Summary: Something is wrong with America, rendering our society incapable of connecting effectively to reality. Who can tell what has caused this social illness, a form of cultural Alzheimer’s? The symptoms appear in many aspects of our national public policy, an inability to effectively take collective action in critical areas such as energy, geopolitics, and management of our economy. This is chapter 2; the first chapter (6 December 2007) discussed our housing bubble.
Contents
- Introduction
- A brief look at free trade
- Problem recognition is always the first step
- About those wages for highly trained professionals
- Ricardo probably would consider our trade policies insane
- Mockery of obsolete orthodoxy, an effective tool to encourage thought
- Other reports about free trade and globalization
- Afterword and where to go for more information
(1) Introduction
Globalization — the free flow of capital, jobs, and trade — was a pillar of the post-WWII geopolitical regime. Economists and the foreign policy establishment assure us that this globalization is an unqualified good thing — a “win-win” for all parties. That is, of course, absurd. Globalization in its current form has clearly become problematic for America. It has weakened us in important ways during the past 3 decades. Unless we start to think more clearly about trade, the ill effects will grow both during this downturn and in the following recovery.
Our inability to adjust to this change is another example of America’s broken thinking. The late USAF Colonel John Boyd described the connection of individuals or groups to reality as a process: Observe, Orient, Decide, and Act. For a description of the OODA loop see this or Wikipedia. All four phases of this process seem to work poorly in modern America, but we seem to have special difficulty with orientation. To learn more about Orientation see this article by Chet Richards.
(2) A brief look at free trade
Is free trade beneficial to the US? David Ricardo stated that both sides benefited if the key factors of production were not mobile (On the Principles of Political Economy and Taxation, chapter 7). That was true in 1817, but not so today. Three of the key factors are mobile: knowledge, capital, and labor (both as migration and outsourcing).
The expansion of our exposure to third world competition was tolerable so long as limited to traditional “tradable goods.” Now both sophisticated manufacturing can be done almost anywhere, exposing a large fraction of our workforce to global wage competition. Worse, globalization is expanding to services. Another tranche of high paying jobs — this time white collar, professional jobs — are going overseas.
As a result, the political support for free trade is weakening. The core of America’s middle class has become vulnerable. By now everyone knows the “globalization” playbook, whether from jobs flowing overseas or immigrants (e.g., H-1B and H-2B visas) coming here to lower wages. That is, the political basis for globalization is eroding even faster than our national balance sheet. Will these folks passively watch their “class interests” (a Marxist education is becoming more useful these days) get eroded in order to maintain record high corp profit levels (as % GDP)?
Globalization is too vast and complex a subject for a brief post, so this will attempt hit the high points of the emerging opposition to globalization among economists.
(3) Problem recognition is always the first step
(a) “Offshoring: The Next Industrial Revolution?“, Alan S. Blinder, Foreign Affairs, March/April 2006. Blinder is no anti-globalization nut, right-wing reactionary, or even just another economist. He is Professor of Economics at Princeton, member of the White House Council of Economic Advisers (1993-1994), Vice Chairman of the Board of Governors of the Federal Reserve (1994-96). Excerpt:
Although there are no reliable national data, fragmentary studies indicate that well under a million service-sector jobs in the United States have been lost to offshoring to date. A million seems impressive, but in the gigantic and rapidly churning U.S. labor market, a million jobs is less than two weeks ‘ worth of normal gross job losses.) However, constant improvements in technology and global communications virtually guarantee that the future will bring much more offshoring of “impersonal services ”. That is, services that can be delivered electronically over long distances with little or no degradation in quality.
That said, we should not view the coming wave of offshoring as an impending catastrophe. Nor should we try to stop it. The normal gains from trade mean that the world as a whole cannot lose from increases in productivity, and the United States and other industrial countries have not only weathered but also benefited from comparable changes in the past. But in order to do so again, the governments and societies of the developed world must face up to the massive, complex, and multifaceted challenges that offshoring will bring. National data systems, trade policies, educational systems, social welfare programs, and politics all must adapt to new realities. Unfortunately, none of this is happening now.
(b) “Will the Middle Class Hold? Two Problems of American Labor“, Testimony of Alan S. Blinder to the Joint Economic Committee, 31 January 2007
…the dividing line between jobs that are deliverable electronically (and thus are threatened by offshoring) and those that are not does not correspond to traditional distinctions between high-end and low-end work. …
First, we need to repair and extend the social safety net for displaced workers. This includes unemployment insurance, trade adjustment assistance, job retraining, the minimum wage, the EITC, universal health insurance, and pension portability — plus other, newer ideas like wage loss insurance.
… Second, we must take steps to ensure that our labor force and our businesses supply and demand the types of skills and jobs that are going to remain in America rather than move offshore. Among other things, that may require substantial changes in our educational system-all the way from kindergarten through college.
Blinder gives the standard remedies: welfare, retraining, and more education.
- The first is likely both insufficient unsustainable as “outsourcing” grows from the manufacturing sector to the larger service sector, and effects higher-wage jobs.
- Re-training just pushes more workers into the ever-smaller boat of jobs not exposed to foreign competition.
- The last is nuts. Consider the plight of middle-aged workers with advanced professional degrees. Do they return to school to get a 2nd masters, or a PhD — competing for the tiny pool of jobs for which these are required?
Blinder is not alone in questioning this orthodoxy, but others take the analysis a few steps further.
(c) “Is Off-shoring Really Just Good Old Free Trade?“, Herman Daly and James Socas, presented to a Senate Democratic Policy Committee Hearing, 5 March 2004. Daly is a Professor at U Maryland, was a Senior Economist at the World Bank. Summary:
Many academic economists argue that off-shoring is simply the next chapter in “free trade” theory – a “good thing.” However, some politicians of both parties are beginning to question whether off-shoring represents a fundamental break from the past. To them it appears that off-shoring is not free trade, as most think of it, but the systematic substitution in the production process of higher cost U.S. workers by lower priced foreign workers, due to an increasingly integrated global economy. The result is rising corporate profits, but falling U.S. jobs, stagnating wages, and enormous pressure on the country’s middle class.
