Minnesotans For Sustainability©


Sustainable:  A society that balances the environment, other life forms, and human interactions over an indefinite time period.




Globalization and Its Discontents

Herman E. Daly*
August 2000


The newspapers and TV say that if you oppose globalization you must be an "isolationist" or even worse a "xenophobe". Nonsense. The relevant alternative to globalization is internationalization, which is neither isolationist nor xenophobic.

The media don’t know the difference, so let us define the terms clearly:

Internationalization refers to the increasing importance of relations between nations: international trade, international treaties, alliances, protocols, etc. The basic unit of community and policy remains the nation, even as relations among nations, and among individuals in different nations, become increasingly necessary and important.

Globalization refers to global economic integration of many formerly national economies into one global economy, by free trade, especially by free capital mobility, and also, as a distant but increasingly important third, by easy or uncontrolled migration. Globalization is the effective erasure of national boundaries for economic purposes. National boundaries become totally porous with respect to goods and capital, and increasingly porous with respect to people, viewed in this context as cheap labor, or in some cases cheap human capital.

In sum, globalization is the economic integration of the globe. But exactly what is "integration"? The word derives from "integer", meaning one, complete, or whole.

Integration means much more than "interdependence" it is the act of combining separate albeit related units into a single whole. Since there can be only one whole, only one unity with reference to which parts are integrated, it follows that global economic integration logically implies national economic disintegration parts are torn out of their national context (dis-integrated), in order to be re-integrated into the new whole, the globalized economy. As the saying goes, to make an omelet you have to break some eggs. The disintegration of the national egg is necessary to integrate the global omelet. This obvious logic, as well as the cost of disintegration, is frequently met with denial.

Denial aside, all that I have just said was expressed with admirable clarity, honesty, and brevity by Renato Ruggiero, former director-general of WTO: "We are no longer writing the rules of interaction among separate national economies. We are writing the constitution of a single global economy." This is a clear affirmation of globalization and rejection of internationalization as just defined. It is also a radical subversion of the Bretton Woods Charter. Internationalization is what the Bretton Woods Institutions were designed for, not globalization.

After the April disruption of its meetings in Washington DC, the World Bank sponsored an internet discussion on globalization. The closest they came to offering a definition of the subject under discussion was the following: "the most common core sense of economic globalization....surely refers to the observation that in recent years a quickly rising share of economic activity in the world seems to be taking place between people who live in different countries (rather than in the same country)". Mr. Wolfensohn, president of the World Bank, told the audience at the Aspen Institute’s Conference, that "Globalization is a practical methodology for empowering the poor to improve their lives."

That is a wish, not a definition.

It also flies in the face of the real consequences of global economic integration. One could only sympathize with the demonstrators from the Mountain Folks for Peace and Justice who were protesting Mr. Wolfensohn’s speech some fifty yards from the Aspen music tent. The reaction of the Aspen elite was to repeat the title of Mr. Wolfensohn’s speech, "Making Globalization Work for the Poor", and then ask in grieved tones, "How could anyone demonstrate against that?" Well, maybe they were fed up with the vacuity and doublespeak of official World Bank pronouncements, as well as with an elitist celebration of globalization in their valley —one that excluded labor and NGOs, and thought it appropriate to serve bottled water imported all the way from Fiji to the participants.

The World Bank’s definition conflates globalization and internationalization as defined above. Consequently, much of the long internet discussion was beside the point —assuming the point was not simply to encourage the venting of anger into cyberspace rather than into the streets of Seattle, Washington D.C., or Prague.

The missed point, in the form of a question, is, should these increasing transactions between people living in different countries take place across national boundaries that are economically significant, or within an integrated world in which national boundaries are economically meaningless? Do we really want to give up national monetary and fiscal policy, as well as the minimum wage? Does economic integration imply or entail political and cultural integration? I suspect it does over the long run, but I honestly do not know which would be worse —an economically integrated world with, or without, political integration.

Everyone recognizes the desirability of community for the world as a whole —but we have two very different models of world community: (1) a federated community of real national communities (internationalization), versus (2) a cosmopolitan direct membership in a single abstract global community (globalization).

If the IMF-WB-WTO are no longer serving the interests of their member nations as per their charter, then whose interests are they serving? The interests of the integrated "global economy" we are told. But what concrete reality lies behind that grand abstraction? Not real individual workers, peasants, or small businessmen, but rather giant fictitious individuals, the transnational corporations.

