Freeman

ARTICLE

Globalization: Extending the Market and Human Well-Being

APRIL 01, 2009 by GENNADY STOLYAROV II

Filed Under : Division of Labor

This article was the winning entry in FEE’s first annual Eugene S. Thorpe Essay Contest.  The commens of Dr. Karl Borden, Chairman of the selection committee, preface Mr. Stolyarov’s article.

 

Preface:

The globalization of culture, politics and economics is arguably the defining characteristic of the past half century.   English has become the international language of commerce, Chinese holiday toys entertain children in Nebraska and Norway, American political consultants sell their advice to candidates in Israel, and  the Bollywood film industry holds its annual awards event in Bangkok.   That an enormous expansion in global wealth has accompanied this increase in global interconnection is self-evident.  That the former is a result of the latter is the Smithian premise.

129 authors responded to FEE’s Call for Papers in competition for the Eugene S. Thorpe Award, and spoke with near unanimity to the benefits of globalization, the causative relationship between the expansion of markets and wealth creation, and the limited ability and frequently destructive consequences of governmental attempts to manage the process.  

The choice of a “best” paper was a difficult one, and the selection committee wants to thank all of the Award participants for their contributions.  Only one paper could win and we will let that paper speak for itself; but special recognition and honorable mention are in order for several of the runner-up contributors.   In particular, two runner-up contributions addressed the issue of “government facilitation” of globalization in a more sophisticated manner than most, recognizing that the concept of government facilitation can and should include not just the destructive mechanisms of market manipulation and management, but also the supportive and (for Smith) essential mechanisms of preserving and protecting the legal infrastructure necessary for free markets to function.    

Mr. Lorenz Kraus of Albany, New York, in his paper “Liberty of Contract and the Division of Labor,” reminds us that “One of the great feats of intellectual history has been the discovery of the crucial connection between a thriving division of labor and a thriving civilization,” and that “the division of labor…depends on the laws and institutions a nation adopts.”    Just so.  Adam Smith was not an anarchist, and his vision of the optimal role of government was not that of no government at all.   Two of the three legitimate functions of government he identifies are the national defense and the administration of justice.   Mr. Darin Clark of Bradenton, Florida, in his paper “Cooperative Exchange, the Occurrence Necessary for the Division of Labor,” emphasizes that “voluntary exchange” can only take place when we have “a necessary framework of laws…This framework of laws is the respect for contractual agreements and rights to private property.”

Government can play a positive role to “facilitate” globalization by enhancing the rule of law in those areas of the world where it is lacking, and by defending property rights whether against the thuggery of high-seas piracy or the high-tech assault of electronic spam.    Honorable mention to Messrs. Kraus and Clark for elaborating on this point.

And honorable mention likewise to Mr. Mark Hendrickson of New Wilmington, Pennsylvania, who offers the insight that modern governments’ attempts to manage trade through bi- and multi-lateral trade agreements is a modern form of the mercantilism prevalent in Adam Smith’s time.   “It turns out that a democracy can be as harmful as a monarchy to the economic well-being of a people, if special-interest politics force the common people to subsidize the privileged few and abrogate the right of a free person to buy from his or her seller of choice.”  Mr. Hendrickson makes a powerful argument in favor of the unilateral removal of trade barriers.

The globalization of the world’s markets is almost certainly a Hayekian effect emerging from the technology of the twentieth century, but it is one that poses a direct threat to the power of governments to control individual behavior.    Governments, whether democratic or autocratic, do not react well to loss of control and will act to retain their power by whatever means necessary.   As the political environment in the U.S. shifts, and with the convenient excuse of recent disruptions in global financial markets (occasioned themselves by government interference), we can expect new efforts on the part of sovereign and meta-sovereign institutions to re-impose their control over international trade.   Hayekian processes tend to persist over time – but the pace at which they proceed is more problematic.  

Congratulations to Mr. Gennady Stolyarov II of Hillsdale, Michigan, on his winning article, “Globalization:  Extending the Market and Human Well-Being.”    