The authors contend that what is happening in today’s globally integrated economy is not the classical operation of “free trade,” and, they point out, that argument can be found in the original writings on which free trade theory is based.
(4) About those wages for highly trained professionals
“The Minimum Wage and Doctors’ Pay“, Dean Baker (Dean Baker is an economist and co-director of the Center for Economic and Policy Research), Beat the Press, 24 June 2006 — Excerpt (emphasis added):
To me, the main economic story of the last 3 decades has been that those in high paying professions (e.g. doctors, lawyers, dentists, accountants, economists etc.) have managed to drive up their wages by sustaining and increasing barriers against competition (both foreign and domestic), while less-skilled workers, like autoworkers, textile workers, dishwashers, and custodians have been deliberately placed in direct competition with low-paid workers in the developing world.
The wages in these latter categories have generally been flat or declined over this period, while workers in most of the high-paid professions have seen substantial pay increases (e.g. the OECD reports that the real wages of doctors in the United States increased by 55 percent from 1964-1995 [sorry, it’s not free data, so I can’t link to it]). If this pattern is to be reversed, then the wage increases for workers at the middle and bottom will have to come at least partly at the expense of the real wages of high-end workers, just as the wage gains of high-end workers have come partly at the expense of those at the middle and bottom over the last three decades.
This is all accounting; one can debate the merits of specific policies to reverse the upward redistribution of income, but there really is not much room to debate the accounting. My favored policy is free trade in professional services, so that doctors, lawyers, accountants and economists can enjoy international competition in the same way as autoworkers, textile workers and dishwashers, see chapter 1 of The Conservative Nanny State.)
(5) Ricardo probably would consider our trade policies insane
Roy J. Ruffin’s article in History of Political Economy (Winter 2002) is highlights the re-thinking of free trade theory: “David Ricardo’s Discovery of Comparative Advantage“.
These observations are Ricardo’s “home runs.” Ricardo emphasized the “four magic numbers” as well as stating that because Portugal has an absolute advantage in the production of both cloth and wine:
“it would undoubtedly be advantageous to the capitalists of England, and to the consumers of both countries, that under such circumstances, the wine and the cloth should both be made in Portugal, and therefore that the capital and labour of England employed in making cloth, should be removed to Portugal for that purpose.” (Ricardo, I, p. 136)
Accordingly, Ricardo realized it was necessary to suppose factor immobility between countries. Indeed, of the 973 words Ricardo devoted to explaining the law of comparative advantage, 485 emphasized the importance of factor immobility!
Here’s a link to Ricardo’s discussion of mobile/immobile factors of production. Discussions of “free trade” usually cite Ricardo — but ignore his specific statement that this assumes the major factors of production are immobile. They were immobile when in 1817, but today communication and cheap transportation have made land the only immobile factor — and land matters not at all.
(6) Mockery of obsolete orthodoxy, an effective tool to encourage thought
It’s not just right-wing nationalists, like Patrick Buchanan, questioning free trade. Here are comments from the site of Brad DeLong (Prof Economics, Berkeley). His readers tend to tilt leftward but remain conventional with respect to economic policies. But trend over past few years is clearly against “free trade.” The right in America has always been suspicious of free trade; labor unions and domestic manufacturers have been opposed. With the left turning against it, the only interest group remaining in favor are exporters.
By Ponzi Q. Globalization, 22 February 2007, link — about Blinder’s recommendations:
“{T}his is what happens when a super smart man honestly analyzes and concludes that the following of his beliefs will lead to horrors but just can’t let go. Many economists must be starting to feel like the Communists felt when it became clear that it just wasn’t working out like they thought it would.
By Ponzi Q. Globalization, 27 February 2007, link:
Why the conflict, dudes? You guys seem stuck in some zero sum downer. You have to realize that there’s no problem. Everybody wins with Free Trade!
The Chinese will get all our boring old jobs researching, developing, and making stuff that people around the world need and want and Americans will do all the new and wonderful work that the Chinese will be too stupid to do. See, the Chinese *AND* the Americans win!
It’s like Brave New World where the Alphas (Americans) do the really really hard intellectual work and the Betas, Gammas, etc. (non-Americans) do the easier — but no less important — routine intellectual and manual work. Thank heavens that geography is destiny when it comes to ability {& that knowledge cannot cross borders}, otherwise there would be a lot of unhappy Americans competing for work with people making a fraction of what it takes to get by in America.
The really cool thing is that it all is happening naturally, with no human intervention. Just the inevitable workings of the natural unfettered market. So there’s really no point arguing whether it’s good or not. It just the way it is and the way it has to be.
By dissent, 29 March 2007, link:
“The free trade economists on globalization remind me of the hard core neo-cons on Iraq. They are incapable of a critique of their own ideology, because they don’t recognize it as such. They think globalization is reality (and truth and beauty and history). So there are no choices but to more heavily commit ourselves to a policy that is proving to be a failure.”
By Fred, 29 March 2007, link:
“Economists, like everybody else, have failed to predict the impact of the digital revolution. What we have left is “Faith” in the free market. You must admit that faith in God is more emotionally satisfying. Indeed, insecurity may foster religiosity.”
By Ponzi Q. Globalization, 29 March 2007, link:
Blinder is an intelligent man and so he sees that the majority of Americans will be screwed by globalization. He sees that globalization, technology, and differences in living standards have combined in a very ugly way. Blinder realizes that with this ugly combination there’s really no good reason to produce much of anything domestically.
Blinder is an orthodox member of the economics community and so he will not propose anything substantial to get us off the destructive globalizationized path we are currently on. That is, he would rather let the majority of Americans suffer than enter a state of sin by proposing heterodox solutions.
Blinder and his ilk are not bad or stupid. They just can’t think out of the box in which their orthodox training has imprisoned them.
(7) Other reports about free trade and globalization
- “Fear of Offshoring“, Alan Blinder, December 2005 (31 pages)
- Pain From Free Trade Spurs Second Thoughts Mr. Blinder’s Shift Spotlights Warnings Of Deeper Downside, Wall Street Journal, 28 March 2007
- “Globalization, Worker Insecurity, and Policy Approaches“, Congressional Research Service, 31 July 2008 (18 pages)
(8) For more information
If you liked this post, like us on Facebook and follow us on Twitter. See all posts about Obama, his administration & policies, and these posts describing how the world is changing:
- Power shifts from West to East: the end of the post-WWII regime in the news, 20 December 2007 — We are seeing another western industry ceding dominance to eastern competitors, one more step in a larger process.
