The Online Library of Liberty

A project of Liberty Fund, Inc.

• Introduction
• Part 1: Rights, Property, and Markets
• Property Or “property Rights”? *
• “design Faults” In Locke’s Theory of Property Taint Ownership With Guilt *
• Is Ownership a Myth? *
• How to Get a Free Lunch? Just Apply For It *
• The Problem of Contract Enforcement *
• The Public Goods Dilemma *
• Trying the Free Market *
• The Statist Legacy *
• Part 2: The Common Sense of Non-economics
• The Yakoubovich Syndrome, Or Lies, Damn Lies, and Economic Policy *
• Winning Policy Battles But Losing the War Against Economic Realities *
• Paying Ourselves More of Their Money *
• The Doctrine of “unequal Exchange” the Last Refuge of Modern Socialism? *
• Corporate Managers Are They Going to Kill Capitalism? *
• When the Economy Needs Morals *
• The Political Economy of Force-feeding *
• Hostile to Whom? *
• Mannesmann’s Courtesy Could Prove Rare *
• Part 3: French and Russian Tragicomedies
• Can Putin Build a Real Economy From Oil and Rigor? *
• Russia and the New Europe Growing Apart *
• Russia Hopping Along On Clay Feet *
• The French Tragicomedy *
• How the French “social Model” Could Self-destruct *
• A Little Bit of History Repeating *
• There Is No French Exception *
• The Hobbling of Private France *
• Part 4: The Capitalism They Hate
• The Capitalism They Hate *
• Striving to Get Richer and Poorer *
• “bread and Circuses” In the Modern Welfare State *
• Who Minds the Gap? *
• Float Or Sink? the Millstone of the “social Market” In Germany *
• How Germany and France, the Sick Men of Europe, Torture Themselves *
• Shall We Borrow From the Children? *
• Low Pay *
• Freedom to Strike Or Right to Strike? *
• Part 5: Creating Unemployment
• Stamp Your Feet and Demand a Fair Deal *
• Paternalism and Employment *
• The Things Labor Unions Are Up to *
• The Instability of the Welfare State *
• Some Bad News Could Be Good News *
• Built-in Unemployment Social Protection Costs More Than It Is Worth *
• Let ’s Throw This Model Away *
• How to Stifle Employment By “social Protection” *
• Workable Alternatives *
• A Tale of Two Models *
• A Vicious Circle of Social Kindness *
• Part 6: The Future of Europe
• The Economic Consequences of a United States of Europe *
• A Giant Free-trade Area Or a Political Counterweight to America? *
• European Crosscurrents and the Federalist Drift *
• How Confederacy Could Turn Into a Federal Superstate *
• Majority Rule By Any Other Name *
• What Now For “europe”? Why the People Failed Their Masters *
• Free-riding On the Euro *
• Some Democratic Economics *
• The Soviet Legacy *
• A War of Attrition Between Economic Reality and Political Dreams *
• A Brightening of the Economic Skies Over Brussels? *
• Turkey Knocking On Europe’s Door *
• Turkey and the Eu Club *
• Europe More Secular and More Islamist *
• A Bill of Rights Europe Did Not Need *
• Europe’s Social-democratic “government” *
• Power Corrupts, So Let ’s Make It Less Absolute *
• Part 7: Economics, True and False
• On the Economics of Protecting Employment *
• The Costly Mistake of Ignoring Opportunity Costs *
• “globalization” and Its Critics Mutual Gain Vs. Cloud-cuckoo Land *
• Are High Oil Prices a Form of Exploitation? *
• Immigration What Is the Liberal Stand? *
• More Nonsense On Stilts Mr. Bentham Is At It Again *
• Risk, Value, and Externality *

“GLOBALIZATION” AND ITS CRITICS

MUTUAL GAIN VS. CLOUD-CUCKOO LAND*

It is an old truth that lack of understanding and sheer stupidity cause more harm and suffering in the world than wickedness and self-seeking. This is particularly the case when politics holds a broad sway over individual lives, when a large proportion of the national income is spent by government, and when a few major collective decisions can make the difference between prosperity and penury; for in such situations the obtuse and the stupid have immense leverage to spoil things while intending to improve them. To aggravate matters, they also possess a mode of discourse that has a more potent and immediate impact on popular opinion than the cooler voice of lucid good sense.

Much of the passionate criticism of “globalization”—perhaps even the very use of this woolly term—can be best understood by bearing these factors in mind. So can the truculent nature of many of the hodgepodge of antiglobal policy measures adopted to combat it. Both the criticism and the policy amount to a protest against the intrusion of reality into a fairyland where everyone had the “right” not to get hurt.

“Globalization” is blamed on many things, of which two stand out. The more naive of the two is a conspiracy theory. Capitalism, personified by the multinationals and especially by the oil majors and the makers of some famous consumer brands, are everywhere busy sacrificing humane values for the sake of profit. They locate production where wages are the most miserable. They pressure gutless governments to condone their destructive practices, to allow them to evade taxes by tricky transfer pricing, to speculate in currencies and commodities, and to steamroll national industry into the ground. In short, they quietly build worldwide capitalism. (It is amusing to note that if multinationals did do all these things, the almost exclusive beneficiaries would be present and future pensioners, very much part of the common people, who own all but a fraction of these sinister multinationals. Exxon Mobil and Coca-Cola do not pay dividends to themselves. Their dividends go mostly to “ordinary people.”)

