Econolitics

 

The focal point of all our recent uncertainties and troubles is globalization. The modern world is increasingly interconnected. As a Chinese saying would have it, a butterfly flapping its wings in Lhasa is a hurricane in Louisiana. (or, 'a sneeze in Washington is a revolution in Caracas.') We don't know why these things happen, or even that they are always correlated; still, it seems so.

There are several aspects to the current crisis of globalization. There is the rise of Asia, and the renewed hegemony of China over many of its neighbors. There is the cross-linking of First World economies, spurred on by the megalomania of American Capitalists. There is the increasingly short supply of oil and other resources which all those societies need. There is the delusion in Washington, Beijing, and maybe some other places that we are masters of the world (whoever "we" may be), just as it once was in the "good old days," All of these factors are combining to produce increasingly sharp confrontations among the world's societies.

I cannot sort out all of it in this short essay, but I want to expose some of the contradictions in these conflicts. My thesis is that inadequate understanding of the problems - wrong theories - is bound to produce unexpected results. I recognize that having a sufficient, even complete, understanding is not enough, as a will to act rationally (so far as that is possible) is also required. I cannot do anything about this last desideratum, except point out the current Bandit regime is unreasonable. That leaves improving our understanding of the situation, which I hope to do.

Competitive (Comparative) Advantage

This is a seemingly easy and attractive idea, which I have analyzed before. It is logically related to the "division of labor." The idea behind both phrases is that it is 'more economical' for people to do what they are good at, where 'economical' is measured by efficiency, speed of production, least use of resources and similar factors. Neo-classical economists split 'economical' in two parts, reflecting a division between domestic and foreign business. In turn, this reflects the rise in modern times of the Nation-State, which is the assumed background of neo-classical capitalism.

In our post-modern, "globalized" world, it should be easy to see that the division of labor and competitive advantage are really one and the same thing. This reduction is the result of removing borders from trade areas. There is no longer any such thing as "domestic" and "foreign" goods; there are just goods and markets.

Neo-classicists are puzzled over the recent, seemingly "wrong" results of Competitive Advantage. I have even heard mumblings questioning the correctness of that notion. I think the reason those neo-classical economists cannot figure out what went wrong is that they are still nationalists. They still see things in terms of "domestic" and "foreign" production and consumption. If, as I maintain, the world economy has been globalized (i.e., de-nationalized), there is no intellectual problem. The traditional term, "competitive advantage," is just irrelevant when there are no national borders. What remains is the universal division of labor.

We have always been taught that the division of labor was an early invention of our species. Because it has been around a long time, it must be a Good Thing. It is easy to conceive what is intended. It is a common experience that certain people "naturally" excel at this, and others at that. So, society is best served by putting people to work using their special talents. This simple idea has merit, but it is not unencumbered. People and societies have conflicting needs which limit the use of talent. For example, a century ago it was usual to put children to work in American textile factories. Children have several advantages in such factories: they are small, more easily controlled than adults, and have fewer needs. But working children do not attend school, so their adult potential is compromised or lost. This simple example shows that the "best:" or "most economic" division of labor is not always suitable or acceptable. We have to be careful about applying "common sense" principles such as the division of labor to actual situations.

Regional Economies

These may be thought of as "economic loops." I am introducing this idea, because it is forgotten by the neo-classical purveyors of "competitive advantage." That there are local - regional - economies either within or separated from larger economies is at the root of most controversies about globalization.

I first became acutely aware of the different values of work and money in regional economies about 30 years ago, when I started travelling a lot up and down the West Coast. A simple example of the difference is the disparate cost of housing in rural and urban areas. This is not simply a reflection of the density of population, the availability of jobs or the desirability of living in the area. In fact, isolated geographical areas have a local economy - an economic loop - which does not "integrate" very well with other economies. This is easily apparent in considering wages paid by different employers within the economic loop. There is the "local wage" and the "national" or "international" wage. Local wages are paid by local employers who are entirely contained within the economic loop. National wages are paid by those larger entities which happen to have an operation within the regional economy, and are invariably higher than local wages. Thus, WAL*MART is a good employer in places like Crescent City and Grants Pass, while being a bad one in the San Francisco Bay Area. Similar wages are paid in the national currency - dollars - but have an entirely different meaning and impact in different places.