- Let us light a candle while we walk, lest we fear what lies ahead, 10 February 2008 – Putting the end of the post-WWII regime in a larger historical context.
- “The changing balance of global financial power”, by Brad Setser, 22 August 2008
- German Finance Minister Peer Steinbrück explains how the world is changing, 30 September 2008
- America has changed. Why do so many foreigners see this, but so few Americans?, 1 October 2008
- America is changing. Read some chilling words from a liberal economist, 2 October 2008
but today communication and cheap transportation have made land the only immobile factor — and land matters not at all.
Henry George, in _Progress and Poverty_, defines land, labor, and capital:
So defined, “land” would include any source of energy including such renewables as solar, wind, etc..
It also would include any commodity. Occasionally I post comments on this blog to the effect that the United States, for its own economic good, should legalize and market drugs. This is not really snark. Drugs are commodities; hence land.
.
.
Fabius Maximus replies: While I agree with you that we should legalize a wider range of drugs, this is Trivia Pursuit territory, but of zero significance other than that. Henry George (1838-1897) was an American writer, politician and political economist.
As for his definition of “land”, see chapter 6 of “Alice Though the Looking Glass”:
Americans are overpaid — because the success of globalization and free trade has enabled middle class workers from around the world to compete for the same jobs many Americans have. Same ability to do the work, willing to work for far less purchasing parity cash.
If America stays with free trade, Americans will make less money until much of the rest of the globalized work force catches up.
If America gets more protectionist, there will be retaliatory anti-American tariffs, so it’s very unlikely for average Americans to see economic advancement, and quite possible for there to be a Smoot-Hawley type trade contraction followed by a long depression. Until Americans are no longer overpaid, but are grateful (again) for jobs that pay similar to overseas jobs.
There are no good solutions to an oversupply of overpriced houses — nor of the oversupply of overpriced American workers. The gov’t should be strongly supporting new businesses and new entrepreneurs. But Obama hates such folk … too greedy.
.
.
Fabius Maximus replies: While I agree with the analysis, I disagree with the ending. That is, I love analysis of the form “there are no good solutions; we need the Blue Fairy.” There are perfectly good solutions to all these problem. The housing bubble will work itself out. The US trade problem requires a mixture of a lower US dollar (less US income and wealth vs. our trading partners), less immigration, and very selective trade barriers.
There are no easy or painless solutions. Just like at the denist.
Note: I added the first sentance after reading comment #54, to make my objection more clear.
Pingback: Americans are overpaid « Tom Grey - Liberty Dad
Thanks for the Humpty Dumpty quote; I recently quoted Carroll myself.
I agree that drugs, itself, is minor but do you seriously think that energy supplies are minor? Or mobile. And how about commodities?
.
.
Fabius Maximus replies: None of those things are minor, but crackpot
economistsideas contribute nothing to the discussion. Let’s define “land” as “heaven” and be done with it.Update: Henry George’s idea of a “single tax” on land was a reasonable (in the sense of conventional or respectable) idea for his time (late 19th C). It is a crackpot idea today. Things change.
Free trade” is a much abused, if not quite meaningless, term. It is a beneficial concept for countries who have built-in advantages over others. In the US it has been mainly used as a rhetorical trojan horse for getting inside other countries’ — particularly developing countries’ — trade barriers.
Globalization is a similar trojan horse — only in this case it is one that benefits owners at the expense of workers. Blinder is right that in the long run this policy is politically unfeasible in America, since it works against the well-being and safety of its citizens.
Theoretically there must be an economy which is both socially viable on a national scale and not exploitative of other nations’ weaknesses — but how to get there, against the entrenched power of current productive capital, is a tangled question indeed.
.
.
Fabuis Maximus replies: In what sense is “free trade” a meaningless term? I think it has a clearly understood and relatively simple meaning.
I do not understand your conflation of “globalization” with exploitation of owners vs workers and other nations. Very ideological, but what is the justification? A more simple interpretation is that it helps those nations with lower labor costs vs those with higher living standards.
“`The question is,’ said Humpty Dumpty, `which is to be master — that’s all.’”
Key point. The purpose of any social system is, ideally, to provide means for all levels (aka ‘classes’) to thrive; failing that, at the least for the powerful to maintain status/control even if those ‘under’ are not ‘thriving’.
The increased percentage in relative earnings by the upper tiers is a somewhat inevitable development given human history in general and modern ‘capitalism’ in particular. The thrust of the latter involves increasingly concentrated power nexi, which process proceeds during both expansionary and contracting phases as fewer and fewer dominant players control increasingly large slices of the communal pie. Globalisation as discussed above is one of the dynamics involved in this inexorable concentration of power.
No matter what the system, however, if the upper orders take so much from the lower orders that they fail to grow and thrive, they lose their base of power. In simple terms, if everyone is broke, who pays those ‘loverly’ fees?
The power and class dynamic is generally absent in most ‘economic’ and ‘geopolitical’ analysis these days whereas of course it always should be front and centre.
.
.
Fabius Maximus replies: Dear Lord, I am grateful that you comment here, but it confuses us that You use the handle of Erasmus.
(1) “The purpose of any social system is, ideally, to provide means for all levels (aka ‘classes’) to thrive;”
How wonderful to have your Word. However, this does not match most (all?) of human history.
(2) “increased percentage in relative earnings by the upper tiers is a somewhat inevitable”
Your will be done! However, could you explain why this is so?
(3) “The power and class dynamic is generally absent in most ‘economic’ and ‘geopolitical’ analysis these days whereas of course it always should be front and centre.”
Lord, you should spend more time watching our Academia. Class dynamics (along with those of race and gender) are their exclusive focus, with all else of little importance. Please forgive me for correction You.
Update: As Seneca notes in comment #15, this is too harsh a reply. Esp my comment to #2, since Erasmus’ statement is accurate.
“crackpot economists contribute nothing to the discussion.”
