Cap'n Arbyte's

The Glory of Globalization

The single best place to look for further information about the position I advance is the book that had the greatest role in shaping it, Dr. George Reisman's Capitalism: A Treatise on Economics, which is available online for free as a PDF book.

Introduction

All significant economic change creates a disaffected group of people, people whose economic situation is threatened by economic change. Such people bear the cost of adjusting themselves to the new realities of doing business. These people see that they have something to lose, and naturally have a desire to preserve the existing order of things.

I am one of those people. The rise of globalization in technology industries makes me, a microprocessor validation engineer in the United States, less secure in my current career. However, I am also an armchair economist, which gives me valuable perspective on how globalization operates and how it will affect myself and my peers in the years to come.

In this essay I describe what in my judgment are the most important factors relevant to an evaluation of globalization. I conclude that globalization is good, that it is reciprocally the effect and the cause of powerfully beneficial economic forces, and that even I — as someone in one of the most "at-risk" fields — emerge as the beneficiary of globalization.

This is not an argument about how we'll all be better off in the nebulous "long run." That is true, but not central to my position. My belief is that the economic changes wrought by globalization are of a character that is an essential feature of capitalism and responsible in large part for its success. To oppose globalization is to attack a central pillar of capitalism and therefore of material civilization itself, which could not have been built without capitalism.

Classical Free Trade

The globalization in high-tech fields is significantly different from the case of classical free trade, which emphasizes the Law of Comparative Advantage. However, understanding that Law is important intellectual scaffolding from which to build an understanding of modern globalization.

You can read David Ricardo's On the Principles of Political Economy and Taxation online. Chapter 7 deals with foreign trade and comparative advantage. The rest of this section is a review of the Law of Comparative Advantage.

Imagine a simplified economy where there are two people (Apu and Bob) and two goods (corn and wheat) and everyone desires to consume the goods in the ratio of 2 wheat to 1 corn. Further assume that the labor needed for each person to produce one unit of each good is given by this table:

Labor needed
cornwheat
Apu1015
Bob48

If Apu and Bob do not interact with each other, they will independently assign their labor to each good so as to produce in a 2:1 ratio of wheat to corn. In a time period where 100 units of labor are available, Apu would devote 25 units of labor to producing 2.5 units of corn, and 75 units of labor for 5 units of wheat. Bob would use 20 units of labor for 5 units of corn and 80 units of labor for 10 units of wheat.

Even though Bob has an absolute advantage (he can produce either good for less labor than Apu), both benefit from concentrating in their area of comparative advantage and trading for the other good. Given the labor ratios above (10:15 and 4:8), Apu should produce more wheat and Bob should produce more corn, and they should trade with each other. For example, if Apu devotes all of his labor to wheat and Bob adjusts his labor to maintain a 2:1 total production of wheat to corn, the following results:

Labor forQuantity of
CornWheatCornWheat
Sum30.67169.337.6715.33
Apu010006.67
Bob30.6769.337.678.67

Total corn production has increased from 7.5 to 7.67, and total wheat production from 15 to 15.33. Reflecting each individual's costs to produce the goods themselves, Apu desires corn but values 3 corn at no more than 2 wheat, while Bob desires wheat but values 1 wheat at no more than 2 corn. Any exchange rate between those limits (i.e 1.5 to 2.0 corn/wheat) would lead to trade. This is one possible outcome, using a price of 1.67 corn/wheat:

Old QuantityAmount TradedNew Quantity
CornWheatCornWheatCornWheat
Apu06.67+2.60-1.562.605.107
Bob7.678.67-2.60+1.565.0710.227

The result in the table above is not at equilibrium, because each person does not end with exactly twice as much wheat as corn. Knowing the optimum solution is unimportant here — what is important is noticing that through producing along lines of comparative advantage and trading, both Apu and Bob end up with a larger quantity of both corn and wheat than they had independently. They are both richer.

Factor Mobility

An assumption built into the above analysis, and relevant to globalization, is that the factors contributing to each person's productivity are immobile. For example, land quality and climate do not move. Today's critics of globalization point out that because technology jobs are intellectual, they are very mobile. Modern computing equipment (which is itself very mobile) makes distance collaboration quite attractive. The classical analysis doesn't apply to today's situation because of this mobility.