There are several ways to describe this difference, but it is always a matter of relative value. One way to think about it is in terms of the U.S. dollar. National dollars are "worth more" in regional loops than elsewhere; i.e. you get more for your money. This is what happens in international trade as well, especially trade with India and China. The differently perceived value of dollars encourages global entities to move operations to places where a dollar buys more ("outsourcing").

But that is not the only way to look at the matter. One could measure how the local people live, or how many hours they must work to acquire a certain product. This amounts to a (neo-)Marxist Labor Theory of Value, because one looks at what one gets materially for the time and effort expended. In this case, dollars do not have a universal value, but must be adjusted to local conditions. Of course, this conversion is not easy: there is the very slippery matter of how one values a style of life. In many rural areas, people tend to own single-family homes which, if located in a city, would be unaffordable for most urban residents. In other words, urban wages are actually lower than rural wages, if measured by ownership of a "standard" single-family home. Rural residents usually have their own water and sewage systems, which is neither desirable nor possible in urban areas. In this case, there is a greater cost of living in rural areas. Rural residents must have an automobile, whereas urbanites can do without; but vice versa for theaters, shopping malls, etc. So, the Labor Theory of Value doesn't explain everything.

We are left with the fact that a regional economy - an economic loop - is self-enclosing, even if there are points of contact and similar value with other economies. In my travels, I observed that it is easy to move from a wealthy urban area to a rural area, but difficult to go back. I also noticed that "wealth" is a relative concept. Urbanites everywhere consider their rural cousins poor, and that view is reciprocated. Value cannot be established by a currency or the wages of labor; rather, it is established by local consensus (ultimately by barter). Getting a job as a teacher or other "professional" is often more highly valued in rural than urban areas, because it is more difficult to support those people "in the middle of nowhere." On the other hand, common labor is actually less valued in rural communities because everyone does it. Different economic loops value the same things differently, and place similar values (measured in "dollars") on different things. Put differently, each economic loop is sub-divided and integrated differently from others. The relative importance of economic components varies from region to region, as well as how those components are related to (integrated with) other components. Further, there is often no (direct) correspondence of the economic components from region to region. Example: the skill of Klamath fisherman in catching salmon and making smoked jerky is useless a few miles up the road in Crescent City.

Even if we use the same concepts and tools in evaluating a regional economy, internal values and mechanisms may not be similar to those of external economies. An economic loop is like a jigsaw puzzle in having a large assortment of randomly shaped and colored pieces. While those pieces can be put together to constitute a regional economy, unlike the puzzle they can also be assembled into a completely different sprt of economy. So, as in physics, our goal in theorizing about economies should be finding what is invariant; if not the particulars, then the general. Just as Einstein perceived the laws of physics should be the same for everyone, but that physical calculations depend on local conditions, so should we view economies. What I have attempted to show so far is that economic loops are a basic concept, not the value of money or labor or resources. Money, labor and resources are put together by local decision makers (politicians, business people, consumers) to create and maintain an economy - a means by which the participants "make a living." This implies that neither money nor labor nor resources are in themselves measures of anything, but only exist in relation to each other. An economic loop is defined by its "internal" relations; i.e., how those things interact.

My view of regional economy explains why interlopers (vacationers, part-time residents) from the City often have little effect on a rural area. They are separate, not integrated. They are still part of the urban economy from which they sprang, with only occasional points of contact with the surrounding economy. As long as the expatriate urbanite maintains contact and participation in the urban economy, the rural vacation home can seem to be a paradise. Thus, many people make the mistake of selling their urban all, planning to maintain themselves in luxury from the proceeds in their rural paradise. But, it doesn't work that way. A common misfortune is falling ill, which turns out to be a far more expensive calamity in paradise than urban hell. Economically, not all values are the same. Those who have a major illness after moving to a rural area soon lose all their monetary advantages, measured as income or wealth. There are several other things that happen to people, so most of those escaping from urbanity are turned into rather needy people in several years.