I’m sorry that you deem George to be a “crackpot,” ( others most certainly do not ) but if material, immobile factors exist – call these factors “land,” “heaven,” “gaia,” or whatever – then the possibility exists to build an economy centered on these factors.
I note in particular that solar, and the climate generally, is one of these factors.
.
.
Fabius Maximus replies: I don’t know how far we’ll get in a discussion — let alone moving on to planning and action — with such a casual attitude to words and their meaning. Attempting to build an economy on the basis of “gaia” as an immovable factor seems a bit odd, IMO.
“the possibility exists to build an economy centered on these factors”
Nor do I believe that autarky is a reasonable strategy, as you appear to be advocating. If successful, we would be a self-sufficient but probably much poorer nations. I do not see what we would gain at such a cost. We need not be nuts, veering from one extreme to another. Have we forgotten about concepts like balance, harmony, and the golden mean?
Correction: The above paragraph incorrectly replies to the comment. Saying “the possibility exists to build an economy centered on these {non-mobile} factors” is not advocating autarky (although it is a common starting point for those doing so).
The process of wage arbitrage which damaged the U.S. middle-class, will eventually be applied to the semi-developed (?) countries of Asia, where wages have risen dramatically. For instance, Kedrosky has a quote up indicating that Africa offers capital the best return on investment now.
One of the early tenants of capitalism is that the capitalist would want to pay his workers “the highest wage possible” so that they could afford his products. The spiral downward started when the factory owner discovered he could move his plant overseas, pay lower wages, and not worry if other middle class employees could buy them. Problem was, all the other capitalists discovered it too. What work would then be left at home?
Elites in favor of “free trade” are the same crowd in favor of “immigration reform,” which is nothing more than “in-sourcing” cheap labor and essentially has the same effect.
.
.
Fabius Maximus replies: This sounds like story-telling for children. Do you have any citations to show that this “tenet” was taken seriously by anybody? Other than the grossly overblown example of Ford?
Ford raised workers’ pay to $5/day in 1914, but fiercely opposed unions. This lead to the 1937 Battle of the Overpass, and Ford signing a collective bargaining agreement in 1941.
FM note: I recommend reading this, and the clicking thru to Shirky’s article.
.
.
On just what is wrong with American thinking, that which renders “our society incapable of connecting effectively to reality,” that cultural form of Alzheimer’s: we have an example in microcosm to instruct our thinking on the broader question, see Clay Shirky’s “Newspapers and Thinking the Unthinkable” (13 March 2009) that is making the rounds:
In fewer words, the disconnect in thinking can be explained just as vested interests meeting the oncoming obsolescence of that in which they are vested with denial and retrenching rather than the radical reorientation that the situation really calls for. A sensible development when one recognizes vested interests as specialists in rent-collecting rather than industry or innovation. From that perspective, an inevitable disease of overcentralization.
I conjecture that the conclusion of the article generalizes too – that decentralization is the hope, and perhaps the solution for the nation much as it is those things for the social problem of the newspapers.
It looks, the U.S. is going through an own cultural revolution similar to what China had. She is inflicting on herself wounds graver than what the outside world does. The U.S. was-is reacting to the World leaving the U.S. behind. This hypothesis explains the denial of reality(“broken thinking”) we witnessed in China too. Somewhat surprisingly China eventually came out of the denial, accepting and adopting to the reality. Let us get this surprise in the U.S too.
One of the big lenses through which most Americans view the world’s trade is very approximately as follows: “If Americans don’t consume, global trade will crash and burn to the ground.” I expect that Fabius Maximus would have followed the reasoning in Brad Setser’s explanation for China’s February trade data. China’s exports are showing a decreasing year on year rate of decline in February versus January. The Chinese Lunar New year dates are used by Setser, Macroman, and other commentators to explain this trend. They’re unable to accept that China’s overall export volumes are not responding as expected to the fall in US aggregate demand.
Another lens through which several people view the US status is that might be possible to reduce the import dependence through a “divide and rule” policy. For instance, one of the themes I’ve come across is that you can massively do away with imports from China through tariffs, etc, while the oil-exporters continue to hold dollar assets. Thus a currency crisis is prevented, and an imaginary “rapid and orderly rebalancing” can ensue, even as millions more are laid off abroad and political crises emerge there. The divide and rule advocates are unable to see the new alliance amongst the Eurasian powers, consisting mainly of Germany, Russia and China. Despite various differences amongst countries, the US dollar hegemony has become a rallying cry, and the US is now more widely seen in the world as the common enemy of all. (246 words)
What FM seems to be thinking about is a gradual import substitution, sector by sector, whatever. This is radically different from the “rapid and orderly” fantasies.
The ruse here is very simple. Most people, unless they’re specialized in economics, or naturally very bright, have a belief that doing away with imports will result in higher local employment. For instance, people seem to imagine that, if you ban imports from China, local companies will come up rapidly, and local people will get jobs to manufacture things imported from China. The fact is that real wages of US workers are much higher than almost anywhere else. Consider a situation where all kinds of items, from textiles, nail clippers, electronics, etc are produced locally, and have to be priced accordingly. This provides two choices; either reduce the wages of US workers, or increase the prices of those goods. Neither of these choices results in a better economy or a better standard of living for people. Apart from reducing people to consuming only the barest essentials, the other effect is that aggregate employment will drop drastically. There’s no way to employ lots of high-paid Americans and hope to sell the same volumes at high prices. If you don’t pay the Americans well enough, despite lower prices, they won’t buy so much, so the factories will be unviable. As for hoping to increase exports, which country will buy US exports in the presence of a huge US Tariff? (245 words)
.
.
Fabius Maximus replies: What I was thinking of was standard combination of mild trade barriers and a lower US dollar. These are the conventional remedies and have been successfullly used for centuries by a wide range of nations. I cannot imagine why your imagination would jump to the usually more-drastic but seldom successful “import substitution” game.
“Nor do I believe that autarky is a reasonable strategy, as you appear to be advocating. If successful, we would be a self-sufficient but probably much poorer nations. I do not see what we would gain at such a cost. We need not be nuts, veering from one extreme to another. Have we forgotten about concepts like balance, harmony, and the golden mean?”