 

Dr. Karl Borden

Professor of Financial Economics

University of Nebraska

Chair, Eugene S. Thorpe Award Selection Committee

 

Much of the prosperity of today’s world arises from the division of labor. Globalization, by extending the market’s scope to the entire world, enables the division of labor to become as developed as the current world population allows. However, to be truly in the interests of consumers and a boon to economic prosperity, globalization needs to occur spontaneously through the workings of the unhampered free market. Government attempts to meddle with this process—even with the sincere intent to facilitate or accelerate it—will only undermine its efficacy at benefiting us all.

In his 1776 classic, The Wealth of Nations, Adam Smith explained that “the division of labor is limited by the extent of the market.” This is not hard to understand on an individual and local scale. Imagine you are somewhat skilled at making tables. If you live alone in a cabin in the woods and can only personally use the tables you make, you might create four or five of them—but there your need for them would stop. You would have little further reason to continually develop your table-making skills. You would not be able to turn table-making into your full-time occupation. After all, you also need food, shelter, non-table furniture, and myriad other goods to have even a meager standard of living. You would have to create all these goods yourself, with no time to develop anything beyond a rudimentary table-making ability.

If you have a few friends who also use tables, you can devote more of your time to making them and improving your craftsmanship, while exchanging the tables for other goods your friends specialize in producing. If you live in a village, your ability to obtain most of the goods you desire solely by producing tables increases along with your likelihood of finding enough people who demand tables to keep you busy during all of your working hours. As you sharpen your skills, you might even begin to incorporate artistic flourishes into your tables and learn how to make tables suited to specific purposes. Perhaps you might become a master craftsman of coffee tables or desks. In a large city, the demand for either of these types of tables alone might keep you employed.

But imagine that your passion in life is to carve elaborate geometric designs into your tables and turn them into unique works of art. This kind of table-making takes many days of hard work, and only a few people in the world would appreciate the merits of your table art. You might be able to command a high price for each of your special tables—say, $10,000—if you could find a buyer. But let us say that only 60 people out of the world population of six billion would be willing buyers of one of your tables each year. In your large city, there are six million people, so your probability of finding even one buyer in your city would be a mere 0.06—giving you an expected annual income of $600 if you specialized in making your unique tables. But if you were able to access customers from all over the world easily, then you might fulfill all the existing demand for your work and thereby receive an annual income of $600,000. You can live lavishly by only serving the needs of 60 people—if your market extends to the entire world. If you could only sell in your city, you would likely never have made many of your special tables, leaving so much potential value uncreated.

Globalization is the process of the ever-increasing extension of markets, past national and even regional boundaries. Three principal factors drive globalization. First, improved transportation and communication technology enables previously formidable barriers of distance and geography to be overcome. Adam Smith remarked on the extent to which water transport facilitated the division of labor and consumers’ ability to get more and better goods faster: “A broad-wheeled wagon, attended by two men, and drawn by eight horses, in about six weeks’ time carries and brings back between London and Edinburgh near four ton weight of goods. In about the same time a ship navigated by six or eight men, and sailing between the ports of London and Leith, frequently carries and brings back two hundred ton weight of goods.” In our age, air freight and the Internet can be added to the list of technologies facilitating the extent of the market.

The second factor facilitating globalization is the removal of government restrictions on trade. Tariffs, quotas, subsidies to domestic producers, and other trade barriers make it difficult for businesses located outside a country to compete with domestic producers based solely on the consumer-evaluated merits of their products. Such interventionist measures tax domestic consumers and foreign businesses and artificially inflate the incomes of some—though by far not all—domestic businesses. The favored businesses have reduced incentives to cut costs and increase product quality, since the government shields them from the most intense competition. In the long run this leads to poor products, widespread waste, organizational inefficiency, and consumer dissatisfaction. When government trade barriers are removed and no regulations are put in their place this burden is lifted from millions of consumers and producers, who are now able to extend the market to the degree desired by consumers. Since reaching a high point with the Smoot-Hawley Tariff Act of 1930, tariffs levied by the United States against imported goods have generally declined up to the present day. Tariffs and other protectionist policies in many other countries have been likewise reduced, especially from the 1980s onward.

