GLOBALIZATION AND THE U.S.
In “The Wealth of Nations” (1776), Adam Smith
defined the two goals of political economy, “…first, to provide a plentiful
revenue or subsistence for the people…and secondly, to supply the state or
commonwealth with a revenue sufficient for the public
services.” 1 When advocating the social arrangements to make these
possible, Karl Marx was no great political economist. However, he well
described the world-wide dynamics that the industrial revolution was
unleashing:
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The discovery of America, the rounding of the Cape,
opened up fresh grounds for the rising bourgeoisie. The East-Indian and
Chinese markets, the colonisation of America, trade
with the colonies, the increase in the means of exchange and commodities
generally, gave to commerce, to navigation, to industry, an impulse never
before known… …steam and machinery revolutionised
industrial production. The place of manufacture was taken by the giant,
Modern Industry, the place of the industrial middle class, by industrial
millionaires, the leaders of whole industrial armies, the
modern bourgeois. Modern industry has established the world-market,
for which the discovery of America paved the way. This market has given an
immense development to commerce, to navigation, to communication by land…and
pushed into the background every class handed down from the Middle Ages. 2 |
In Marxian economics, labor is the source of all
product value. Economic competition, however, forced capitalists to substitute
increasing amounts of capital (labor embedded in the means of production) for
workers’ wages, leading to the impoverishment of the proletariat, and
eventually to revolution. In contrast, neoclassical economics concerns itself
with the workings of what the Economist calls the “marvelous machine.” Neoclassical economics does not privilege labor,
concerning itself mainly with the technical issues of supply, demand, and the
policy determinates of output. The ultimate goal of Marxian social analysis was
to free workers from an exploitation that Marx precisely defined by formula. The
ultimate goal of neoclassical economics is to maximize GDP output, and
therefore social happiness.
We discuss Marx because he placed at the center of
his analysis, labor. Differential labor costs now drive the engine of
globalization, impacting people in both developed and developing societies.
Significantly for the United States, we discuss China.
Steven Rattner helped restructure General Motors in 2008. In the July/August 2011 Foreign Affairs Magazine, he set forth the 2009 labor costs of building cars at various G.M. locations, there being decreasing differences in productivity.
2009 Labor Costs/Hour
|
United
States |
Mexico |
China |
India |
|
$55.00 |
$7.00 |
$4.50 |
$1.00 |
Labor costs in the U.S. are 12X those of China’s; an
Asian Development Bank study of Apple IPOD assembly costs estimates that labor
costs in the U.S. are 10X higher. It is this labor cost differential that
incents the multinationals to build assembly plants abroad. Furthermore, due to technological change, the U.S. also has to compete against low-wage, highly skilled workers. The goal of the
capitalist system is simple and somewhat impersonal, Max [Profits]. The highly
competitive nature of this system requires large manufacturing companies to produce abroad. If they don’t, their competitors will eat their lunch (put them out of
business).
The
data above is a simple statement of costs. The reality of how Min [Costs]
happens is, of course, very much more complicated. Our viewpoint of markets and
economic activity is that they are social systems; it is therefore relevant
what people say and do. The following
discusses China as an example of modernization and economic adaption. We write
about China because it is now very relevant to the U.S. We hope our readers
will take the following only literally.
The Modernization of China
In the mid 1700s, the British sought to expand their
trading empire in China. Their presence was not exactly welcome. By 1760, they were
restricted to an enclave in Canton. In 1793, George III (that one) sent Lord
George McCartney to the Qianlong emperor to ask for expanded British trading
rights and diplomatic representation in Beijing. The Qianlong emperor’s reply
was a classic:
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We
have never valued ingenious articles, nor do we have the slightest need of
your country’s manufacturers. Therefore, O king, as regards your request to
send someone to remain at the capital, while it is not in harmony with the
regulations of the Celestial Empire we also feel very much that it is of no
advantage to your country. 3 |
Unlike Japan, China did not learn from its
environment. How is China adapting now? This leads to a perspective of its
complex society, and what the U.S. must do to compete.
Chinese civilization is about 4,500 years old and
has its uniqueness. The polar opposite of Mideastern
societies, China places the state as the only major collective above the
family. The result is a dynamic that is not unlike that which occurs in large
corporations, cycles of centralization and decentralization. At the end of the
Cultural Revolution in 1976, the central government necessarily devolved a
large amount of responsibility to the provinces, many of which had continued to
tolerate a degree of private enterprise. In the words of MIT Sloan School
economist Yasheng Huang (2008), central government
reform policies, “ …accommodated the spontaneous
actions on the ground.” 4
Economic growth is a bottom-up activity because it
relies upon a knowledge of local profit opportunities.