Consider a few consequences of globalization, of the erasure of national boundaries for economic purposes. Briefly, they include: (1) standards-lowering competition to externalize social and environmental costs to achieve a competitive advantage —the race to the bottom in terms of both efficiency in cost accounting and equity in income distribution; (2) increased tolerance of mergers and monopoly power in domestic markets in order to be big enough to compete internationally; (3) more intense national specialization according to the dictates of competitive advantage with the consequence of reducing the range of choice of ways to earn a livelihood, and increasing dependence on other countries. Free trade negates the freedom not to trade; (4) world-wide enforcement of a muddled and self-serving doctrine of "trade related intellectual property rights" in direct contradiction to Thomas Jefferson’s dictum that "knowledge is the common property of mankind".

Let us look at each of these in a bit more detail.

1. Globalization undercuts the ability of nations to internalize environmental and social costs into prices. Economic integration under free market conditions promotes standards-lowering competition (a race to the bottom). The country that does the poorest job of internalizing all social and environmental costs of production into its prices gets a competitive advantage in international trade.

More of world production shifts to countries that do the poorest job of counting costs —a sure recipe for reducing the efficiency of global production. As uncounted, externalized costs increase, the positive correlation between GDP growth and welfare disappears, or even becomes negative.

Another dimension of the race to the bottom is the increasing inequality in the distribution of income in high-wage countries, such as the US, fostered by globalization.

In the US there has been an implicit social contract established to ameliorate industrial strife between labor and capital. Specifically, a just distribution of income between labor and capital has been taken to be one that is more equal within the US than it is for the world as a whole. Global integration of markets necessarily abrogates that social contract. US wages will fall drastically because labor is relatively much more abundant globally than nationally. It also means that returns to capital in the US will increase because capital is relatively more scarce globally than nationally. Theoretically, one might argue that wages would be bid up in the rest of the world. But the relative numbers make this a bit like saying that, theoretically, when I jump off a ladder gravity not only pulls me to the earth, but also moves the earth towards me.

Free trade, and by extension globalization, is often defended by appeal to comparative advantage. The logic of comparative advantage assumes that factors of production, especially capital, are immobile between nations. Only products are traded.

With capital mobility now the major defining feature of globalization we have left the world of comparative advantage and entered a regime of absolute advantage which guarantees gains from trade to the world as a whole, but does not guarantee that each nation will share in those gains, as was the case under comparative advantage. Global gains under absolute advantage are theoretically greater than under comparative advantage, but there is no reason to expect these gains to be shared by all trading partners. Mutual gain could be restored under absolute advantage by redistributing some of the global gains from trade. But I have never heard that idea discussed by globalization advocates.

Often they appeal, quite illogically, to the doctrine of comparative advantage as a guarantee of mutual benefit, conveniently forgetting that the logic of comparative advantage requires immobile capital, and that capital is not immobile. Indeed, some even argue for free capital mobility by extension of the comparative advantage argument —if free trade in goods is mutually beneficial then why not also have free trade in capital? However, one cannot use the conclusion of an argument to abolish one of the premises upon which the argument is based!

2. Fostering global competitive advantage is used as an excuse for tolerance of corporate mergers and monopoly in national markets (we now depend on international trade as a substitute for domestic trust busting to maintain competition). It is ironic that this is done in name of deregulation and the free market. Chicago School economist and Nobel laureate Ronald Coase in his classic article on the Theory of the Firm, said "—Firms are islands of central planning in a sea of market relationships". The islands of central planning become larger and larger relative to the remaining sea of market relationships as a result of merger. More and more resources are allocated by within firm central planning, and less by between-firm market relationships. And this is hailed as a victory for markets!

It is no such thing.

It is a victory for corporations relative to national governments which are no longer strong enough to regulate corporate capital and maintain competitive markets in the public interest. Of the 100 largest economic organizations 52 are corporations and 48 are nations. One-third of the commerce that crosses national boundaries does not cross a corporate boundary, i.e. is an intra-firm non market transfer. The distribution of income within these centrally planned corporations has become much more concentrated. The ratio of salary of the Chief Executive Officer to the average employee has passed 400 on its way to infinity —what else can we expect when the chief central planners set their own salaries!

3. Free trade and free capital mobility increase pressures for specialization according to competitive (absolute) advantage. Therefore the range of choice of ways to earn a livelihood become greatly narrowed. In Uruguay, for example, everyone would have to be either a shepherd or a cowboy in conformity with the dictates of competitive advantage in the global market. Everything else should be imported in exchange for beef, mutton, wool, and leather. Any Uruguayan who wants to play in a symphony orchestra or be an airline pilot should emigrate.