When factors of production are mobile, they move to where they have absolute advantage. Apu's labor is a factor of production, so if he is mobile, he would like to become Bob's neighbor to enjoy the benefits of the land and climate where Bob lives. Assume that this gives Apu an identical production profile as Bob (4 labor per corn, 8 labor per wheat). In this case total production rises to 10 corn and 20 wheat, each person with half of that total.

Globalization's critics point out that while this has benefited Apu, it has harmed Bob, because now there is no comparative advantage for Bob to gain from. Total wealth has risen, but Bob's wealth has fallen in absolute (not just relative) terms.

Worse, in a more realistic market scenario where there is money and a great variety of goods, the increased production of corn and wheat will reduce the prices of those goods. Assuming Bob sells some of his production, his reduced selling prices put him in an even worse situation. Does it therefore follow that Bob should forbid Apu from moving in, that factor mobility is undesirable, and that globalization is bad?

There are unrealistic assumptions and a gigantic omission of context hidden in the anti-globalization argument. To uncover the truth, we must build up from the relevant economic fundamentals.

The Division of Labor

People improve at tasks through education and experience. Their productivity in those tasks rises, which creates a comparative advantage versus other people who perform other tasks. (Comparative advantage is ever-present; it is not restricted to discussions of international trade.) This is the reason why, for example, the construction of homes involves carpenters, plumbers, electricians, etc. instead of a group of laborers with homogeneous skills. The expression, "Jack of all trades, master of none" is a popular reminder that comparative advantage can be derived from division of labor.

Comparative advantage even exists among people who do essentially the same work and at the same company! For example, an experienced engineer could perform certain basic tasks much more quickly than a recent college graduate, but a company seeking to maximize its profits will assign its labor along lines of comparative advantage, using the experienced engineer to perform tasks where the experienced engineer's abilities are even more superior than the basic tasks.

(Incidentally, the primary way the less productive can successfully compete against the more productive is by accepting a lower wage. This is one of the contributing reasons why wages are determined by the productivity of labor.)

A larger market offers greater opportunities for greater division of labor, creating new jobs (and therefore new production) of a kind that cannot be supported by a smaller market.

For example, a small, isolated town would not have any residents who are chemical engineers because the local market for chemicals is too small to support a chemical company. In a large city, enough people need chemicals that a person can earn a living by specializing in chemical engineering full-time. Specialization grows as markets grow, ultimately creating new kinds of products that would never have existed without those larger markets.

Such new products represent an acceleration in the rate of economic progress over simple cost reductions (equivalently, increased production) of already existing kinds of products. Globalization does reduce costs, but by increasing the sizes of markets globalization encourages specialization as well. It is important to understand that there is no possibility of "too much" specialization, or in other words "running out" of high-tech, high-productivity jobs. The degree of specialization is limited by the size of the market that the specialty serves, so larger markets support a higher proportion of specialization than smaller markets. Far from "draining away" high-tech jobs, globalization will increase the proportion of high-tech, high-productivity jobs in the worldwide economy. (And this increase will go beyond the increase that would happen simply due to less expensive labor.)

Indeed, the entire history of capitalism shows this; throughout both population growth and a proportionate increase in higher-level education, no limit in specialization is in sight, and the proportion of high-tech, high-productivity jobs has always increased.

To return to Apu and Bob, Bob's situation would be enhanced if he could improve his productivity at producing either good. He would enjoy both a higher standard of living from his own greater production, and the higher productivity would introduce a comparative advantage which will create benefits from trading with Apu. It is in Bob's interests to be a member of a large market, because this enables him to become a specialist — e.g. a "corn farmer" — instead of a generic farmer.

If Apu and Bob constituted the entire market, Bob could not become a corn specialist. Even if he did not manage to improve his productivity at all, he would produce 25 corn, but Apu could not produce 50 wheat to balance their consumption desires. In a larger market, Bob could specialize, but this raises the question of what will happen to the other people who were producing corn.

