Why Globalization Works: A Review

This is a paper I wrote for an econ class I took. It's a review of the above titled book written by Martin Wolf. It's quite toned down because it's for a class and I had to bow to the man in order to get a grade, but the book was pretty good and I would recommend it. I couldn't get the footnotes in without more work than I was willing to do. If you want the references you can always ask right?

Martin Wolf’s book, Why Globalization Works, is an attempt to defend, logically and empirically, the phenomenon that has come to be known as “Globalization.” This phrase has become an increasingly important issue in modern political and economic debate. It is far too often assumed that those doing the talking and the listening in these debates have the same definition of what the word means. This is rarely true. Globalization has become a phrase much like the word “capitalism,” which was coined by Karl Marx and was intended as a smear term to defame the market system. It came to have many meanings and was used in different contexts by both the enemies and proponents of the market economy.

Likewise globalization is simply a word. Yet that word can evoke wildly differing emotions and images in people’s heads, depending on which side of the fence they are standing on. Globalization is a word used to describe the trend towards the internationalization of markets. It denotes an increasing connectivity between countries and people through the ties of mutually beneficial trade. Wolf defines the term as “movement in the direction of greater integration, as both natural and man-made barriers to international economic exchange continue to fall. ” Wolf correctly sees this trend as being the effect of both natural and man-made causes. It is not an immutable force that we are powerless against, yet neither is it the product of policy alone.

Wolf’s defense of globalization is based on three main arguments. The first is the superiority of a market system based in property rights, freedom of exchange and individual initiative (or what Wolf calls the “liberal economy”), over systems based on centralized planning, collective ownership and government intervention. The second argument shows why it is logically and historically acceptable and desirable that markets should cross boundaries with few, if any, interruptions. The third argument is an attempt to use empirical data and basic economics to refute the claims raised by those on the anti-globalization side of the debate. The book is well-written and with few exceptions, all three arguments are convincing.

In demonstrating the superiority of the market economy, Wolf describes in basic terms the way it functions. He describes how the incentives of private property and self-interest combined with essential institutions that protect property and enforce contracts are capable of producing vast amounts of wealth. He correctly states that “As a way of satisfying the material wants of mankind, self-interest exceeds the power of charity as the Amazon exceeds a rivulet. ” As further proof of what he calls “the magic of the market ,” (a term he borrows from Ronald Reagan,) Wolf leads us on a tour of economic world history and, using statistics on economic growth and living standards , shows how markets have improved the economic well-being of humankind by leaps and bounds since the time of the industrial revolution.

Wolf’s argument here is extremely convincing for anyone with even a basic knowledge of economics and world history. Only someone completely ignorant of the extent of and reasons for the failures of the various collective experiments of the past century could find much to dispute here. It is also consistent with the theories of great economists of past centuries. F. A. Hayek, an Austrian-born economist, wrote a book entitled The Fatal Conceit, in which he postulated that the information required by central planners to run a socialist economy was so vast (and in many cases unknowable,) that socialism could not be a viable economic system, and had no hope of competing with a market economy .

In the early 1900’s another Austrian economist, Ludwig Von Mises, engaged in a lengthy debate with the socialists of his day about the possibility of economic calculation under a socialist system. Mises argued that not only did central planners have an information problem, but that since socialism lacked private ownership and therefore a system of prices, it had no way of calculating what the efficient use of scarce economic factors would be. He predicted that socialism (in the Marxist-Leninist sense of the word) would result in economic chaos and mass poverty .

Both of the above arguments have since been show to be empirically and theoretically correct. Communist systems such as the Soviet Union collapsed completely and others like China and Vietnam have since liberalized to a significant extent. Although Wolf does not cite Mises or Hayek here, (although he does cite Hayek elsewhere,) his conclusions match theirs. He correctly explains that the market is unquestionably the only method of economic organization that is capable of producing wealth in quantities sufficient to sustain and perpetually enrich the world’s population. Markets are here to stay.

Wolf’s argument that markets should cross borders is also very convincing. He begins by quoting Adam Smith when he said, “What is prudence in the conduct of every family can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage. ” Both Adams Smith’s and Wolf’s arguments here are essentially arguments against protectionism. When governments seek to prevent their populations from trading with foreigners it is invariably to enrich or protect a minority group. Protectionist policies have their roots in lobbying and political pressure from majority or well-funded minority groups. However, their success comes at the expense of the welfare of the majority of the country.