Most people derive as much satisfaction from how they earn their income as from how they spend it. Narrowing that range of choice is a welfare loss uncounted by trade theorists. Globalization assumes either that emigration and immigration are costless, or that narrowing the range of occupational choice within a nation is costless.

Both assumptions are false.

While the range of choice in earning one’s income is ignored by trade theorists, the range of choice in spending one’s income receives exaggerated emphasis. For example, the US imports Danish butter cookies and Denmark imports US butter cookies. (And, as I learned at the Aspen conference, Colorado imports drinking water from Fiji, and perhaps Fiji imports rocky mountain water from Colorado.)

The cookies cross each other somewhere over the North Atlantic. Although the gains from trading such similar commodities cannot be great, trade theorists insist that the welfare of cookie connoisseurs is increased by expanding the range of consumer choice to the limit.

Perhaps, but could not those gains be had more cheaply by simply trading recipes? One might think so, but recipes (trade related intellectual property rights) are the one thing that free traders really want to protect.

4. Of all things knowledge is that which should be most freely shared, because in sharing it is multiplied rather than divided. Yet, our trade theorists have rejected Thomas Jefferson’s dictum that "Knowledge is the common property of mankind" in exchange for a muddled doctrine of "trade related intellectual property rights" by which they are willing to grant private corporations monopoly ownership of the very basis of life itself —patents to seeds (including the patent-protecting, life-denying terminator gene) and to knowledge of basic genetic structures.

The argument offered to support this grab is that, unless we provide the economic incentive of monopoly ownership for a significant period of time, little new knowledge and innovation will be forthcoming. Yet, as far as I know, James Watson and Francis Crick, who discovered the structure of DNA, do not share in the patent royalties reaped by the second rate gene-jockeys who are profiting from their monumental discovery. Nor of course did Gregor Mendel get any royalties —but then he was a monk motivated by mere curiosity about how Creation works!

Once knowledge exists, its proper allocative price is the marginal opportunity cost of sharing it, which is close to zero, since nothing is lost by sharing it. Yes, of course you do lose the monopoly on the knowledge, but then economists have traditionally argued that monopoly is inefficient as well as unjust because it creates an artificial scarcity of the monopolized item.

Of course the cost of production of new knowledge is not zero, even though the cost of sharing it is. This allows biotech corporations claim that they deserve a fifteen or twenty year monopoly for the expenses they incur in research and development. Of course they deserve a profit on their efforts, but not on Watson and Crick’s contribution without which they could do nothing, nor on the contributions of Gregor Mendel, and all the great scientists of the past who made the fundamental discoveries. As economist Joseph Schumpeter emphasized, being the first with an innovation already gives one a temporary monopoly. In his view these recurring temporary monopolies were the source of profit in a competitive economy whose theoretical tendency is to compete profits down to zero.

Believe it or not, most important discoveries were made without the benefit of granting monopoly ownership of the knowledge to the discoverer. Can you imagine such a thing —scientists motivated by the pure love and excitement of discovery, and content with a university salary that puts them only in the top ten percent, but not the top one percent, of income recipients!!

As the great Swiss economist, Sismondi, argued long ago, not all new knowledge is a benefit to mankind. We need a social and ethical filter to select out the beneficial knowledge. Motivating the search for knowledge by the purpose of benefiting mankind rather than by securing monopoly profit, provides a better filter.

This is not to say that we should abolish all intellectual property rights —that would create more problems than it would solve. But we should certainly begin restricting the domain and length of patent monopolies rather than increasing them so rapidly and recklessly. And we should become much more willing to share knowledge. Shared knowledge increases the productivity of all labor, capital, and resources. International development aid should consist far more of freely shared knowledge, and far less of foreign investment and interest-bearing loans.

Let me close with my favorite quote from John Maynard Keynes, one of the founders of the recently subverted Bretton Woods Institutions:

I sympathize therefore, with those who would minimize, rather than those who would maximize, economic entanglement between nations. Ideas, knowledge, art, hospitality, travel —these are the things which should of their nature be international. But let goods be homespun whenever it is reasonably and conveniently possible; and, above all, let finance be primarily national.

* Used with permission of the author.
Based in part on a discussion given at The Aspen Institute’s 50th Anniversary Conference, "Globalization and the Human Condition", 8/20/00, Aspen, CO.
See original at < http://www.puaf.umd.edu/faculty/papers/daly/Dalypapers.html >.


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