Notes on “Globalization and All That” Class No. 3
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Preliminaries
Announcement: No class next week due to Columbus Day
Review from Last Week
The Federal raised interest rates last week
- this is intended to cool down the economy to flight inflation
- borrowing money will now cost more
- better CD and savings account rates
- costs more for international borrowers and others to pay off debt
If I’m a trillionaire living in Thailand, what am I going to do?
- I will shift investments to the US because interest rates are higher than in other countries
Remember that $1T goes around the world every day looking for the highest interest rates
- the cost to buy dollars will increase, i.e., our exchange rates increases
- our exports will decline
- governments manipulate interest rates to manage the economy
- governments want to avoid inflation
- inflation allows people to pay off debt with cheaper dollars
- inflation is especially bad news for people on fixed incomes
- by manipulating interest rates, everything is affected
Take-aways from last week
- protectionism
- liberals believe that tariffs are bad
- economic nationalism
- beggar thy neighbor policies
- other tactics
- import quotas
- anti-dumping policies
- regulatory policies
- exchange rate control
- infant industry argument
- protect critical economic sector. e.g., military?
- protect job/domestic industry, e.g., cars
- retaliation
- political support in general
- policy know as “mercantilism”
- developed in feudal times
- contrasts to free trade
A Little Theory
Empires and Globalization
- not new - Spanish, Dutch, British build on trade in gold, silver, spices
- build on feudal systems of Europe - closely aligned with Conservativism
- slavery and some “international” companies
- trade and slavery create “profits” or excess capital for some - investment combines with technology to create Factory System
Conservatives have an organic conception of society
- don’t like change
- tends to like limited government
- but also feels that sometimes government has a role in protecting people
- in the feudal system, the Lord had responsibility to look after his subjects (the peasants)
- in capitalism, there was no such contract
In feudal system, people have very small social networks
- when factories came into being, that network was much larger
- people realized that they were being exploited
- they therefore formed unions to combat exploitation
To get capital to start, you had to have capital
Industrial Revolution and Capitalism
- Industrial Revolution begins in the mid-18th century in the UK
- capitalism as a system begins to emerge with the Industrial Revolution in the UK
- new economics theory emerges - classical economics
History in Transition
- feudalism -> capitalism
- classical economic theory - the free market and free trade “classical economics”
- conservativism -> liberalism -> socialism/social democracy (in Europe)
- capitalist UK dominates world trade and system using free trade and liberalism (sort of)
20th Century
- rise of trade unions and social reformers
- modern liberalism calls for more government intervention
- socialism critiques liberalism and capitalism
- UK declines after WWI and WWII, replaced by USA as dominant economic power
- after 1945 US lead world system developed under “neo-classical economics” also called neo-liberalism and globalization under these views
Germany was not a state until 1872
- John: this was not like “we gave the colonies back to America”
Germany was blamed for WWI
- they were asked to pay for WWI
- their economy collapsed
- inflation was rampant
- people took their morning pay home in wheelbarrows before inflation ate it up in the afternoon
- the middle class was destroyed
- this created an environment in which Nazi ideas were popular
- blaming someone -> e.g., the Jews
- thus, much of the cause of WWII was in laid in the consequences of WWI
Documentary “Atomic Cafe” captures the period of MAD (mutually assured destruction)
Communism and Radiation
- both get inside you and can kill you
War changes everything: WWI ended European empires and changed the world
- total deaths
- 11 million military
- probably another 8 million civilians
- possibly another 50-70 million from disease, especially the Spanish Flu
- the first day of the Somme offensive, July 1, 1916, resulted in 57,470 British casualties
- by the time the offensive ended in November, the British had suffered about 420,000 casualties and the French about 200,000
- German casualty numbers are controversial, but may be about 465,000
- about 1.2 million die in 4 months
Adam Smith (1776 book The Wealth of Nations)
- economic liberalism
- making pins, one part by each worker
Supply and Demand assumes rationality
- see diagrams in previous lecture notes
Invisible Hand
- the Market best served by rational individual choices
- the Market looks to be steered by an invisible hand because of the rationality of the individual choices
- the “invisible hand” would thus be collective individual rationality
- rationality is based on competition and self-interest
- interplay between self-interest and competition takes the sharp edges off self-interest
- “inelastic demand” = people keep buying regardless of the price
- “collective good” e.g., requiring people to wear seat belts
- if you get hurt, it costs us all
- this is a goal/responsibility of government
- how big gov’t should be is the subject of debate
David Ricardo (1772-1823)
- Smith saw States acting as individuals on the international level
- free trade makes States efficient, stimulated industry, encourages innovation, and creates a “greater benefit”
- trade is not a zero-sum game
- “comparative advantage”
- e.g., first treaty between Portugal and Britain
- port & textiles free trade
Comparative Advantage
- effectiveness of the Market through international trade leads to specialization
- States produce what they are the most efficient in producing in a competitive market place
- effectiveness based on the amount of labor inserted into production
- cooperative advantage promotes trade and specialization
John Stuart Mill (1806-1873)
- wrote during 19th century and industrialization
- postulated/noticed that the market did not work to the self-interest of the factory worker
- State therefore needed to provide corrective action to supplement the Market
- selective action by the State to promote education and social welfare when individual could not provide
Jeremy Bentham (1748-1832)
- founder of modern utilitarianism
- Bentham principle: “it is the greatest happiness of the greatest number that is the measure of right and wrong”
The Manchester Liberals = the above three
- they all define how we think about markets and trade
- these ideas reemerged to structure globalization in the last several decades
- liberalism is challenged on the Left by Socialism and on the Right by Conservativism after the middle of the 19th century
- all are “theories” about human society, but also ideologies
- so what’s a theory and what’s an ideology?