In order to answer that question, another fundamental economic principle must be understood.

General Overproduction is Impossible

It is essential to understand that there can be no such thing as a general overproduction of all things simultaneously. There is no practical limit to human desires, and therefore no amount of production could completely satisfy those desires.

A person who owns an old automobile would like a newer automobile, and a person who owns a new automobile would like to have a luxury automobile. A person who owns a modest home would like to own a magnificent one, and a person who owns a magnificent home would also like to own a magnificent vacation home. A person who travels some distance to reach an amusement park would like to have one closer and with shorter lines and more rides. A person who vacations in the tropics may wish to vacation in space. A person who owns a computer would like it to be faster and have software of higher quality. And so on.

Technological progress has an important relationship to our limitless desires. It is both the source of desires and the means for (partially) satisfying them. For example, communication is a basic desire, but the quality of that communication is affected by technology. Mailed letters were a solution to the burden of travel. The telegraph was a solution to the slowness of mail. Radio and the telephone add the human voice, including the ability to hear emotions. Television added the sense of sight to the sense of hearing. All of these things improve the quality of communication in various ways. In some cases (the telegraph) the technology becomes obsolete, but in others (mail, radio, telephone, television) they complement each other and people wish to use them all.

The computer is perhaps the best example of technology being the source of desires. Decades ago, when computers were in their infancy, no one could have predicted the many uses there are for computers: calculation, communication, recreation, simulation, economic prediction, optimization, medical research, etc. Entire fields such as artificial intelligence would not exist at all without the computer. Imagine the ways artificial intelligence could be useful to you, and ask yourself if anyone could have even imagined such possibilities a hundred years ago. The availability of technology causes you to recognize new and varied ways (i.e., specific desires) to satisfy your basic desires, and simultaneously helps you reach them.

Each person's desires are limitless in total, but physical wealth is always finite. This creates the necessity for each individual to prioritize their desires. A person who owns five automobiles but does not own a boat, would like to own one — and a person who owns five boats but does not own an automobile has the opposite desire. An abundance of one thing reduces its marginal utility. When the marginal utility of other things is greater, those things will be pursued.

Therefore, it is possible to have a relative overproduction of one kind of thing versus another. In a world where everyone owns five automobiles but no one owns a boat, peoples' desires for land transportation are met to a far greater degree than their desires for water transportation. Economic production in this hypothetical world would show an overproduction of automobiles but ipso facto an underproduction of boats. In a world with a superabundance of both automobiles and boats, whatever other things have the highest marginal utilities (perhaps homes or medicines or amusement parks) are relatively underproduced.

An overproduction in one area necessarily implies an underproduction in some other area(s). General overproduction of all things simultaneously is impossible because desires are infinite.

Economic Competition

If Bob becomes a specialist (corn farmer), it would create a relative overproduction in corn and a relative underproduction of everything else. As he gains knowledge and experience, his productivity will improve, intensifying this overproduction. The price of corn will fall, which will make corn farming relatively less profitable. Bob's farming operation, to the extent he has increased his productivity, will be more profitable than other corn farmers'.

Lower corn prices mean that the vast majority of the population — i.e., everyone who is a net consumer of corn — benefits from the economic competition in corn production. People who do work that is related to corn production, however, will need to lower their prices or lose customers. Their profitability will be reduced, and may become an outright loss.

An unskilled laborer such as a corn detasseler may lose their job. This is little inconvenience to them, because as an unskilled laborer it is easy to find other work of comparable productivity in another field. Recall that overproduction of corn necessitates underproduction of other things, which will ipso facto have higher profitability and a reason to expand by hiring.

A skilled worker such as a farm machine operator will have a more difficult time adjusting. To achieve a similar level of productivity in a new job, they need to acquire new skills, which may mean a period of returning to formal education while drawing on savings.

A corn farm owner will have the most difficult time adapting. Lower prices may make the farm unprofitable. The easiest path, if it is possible, is to grow some other crop. Changing is a significant cost, but preserves much of the investment in the farm. Such preservation is not always possible — for example, many farms in the eastern United States permanently ended operation as transportation improvements made it cheaper to produce food in the midwest and transport it to the east.

