by 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
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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).