Insofar as straw men are also “land,” your comments are pertinent.
Otherwise, I shall simply note that – for whatever motive – you have chosen to disagree with me, and I shall move on.
.
.
Fabius Maximus replies: Re-reading your post, I see your point. Saying “the possibility exists to build an economy centered on these {non-mobile} factors” is not advocating autarky (although it is a common starting point for those doing so). I have noted this correction in your original comment.
FM: You say that globalization benefits low-cost wage countries. Isn’t that Thomas Friedman’s theme — whom you recently lampooned? You say it comes at the expense of high-standard of living countries, though the advocates of globalization all come from high standard of living countries. Were they all foolish in this, or did owners have different interests from workers in this case?
I said free trade was “almost” a meaningless term because in the political realm, as opposed to the academic, it is almost always used in a hypocrtical and misleading way.
Erasmus’s comments above (comment #6) may be arguable but don’t deserve the mocking dismissal you give them. For example:
“The purpose of any social system is, ideally, to provide means for all levels (aka ‘classes’) to thrive.”
This is certainly the basis of western social theory, in Hobbes, for example. You misinterpret it, perhaps, as a statement that all should thrive equally, but that’s not what is meant. It does mean that all should thrive in some way, even if there are great differences between peasants’ thriving and landowners’. Clearly, in our present situation where large numbers of folks are losing their jobs, the managers of society are failing to fulfill the basic promise of the social contract, and risk losing the consent of the governed.
.
.
Fabius Maximus replies: Quite a few subtle, insightful points in here. None of which can be adequately explained at this level of brevity, but I’ll take a shot.
“Were they all foolish in this, or did owners have different interests from workers in this case?”
You raise a point I considered including in the post (but since it was already 2600 words…), about the politics of globalization. Some sectors benefit (workers and owners in export-focused industries). Sometimes owners benefit (tech industries importing low-wage workers). Very often importers benefit while domestic suppliers/workers are harmed.
“I said free trade was “almost” a meaningless term because in the political realm, as opposed to the academic, it is almost always used in a hypocrtical and misleading way.”
I understand your point, and sympathize. But I believe that we should not eliminate words — or consider their meaning polluted — because politicos use them in a hypocritical way. Given the low level of American political discourse, soon we’d be reduced to only words found in Dick and Jane readers.
“This is certainly the basis of western social theory, in Hobbes, for example.”
Agreed, but it hardly seems the basis of western social systems, which was my point. I stand corrected, however, in that Erasmus’ statement was literally accurate — hence my comment unjustified.
One of your very best articles yet, FM. One minor issue: isn’t it debatable that globalization is good in the long run for anyone?
Globalization has certainly been a disaster for America and Europe and, with the international drug trade, Mexico, Columbia, Afghanistan, et al… But has globalization been any better for China or India?
For a while, from (say) 1991 to 2007, China seemed to benefit from globalization — but now, as James Fallows points out in his excellent article, massive unemployment has led to widespread unrest throughout China, and social upheavals may follow. It’s well to recall that the USSR was ultimately destroyed not by nuclear bombardment or by a conventional NATO attack, but by the failure of its economic system.
.
.
Fabius Maximus replies: Fallows is a nice writer, but hardly an analyst. Nor does he show that there is “massive unemployment”, relative to China’s workforce. It would be very difficult IMO to show that globalization has not benefited China. The mere existence of a recession does not do so.
You basically summed up my approach to trade in your response to comment #2.
I plan on using that approach with nuances from other things as well, when and if I run for office again.
The basic problem is our leaders, corporate, buracratic, and political, have interests and goals that have diverged from the citizens at large. This is why the people feel left out of the process eventually affecting loyalty and committment to the system. Illegal immigration, offshoring, and many other issues are the symptoms of this divergence.
.
.
Fabius Maximus replies: I absolutely disagree with your formulation of the problem.
“The basic problem is our leaders, corporate, buracratic, and political, have interests and goals that have diverged from the citizens at large.”
In a well-formulated language such a thing could not ever be written, using the form “it just happened” — with no active agent. We allowed them to steer America in a way that differed from our interests. That is the way of the world: if we are weak, stronger groups will take over. The problem is not “them” (there is always a “them”), but us.
“the people feel left out of the process”
Poor little helpless people. Don’t worry, strong leaders will eventually come along to lift the burden of self-government from our weak shoulders — unless we decide to be strong.
RE: “The purpose of any social system is, ideally, to provide means for all levels (aka ‘classes’) to thrive.”
FM: “but it hardly seems the basis of western social systems.”
The comment referred to Asian and tribal systems as well, not just Western. Note the qualifier ‘ideally’.
I am not aware of any system – again either tribal or imperial – that does not concentrate power at the upper levels. This is necessary, natural and therefore inevitable. The difference between good and bad systems is the degree to which they further ‘enlightenment’ or ‘good living’ versus degradation.
As to yr remarks viz. class: since it is many decades since I was at university, I have no idea what the academia are about, but certainly ‘class’ is rarely discussed in most current affairs venues. The word seems to have been frozen in time around the Communist-Capitalist polemics of several decades ago. But essentially its meaning refers to differences in role and status. Something that occurs naturally and inevitably with any group of people, be it a small family, tribe or national collective. It is in this root sense that I use the word, as in ‘classes or orders’ of things.
.
.
Fabius Maximus replies: While I corrected my comment to agree that your statement was true of much western thought, I doubt it is true of all western thought — and even less of “Asian and tribal systems.” Do you have any citations to back it up? It’s a complex and subtle question, depending on definition of “thrive.”
In what sense did Confucian theory provide a means for the peasants to “thrive”? How about feudal Japan and Europe? Did Roman poltical theory consider it important that “all levels” thrive? What about the slaves on the farms, gladiators in the arena, those in the mines?