John: “a theory is a suggestion on how we explain a phenomenon”
- a hypothesis is a guess on what’s going to happen
Alan Friedman (audience)
- both theory and ideology are intended to explain why something happens
- one tests theories using technology and either supports or refutes it
- ideology is the same based on personal intense beliefs
- no amount of evidence can change one’s beliefs
- not measured against reality
an ideology is a set of beliefs
- it says how the world should be
- theories do not say how things should be
- e.g., you can’t put France in a box
- 80% of France is Catholic, but abortion is not an issue there
John: social scientists try to test things
- it’s hard to be a social scientist because you can’t control everything
- e.g., theory that older people tend to vote Republican
- “you thought quantum physics were hard? try figuring out how people vote!”
Break
Animated talk by a Marxist theoretician
Discussion
- a Marxist would say that the goal of capitalism is to maximize profit
- in the 1850s in Britain, they were paying workers almost nothing
- thus, the workers couldn’t buy the goods, so they had to sell them to other countries
- debt is a way of offsetting low wages
- also note the strength of the financial sector vs. the manufacturing sector
- “Trump is the last gasp of the manufacturing sector”
The Political Theory of Liberalism-Pluralism
- origins
- John Locke was the “father” of liberalism: “life, liberty, and property”
- English Civil War “consent of the governed” Bill of Rights
- predates American Bill of Rights
- French Revolution
- American Revolution
- Age of Enlightenment
- political ideas very suited to the new capitalist structure
- basis of the first parliamentary democracy: the U.K.
- the Queen is a feudal remnant
- but Britain is obsessed with class
- even Marx said that capitalism has done wonderful things, but at what expense?
Question: Who controls the government in a capitalist society?
- that’s the $64,000 question
- is a liberal democratic state really a government of the people?
- John argues that the power in a country has shifted to people who control international capital
- audience: at one time the FDIC was considered communist or socialist, but it waved the society in the 1930s
Tenets of Classical Liberalism
- individuals have natural rights
- individuals are equal under the law
- government should be limited
- government’s #1 purpose is to server individuals
- societal power is decentralized, widely shared, diffuse and fragmented, deriving from many sources, i.e., power pie divided into many pieces
- society consists of many diverse groups and associations (e.g., business, labor, professional, religious, etc.) and constitutes a conglomeration of dissimilar and often conflicting interests, no one of which plays ...
- government is supposed to be the referee
- society is made up of a multitude of conflicting interest groups balanced by the state, groups are equally influential in their impact on government policy and major institutions
- “the state represents institutionalized power”
Liberalism-Pluralism
- the role of government/state is:
- society is a struggle of competing groups within and arena refereed by the State
- the State represents institutional power and authority
- the State is ...
Social Contract Theory
- much of liberal thought is based on the idea of a social contract
- this is because we are all born free and we are all reasonable
- many liberals believe that the justification for having a government lies in the fact that we are all free, but we must choose to give up some of our freedom to protect ourselves from other people
Ideas
- one idea: people will tear each other apart if we don’t have government
Modern Liberals
- this cam about in response to some of the horrors of the industrial revolution and unrestrained capitalism
- modern liberalism is not fear of government power
- instead, government power can be a force for good, limiting the worst conditions of poverty, illiteracy, racial exploitation, etc.
- government starts to do many more things, e.g., welfare, health care, regulation, etc.
John Maynard Keynes (1883-1946)
- great depression viewed as an example of serious flaws in the market, especially during periods of risk, uncertainty, and ignorance
- Keynes favored state/government intervention/action to shore up market failures and and activist macroeconomic policy
- he argues that gov’t has to intervene during the 8-year cycles
- gov’t has to intervene to stimulate economy at those times = Keynesian Intervention
- = “demand management”
- flies in the face of liberal ideas, even more in Europe than in the US
Keynes: Gov’t should do more stuff
- the Paradox of Thrift illustrates Keynes’s view that rational individual actions can produce irrational collective outcomes
- when all individuals rationally save, they collectively become poorer as economic activity slows
- gov’t can compensate for the indivisible had’s failure by spending when individuals do not
- Keynes participated in the birth of the Bretton Woods system that established several institutions that organized much of the international political economy following WWII
- while Bretton Woods sought to create a liberal system of international economic relations among Western member states, individual nations would be allowed to support domestic markets and insulate them from depressions and other economic dislocations
- this collapses in the early 1970s when we moved off the gold standard
- this is neo-liberalism