Video Transcript: The Confused Literature on Globalization | David Gordon
Well, if I'm to talk about the confused literature on globalization, I think one should first ask what is globalization. Otherwise, the rest of the talk might be confusing, or at least I would get confused. By globalization is usually meant the fact that the countries of the world have been coming closer together, especially in economics, as Suda Shinoi was discussing in her talk. The countries are more continually involved with trade with one another, and there's all sorts of economic investments that countries have in each other. The multinational corporations and foreign investors spending a lot of money in in various countries. Sometimes the term is also applied to political unions, but I won't be so much concerned with that in this talk. I'll be concerned almost entirely with economic, the economic aspects of globalization. What I'd like to do is to discuss six recent books on globalization, at least some of which are partially confused. If I get through those in the allotted time, I have a couple more in reserve. But I think I'll be able. The six I'll be discussing should take me to the end of the lecture. Now, the first two books I want to discuss, I'll take together, are both by Joseph Stiglitz, who was the winner of the Nobel Prize for Economics in 2001, and the two books are Globalization and Its Discontents, and then the second one, which came out just this year, is called Making Globalization Work. Now the title Globalization and its discontent, of course, evokes the famous short book of Freud's Civilization and its discontents. But I doubt that by entitling his book in that way, Stiglitz was intending to suggest that his book also consists of unfounded speculation. Stiglitz is not an opponent of the free market. He's not a full-fledged socialist. On the contrary, he accepts the argument from information advanced by Friedrich Hayek, that a socialist system couldn't work because no socialist planner could amass all the necessary information to determine what the proper prices of goods should be. In fact, Stiglitz himself is one of the great figures in the economics of information. However, although he supports the market economy to some extent, he does he by no means favors an unrestricted free market, and in fact he thinks that the problem with globalization today, the principal problem of globalization today, is that it the policies that have been advocated by the leading agencies promoting globalization, such as the International Monetary Fund, have been too much oriented toward the free market. They're too free market. We don't have enough government guidance and intervention. And he says, "Well, globalization could be a good thing, but it isn't really. It hasn't really had the very good results. And he gives. He says one example is there are enormous numbers of people in the world who are extremely poor, in spite of the fact that globalization is supposed to be advancing very rapidly, and we're supposed to be growing economically worldwide. But there are an awful lot of poor people. He gives. He says, according to the World Bank definition of poverty, I should say Stiglitz himself was the vice president and chief economist of the World Bank for several years. According to the World Bank standards, someone counts as extremely poor if
he's living on less than $2. As poor if he's living on less than $2 a day, and extremely poor if he's living on $1 a day. Now he gives figures for say for. 2004, the world population is about 6.5 billion. He said 40 percent of the world's population is poor by that definition, and 877 million are extremely poor. Now I shall ask you to take note of those figures because I'll be mentioning them a bit later in connection with another writer, but he said globalization isn't working very well because look at all the very poor people now. Why is it that there are so many poor people if the economy of the world has been developing so much? We've had tremendous increases productivity. Why is it that there are so many poor people? He ascribes a good deal of responsibility to a policy pursued by the International Monetary Fund. He calls this policy the Washington Consensus. Now, the International Monetary Fund, as you know, was founded after the famous Breton Woods meeting, John Maynard Keynes was the principal British delegate to that meeting. And when the IMF was set up, according to Stiglitz, everything or most things about it were quite good. The purpose of the fund was that if economies weren't doing very well. The IMF would loan them a lot of money so they could pursue proper Keynesian policies of increasing spending to get us out to get the country out of the economic doldrums. He said, obviously, the thing to do. We know this very well from economic theory is if there is a recession or depression, just the government should just start spending a great deal of money right away to get us out. Now it's odd that Stiglitz is generally regarded as one of the world's greatest economic theorists. In fact, many people regard him as the greatest theorist of his generation, and yet in both these books he gives extremely crude analyzes of concepts. He doesn't deal with any of the criticisms in advance of the Keynesian policies, but he says that the problem is that the IMF doesn't follow the Keynesian policies anymore. It now follows Washington consensus view, which says that the what the government what governments should do is cut the budgets, have very strict limits on spending, not get into debt, and that this is more important than following proper Keynesian policies, the Washington census view is one of austerity-that government should really try to privatize as much as possible, should engage in free trade and other horrible policies like that instead of pursuing the truth that was brought to us in 1936 by John Maynard Keynes, I should say also that in characterizing the views of the opponents of Keynes, Stiglitz again doesn't display much sophistication. He says that opponents of Keynes believe that demand and supply are always in balance, so that all unemployment is necessarily voluntary. Now, obviously, the opponents of Keynes wouldn't believe, say, if the government has minimum wage legislation or unions have enforced certain restrictions on wages that unemployment is voluntary in those circumstances, but somehow Stiglitz omits that. Now, if one looks, however, what Stiglitz says in the in his books, how he describes various events, what he himself says about the events of the world