Thus in the decade of the 1980s, capitalism in China grew in the agricultural
provinces of China, not in the more politicized metropolitan centers of Beijing
and Shanghai. For instance, Huang writes that Zhejiang province, “…is home to
half to China’s largest private-sector firms…what is often lost in the Zhejiang
story is that the province was poor and deeply agrarian in the 1970s…Today
it…is the bastion of Chinese capitalism. Its businesses dominate European markets
in garments…and the region has begun to venture into electronics and
petrochemical products. …All (its) wealth was built on a rural foundation.” 5
In the 1990s, a newly conservative national
leadership began to emphasize urban China rather than rural China, and sought
more foreign direct investment. As a result, “…fiscal recentralization in 1994
…substantially reduced the autonomy of the provinces.” 6 Credit
constraints on rural enterprenurship were tightened.
In periods beginning in 1981 and ending in 2001, the private sector’s share of
fixed-asset investments declined from 21.4% to 13.3%, in favor of the
state-owned enterprises. 7 Thus, there are lots of new skyscrapers
(there is something universal about the appeal of real estate) in Shanghai, but
less investment in the rural areas. As a result of regionalism and changes in
economic policy, the forms of corporate ownership in China are extremely
complicated.
Tsai (2007) lists five major models of corporate
ownership that vary by locality:
1) The
Zhejiang model, self-reliant growth driven by private business and private
finance.
2) The
Sunan model, local government takes on a role of
providing land, credit, and guidance to collective firms.
3) The
South China model, combining elements of both above with an emphasis on foreign
trade and high levels of foreign direct investment.
4) The
State Dominated model, found in major industrial centers such as Shanghai and
not favoring private enterprise.
5) The
Limited Rural Development model, the state invests directly in local economic
development. 8
We
mention this for a purpose. China’s economy is like a hummingbird. It manages
to fly despite theory because it is socially organized to compete in
manufacturing exports with low labor costs, with a model Max [Employment] – regardless of the
efficiencies inherent in the model Max [Profits]. Like many other developing countries, China is furthermore working furiously to produce
higher-valued products by education and government programs.
A
state-owned firm, Shanghai Zhenhua
Heavy Industry Co. Ltd (ignore the music), manufactured the eastern span of the San
Francisco Bay Bridge. 9 The main contractor is Fluor
Corporation, a U.S. multinational. It’s website
describes the
project. What is really relevant is the behavior the market system
incents. Fluor won its contract bid, based upon cost. If it had sourced the
bridge from a U.S. supplier, it probably would not have won the bid.
What Can the U.S.
Do?
What can the U.S. do to compete against China’s large advantage of lower costs
and increasing sophistication?
To draw a football
analogy, a home team that
executes the same play, regardless of what the competition does, will surely lose. In 1945 with around 50 % of world GDP measured by
purchasing power parity, the
U.S. could determine
the world’s economic system; now it accounts for only 21%. 10 Regardless of the rhetoric, the U.S. now has to adapt itself to the world, that includes China
and many other developing countries.
What
might that adaption be? To ascertain the truth of any proposition, push it to
the extreme and consider the consequences. Consider the pure capitalist and
socialist models. The capitalist model lets unfettered markets determine
resource allocation. The problem with this model is first that unfettered
markets can make big mistakes, and then they correct violently. The second problem
is that it assumes the mobility of capital and labor, ensuring the full
employment of resources. In a world of national boundaries, the capital is
mobile while labor is not. The pure capitalist model will result in continued
high U.S. unemployment; as capital and know-how, aided by technology, continue
to move abroad. There may be ghost towns out west, but in the past everyone
could have moved to Los Angeles. According to the Commerce Department, between
2000 and 2009 the multinationals cut 2.9 million jobs in the U.S. and added 2.4
million overseas. 11
At the other extreme, the socialist model is also
problematic. Under the socialist model everyone had jobs centrally assigned,
but they produced junk that could not compete in world markets. Germans have a
knack for producing world-class exports? Not always. The West German Treuhand discovered that most of East German industry had
to be scrapped and that only the Carl Zeiss Optical
Works in Jena produced a world-class product.