What would the world look like if the U.S.had elected to withdraw after its victory in 1945 instead of confronting the Soviet Union? If we had allowed the subversion of western Europe, even the conquest of Japan? Well, we cannot of course know, but it is likely the world would be a much,much poorer place. Decolonization might have continued in some form, fewer countries would have nuclear weapons today. Segregation might still be in effect in America and we would certainly be prosperous (by world standards) but nowhere nearly as prosperous as we are today. What other country supports a drug addict population the size of ours among the poor? Relations with a still impoverished, collectivized China would be much better. Indeed China might have gotten to play the role that Japan filled in the 1950s, only later. By now the Soviet Union would have collapsed– I believe it would have collapsed even more quickly if we had not been in competition with it. One generation of feasting on western Europe would have done the Russians in completely.
I offer this mind game simply to remind all that we have had unprecedented prosperity at a great cost to ourselves, but most would reject the isolationist arguments advanced once and being advanced again. Autarchy is a prescription for disaster even if the US could pull it off for a generation. The U.S. can reindustrialize but not led by Washington. It will take some time, a generation no doubt, and a balance can be found again. But we cannot live on debt as we have since OPEC. We became the users and the Chinese were the last dealers who finally broke the system. It is not a mystery and its repair is not either. Hard work, patience, refusing to reward greed and recklessness — which Washington is doing — is not a good start in my opinion. But it is early days in the Brave New World. World War II is finally over.
Erasmus: sorry to hear that you didn’t mean “class” in the Marxist sense. Even more disappointed that you seem to say that class is a natural, unavoidable, outcome of any human interactions. This is close to the twisted philosophy of social Darwinism, wherein the stronger do and should prevail.
If human evolution is progress from selfishness and the use of force, to cooperation and the use of reason (admittedly an arguable thesis), then we should be able to continually move in the direction of less difference between classes, and more equal distribution of goods. Marx shared this belief in progress with most major 19th century thinkers, and praised the capitalist mode of production as a necessary phase of it, but argued that we couldn’t merely reason or morally argue our way into a higher level of social organization, but had to physically overthrow the present one, since capitalists would never voluntarily give up their present power and wealth.
.
.
Fabius Maximus replies: I agree. Class is one of the many interesting innovations of Marxist theory, with a high degree of explanatory power. IMO far more analytically useful than the race and gender obsessions of today’s academia. Marx himself was a good political theorist, although a terrible economist.
Provocative. But you leave out the essential ingredients for anyone who wishes to confront the problem in a meaningful way. You are arguing Angels On The Heads of Pins, due to the absence of relevant axiomatic foundation.
Go back to the beginning, to the drawing board. What is the essential raw material here? How is it shaped, and how is are its interactions limited by mal-shaping?
Erasmus is far ahead of Seneca on this score, but you should understand better where each goes wrong.
.
.
Fabius Maximus replies: Globalization and trade from the beginning, the drawing board. You ask a lot from a 2600 word article (the average web post is 250 words) on a free site. You are looking for my 2.6 million word article, available on my subscription-only website — for only $1 per word.
FM: “The US trade problem requires a mixture of a lower US dollar (less US income and wealth vs. our trading partners), less immigration, and very selective trade barriers.”
Perhaps that is Obama’s plan. It’s very cunning: force our major creditor nations, who are also our major trading partners, to accept ever more dollars until they can take no more and inflation results and the dollar devalues. It solves the problem of too much dollar denominated debt and the trade deficit at the same time. And with a lower dollar there will be less immigration since much of that is driven by economic factors.
About the only thing Obama’s not doing in your prescription is selective trade barriers, although that may come later.
.
.
Fabius Maximus replies: What evidence is there that this “is Obama’s plan”?
Erasmus in comment #18: “I am not aware of any system – again either tribal or imperial – that does not concentrate power at the upper levels. This is necessary, natural and therefore inevitable. The difference between good and bad systems is the degree to which they further ‘enlightenment’ or ‘good living’ versus degradation.”
Why is this necessary, natural and inevitable? Is it because all social systems are based on force? If feaudalism and bourgeois capitalism are equally inevitable how do we move from one to the other? Is our present system inevitable? Perhaps you’re just saying that whatever system we find ourselves in, it will concentrate power at the upper level. If that’s so, why don’t we just accept where we are now, and not worry about the AIGs and Morgan Stanleys of the world?
.
.
Fabius Maximus replies: I’d like to say I dislike piling on, but it is not true.
IMO the essence of modern Western thought — the key factor distinguishing us from the ancients — is our willingness to break with history, and imagine that these fundamental relations from the past can be changed.
Observe, Orient, Decide, Act
Your title for this blog post, “Globalization and Free Trade – Wonders of a Past Era, Now Enemies of America” has me thinking that EVEN Fabious Maximus is having a bit of trouble connecting effectively to reality. Or were you being sarcastic, FM? Or maybe Swiftian?
As far as I know, bloggers are exercising their free speech, and S T R E T C H I N G in an ever more hopeful way into leadership roles. That’s a GREAT thing, even if I don’t agree with this post. At least, personally, FM has completed his own OODA loop for now.
In my own opinion, globalization and free trade will NEVER be stopped. Nor should they be. These two things have become as true as being born to die, and paying taxes to our land, America. For those among us who are “control freaks”? What can I say?
Take your best shot, in Instapunk style: I have the greatest control over…?
1. Being born
2. Dying
3. Globalization
4. Free trade
5. Paying taxes
SOME questions answer themselves…EVENTUALLY.
.
.
Fabius Maximus replies: I would like to comment on this, but am not dressed for church.
I have been doing business in China for 30 years now. A friend runs a $1 Billion+ electronics/semicon/technology distribution company there. 40,000,000 have lost their jobs, and over 200,000 companies have shuttered their doors. Chinese government estimates are for @ of these numbrs, so they track.
Any time I start hearing Henry George quoted I cringe. And any time I hear Marxist ideology I just laugh. I think we know how that worked out. Anyone who thinks Fabian Socialism is a viable alternative needs to get back on their meds. The simple fact is that we have a correction in a distorted market. The herd mentality was at work when American and other multinationals ran to China to install their low cost manufacturing bases. The other part of that equation was the high cost of American labor, much of it unionized and unwieldy. Too many and too restrictive work rules are just as bad as unsustainably high wages. The rush to serve the Chinese market was enhanced and distorted when companies found that their competitors were taking advantage of low manufacturing costs. Currency manipulation by the Chinese government didn’t help either.