The greater degree of investment a person has made into a field, the greater is the burden of economic adjustment. The unskilled are almost unaffected, the skilled are substantially inconvenienced, and the heavily-invested may lose their fortune. These are the disaffected parties created by economic competition. Why should they support it?

They should support economic competition because almost all of the time they are simply and wholly beneficiaries of it. People are consumers of a great variety of goods, but due to the division of labor they are producers only of a very small variety. Further, the inconvenience of it affecting one's own field are tempered by two facts: (1) The degree of inconvenience is proportional to one's ability to bear it, and (2) The fortunes that could be lost due to economic competition could not have been gained without it in the first place — all great (legitimately earned) fortunes are themselves the result of prior economic competition.

The great virtue of capitalism is precisely that it allocates capital and labor to the areas where they will be most productive. Economic competition is the "invisible hand" that guides the productive use of resources. Any attempt to prevent people from becoming dislocated by economic competition necessarily impedes this adjustment mechanism and therefore creates inefficiencies that need not exist. The risk of needing to adjust one's life as a result of economic competition must be judged against the certainty of being a pure beneficiary of it in the vast majority of cases. And, it must be asked, what form of economic adjustment could be more gentle than economic competition, which affects all people impartially and impersonally, and makes itself known in advance through smoothly-changing prices, giving time for appropriate planning? There must be a mechanism — ignoring the need to adjust to changing conditions (such as, to take a wild example, the greater need for resources in construction following an earthquake) is to jettison reality. Those who do not like economic competition should propose an alternative.

Globalization is not unique in its impact on the economic system. The great changes wrought by economic competition due to technological progress have had a much greater impact, causing entire industries to rise and fall, yet we are permanently better off for it. It is interesting to note that technological progress has far fewer opponents than globalization.

Economic competition is an issue of principle. It's ridiculous to favor it in all cases except those that affect one's own industry or some favorite victim group. Any attempt to implement such a scheme would create an unsolvable tangle of conflicts and pressure-group warfare. You are either for a fundamentally fair and efficient and benevolent adjustment mechanism, or you are not.

The Hypocrisy of Anti-Globalization "Capitalists"

The names "Apu" and "Bob" were chosen to implicitly suggest international trade, but nothing in the analysis requires it, and in fact the circumstances I've described are based on the domestic history of farming (which the especially alert might have noticed a few paragraphs ago.) The historical tie-in is to consider Bob as a midwest pioneer who has the advantage of superior land. Apu is an eastern farmer who follows him to the midwest. The people facing economic adjustment are in the east, working on lower-productivity farms. The actual outcome, of course, was for the midwest to focus on farming (its comparative advantage) and for the east to focus on other things.

Trade between two individuals in the same city, or between two cities, or between Iowa and New York, or between the United States and Malaysia is fundamentally the same. If economic competition between individuals is good, then for the same reasons economic competition between nations — or more precisely, between individuals who happen to live in different nations — is good. Absent politically created barriers like tariffs, political borders are irrelevant to economics.

A person who advocates free economic competition domestically must advocate free economic competition internationally, or be a hypocrite. A person who advocates protectionism in international affairs must for the same reasons advocate protectionism domestically, or be a hypocrite.

The Current Situation

Globalization in the high-tech industries today is unifying what were formerly separate and only loosely-connected labor markets. The intellectual nature of high-tech work combined with the increasing capabilities of distance collaboration have made physical location a small barrier. Workers in another country are able to contribute as if they were all in the same city. [No time zone nitpicking please; imagine they're in South America.]

A unified labor market intensifies economic competition among laborers. One of the reasons for hiring foreign workers is cost — this is not the only reason, but it receives the majority of attention and ire. There are many reasons why foreign workers are cheaper than domestic workers, but that is a side issue. The relevant fact here is that in a unified labor market, expensive domestic workers are at a disadvantage to cheap foreign workers. It's the same as if a bunch of immigrants moved into your city and offered to do your job for less than you are making.