from his perspective knows a great deal about events because he was let's say vice president chief economist of the World Bank. What he says actually doesn't at all correspond to his diagnosis of the situation. One of the chief examples he gives to show that globalization isn't working very well is that in the East Asian
countries in 1997, 1998, there was an economic collapse, say in Thailand, South Korea, Indonesia, there was these countries had been doing very well, but there was a collapse. According, what brought about the collapse? Well, as he he himself mentioned, what happened? Say in Thailand, there was a collapse in the financial system because speculators on money had suddenly. Decided the money of Thailand was going to fail, and they withdrew their money from it and took it elsewhere, causing collapse in the Thailand monetary system. And also in the other countries, there has been very heavy firms that engage in very speculative borrowing from banks and the lenders just withdrew. They thought these firms were going to fail in demand and payment of their money, and the investors withdrew capital very rapidly from these countries, causing a downturn. Now, readers, listeners, readers familiar with the Austrian view will not fail to notice that what what Stiglitz is describing is entirely in accord with the Austrian view of the business cycle. That expansion of bank credit can, in certain circumstances, lead to an economic crisis, and yet, what happens here? This is certainly not this expansion. Is certainly not something a free market policy. On the contrary, one can only have such expansion if we have a monetary system that allows fractional reserve banking in a free market or monetary system of say gold or commodity standard, one couldn't have just the process Stiglitz is describing. Yet he he says that the these these financial collapses, which seems to be one of just what the Austrians have been talking about is to show the fault of the free market. This shows the dangers of not following proper Keynesian policy, whereas what he seems to be describing is rather the failures of a Keynesian policy. That's a very inflation inflationary policy. There's been currency speculation, speculative loans, all sorts of things that wouldn't be in place if there were a genuine free market society. Again, another example he gives is that in Russia, he said, "Well, after the collapse of communism, the economy didn't improve at all. In fact, the productivity of the economy in Russia is less than it was under at least some years of the communist period. So he said, "Well, doesn't this show how bad the free market is because free market is supposed to be much better than socialism, communism. But in fact, it's not doing as well. It's not that he wants to bring back communism. He says this shows again we have to have the government coming in and intervening. But what he describes in the book is again a situation where when the Soviet government privatized, what happened was the government gave industrial plants and all sorts of property to businessmen, people who were friends of those in power. Sometimes people in government just took over and privatized certain property themselves, and then there were no laws putting,
giving, putting in place property rights. So the new owners, using putting that word in quotation marks, engaged in what is called asset stripping. They tried to convert their property, their new property, into cash as fast as possible and get the money out of the country because they knew their alleged titles weren't secure, and again, one thing that happened was when the property was allegedly privatized, then it became subject to local groups, government groups who would try to seize it or get extort money from the owners and put it under regulation. So again, this is not at all a situation of a free market. It's on the contrary one of a government intervention of a chaotic kind. And yet, Stiglitz describes this, gives us a key example showing the failures of the free market. Now there are in the two books there are some useful chapters. For example, Stiglitz has what I thought was an excellent discussion of the problem of dumping in foreign trade. Now people who favor tariffs will sometimes say, "Well, free trade may be all right if there's fair competition, but what happens if, say, one country deliberately sells goods below cost in order to drive our producers out of the market? Just. So that once they're driven out of the market, then they can raise prices and get a monopoly on trade. Meanwhile, the people in our country will will have lost their businesses and jobs. Now, as Stiglitz points out, and here he's giving, he's making a point similar to that that Murray Rothbard made in his discussion of predatory pricing in many economies today. It really doesn't make much sense to say that a business is going to sell below cost. That isn't a good way of making money. It was like the the old story where someone told a friend of his that he was selling below cost, and someone asked him, "Well, how can you make how can you make any money if you do that? He said, "Well, I make it up in volume. But now, if it's counter to that, well, then the businesses could if they sell below cost, they'll have a loss at first. Then they'll make it up by raising prices later. As Stiglitz points out, there's no real cases where that's ever been shown to have happened. People talk about it; never been shown to happen. But now, this point that he's saying has been