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Dispensing with the prattle that states that trade will not war

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While outsourcing will undoubtedly be a whipping boy in the US 2008 elections, the process will not have abated and its effects will mark many nations, the US included, for decades to come. I heartily recommend The World Is Round, John Gray's review of Tom Friedman's The World Is Flat: A Brief History of the Twenty-first Century as the most realistic analysis of what outsourcing and globalism will and will not do:

[Karl] Marx's view of globalization lives on, and nowhere more vigorously than in the writings of Thomas Friedman. Like Marx, Friedman believes that globalization is in the end compatible with only one economic system; and like Marx he believes that this system enables humanity to leave war, tyranny, and poverty behind…

[Friedman] shares Marx's blind spots. Because they were on opposite sides of the cold war it is often assumed that neoliberalism and Marxism are fundamentally antagonistic systems of ideas. In fact they belong to the same style of thinking, and share many of the same disabling limitations. For Marxists and neoliberals alike it is technological advance that fuels economic development, and economic forces that shape society. Politics and culture are secondary phenomena, sometimes capable of retarding human progress; but in the last analysis they cannot prevail against advancing technology and growing productivity.

Friedman is unequivocal in endorsing this reductive philosophy… Technological determinism may contain a kernel of truth but it suggests a misleadingly simple view of history. [Friedman ignores the] the persistent power of religion and nationalism forces that in his simple, deterministic worldview should be withering away.

It is an irony of history that a view of the world falsified by the Communist collapse should have been adopted, in some of its most misleading aspects, by the victors in the cold war. Neoliberals, such as Friedman, have reproduced the weakest features of Marx's thoughtits consistent underestimation of nationalist and religious movements and its unidirectional view of history. They have failed to absorb Marx's insights into the anarchic and self-destructive qualities of capitalism. Marx viewed the unfettered market as a revolutionary force, and understood that its expansion throughout the world was bound to be disruptive and violent. As capitalism spreads, it turns society upside down, destroying entire industries, ways of life, and regimes. This can hardly be expected to be a peaceful process, and in fact it has been accompanied by major conflicts and social upheavals. The expansion of European capitalism in the nineteenth century involved the Opium Wars, genocide in the Belgian Congo, the Great Game in Central Asia, and many other forms of imperial conquest and rivalry. The seeming triumph of global capitalism at the end of the twentieth century followed two world wars, the cold war, and savage neocolonial conflicts.

Over the past two hundred years, the spread of capitalism and industrialization has gone hand in hand with war and revolution. It is a fact that would not have surprised Marx. Why do Friedman and other neoliberals believe things will be any different in the twenty-first century? Part of the answer lies in an ambiguity in the idea of globalization. In current discussion two different notions are commonly conflated: the belief that we are living in a period of rapid and continuous technological innovation, which has the effect of linking up events and activities throughout the world more widely and quickly than before; and the belief that this process is leading to a single worldwide economic system. The first is an empirical proposition and plainly true, the second a groundless ideological assertion. Like Marx, Friedman elides the two…

It is necessary to distinguish between globalization—the ongoing process of worldwide industrialization—and the various economic systems in which this process has occurred. Globalization did not stop when Lenin came to power in Russia. It went on—actively accelerated by Stalin's policies of agricultural collectivization. Nor was globalization in any way slowed by the dirigiste regimes that developed in Asia —first in Japan in the Meiji era and later in the militarist period, then after World War II in Korea and Taiwan. All these regimes were vehicles through which globalization continued its advance. Worldwide industrialization continued when the liberal international economic order fell apart after World War I, and it will carry on if the global economic regime that was established after the fall of communism falls apart in its turn.

There is no systematic connection between globalization and the free market. It is no more essentially friendly to liberal capitalism than to central planning or East Asian dirigisme. Driven by technological changes that occur in many regimes, the process of globalization is more powerful than any of them. This is a truth that Friedman—as an avowed technological determinist—should accept readily enough. If he does not, it is because it shows how baseless are the utopian hopes he attaches to a process that abounds in conflicts and contradictions. Globalization makes the world smaller. It may also make it—or sections of it—richer. It does not make it more peaceful, or more liberal. Least of all does it make it flat.