Increased Tolerance and Respect

The third factor responsible for globalization is increased tolerance by people throughout the world for others of different national, ethnic, and cultural backgrounds. As trade among people begins to take place, it becomes easier for people to see one another in terms of the goods and services they offer, rather than in terms of negative stereotypes, hatreds, and fear of “the other.” In a virtuous cycle, people in globalizing markets begin to extend increasing respect, understanding, and willingness to cooperate to those who are unlike them. A more cosmopolitan, individualistic outlook emerges: Each producer and consumer is judged on the basis of personal actions and merits, not circumstantial group identity. This in turn makes it much easier for people to engage in trade with still more others, unhindered by unwarranted negative preconceptions. The prevalence in the United States of Mexican food, Japanese automobiles and electronics, Chinese manufactured goods, South American fruits, and hundreds of thousands of other goods imported from virtually all parts of the world illustrates the seamless merger between economic and cultural exchange—a ubiquitous characteristic of globalization. Richard Cobden, perhaps the most outspoken free-trade advocate of the nineteenth century, saw this growth of tolerance as a desirable aim and outcome of the extension of trade: “The people of [France and England] must be brought into mutual dependence by the supply of each others’ wants. There is no other way of counteracting the antagonism of language and race . . . and no other plan is worth a farthing.”

More Variety

The benefits of globalization are manifold. Economists recognize that globalization lowers prices for a wide array of consumer goods, thereby making consumers better off in real terms. But increased product variety is another outcome, well documented by Christian Broda and David Weinstein in their 2006 Quarterly Journal of Economics paper, “Globalization and the Gains from Variety.” Broda and Weinstein note that “in 1972 the US imported 74,667 varieties (i.e. 7,731 goods from an average of 9.7 countries) and in 2001 there were 259,215 varieties (16,390 goods from an average of 15.8 countries).” Some of these goods were already common in their regions of origin but have now been able to spread elsewhere and find willing consumers. The spread of other products was only made possible by the ability of their providers to find enough customers by extending their market to the entire world. In his essay “Spicing the Gains from Globalization with Product Variety,” Neel Chamilall emphasizes “that consumers value this greater product variety for its own sake, on top of the lower prices that globalization also generates.” A wider range of possible satisfactions is valued since the more kinds of products exist, the likelier a particular product is to fulfill the specific tastes of an individual consumer at any given moment.

But globalization’s extension of the market facilitates more than the production of greater numbers and varieties of material goods. The intellectual division of labor—as well as the opportunities for intellectual cooperation extending throughout the world—are also greatly magnified by globalization. In “Globalization: The Long-Run Big Picture,” George Reisman explains that globalization brings about a “substantial increase in the number of highly intelligent, highly motivated individuals working in all of the branches of science, technology, and business. This will greatly accelerate the rate of scientific and technological progress and business innovation.” Reisman observes that “one of the greatest of all gains that results from the division of labor is the ability of geniuses to devote their full time to activities representing the discovery and application of new knowledge.” The broader the division of labor, the greater the likelihood that a creative genius in business, science, medicine, engineering, or another vital field will not personally need to manufacture most of the goods he desires. Moreover, the likelihood that he will find a market receptive to his own endeavors increases to the maximum extent if he can interact with anyone in the world.

When creative geniuses—or creative people in general—communicate with one another, exchange ideas, and build on one another’s work, additional economies of scale emerge. Many creators relying on each other’s utmost strengths can produce more discoveries, inventions, structures, and organizational innovations than the sum total produced by each creator working in complete isolation—just as the division of labor in the pin factories Adam Smith observed could raise the number of pins produced per worker by orders of magnitude. When national, geographic, and cultural boundaries no longer pose barriers to creators exchanging ideas and undertaking joint ventures, some of the greatest possible benefits to all humanity can be realized.

Raising Everyone’s Standard of Living

If globalization proceeds unhampered, it will achieve, in Reisman’s words, “the elevation of the productivity of labor and of living standards all across the globe to the level of the most advanced countries, and at the same time the radical improvement in productivity and living standards in what are today the most advanced countries.” As everyone is enabled to participate in a truly global division of labor, its benefits will spread throughout the world—eradicating true poverty and much other human suffering in all areas where governments do not forcibly restrain their people from peaceful economic and cultural exchange.