The practical solution, everywhere, is a mixed
economy that includes both private initiative and state involvement in varying
degrees. But the mixture should, and of course will, depend upon each nation’s
culture. In the West the general logical rule is the excluded middle, an object
is either an A or a B. This does not necessarily lead to an ideologically rigid
capitalism. Because that rule can still be fulfilled with the idea that everything
should be in its proper place in a logical hierarchy. There is a role for
private enterprise, essentially to make things happen in the short-term. There
is a separate role for government to make collaborative long-term investments
(we use this word very precisely) in education, infrastructure, R&D, and to
pick, as private industry does but at a different level, the winners and some
inevitable losers. These investments, as President Obama says, will help us "up our game." Furthermore, trade policy should be conducted under the
principle of generalized reciprocity. 12
Many discussions in Washington boil down to this: 1)
Let the multinationals continue to export jobs abroad freely in the name of
efficiency and shareholder value. 2) Continue to spend money on social programs
in the distant hope the economy will recover. Neither of these ideological
derived “solutions” deal with the underlying problem.
There has to be a solution to the underlying structural jobs problem. We quote
Andy Grove, former Chairman and founder of Intel:
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WANTED:
JOB-CENTRIC ECONOMICS Our fundamental economic beliefs which we have
elevated from a conviction based on observation to an unquestioned truism, is
that the free market is the best of all economic systems-the freer the
better. Our generation has seen the decisive victory of free-market
principles over planned economies. So we stick with this belief, largely
oblivious to emerging evidence that while free markets beat planned
economies, there may be room for a modification that is even better. Such evidence stares at us from the performance of
several Asian countries in the past few decades. These countries seem to
understand that job creation must be the No. 1 objective of state economic
policy. The government plays a strategic role in setting the priorities and
arraying the forces and organization necessary to achieve this goal. The
rapid development of the Asian economies provides numerous illustrations. In
a thorough study of the industrial development of East Asia, Robert Wade of
the London School of Economics found that these economies turned in
precedent-shattering economic performances over the ‘70s and ‘80s in large
part because of the effective involvement of the government in targeting the
growth of manufacturing industries. 13 |
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In
the July/August 2011 Foreign Affairs
Magazine, economist Michael Spence more generally writes:
|
The late American economist Paul Samuelson once
said, “Every good cause is worth some inefficiency.” Surely equity and social
cohesion are among them. The challenge for the U.S. economy will be to find a
place in the rapidly evolving global economy that retains its dynamism and
openness while providing all Americans with rewarding employment
opportunities and a reasonable degree of equity. This is not a problem to
which there are easy answers. As the issue becomes more pressing, ideology
and orthodoxy must be set aside, and creativity, flexibility, and pragmatism
must be encouraged. The United States will not be able to deduce its way
toward the solutions; it will have to experiment its way forward. |
__
In the 8/30/11 NYT, MIT President Susan Hockfield more specifically writes:
|
The United States became the world’s largest
economy because we invented products and then made them with new processes.
With design and fabrication side by side, insights from the factory floor
flowed back to the drawing board. Today, our most important task is to
restart this virtuous cycle of invention and manufacturing. Rebuilding our manufacturing capacity requires the
demolition of the idea that the United States can thrive on its service
sector alone. We need to create at least 20 million jobs in the next decade
to offset the effects of the recession and to address our $500 billion trade
deficit in manufactured goods. These problems are related, given that the
service sector accounts for only 20 percent of world trade. To make our economy grow, sell more goods to the
world, and replenish the work force, we need to restore manufacturing – not
the assembly-line jobs of the past, but the high-tech advanced manufacturing
of the future…. The United States remains a top producer of
advanced technology products. But our dominance has eroded. Ten years ago, we
enjoyed a trade surplus in advanced technology manufactured goods; today,
that category accounts for an $81 billion annual trade deficit. Countries
that used to make inexpensive goods at low cost have developed the capacity
to produce high-value goods, making it ever more tempting for American
companies to design at home but manufacture abroad. This not only destroys manufacturing jobs, but
also saps our inventive advantage…. The prospect of good manufacturing jobs in the
United States is not a fantasy. Germany and Japan enjoy high wages and run
major surpluses in manufactured goods; so can we. Our economy will thrive
only when we make what we invent. |
So, what’s going to help the situation in the short-run?
In the 9/2/11 CNN, Harvard’s Kenneth Rogoff said
infrastructure projects, properly financed, and certainly not cutting the
budget – which would reduce demand. Other than that, economic growth is going
to be determined by the long-term fundamentals such as education and, we might
add, entrepreneurship and some forms of industrial and trade policy.