26 Aug 2008

Nobel Laureates Endorse Marxism

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My title is a bit of an exaggeration. (Isn’t it?) Monday’s WSJ has an article, “Nobel Laureates Say Globalization’s Winners Should Aid Poor” (sub req’d). The more I read of this article, the more grateful I became that I was never awarded the (pseudo-)Nobel Prize in economics.

The entire premise of the article is that “[g]lobalization and technology have increased income inequality around the world,” and that governments need to sop up some of the admitted gains from globalization in order to compensate the losers.

Yet I challenge step one in this argument. It is certainly possible that globalization has increased income inequality in the richest, most capital intensive nations (such as the US). But my strong hunch is that global inequality has gone down because of globalization. Yes, a measly few million capitalists in the West have gotten much richer because they could move factories to China, employ call center operators in India, and so forth. But the bigger story is that billions of the world’s poorest people are now earning higher wages than they were before foreign investors came to town. I would be interested to see a calculation (however rough) where someone plugged in the various incomes from around the world to see what the global Gini coefficient was in, say, 1988 versus 2008. (A quick search shows me [pdf] that the world Gini apparently went up from 1988 to 1993, but since then China and India have grown much faster than their richer peers. My guess is that the Gini went down from 1988 to 2008.)

As Ludwig von Mises would often observe, Western workers are all about redistribution, until you point out that by global standards, blue collar workers in the US are among the richest of the population. So if they are serious about taking from the filthy rich and giving to the neediest, they should send 75% of their paychecks to African orphans every month.

One final quote from the WSJ article to reassure the reader that I am not being unfair to these Nobel clowns. Here we pick up where the reporter quotes Finn Kydland:

“Globalization ought to be good for all countries,” though it isn’t unless government policies are up to the challenge, he said. Look at Brazil and Argentina over the past two decades, he added. In Brazil, global growth has boosted low-wage workers’ income levels more than the levels of higher earners. Argentina, by contrast, saw its per capita GDP slide by some 20% in the 1980s as a series of government administrations piled on a debt load that eventually became crippling. Since then, real wages have fallen and the gap between rich and poor has widened.

What made the difference? “Bad economic policy,” said Mr. Kydland. “If there’s not a mechanism for redistribution, it probably won’t happen.”

Wow. I initially read this passage at the gym–my superior physique is not natural, my friends–and thought it was dumb. But now I see that it is D-U-M dumb. Yes Mr. Laureate, if a government piles on a crippling debt load that caused per capita GDP to slide by 20%, then that can seriously harm an economy–and one of those harms is that the poor typically will get hit harder during such a calamity. But what the heck does this have to do with lower tariffs and costs of transportation, foreigners investing capital in your country, etc.?

It is true that in some South American countries, brutal thugs seized control and implemented–at gunpoint–Chicago-style economic reforms. But Naomi Klein notwithstanding, that doesn’t prove that market forces are a bad thing, anymore than the Spanish Inquisition* proves the case for atheism.

In conclusion, let me concede that it is theoretically possible for an entire country to become poorer due to globalization. (All you have to do is take the group of people who are losers from globalization, and put them into one country. Voila!) However, for the world as a whole, globalization raises per capita living standards, because it increases productive efficiency–humans as a race churn out more stuff per period, when production is concentrated in those areas with the highest return. And empirically, even though some capitalists do very very well in the new system, much of the benefits of the higher output is showered on the masses. I explain more fully in this article.

* I bet you weren’t expecting a reference to the Spanish Inquisition

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