Home > Uncategorized > The narrative of globalization

The narrative of globalization

from Thomas Palley and the current issue of the RWER

As regards economics, the conventional wisdom interprets globalization through the lens of trade theory, which maintains there are gains for all countries that participate.[1] The narrative is that there have been two globalizations in the modern era. The first began around 1870 and ended in 1914. The second began in 1945 and is still underway. Globalization is identified with the history of trade, and the narrative is constructed around a temporary inter-war interruption that put globalization on hold in the 1920s and 1930s.

 In a recent paper (Palley, 2018), I have challenged the conventional view and argued that there have been three globalizations, not two. The first Victorian globalization ran from 1870 to 1914. The second Keynesian era globalization ran from 1945 to 1990. Both were driven by gains from trade that provided aggregate benefits to countries and the world economy.

 Since 1990 there has been a third neoliberal globalization which has been driven by industrial reorganization, motivated by redistributing income to capital away from labor. Neoliberal globalization can be described as “barge economics” (Palley, 2007, 2008). The idea draws on the observation by Jack Welch, former CEO of General Electric, that business would ideally like to have “every plant you own on a barge”. Welch envisioned factories floating between countries to take advantage of lowest costs, be they due to under-valued exchange rates, low taxes, subsidies, absence of regulation, or abundant cheap exploitable labor. In such a world, there is an inevitable large increase in trade because goods must cross borders, but trade theory does not explain what is going on.  

 Barge economics produces winners and losers. In developed economies, capital’s share has increased at the expense of labor’s as workers and the entire economic system are subject to pressures from global labor, regulatory, tax, and social wage arbitrage. Developing countries can gain from arrival of the barge to the extent it brings FDI and technology, and promotes domestic investment and export-led growth. That has been the case in China. But developing countries can also lose to the extent that their indigenous industrial base and income distribution is subjected to barge arbitrage, or to the extent that the barge only brings shallow export-processing zone development. That has been the case with Mexico.

 Barge economics is motivated by distributional conflict. Since investments and expenses incurred for redistribution are costly to the economy, it undermines claims of a market economy to be Pareto optimal. Barge economics means there may even be no net gains from trade, and society may be worse off. Profits increase so that capital gains and labor loses, but labor’s losses can exceed capital’s gains. That is fundamentally different from conventional Stolper – Samuelson (1941) income redistribution effects which are generated in the context of Heckscher-Ohlin trade that increases global productivity.

 In addition to misconstruing the economics of the neoliberal third globalization, economists neglect the domestic political and geopolitical ramifications. Those ramifications vary by bloc, and they raise conflicts and contradictions that threaten to check globalization. The domestic political checks operate within blocs, while the geopolitical checks operate between blocs. It is those checks that now challenge globalization.    read more

[1] Proponents of globalization make claims of large gains from trade. Those gains are outlandish in terms of their own theory, which is already based on the optimistic assumption of full employment (Rodrik, 2007). They effectively exclude the possibility of losses contemplated by other theoretical perspectives (Capaldo, 2014).

  1. November 23, 2018 at 6:41 am

    The main focus of the paper (as a whole and not the copied part in the Blog) is on politics and geopolitics, and economics plays a very small part. I have little objection on the Palley’s geopolitical account of the present state of Globalization and its backlash, but his argument is based on a wrong understanding of the actual state of trade theories.

    Palley is mistaken to think that there is one single trade theory. There is no single trade theory, but there are trade theories. Heckscher-Ohlin trade theory (the only one which is referred explicitly in the paper) is only one of them. Which of trade theories one is talking of, or thinking by, matters much, not only for understanding the neocon ideology, but also for understanding the real nature of economic globalization and policy related to it.

    Let me cite a sentence from Palley’s article:

    Palley > Developing countries can gain from arrival of the barge [Shiozawa: factory which “floats” from country to country] to the extent it brings FDI and technology, and promotes domestic investment and export-led growth. That has been the case in China.