Democracies have always shown a tendency towards protectionism because of the political incentives built into the system and Wolf seems to recognize this. I.M. Destler’s book American Trade Politics, expresses this view clearly and in detail, with particular emphasis on how this trend plagued the American political system up through WWI . He goes on to show how changes in the American political structure allowed for a general lowering of protectionist barriers to the benefit of Americans and our trading partners. If general welfare and overall living standards are what one is concerned about, protectionism is obviously the wrong road and thus domestic markets should naturally be allowed to meld into international markets.

But not only are Wolf and Destler correct on this point because protectionism makes a nation poorer, but perhaps more importantly, because of the political implications of protectionism as well. Ludwig Von Mises wrote that “The philosophy of protectionism is a philosophy of war. The wars of our age are not at variance with popular economic doctrines; they are, on the contrary, the inescapable result of consistent application of these doctrines. ” He was speaking here of WWI and WWII both of which he lived through and both of which were fueled in part by the prevalence of closed, protectionist economies. The Economist Henry George also noted this concept when he said, “What protection teaches us, is to do to ourselves in time of peace what enemies seek to do to us in time of war. ”

Wolf recognizes this idea as well and devotes nearly and entire chapter to the rise and fall of an international liberal economy from the late 1800’s up through WWII with special emphasis on how reactionary, illiberal policies helped plunge the world into war not once, but twice. Seen in this light, globalization is not just about rising living standards and economic growth. It is also largely about peace and cooperation. It is a trend towards growing international, economic interdependence. History seems to clearly show that countries that trade and are dependent on one another economically are much less likely to go to war with each other. The trend we call globalization has the potential to weave together the economies of every nation on earth, thus greatly reducing the likelihood of a recurrence of the devastating wars of the past. This is perhaps its crowning virtue.

The remainder of Wolf’s book is dedicated to refuting the myriad of arguments put forth by opponents of global integration and international trade. The main arguments he addresses are poverty, inequality, the supposedly negative effects of free trade, the imaginary dominance and dangerous nature of large, international corporations, fear of harm to state sovereignty and international identity and the instability globalization may cause with regards to national currencies and financial markets. Wolf’s refutations are overall very good and seem to be empirically sound.

Various people are opposed to globalization because they feel it creates poverty and inequality. They feel that it “exploits” workers in foreign countries, especially children, and that it makes only the rich richer while the poor get poorer. Wolf correctly explodes these myths in two ways. He uses empirical data to show that poverty and inequality have not increased in any negative way due to globalization. Instead he shows how living standards have increased dramatically for much of the world’s population, especially in Asia . Inequality may appear to be growing depending on how we look at it, but this is not the product of falling living standards, but rather the dramatic differences in rising living standards. The gains from globalization to some have been huge, while to others they have been modest, but the point is that they are gains.

Trade does not impoverish, it enriches. Much of current inequality among nations is the result of government, not markets. Collectivism, totalitarianism, poor monetary policy and fiscal imprudence, bureaucratic corruption and Western Imperialism are all major contributing factors. The poor nations of the world have not been impoverished by trade or liberalism, but by a lack of them. Contrary to what the opponents of globalization may think, the solution to poverty and inequality is not more government and less trade, but the exact opposite. To those bemoaning inequality Wolf directs the following remark,

“[the] long-term trend towards global inequality over almost two centuries…is the consequence of the dynamic growth that spread, unevenly, from the UK in the course of the nineteenth and twentieth centuries. In the process a growing number of people became vastly better off than any one had been before, but few can have become worse off. Such dynamic growth is bound to be uneven. To bemoan the resulting increase in inequality is to bemoan the growth itself. It is to argue that it would be better for everybody to be equally poor than for some to become significantly better off, even if, in the long run, this will almost certainly lead to advances for everybody. ”

Wolf’s answer to opponents of international trade is solid as well. Here he adequately defends globalization against everyone from environmentalists to protesters of third world sweat shops. Perhaps his most effective work is his criticism of the world’s wealthy economies for their continued protectionism especially with regards to import quotas and agriculture . It is harmful to the idea of free trade and economic liberalization if those nations which are supposed to be championing it and that are pressuring poorer nations to open their borders to foreign goods, are at the same practicing blatant protectionism with regards to select industries. Many of the particular industries in question here are very important for developing countries. This kind of game has the potential to make cynics of developing nations which may then become hostile to trade. It could undo much of the liberalization that has been accomplished thus far.