made by other authors. What I thought he's especially good at is that he says that he points out again, based on his knowledge, expert knowledge from his. He was also on the Council of Economic Advisers under President Clinton. That in actual cases where people claimed there been cases of dumping, what happens is he says this is just really a trick by business groups to that what they do is they'll say that various countries such as China are engaged in dumping, but their estimates of costs are artificially high. I think there was one case they were there were golf carts being made in one of the Asian countries, I think in China, and they calculate they said there was dumping because the cost the costs in this country were less than the cost of producing the golf carts in Canada. So the fact they were selling them at these lower costs showed they were selling below cost, and of course that doesn't follow at all. Now I want to next turn to the two books by another economist, the Indian economist Jagdish Bhagwati, who,
although is not a Nobel Prize winner, is usually in the front running in the lists when people are saying who was going to be getting the Nobel Prize. He's a name that very often figures. Two books that by him I want to consider, or want to call, in defense of globalization, and the other is free trade today. I should say Abagwati is had very different views from Stiglitz, but he's like Stiglitz, a professor at Columbia University. So I imagine department meetings in that university, economics department meetings, aren't entirely congenial. Now, but what Abagwati was is largely, although not entirely, in the books defending a free trade and free market policy. And what makes his books unusual is this: that economists, neoclassical economists, unlike Austrians, have a particular model of the economy that they're very concerned with, in which they try to come up with conditions for efficiency. Define where they find efficiency is in this way that economy is efficient if there can't be a Pareto superior change. Pareto superior change is a change of some kind that would make at least one person better off and no one worse off. So what the neoclassical economists do is try to come up with conditions, specify conditions for what's called Pareto optimality, where you can't have such changes. So, what Abagwati and others tried to do at one time was to say, even though free trade usually is works best, one can one can come up with examples where free trade isn't always the efficient course of action. Now, one example of such a case is not one that Abagwati himself came up with. It's an old example, so-called terms of trade argument. Is as you know from neoclassical theory, monopolists can by raising his price above the competitive price can get extra profits for himself. Now, of course, Austrians don't accept this view. Murray Rothbard in the Manicomian State has a classic discussion at this point, showing there's no way to distinguish the. Market price and the so-called competitive price, but in the neoclassical view, you can you can have such a distinction. Now, supposing there are a number of producers producers of a certain item in in a country, if the government imposes an export tax on this item, it can have the result that all the businesses taken together will act as a monopoly when considering foreign customers. So, by imposing the export tax, all the businesses taken together will gain have certain monopoly gains, and it's claimed that according to this argument, we can show that tariff would actually be a better economic policy from the point of view of that country than complete free trade. As I say, Abagwati, although he didn't develop that argument, was famous for coming up with arguments showing exceptions to free trade from this point of view, excepting these neoclassical assumptions. So what he does in in these two books is rather to argue against his own previous views. He said, "Well, there may be such cases, but they really don't amount to very much. It's not worthwhile going after them, trying to come up with them because they're really not going to get you much gains. And also, you can show that there, if you do want to intervene, there are other ways to intervene than tariffs that really are even more efficient, but these two points aren't the main point he stresses in the
book. It's rather this that he says that these points would show that these interferences with free trade aren't so good or aren't necessary, but they wouldn't show they're bad. But the next point he makes, which I think is the key point in the two books is he says, if there are alleged gains from interferences with trade, then businesses that will benefit from these gains will spend a lot of money trying to get these gains. This is a case, of course, what Gordon Tulla calls invented the concept, although not the phrase calls rent seeking. That if there is some benefit available by government interference, people spend a lot of money trying to get this benefit for themselves, and the money they spend is really what economists term a dead weight loss. It's not productive, so it turns out that there's a lot of money invested in this rent seeking. So it's a big drain on the economy, and so by having complete free trade, we avoid we avoid this whole problem altogether. I should say that Abagwati, who does not suffer from the vice of false modesty, doesn't is very anxious to say that what he's talking about should not be called rent seeking. He has some other term for it, something like profit seeking. He said because he wants to say that his concept is not the same as Gordon Tullock and Kruger's concept. He he's has a very different concept. But I must say, it's although I'm not an expert at all in this field, it seems quite a distinction without a difference to me. But regardless of how it's to be termed, I think he's right that this is a very good point against this kind of economic interference. Now, the last books I want to consider also two books by another author. By these two are