Caste and Class

Economies often have 2, 3 or more "layers." We usually identify those layers as "caste" and "class" because those are the most visible features of the layers. "Caste," "class" and economic measures are actually all part of the same thing which is the socio-economic groups. Social class, simply "class," is delimited by the associations of its members. It is not necessarily based on family, gender or geography, although those might be factors. Class is usually determined by common interests, values and activities, which is frequently self-policed. Caste is not class, but an arbitrary division of society into groups according to a theoretical scheme. Caste is more "cultural" than class, reflecting the habits and preferences of entire societies. Most often in our times, caste is arranged by religious beliefs. Members of a caste are imputed to have properties assigned to the group. In caste systems, the group is assigned an identity and a role, which then informs its members. Usually, membership in a caste is traditionally assigned and hereditary, but there are castes - priests and mandarins, for example - which recruit apprentices. This latter sort of caste is usually a Guild identified by their function in society.

Caste and class are further identified by "style of life" or common culture. Most often, those belonging to a caste or class are also assigned a corresponding income and wealth. For that reason, caste and class cannot be separated from purely "economic" measures. Moreover, the role of each caste and class in social decision-making is usually defined and enforced. That assignment guarantees that a given political role will be attached to specified groups. So, political, cultural and economic factors are not only intermixed, but inseparable. To examine one is to examine the others. The physical analogy is the wave and particle properties of all matter; it's a matter of perspective.

Most societies become more rigidly stratified as they age; i.e., social mobility declines. The High Medieval period in Europe is representative of an advanced age. Most offices were held in perpetuity under the system of primogeniture. Even the Guilds fastened themselves on sons, who were fastened to the towns. Serfdom - being attached to the land - was widespread. The Medieval system probably collapsed on account of Columbus. The New World provided an escape hatch for the discontented, and a counter-example which eventually undermined the Ancien Regime.

The United States is probably in a similar condition of advanced age. This has happened rather quickly, by historical standards, but everything happens more quickly these days. The recent series on class in the New York Times and a parallel series in the Wall Street Journal reported that social mobility in America is at century low. There is an increasing division between the wealthy and sanscullotes in America which now threatens to become permanent. People are stuck in whatever time, place and manner they were born. It is possible these trends will reverse, but that would also require reversal of much that has been entrenched in American government since 1980.

Lethal Combination

The present situation combines a mistaken theory, Competitive Advantage, with deliberate ignorance of regional economics, all to benefit the international elite.

"Outsourcing" is an important component of globalization. It is part and parcel of the great Race to the Bottom. For whatever reason, corporations have not been able to raise prices; i.e., profit from inflation. So, their response has been to lower costs, which is done by "outsourcing." Outsourcing simply transfers incomes (a major component of costs) from one region to another where wages and benefits are lower. It does not matter whether incomes are transferred from the United States to Mexico, or from Brazil to Thailand. To the extent that costs are lowered, there is a corresponding decrease in the average standard of living over the affected regions. That there must be a decrease in the standard of living is necessitated by the simple fact that the cost savings have to come from somewhere.

The financial press reports every day on the health and success of global corporations. They are doing very well indeed, and their CEOs and managers are getting paid salaries and bonuses beyond the ken of King Midas. Most of that has been extracted using the process of globalization. It is true that Potemkin Villages, such as Bangalore, seem to be doing very well. But now they are threatened by even lower cost centers in depressed areas of Eastern Europe. If the outsourcing boom in Bangalore ends, many Indians will be far worse off than they were before sudden wealth. That's because there is an intimate connection between two words: boom and bust.

The global social, political and economic elites benefit from the Great Game of Globalization. Politicians and business people representing regions receiving the outsourcing will be handsomely rewarded for bringing in new jobs and wealth. Those on the losing end are patiently ignored. In the United States, particularly, conservatives have turned up the volume on "it's your own fault" the jobs went away, because you were too stupid, too demanding or just plain uppity. The punishment is meant to be exemplary, and it is, often cowing workers and their representatives. Those not affected are all too glad not to be drawn into the poverty and depression that afflicts those "outsourced." We don't hear much about them on the nightly news, and we don't want to. So much for Solidarity Forever.

While the profits accrue to the plutocracy, the Bandit gang is slighted by not being Master of the Universe. So, they've been ordering the Chinese to float the Yuan, despite the strong advice of their Guardian Angel Greenspan to the contrary. The Bandit has a real problem on his hands: whether greed is more important than megalomania. I think it doesn't matter. American capitalists have set in motion a machine far greater than themselves which has its own, secret purposes and destination.

It is Washington, Beijing and other places that are under control. They are not masters of their own fates, much less the Universe.