"Globalization Has Not Yet Gone Far Enough"

I stumbled across this review of Dani Rodrik's book Has Globalization Gone too Far? (1997) written by Brad DeLong in December, 1998:

Globalization Has Not Yet Gone Far Enough, by Brad DeLong: Dani Rodrik is trying to create space in the debate over globalization for a rational middle--for positions that neither lead the cheers for the onrushing economic integration of the world, nor m mindlessly condemn international economic integration in a fit of reactionary nostalgia for a past that never was.

Dani Rodrik's argument is an updated and better-written version of an argument made by Karl Polanyi--in a book called The Great Transformation--long ago, back at the end of World War II. Polanyi argued that the developing market economy tended to destroy the web of social realtionships that held human society together. The market for labor pressured people to move around the globe to where they could earn the most--at the potentially substantial sociological price of creating strangers in strange lands. The market for consumer goods rewarded people for being fortunate or for responding to the incentives provided by factor markets--and in so doing made human status rankings the product of responsiveness to market forces rather than the result of social norms and views about distributive justice. And, Polanyi argued, in the long run this undermining of sociological order by the market economy threatened to destroy the social and institutional bases on which the market economy rested.

You can disagree with virtually all of Polanyi's argument. You can say that the market for labor offers people opportunities, not constraints. You can point out that the "social norms" and "views about distributive justice" that underlie non-market distributions of income give the most to those with the biggest spears or those who can most effectively perform the confidence trick of convincing their lessers that obedience to the powerful is obedience to God. Market distributions of income at least have a meritocratic component, as well as a positive entrepreneurial component that makes it possible to do well by doing good.

Yet there remains a sense in which Polanyi's argument cannot be dismissed. The distribution of economic welfare produced by the market economy--roughly that one's weight in the social welfare function maximized by the market is approximately proportional to the market value of your endowment--does not fit anyone's conception of the just or the best. We have considerably more confidence in the correctness and appropriateness of political decisions made by democratically-elected representatives than we do of decisions made by those with large spears or large temples. So there is a powerful place for government to manage the market--in the interest of avoding large depressions, in the interest of providing social insurance to transform the market distribution of income into one that produces higher social welfare, in the interest of avoiding pointless churning of the structure of industry produced by the fads and fashions that sweep the minds of financiers.

Post-World War II social democracy in the advanced industrial economies has produced the wealthiest, best, and most just societies the world has ever seen. You can complain that the redistributional and industrial policies of social democracy have been economically inefficient, but they have been--politically--very popular. It seems a good bet that the stable politics of the post-World War II era in the advanced industrial economies owe a good deal to the coexistence of rapidly-growing, dynamic market economies and social democratic polities.

And this is where Dani Rodrik comes in. For Dani Rodrik is concerned that economic integration is undermining the ability of countries to shape their own versions of social democracy, or indeed to shape any version of social democracy. Rodrik fears that--unless a way is found to strengthen social democracy in the face of international economic integration--that either sociology and politics will bring a halt to increasing economic integration, or increasing economic integration will erode the market economy's social foundations and lead to increasing political instability.

How does Rodrik believe that globalization undermines social democracy? First, because globalization has undermined governments' ability to carry out social insurance programs. Social insurance is the redistribution of income and wealth by transferring wealth from market winners to market losers, thus insulating domestic groups from those market risks deemed "excessive." A principal tool for funding social insurance has been the taxation of capital. Perhaps the most important aspect of globalization has been the sharp increase in the mobility of capital. This increase in capital mobility "has rendered an important segment of the tax base footloose." The consequence is that governments seeking to fund social insurance are left with the unappetizing option of increasing tax rates disproportionately on labor income.

Second, globalization has increased the degree of competition in the labor market. Most economists (me included) have argued that this increase in labor market conditions has had little impact on the wages of American workers. But as Rodrik points out, "...saying that the impact of globalization on advanced-country labor markets is quantitatively rather small in the real world and is overshadowed by other phenomena (such as technological change) is no different [in the Heckscher-Ohlin-Vanek framework] from saying that the gains from trade have in practice been small." There is a problem of cognitive dissonance here.

Many economists would look at increased labor market competition--the undermining of unions--with approval. Doesn't union monopoly create inefficiency?  But as Rodrik points out, reduced union power increases economic efficiency "only to the extent that employment expands in industries in which artificially high wages previously kept employment below efficient levels.... It is difficult to make [this]... case ...in... sectors where [union] monopsony wages were ...most prevalent" in the United States.

Rodrik's conclusions are essentially those of Polanyi: create space for social democracy, recognize that markets are the servants of societies and polities, make the world economy a moral community with standards and practices of fairness.

I do not know if Rodrik will be successful in his attempt to create space in the debate over globalization for a rational middle--for positions that neither lead the cheers for the onrushing economic integration of the world, nor m mindlessly condemn international economic integration in a fit of reactionary nostalgia for a past that never was. But it is an effort well worth making.