I urge the reader to the full review and its refutation of the halcyon view that Friedman espouses. Gray is not the only observer to note that Friedman's book is an interesting article over inflated. Dispense with The World Is Flat and go to Friedman's NYT article, It's a Flat World, After All which is the essence of the book. But read Gray first.

It is clear to a growing number of US nationals that our failure to keep abreast of scientific and technical education and research and to build and retain a substantive manufacturing capacity in those emerging sectors is going to soon put the US on the declining end of the robust nationality of other states. The most piercing analysis of the implications of offshoring rise from Alan Blinder (former vice chairman, Board of Governors of the Federal Reserve System and former member of the Council of Economic Advisers, now at Princeton). Unlike many economists whose works seem remote from politics, Blinder blends them both in what I submit are essential reading to understanding the economic and political implications of offshoring. The horizon is not attractive.

Comparative advantage is the name of the game and ours has been allowed to lapse. Always an obscure concept save for economists, comparative advantage is not well understood by lay readers and certainly not by those whose jobs move overseas. Blinder does as good a job as I've seen in presenting economics in political human scale. All things being equal, world per capita incomes will indeed level in globalization. The US will have a painful economic and political adjustment for its failure to retain its advantage. From Blinder's Fear of Offshoring:

The furor over [N. Gregory] Mankiw’s remarks [on offshoring for which he was excoriated in the press and by Congress] was grotesquely out of proportion to the current importance of offshoring, which is still largely a prospective phenomenon. While we have no reliable national data on the extent of offshoring, the fragmentary studies that have been done to date have concluded that fewer than a million U.S. service-sector jobs have been lost to offshoring up to now. A million jobs may sound like a lot. But in the gigantic U.S. labor market, with its rapid turnover, a million jobs is less than two week’s normal gross job losses.

But here’s the great irony. Looking to the future, I believe that Mankiw and other economists who interpret offshoring as nothing more than international business as usual are greatly underestimating both its importance and its disruptive impact on Western societies. Sometimes quantitative change is so large that it brings about qualitative change. Indeed, I will argue in this paper that we have barely seen the tip of an offshoring iceberg that, as the rest of it is revealed, may prove to be something to behold.

Continuing this theme of 'You ain't seen nothing yet,' listen to the audio of Blinder's discussion and Q&A of Fear of Offshoring (text here). Here's a snippet on winners "or some constituencies that are winning here that maybe don’t quite understand yet that they’re winning" and losers in response to the question, "Over time, will some of those winners more clearly identify their own positive stake in this and serve as a counterweight to the political pressures the other way?":

I’m not very optimistic about that. I think that with some pockets in which it’s dramatically untrue — like the financial services industry, which is a winner from globalization and understands it’s a winner and understands the basic principles of comparative advantage — because after all, everybody in financial services has taken Economics 101. I think it’s true. (Laughter.) In the land as a whole — just take construction workers as an example — these basic principles are not understood; this is abstract gobbledygook to them and there’s no connection made between globalization and income gains. And by the way, they’re not completely wacky on this because — this, again, won’t surprise you — if you actually tried to decompose the income gains over the last decade into what’s due to trade and what’s due to non-trade, you won’t get that much from trade. So it’s not like they’re missing the lion’s share of the story; it’s only a minor part of the story.

But I’m pretty pessimistic for the following reason: David Ricardo taught us the basic story here in the early part of the — very early part of the 19th century. And Adam Smith had most of the idea anyway 35 years before that. So here we are 230 years after Adam Smith, and how many people understand comparative advantage? Well, it’s a pretty small number. And we economists have vast experience in trying to persuade people of this case, and we fail and fail and fail. I mean, when I come to the lecture on comparative advantage at Princeton in Economics 101, I start the lecture by saying you’re about now — you’re all about to cross a line, which you’ll never cross back in the other direction, between the minority of the world that understands comparative advantage and therefore believes in trade, and the majority of the world that doesn’t and therefore doesn’t. And I think that’s largely true, and I think it’s always going to be a minority. (Laughs.) I don’t see that we get to a majority on that.

So I’m not — while your point about there being winners is 100 percent correct — couldn’t be more correct — I’m not at all convinced that we get to the point where the winners become a powerful political force.