The other supposed culprit in bringing about “globalization” is the rise of market liberalism and in particular the gradual freeing of trade and capital movements that began in the 1950s and which is, albeit slowly and jerkily, still going on. The freer trade is, the more limited is the sovereignty of states over their own economic destiny. “Globalization” rubs out national identities, smothers diverse national cultures under an American layer, and undermines the primacy of politics over economics, a primacy that is sacrosanct to democratic ideology. Antiglobalizers want to ward off these by-products of freer trade by reverting to cozy protectionism. At the same time they tacitly assume that one can have it both ways and the riches created by the free movement of goods and capital can somehow be preserved.

A Kennedy Round, a Uruguay Round, an EFTA or a NAFTA, the GATT, and the WTO have undoubtedly made trade more free and global. But they did not invent free trade. Instead, they have restored a situation of few or low barriers that had prevailed more than once in history, the last time in the final third of the nineteenth century. In fact, free trade and protection have usually alternated in a complicated geographical and time pattern in which it is hard to discern a bias one way or the other.

Deep underneath these ups and downs, however, there has been a great trend for as long as we can look back: the trend of a steeply improving transport technology at sea, on inland waters, on the road and rail, and lately in the air, evolving from such basic devices as the wheel, the sail, the oar, the spring, and the engine that transforms energy into motion.

The effect of improving transport technology was, of course, that the movement of goods and also of persons became progressively less costly in both time and other resources. The scope for the division of labor and mutually profitable exchange steadily widened. This manifested itself in the steep fall of transport cost as a proportion of the delivered value of merchandise—an effect that, over the centuries, far outweighed any effect the raising or lowering of trade barriers may have had.

It was by historical standards only recently, in the sixteenth and seventeenth centuries, that long-distance trade was still practically limited to spices, tea, silk, dyestuffs, and precious metals—goods with a high value-to-weight ratio. Today, even lowly cement and scrap metal will travel thousands of miles. In Goschen’s day, half a percent on Bank Rate was supposed “to draw gold from the moon.” Today, a single-digit basis point rise will do it.

The long decline of transport and communication cost, and hence the declining relevance of location, has in our own age reached a point where competition is never far away. Business and labor can no longer get away with comfortable practices. In the post-World War II period, even in some of the more advanced economies, workers used to “own” their jobs, wages could only go up and hours worked could only go down. Everybody had a “right” to make a living in his chosen occupation or, failing that, draw earnings-related unemployment pay almost indefinitely. If winemakers or shoe manufacturers could no longer make their business pay, they nearly always managed to get state aid and carry on. Structural change in the economy, that would force many to adapt and suffer damage in the transition, was powerfully retarded by the political will not to let anyone get hurt.

This was Cloud-Cuckoo Land, and rather abruptly it is proving to be unsustainable. Welfare reform is in the air, working hours are getting longer again, and instead of the unions blackmailing the employers as has been the case for decades, it is now the employers who start blackmailing their workers by the threat of relocating, outsourcing, or straightforward job cuts. There is of course fierce political gesticulation to stop these developments, but what is politically desirable is no longer necessarily practicable. Reality is back with a vengeance. And reality, when it takes people by surprise, is not uniformly tender.

If globalization throws the doors open to reality, and reality is harsh, what is the point of globalizing? If it could be halted or reversed, should it be?

The short answer is that since transport and communications technology cannot be disinvented, reversing globalization cannot be done. However, such an argument will not stop wishful thinking.

In a public debate with antiglobalizers, Frits Bolkestein, arguably the clearest mind in the outgoing Commission of the European Union, once innocently asked them: “Why do you want to keep the poor countries poor?”

One elegant achievement of economic thought is the Factor Price Equalization theorem proved by Paul Samuelson. It states that if trade in goods is free and transport costs are zero, the rewards of factors producing tradable goods will in equilibrium be equal everywhere. More realistic assumptions used by Olin and Heckscher yield the result that factor prices will at least tend to converge. The significance of the theorem is that people do not have to migrate from poor to rich countries to achieve higher incomes; free trade will do it for them even if they stay at home. The point of globalization, then, is that both the rich and the poor countries gain, but the poor ones gain more, faster. Lovers of equality and worldwide “social justice” ought to welcome it, and not begrudge the transfer of less skilled jobs from the richer to the poorer countries.

They contend, instead, that in practice the opposite happens and social justice is flouted. The rich gain more than the poor; indeed, the poor may actually lose. Statistics can be made to say almost anything. They are made to say that the majority of third-world countries have been losing ground to the rest of the world in the course of trade liberalization. The International Labor Office has in a recent report held globalization responsible for this.

The majority of third-world countries that have grown more slowly than the world average are mainly African and mainly small- or mediumsized. They suffer cruelly from their incompetent governments, which are often engaged in shameless thieving. Two countries in the third-world minority, which is growing faster than the world average, are China and India. With a combined total of close to 2.5 billion inhabitants, they account for nearly a third of the world’s population between them. Their recent growth rate has been twice to three times that of the first world. If globalization was at least partly responsible, it certainly does seem to prove the point.

[* ]First published by Liberty Fund, Inc., at www.econlib.org on November 1, 2004. Reprinted by permission.