England, which obviously isn't a complete virtual state yet because it still has a manufacturing base. But more and more of its returns are really being earned on high-level services -- insurance, finance, transport, R & D, the medical area -- where English and Scottish innovations in cloning are just leading the world. And the returns on things like this, the products developed on the basis of this, are just going to be very, very large. English growth rates have been very good relative to the rest of Europe, as have been English employment rates. English inflation rates have been low. So obvious countries can do this without mainly focusing on a manufacturing sector. I think the same thing is gradually beginning to happen in Holland. It has already happened in Switzerland. And it is catching on in Germany, although I think Germany is a little slower to move in this direction than some of the other countries.

Q: You also talk of the division of the world into "head" and "body" nations.

Blake Harris  |  Editor