again by another Indian economist, Deepak Lal, who is a professor at UCLA, the two books are one I believe I unfortunately wasn't here present at the lecture. I believe one of them, Jeff Herbiner, I've been told has talked about, is called "In Praise of Empires, and the other, which has just come out, is called "Reviving the Invisible Hand. Now, what I especially liked about Reviving the Invisible Hand, which I think is the better of the two books, is that Lal directly responds to some of the points that Stiglitz raised in his criticisms of the free market in his defense of the statist guidance of globalization. You'll remember that I gave some very frightening statistics from Stiglitz on how prevalent world poverty is, and Stiglitz was saying, "Well, if we have so many poor people." How can it be the case that free market globalization is working? Obviously, something's wrong. Well, Lal contends that these, although he certainly admits there is a great poverty in the world, Lal contends that the statistics the World Bank people have used are based on false methods of collection. He says, based on his own experience as someone who was working for the Indian government and engaged in collecting data of various kinds. In some cases, when people were asked to do surveys of those who were how many people were poor, they would simply fill out the forms that they'd had from the previous years, so no wonder the number of poor people isn't decreasing because they're just filling out the same figures they used in previous years. Of course, this evidence is partly anecdotal, but Lal also points
out that in some cases the figures have been exaggerated because the calculations are using figures from two different sets of data to come up with who the poor people are, so that they're taking the rich who are the more well-off people from one way of looking at it, and who are the poor people from a different way, and they're kind of amalgamating the two in a way that's unacceptable. Now, Lal also challenges Stiglitz on the basic point he makes, where Stiglitz says his theoretical argument: the market is imperfect. What, as I mentioned, neoclassical economists tried to develop the exact mathematical conditions under which we can show that an economy is Pareto efficient in the way I explained it. The most important, the key work there was, of course, the famous by Arrow and Kenneth Arrow and Debreu showing the exact mathematical conditions under which a market economy is efficient. Now, what Stiglitz is famous for in economic theory is that he said, well, if these conditions that Aaron Duspect, there he said they're very strict conditions. For example, they require perfect markets in all commodities. If we don't have some of these conditions satisfied, then he says we can show that the market isn't Pareto efficient. We can come up with Pareto superior changes. He says these, especially cases where we have say one person in exchange knows more than another. Case of what they call asymmetric information. So Stiglitz says, if whenever we have such a case of a market imperfection, then there's theoretically a case for government interference. Now Lal quotes very effectively, I think, devastating quotation from a paper that Stiglitz wrote with Greenwald, 1986, was one of the key papers in Stiglitz's career, and Stiglitz said something like this: He said, "Well, we're not considering in this paper any inefficiencies that would result by competitions among people to get, say, subsidies that would be occasioned by by trying to correct for these inefficiencies, say the government would say, "Well, we've got an inefficiency here, so we're going to grant certain people subsidy. What if you had businessmen spending resources trying to get the subsidy? So Stiglitz says, "We're not going to consider that. He said it could be argued that if this is by not considering this, we haven't really shown any that the market is that there is some case that the market is inefficient. But he just passes that by. So Lal is pointing out that Stiglitz is really giving away his whole case here. But I don't think the book the book contains much more than an attack on Stiglitz. I just have mentioned a couple key points that I think are very valuable. One Lal makes. He adopts, although not entirely something of an Austrian view of the business cycle, but he says, "What if you don't accept this? What if you think that the the market economy will periodically lead to recessions? He says even if you you think that, then it's still the case that the market does better than other systems. Sometimes businesses say you have periods where the large numbers of businesses. Fail. This is sometimes a very painful process, and people have to readjust. But it's still the economy is still growing, and if we look, say, at
Thailand, it's doing better than countries like that, say other countries such as North Korea that didn't have depressions. It's better to have ups and downs if you're growing fast enough than to have sort of a level growth if the growth is slow. Lal also, I think, very calls said, well, makes an excellent point. If say we
can't, we're not able to negotiate free trade with other nations. Other nations insist on retaining their tariffs, and the best policy for a nation to follow is unilateral free trade. He's one of the. This is a key point that I think many less Inclined to, or less inclined to accept the conclusions of sound reasoning, avoid because they're afraid of being too radical. But Lal comes right out in favor of unilateral free trade. Unfortunately, the other book, in praise of empires, Lal I think falls into a fallacy. He said, "Well, if we're to have a free market order, then we have to have some. We have to have a proper legal system enforcing this order. I think so far, and he said, "Only an empire can do this. And unfortunately, this I think is a case where the cure is worse than the disease, but in spite of the sparing, I think that he's the best of the three authors I mentioned. Okay, thank you very much.