But aside from staying out of globalization’s way, governments cannot act efficaciously to promote or accelerate it. As George Washington is reputed to have said, “Government is not reason. It is not eloquence. Government is force; like fire it is a dangerous servant—and a fearful master.” Government’s entire modus operandi is force or the threat thereof. If the government promotes anything in an affirmative fashion, it can only do so through the use of force. Calling a particular exertion of government force a “free-trade agreement” or a “free-trade organization” does not alter its nature, and the facts attest to this. In “Can Trade Ever Harm a Country?” Robert P. Murphy comments on the NAFTA “free-trade agreement”: “The NAFTA is over 1,000 pages, detailing all sorts of environmental and labor regulations and establishing supranational boards to rule on disputes. If NAFTA really did nothing but establish free trade, it would be the size of a postcard, and there would currently be no tariffs between Mexico and the US.” It is true that NAFTA lowers some tariffs and lifts other trade restrictions, but the government’s affirmative exertions in this agreement amount to regulating and intervening more in certain aspects of commerce by controlling thousands of tiny elements of production, employment, and property ownership that would otherwise have been left to individual choice. There is no clear way of determining that the “free-trade agreement” resulted in more freedom than would have existed otherwise.

International institutions devised by Western governments allegedly to promote deregulation and globalization have often achieved the opposite purpose. Much of the apparatus of the World Trade Organization (WTO) engages in the imposition of retaliatory tariffs on the products of countries whose governments are deemed uncooperative. From a free-market standpoint, this is a travesty. Because the government of a particular country has infringed on economic freedoms, must the private individuals and businesses of that country suffer further infringements of their freedoms as a result? Moreover, having tariffs imposed through the WTO merely legitimizes them and falsely assures many who would otherwise have opposed them that trade barriers are necessary somehow to bring about free trade.

Unilateral Action that Works

The only legitimate government policy regarding globalization is to let the process develop spontaneously through the interactions of billions of private individuals and to lift all trade restrictions unilaterally. Even if other governments have tremendous trade restrictions against American producers, and even if they completely prohibit imports into their countries, the U.S. government should permit all foreign goods to enter the country without at all taxing them, restricting their quantity, or regulating their quality.

The reasons for unilateral renunciation of all trade restrictions become clear once one considers that American consumers are subject to two distinct sources of harm. The first source is the trade barriers set up by other governments. But trade restrictions established by the United States government perpetrate even greater damage to American consumers, resulting directly in higher prices and lower quality. The presumption behind multilateral “free-trade agreements” has been that only foreign-imposed trade barriers hurt domestic consumers, while domestically imposed trade barriers are simply defensive or retaliatory measures. But if both foreign and domestic trade barriers hurt domestic consumers, then it is always preferable to have just one of these sources of harm—the foreign trade barriers—instead of both.

The benefits of unilateral renunciation of trade restrictions do not stop at freeing consumers from domestically imposed tariffs, quotas, regulations, and subsidies. Such a course of government inaction sends an unambiguous message to foreign governments and businesses that we are willing to benefit from anything they have to offer us, while respecting them enough to let them operate as they see fit. This gesture of goodwill is likely to be reciprocated, just as Cobden’s success in getting Britain to abolish the Corn Laws unilaterally in 1848 led multiple European countries to eliminate many of their own trade barriers.

The way to truly accelerate globalization is not to wait for all nations to agree warily to the conditional removal of restraints on their own people, but rather to boldly proceed alone in knocking down one domestic trade barrier after another. With the passage of time, it will become evident that not having retaliatory trade restrictions against the producers of other countries does not in fact harm American consumers or producers. Other governments, seeing the mercantilist fears falsified empirically, will become increasingly inclined to join in the rising prosperity by opening their markets to globalization. As globalization fosters a truly international division of labor, billions of people will come to benefit from unprecedented product variety, technological growth, and cultural exchange.

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