It is important to realize that this is more than just an analogy, it has actually happened — the United States has a long history of immigration, including those who arrived penniless and took low-paying jobs, and most of the population is descended from such immigrants. The impact of immigration on the United States in the past 250 years has been 250 million people, 250 million jobs, and the wealthiest, most productive society on earth.

This is not a coincidence, and our great success has not come in spite of increasingly competitive labor markets — rather, they were an important factor in creating that success, because reducing production costs (including labor costs) is the key to prosperity. Lower costs mean producing more with less, they mean higher productivity, which translates into higher real wages.

Competition with foreign workers in computer-related fields will reduce domestic wages in those fields, causing a shift into other things. Simultaneously, the increasing size of the labor market will create new opportunities for high-productivity specialization. In my judgment, American labor will see a net shift away from computer-related fields into all others (where there will now be a relative underproduction) but particularly into the biomedical fields. This influx of educated workers will accelerate biomedical advances and cement our present advantage in this area. This will be hugely beneficial to our aging population and will also create the technologies for those of us who are still relatively young to have incredibly long, healthy, and productive lifespans.

The future excites me. I'm genuinely glad that American workers won't need to spend so much of their valuable energy on computers, and will be freed up to focus on the next technological revolution.

(All the same, I must issue a reminder and a warning: Economic competition is vital to biomedical advancement, and schemes such as socialized health insurance and regulated drug and service pricing threaten and could completely derail progress. It is important to be a clear and loud advocate for capitalism in an industry that is already heavily controlled, or it will be unable to duplicate the enormous progress seen in the virtually uncontrolled computer industry.)

There's an old joke about economists that when you're standing in the unemployment line, at least you'll know why you're there. If I become one of the people who must leave the computer industry and go back to school to study biology and medicine, I'll not only know why I'm there, I'll be smiling.

Summary and Conclusion

The economic changes brought about by globalization will affect different people in different ways.

Everyone benefits from globalization through a general increase in production which causes generally lower prices. While the diffuse nature of this benefit makes its magnitude difficult to measure, it is certainly real.

The impact of globalization is greater for individuals with a greater interaction with the affected industries. For people brought into the international economic system as a result of globalization, there are large and obvious benefits. Displaced workers in those industries will need to find new employment, but the fact that a relative overproduction in their industry caused them to lose their job necessarily implies a relative underproduction, and therefore employment opportunities, elsewhere in the economy.

The burden of adjustment falls most heavily upon those most able to bear it, and even this may be greatly diminished through planning. Savings provides liquidity during a person's transition to a new field. Savings are the source of funds for paying ongoing expenses such as food and housing as well as new expenses such as education. Forethought enables a person to anticipate the economic changes before they occur. Forethought includes identifying possible alternative industries to work in, beginning an education in them, and saving enough money to make the transition more comfortable when it arrives.

An understanding of economics helps the temporarily disaffected to realize that their transition is a necessary and healthy consequence of economic competition, that economic competition underlies and makes possible the continually growing abundance of wealth, that without it they would be dramatically worse off, and therefore it is in everyone's interests to support.

Capitalism is dynamic. The structure of production is continually changing. Every participant in the economic system has the incentive and the moral responsibility to plan for the future, to match their skills to the productive opportunities in the economy and to enhance their skills and focus them on new areas as the economy changes. Success in capitalism requires paying attention to the market and responding appropriately, no matter your level of production, from janitors and bricklayers to validation engineers to captains of industry. To succeed, you cannot stand still. Complacency is failure. As Andy Grove is fond of saying, "only the paranoid survive."

To address American competitiveness directly, I firmly believe that one of America's greatest strengths is the adaptability of its people. We create change, and we thrive on it. The historic accomplishments of the United States in science, in invention, in engineering, and in business are without peer. Americans are the people best positioned to prosper in the globalized economy. We should welcome globalization with open arms and should encourage it as clearly and forthrightly as we are able. Globalization is an unalloyed good, for us and for everyone.


UPDATE 2003-11-10 23:19:51 UTC: Also see this related blog article for my responses to specific antiglobalization charges.

UPDATE 2004-01-12 02:14:42 UTC: Also, this article and this essay.

Tiny Island