    If FDI brings technology, enhances learning by making, raises the productivity and wage rate, it is necessary to make balance the speed of learning and acquisition of technology and the side effects of FDI. China has succeeded to control this, Mexico did not. China intervened in the form of management (joint-venture), to limit the effects (free trade zone at the first phase of opining-up), and speed of liberalization. Chinese have proceeded step by step by “seeing by experience” principle. They had not believed simply the teaching of neoclassical trade theories.

    Trade liberalization affected not only manufacturing job (that Palley mentioned), but also repressed wage rise in the United States. The real wage rate of median-income laborers stagnated since 1970’s (and in Japan since 1990’s). Mainstream economists are only interested why the gap between high skilled and non-skilled workers increased, but seldom questioned why the real wage rate stopped to increase since 1970’s. But, this was, together with job loss, a serious problem for majority of workers.

    The problem for economics is that mainstream economics has no trade theory which can explain globalization and its effects. Heterodox economists (including Thomas Palley who is a Post Keynesian) did not tried to produce a new theory by which to explain what is happening in the world. More than half of international trade is now occupied by input trade. Heckscher-Ohlin trade theory cannot explain globalization, because it lacks the framework of input trade (or trade in intermediate goods). The same is true for New trade theory (à la Krugman) and New new trade theory (à la Melitz). The former explains how the intra-industry trade occurs among countries of the same level of development (and thus of the equal wage level). The latter is essentially a theory of single country open to the world trade. All four generations of mainstream trade theories (including textbook Ricardian trade model) lack the framework that can analyze input trade. The gains from trade are preached by neocons because it fitted to their market-oriented ideology and not by theoretical reasoning.

    The second reason of inability to deal with real problems of globalization is that the neoclassical trade theories assume full employment as a part of their model building. Thus they are excluding unemployment by assumption. Neoclassical economists are thus excluding the real problem of international trade, i.e. the unemployment. I wonder why Thomas Palley does not question “trade theory” and only argues consequences of those theories as something accepted.

    Are there no trade theories that can deal with unemployment caused by (greater) liberalization? There is at least one: the theory of international values. It is a very general theory that can treat input trade but can also treat the unemployment problem.

    See my paper: Shiozawa (2017) The New Theory of International Values: An Overview. See Theorem 4.3 (existence of unemployment) in particular for unemployment problems. A new analytical framework is proposed in the new paper by me and Fujimoto in order that we can treat international specialization and competitiveness with the existence of unemployment: See Shiozawa and Fujimoto (2018) The Nature of International Competition among Firms.

  2. Postkeynesian
    November 23, 2018 at 9:54 am

    Spanish imperium is the firts…

    Colón, Elcano, Etc. 1942, not 1870.

    Spain Discovery the sphericity.

  3. November 24, 2018 at 5:03 pm

    No more comments?

    • November 27, 2018 at 12:57 pm

      Yoshinori, you say lots of interesting things about trade theory, but non-working explanations are irrelevant to what has actually been happening: as Palley puts it:

      “In developed economies, capital’s share has increased at the expense of labor’s as workers and the entire economic system are subject to pressures from global labor, regulatory, tax, and social wage arbitrage”.

      How did independent people and countries come to be workers and markets in the first place? By imposition of money and capitalist entrepreneurs bankrupting them, siezing their land and forcing them into wage slavery. No mention of that in trade theory, but it is implied in Palley’s comment. Outcomes are a result not of theories but of our believing them, even when they are red herrings distracting attention from evil intentions.

      What I found most significant in Palley’s paper was note 9, which says “Faux’s (2006) global class war hypothesis … emphasizes the ‘Party of Davos’ which enables capitalists to escape their national identities and form a global class that wages class war everywhere”. For more detail see

      https://www.thenation.com/article/party-davos/

      Economics seems to come into this via Mirowski’s “The Road From Mont Pelerin”:

      https://www.jstor.org/stable/j.ctt13x0jdh

  4. Helen Sakho
    November 27, 2018 at 2:05 am

    Very good question, Yoshinori. In addition to repetitive comments by myself this evening, let us pose a new question:
    Who were the First and the Last Emperors in history?
    Who ruled the longest and conquered the vastest territories/markets?
    Where are they now?
    Was their downfall due to a natural process or bad economic advice?

  1. No trackbacks yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.