Wolf does give some concession to the anti-globalizers when he discusses transnational corporations. Those worried about the power and influence of corporate, special interests do have some cause for concern. They can and have in the past exercised great influence in the policy making arena. As previously mentioned, Destler shows in his book that America, widely considered to be one of the most liberal democracies in the world, has been greatly influenced by big business . Destler also recounts how even today when the majority of American businesses benefit from liberalized trade agreements and despite the fact that the country has made huge strides towards eliminating trade barriers, American corporate interests are still able to frequently gain protection at the expense of both their competition and the consumer. He gives specific examples such as the inability of CAFTA to lower sugar or orange juice barriers and of the steel tariffs passed by President Bush during his first term

But despite the fact that corporations do influence politics, they are not governments. They do not control world events, they do not “exploit” or force people to work for them or buy their products. This is an important distinction to make and Wolf makes it brilliantly:

“The claims that companies are bigger and more powerful than countries is not just wrong factually. Far more important, it is misconceived. For lurking behind these claims is a willful error: a refusal to distinguish power from freedom. Companies differ from countries because they can succeed by obtaining from their customers what they need to pay their suppliers…they cannot force their customers to buy from them. The resources they control are the result of free choices made in the marketplace. Countries…have coercive control over territory. Even the weakest states can force people to do things most of them would very much prefer not to…Companies do not. They are civilian organizations that must win their resources in the marketplace. They rely for survival not on coercion but on competitiveness. ”

One major argument that desperately needed addressing when talking about globalization was its effect on local currencies and financial markets. The possible problems here became glaringly apparent during the Asian crisis of the late 90’s. As a result of what happened, some of these Asian governments chose to blame the market and took steps backwards away from liberalization. The problems globalization creates for financial markets are largely the result of poor policy and bad finances on the part of governments. Blaming the market for these things and advocating less financial freedom as a result, is tantamount to shooting the messenger. However, these problems are real and do require delicate handling.

Wolf does a skillful job of this. He diagnoses the problem as arising from government, and the IMF, but also acknowledges that governments need time and careful preparation to avoid these pitfalls as they liberalize. He advocates gradual reforms to the banking and financial systems coupled with a slow relaxation of exchange controls and opening to foreign investment . This seems to be a good solution, and time will tell if it is one that will work.

Finally, Wolf’s argument that we need not fear globalization’s effects on the state and its power is perhaps his weakest. He is correct that we need not fear, but for the wrong reasons. He claims that the threat posed by technology and international integration is greatly exaggerated. He first tries to prove this using an unconvincing array of statistics. Just because statistics do not yet reveal that this trend is taking place, does not mean that it isn’t, or that it will not at some future time. It seems a little early on to come to so firm of an empirical conclusion solely on the limited data he presents. He also makes the case that “the bedrock of international order is the territorial state, with a monopoly of coercive power within its jurisdiction. ” He attempts to support this claim by asserting that, “This is why failed states, disorderly states, weak states and corrupt states are shunned states – they are the black holes of the global economic system. ”

This may be true, but it is an apples and oranges comparison. Every example he mentioned to support the claim was a state, only to varying degrees of unattractiveness. This is not an effective argument in a debate about whether or not the state as an institution itself may change unrecognizably or cease to exist. Political organizations have changed greatly throughout time. The modern nation-state is a surprisingly new institution, only really coming into being after the French Revolution. It remains to be seen if it will endure into the distant future, especially in the bloated, insolvent, welfare-state form it has come to assume. We needn’t fear globalization's effects on states because it will only serve to change them for the better, not because it won’t change them.

Despite this one weakness, his arguments are overall very compelling. He does a very thorough job of defending globalization and it is hard to imagine an educated, rational response to the contrary. It is clear that what we call globalization is a highly desirable and beneficial trend. If it succeeds, we will likely see a level of prosperity and freedom that we can now only imagine. That is if the very real and very dangerous anti-globalization movements don’t succeed in derailing the train before it has reached the station.