Much of the manufacturing sector, one of the pillars of a modern economy, in this country has simply evaporated. Much of the blame lies with the quarter to quarter profit driven mentality, the drive to grow at any cost, and a fatal misunderstanding of the means and importance of technology as corporations and government came to be dominated by lawyers, MBA’s and non technology/manufacturing management. Most major American technology companies today are simply labels and marketing.
Changing the system in this manner is simply not an option. Free trade works. But it has to be a level playing field. There are many instances, including here in the States, where governments tilt the table. Actually having a government and intelligentsia that understands the real world rather than living in a bubble would help.
While I do enjoy these lengthy articles and comments, it is really so simple:
In a time when every iota of technology, education, training and raw materials flow unimpeded to China and India, in violation of copyright and patent laws, it it not possible for American workers to compete with 50 cent an hour Chinese workers who are using our own technology against us.
There are only two possible outcomes: (1) our hourly wages must decline to China’s level, or (2) we must become protectionist.
Given our broken democracy and failed schools, either we revolt or invest everything in China.
.
.
Fabius Maximus replies: The “all or nothing” fallacy. Everything must be black, or white. How sad that life is not like this child-like view.
You can make it sound complicated, but it’s just not. You support higher wages at the expnse of the consumer. More barriers to acquiring the necessities of life.
You might think that forcing higher wages through protection somehow outpaces the increases in consumer prices. If so, I have a wonderful perpetual motion machine to sell you. Value is not created by the pen.
Your solutions would lead to a limit on my freedom. Let me propose a solution that preserves your ability to pursue folly, and my freedom: sequester yourself and those that agree with you into a piece of property, and burn a little pile of cash at your border anytime you get an import. It will only affect your little world, and the rest of us can continue to enjoy the freedoms of a smaller, less difficult world.
.
.
Fabius Maximus replies: I love the single factor world views (in this case lower prices to the consumer are the only public good). It provides a charming simplicity to life. I wish Morgan had stated his occupation. We could allow massive immigration into his specific field, driving wages down. It would be interesting to see his response.
Pingback: Top Posts « WordPress.com
I can not believe that you recycling arguments against free trade when it has brought us close to 30 years of unparalleled prosperity in the history of the world. Your factor immobility argument is indistinguishable from earlier arguments against free trade, except that it applies, as it should, to knowledge industries as well as manufacturing. Your losing it.
.
.
Fabius Maximus replies: In what sense is this a reasonable response? Are all public policies frozen into stone, because if they once worked they are consider universal law — immutable and untouchable forever?
BTW, the world is not limited to what you believe. It is a weak opening for your response.
Bravo # 25. We know what happened. We “beat” the Soviet Union. Instead of drawing the correct conclusion we became delusional. Clinton disarmed without confronting the Pentagon, we made wars without goals, the National Treasury Party distributed manna, and it imploded. Maybe it could have been prevented, but it was unavoidable. There was once a King of France who lived off of other people’s money. But an entire country behaving like that? We were warned. We ignored the warnings. Have long believed we needed electoral reform to permit citizens to vote for NONE OF THE ABOVE. That is the box I would have ticked each time since 1964. That we lasted such a long time on autopilot is evidence that Bismarck was right: God loves little children and the U.S.of A. as well as a tribute to the fundamentals of this once great nation. Might become great again, could do, but we need to overhaul our politics and our public values, not try to end free trade. We need to close most of our foreign bases, reform our military — not make it smaller, initiate a national service program that enrolls at least 300,000 volunteers a year for 2 to three years of paid service, reform the tax code, get the government out of public education, and encourage the creation of new education beginning at age 2 for all. The world is not our enemy, we are our enemy as Pogo told us some time ago. I suggest we meet the enemy, wrestle it into submission and resume our role as a light unto ourselves.
At a certain point, it will be cheaper to “outsource” to Oklahoma than to India. In fact, near sourcing is a real strategy for a growing number of firms. When you include the extra costs of a poor legal framework, political risk, poor infrastructure, transport costs, increased inventory holding costs, et al, the actual failure rate for outsourcing projects start to make a lot more sense (lots of companies have had their costs rise after outsourcing).
The nearness to american consumers, higher productivity in real terms, lower barriers of communication, fewer problems in time zone management, all these real advantages create a differential advantaging american workers. Have you ever heard of the 3rd shift effect where your outsourcing partners run two shifts for you and a 3rd shift for the counterfeit market? That doesn’t happen when you open a factory in Appalachia.
A whole host of jobs, some quite blue collar, are too expensive for us to do right now. Look up the treatment regime to prevent bed sores, a perfectly treatable and nasty condition. We currently can’t afford to fix that even though the labor required doesn’t even need a high school diploma (it’s simply turning patients every two hours). We need to be a lot richer to hire the people necessary and that’s only one example of jobs that would be created had we a large enough economy.
There are plenty of trade barriers that cost US jobs (the sugar quota system badly hurts US candy manufacturing). Hopefully you’re at least in favor of getting rid of them.
The fact that you had to reference Pat Buchanan to represent the supposed vast legions of right wing nationalists suspicious of free trade actually reveals just how few free trade skeptics there are on the political right. Republicans are regular aye votes on free trade agreements in the Senate.
The outsourcing and offshoring of white collar jobs, meanwhile, remains far more bark than bite at this point. Much more interesting is just how little you hear about this compared to 5 years ago when talk raged of setting up shop in India and China.
.
.
Fabius Maximus replies: Good point! Support for free trade treaties is stronger among Republicans than Democrats. I cited someone on both wings to show that it was not a simple partisan one.
The “offshoring” issue may have died down during the boom, esp as the US dollar fell aprox 1/3 from its 2000-2003 level. Let’s see what happens during a long downturn.
Imagine how dysfunctional the US economy would be without free trade between the States.
Imagine how dysfunctional a State’s economy would be without free trade between counties.
Imagine how dysfunctional a County’s economy would be without free trade between cities, towns, and villages.
Imagine how powerful the world’s economy would be if it were free as trade is free between US States, Counties, Cities, Towns, and Villages.
This kind of free trade is the promise of globalisation. That promise is empty without free markets that are protected from subversion. A market is not free if there is a participant that is too large to fail.