Blinder thinks that offshoring will rise above all other issues as a political force in US politics:

I think when it comes to politics, the three most salient issues are jobs, jobs, jobs. Everything else is tertiary after jobs — politically, not economically. Economists would start with wages actually. They say, "The jobs will take care of themselves; we start with wages." But that’s not the way the political world thinks of it… [The] reason that China has become the big threat, if I may — let’s just say competitor — in manufacturing and the reason that India has become the big competitor in business services is they put in place the infrastructure necessary to do it. That includes trained people, communications. Now a lot of this the private sector had to do, especially in India, because the public sector was not actually doing it. But some of it had come out of the public sector. And you know, put in open — well, I shouldn’t say "open" because they’re not fully open. Let’s just say real markets moved towards capitalism. This formula is available elsewhere, so it’s not going to stay only in China and India. And as you well know, as everyone in this room well knows, it’s not foreordained that America stays ahead — so far ahead of the rest of the world as it’s been for the last hundred years or so.

So significant catch-up has already happened in Japan, Singapore, Hong Kong, Korea — South Korea, that is — and a variety of other places — should be expected. Now politically, you know, I think Americans have been used to being at the top of the heap for a very long time. And the notion — I think I mentioned this before — the notion that the rest of the world is — or large swaths of the rest of the world is catching up to us at a rapid rate is going to be a source of political angst. I mean, one thing we know about people, as opposed to homo-economicus, is that people care about their relative standing. There’s a huge literature about this in economics. Like if everybody’s standard of living goes up 30 percent, people don’t report that they’re happier, but if mine goes up 30 percent and yours doesn’t, I’m much happier. (Laughter.) Well, this is going to play out on the global scale. Americans are not going to like the idea — and they’re going to complain to their government, do something about this — as the income gap between India and China on the one hand, and us on the other hand, closes. And it will close. And one result of this — and again, especially the job loss that goes with it — and I mean here the gross job loss. It’s not going to be a consolation to the people that lose their jobs to say, "Well, some other guy gained a job; it doesn’t matter" — it’s the gross lost jobs — is going to be constant, unremitting strain on the liberal trading regime, constant clamorings from various sources to stop this process in one way or another. And it’s going to be a big fight. It’s going to be a big fight.

I would refer readers to a short four article series on the structural issues surrounding outsourcing: Reforms, not rhetoric, needed to keep jobs on U.S. soil, Companies determined to retain 'secret sauce', How India is handling international backlash, and The next battlefields for advanced technology.

But given where we are now, it is going to be a fight, domestically and abroad.

Fear of Offshoring (Audio)
Speaker: Alan S. Blinder
Presider: Andrew Crockett, President, JP Morgan Chase
Council on Foreign Relations, New York, NY
December 13, 2005
University Channel

Fear of Offshoring [Rush Transcript; Federal News Service, Inc.]
Speaker: Alan S. Blinder
Presider: Andrew Crockett, President, JP Morgan Chase
Council on Foreign Relations, New York, NY
December 13, 2005

Fear of Offshoring
By Alan S. Blinder
Princeton University
CEPS Working Paper No. 119
December 2005

Economic Advice and Political Decisions: A Clash of Civilizations?
By Alan S. Blinder
Princeton University
CEPS Working Paper No. 112
July 2005

The World Is Round
By John Gray
The New York Review of Books
Volume 52, Number 13
August 11, 2005

It's a Flat World, After All
By THOMAS L. FRIEDMAN
New York Times
April 3, 2005
Fee Archive
Mirror, Mirror, MirrorMirror

Reforms, not rhetoric, needed to keep jobs on U.S. soil
By Ed Frauenheim and Mike Yamamoto
CNet
May 4, 2004, 4:00AM PT

Companies determined to retain 'secret sauce'
By Mike Ricciuti and Mike Yamamoto
CNet
May 5, 2004, 4:00AM PT

How India is handling international backlash
By Dinesh C. Sharma and Mike Yamamoto
Cnet
May 6, 2004, 4:00AM PT

The next battlefields for advanced technology
By Mike Ricciuti, Ed Frauenheim and Mike Yamamoto
CNet
May 7, 2004, 4:00AM PT

Bush, Adviser Assailed for Stance on 'Offshoring' Jobs
By Jonathan Weisman
Washington Post
February 11, 2004

Gordon Housworth



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