If globalization is not good for all, is your proposed solution a weaker dollar, less immigration, and selective trade barriers? (referencing your reply to comment 2)
If that is so, who decides which trade barriers to raise? My guess is that the industries with the strongest political connections will get to protect their turf, regardless of whether those protections are warranted. How would we even decide which protections are or are not warranted?
What about the views from across the water? If we tax Brazilian imports or whatever, won’t they turn around and tax those American goods they bring into their own country? I’m not sure how our own trade barriers wouldn’t set off retaliatory tariffs across the globe. In a vacuum, protectionism sounds OK, but I’m not sure it works in a world where other actors can respond. This seems to be a standard free trade argument, and I would be interested in your comments. Is capital mobility the key?
Put another way, why should we be concerned with American workers’ well-being over the well-being of the Mexican or Brazilian or Chinese manufacturers? Is this economic nationalism a good thing, even if it sets off nationalistic retaliation in other countries? Lots of questions here – sorry I can’t give any answers.
.
.
Fabius Maximus replies: For your first question there are no good answers. However this question can be asked about any public policy. Despite the potential for special interests, from distortion to outright corruption, public action is taken every day. We do the best we can.
As for your second question, other nations will act in their own best interests. If we lack the social cohesion to do the same, we will have earned the result — no matter how harsh.
I love the focus on social cohesion.
You’re correct that we can ask the same of any policy. The question for me is whether the potential for corruption and distortion in a protected economy outweighs the potential (and becoming more actual) negatives of a globalized system. As I understand the situation, corn ethanol subsidies are a great example of this sort of public policy making gone awry.
As for the focus on self-interest: does the action in our own self-interest necessarily lead to conflict? Perhaps it is in our long-term national self-interest to take the short-term economic fallout for the development of other nations. Of course, in the long run we’re all dead, but it seems to be a point worth arguing. Is it a question of whether that development comes about slowly enough that America doesn’t disintegrate – i.e. balancing the short-run economic harm with the long-run economic benefit?
Another viewpoint on what is wrong with free trade and globalization: that which it claimed to do was overshadowed in significance by that which it did under cover of its own rhetoric, so criticizing it and proposing to reform it as if it were just what it claimed to be is naive and ineffective. Fabius Maximus, how would your original post have been different if it assumed John Perkins’ account of globalization as the most important features thereof? {as described in his book Confesions of an Economic Hit Man” (2004).
In short, if globalization is viewed as an American economic colonization of most of the rest of the world by means of overt finance and covert threats and violence, and “the free flow of capital, jobs, and trade” is a misleadingly egalitarian description of a system that actually intended much more specific flows of these things despite superficial appearances? Do the prescriptions change?
.
.
Fabius Maximus replies: The book describes what is known as the “Washington Consensus“, the standard recommendations of US-led institutions for under-developed nations to grow. It seldom works well, resulting in massive debts recurring crises.
The “rising tigers” of south-east Asia followed a different and more successful policy, which when adopted by China became known as Bretton Woods II “system”: an undervalued currency, high domestic savings rate, strong government intervention to protect and encourage industry, and export-let growth. This generates not just rapid development and increased wealth but current account surpluses — not borrowing.
It has transformed nations like Brazil from dependents to strong nations. Today BWII is the modern form of globalism.
Jonathan Rubenstein: “What would the world look like if the U.S.had elected to withdraw after its victory in 1945 instead of confronting the Soviet Union? If we had allowed the subversion of western Europe, even the conquest of Japan?”
Perhaps here lies the real fallacy of the present age – was the US actually better off as a result of abandoning its traditional policies and intervening against the Axis? What if the US had allowed Germany and Japan to destroy the Soviet Union and negotiate a peace with Britain leaving the world under a different 4 powers than the post-war US-Soviet-British-Franch condominium? Many of the social pathologies of modern America society stem from social forces unleashed during WWII – mass divorce, uprootedness, government subsidized promiscuity, the education and suburban housing debt rackets, mass female participation in the labor force, war as the answer to overseas disagreements, racial strife in the cities, the drug culture. With no Soviet Union, no Korean and Vietnam wars, no Cuban revolution, radically different policies towards colonialism with no Soviet money flowing to revolutionaries, no Afghan wars, no Arab radicalism (only made possible by Soviet financing and Anglo-American timidity in the face of expropriation of Anglosphere oil assets), no endless budget deficits and high spending and high taxes in the absence of WWII debt and Cold War defense spending, etc.
High wages in America are no more an obstacle to American industry being competitive than they are to Germany. Germany manages to run a modern industrial economy with high wages.
The major question for America is how much longer we citizens will tolerate a socio-political system set up to make everyone work to make money to pay to the banks as interest on massive debts to acquire “stuff” we neither have a need for or a way of practically using.
Bryant Arms in comment #33: “Imagine how powerful the world’s economy would be if it were free as trade is free between US States, Counties, Cities, Towns, and Villages.”
Would it have a single world currency, a single world regulatory framework, a single world government, a single world legal and real estate framework, a single world language, and a single world business culture?
The US enjoys unity in all those things. Who would get to impose them on the whole world?
.
.
Fabius Maximus replies: Continuing your comment… why assume that the one world order would look like the US? Perhaps like China? Or Brazil?
Freedom of trade is an instance of the wider freedom of association; as such it’s a right like any other…. unless you subscribe to the socialist-originated spurious notion of “economic” versus “political” liberty.
That’s where they began their long task of destroying “the system of natural liberty” over a century ago. First, they arbitrarily divided liberty into two spheres: the economic and the political. They then renamed the “economic” half of freedom as “capitalism” and set out to destroy it first — knowing full well that it was the least well-defended from a moral standpoint, and that once it was conquered, the second “political” sphere would fall after the first, for lack of principled defenders — because there is no such distinction: freedom is freedom.
That’s why socializing the economy always kills freedom, and why every genuinely free society is economically capitalist. Stepping away from freedom of trade, is a step away from freedom. And that’s morally wrong.
.
.
Fabius Maximus replies: Free trade vs. socialism? So we should condemn those commie knaves Alexander Hamilton and George Washingon, who errected the strong trade barriers that sheltered and developed American industry during the 19th century.