Globalization anxiety as mass hysteria?

Those who are puzzled by globalization anxiety and attribute it to collective irrationality (see Tyler Cowen's piece in the NYT) overlook a fundamental aspect of markets--their "embeddedness."  What I am referring to is the idea that successful markets need to be embedded in a larger set of man-made rules and governance structures.  Markets need regulation, stabilization, and legitimation because they are not self-regulating, self-stabilizing, or self-legitimizing. The success of modern capitalism is due as much to the institutions that govern markets--political democracy above all--as it is to the power of markets themselves. 

It is important to understand this because it provides an important clue as to why domestic and international trade are different.  Domestic trade takes place within thoroughly embedded markets; there are clear rules and they apply to all transactions equally. International trade, on the other hand, is conducted in only weakly embedded markets: the rules either do not exist or apply unevenly.  I believe this is the fundamental reason why their consequences are often perceived so differently.

Let me make this concrete. If Harvard fires me and hires Tyler Cowen instead, I would feel bad for sure. But I would not blame Tyler or Harvard, because I would assume that the decision was made on fair grounds: we compete under the same ground rules, and if Tyler beat me to it, it must be because he deserves it. 

But suppose instead that Harvard hires John Plagiarizer, who has a much longer vita and larger citation counts than either one of us, because... well because he is a flagrant plagiarizer. I think I would have pretty good reason to feel cheated.

An extreme example? Let me make it less so.  Suppose that I am an experimental psychologist instead of an economist and the person Harvard hires in my place is someone who has accumulated a long vita by virtue of not having to abide by human subjects review standards. (You can find out a lot about human behavior through torture.)  Would I not feel treated unfairly? You bet I would.   

The international trade counterpart of this hypothetical is the worker who loses his job because his company decides to move to a country where, say, labor rights are routinely violated. So the "us" and "them" characterization that Tyler attributes to irrational nativism perhaps has more to do with the absence of a common set of international rules on labor standards, environment, consumer safety, and so on. 

By overlooking the problems created by trade in instances where regulatory arbitrage does play an important role, we miss the opportunity to celebrate the kind of globalization where such arbitrage doesn't play a role.  The latter type of trade probably constitutes the bulk of world trade. But because economists do not make this important distinction, they have no language or ability with which they can respond appropriately to the uneasiness out there--except for calling it irrational. 

And by the way, Harvard cannot fire me because I have tenure (as does Tyler). Which makes any pontification on our part about job anxiety a very poor guide to reality. 

UPDATE: Tyler Cowen responds, but frankly I am not quite sure I follow it, as it seems to have been written in haste.  He concludes thus:

The bottom line is that most people support their countries to a highly irrational degree in most international questions or disputes.  That's just obvious -- watch the World Cup -- and yes Jonathan Swift understood that too.

I have no trouble with this, except that I did not think this was what the argument was about. I thought Tyler was trying to explain why opposition to globalization had increased and become more salient in recent years and why many intellectuals were going soft in their role as cheerleaders for globalization.  I don't think a constant (nativism) can explain a change. I do think an important part of the explanation is that regulatory arbitrage has become a much bigger issue now.

And by the way, some readers may want to be informed by real research as to what drives protectionist sentiment around the world. Here is where you can start (Non-gated version here).

Comments

[John V]

I think you're being too sophisticated with your reasoning.

Perhaps you, as an economist, can arrive at such conclusions. But if actually talk to Joe Sixpack in the street, it has nothing to do with rules or "institutional asymmetry". It's simply about losing "American jobs" to "them" and that ain't good because Americans need those jobs and without "those jobs", we're going to hell in a hand basket. Businesses are simply seen as "sell outs" to "their citizens".

If they agree with your explanation, it's only because it arrives at a similar conclusion that they want to hear.

[John V]

I think you're being too sophisticated with your reasoning.

Perhaps you, as an economist, can arrive at such conclusions. But if actually talk to Joe Sixpack in the street, it has nothing to do with rules or "institutional asymmetry". It's simply about losing "American jobs" to "them" and that ain't good because Americans need those jobs and without "those jobs", we're going to hell in a hand basket. Businesses are simply seen as "sell outs" to "their citizens".

If they agree with your explanation, it's only because it arrives at a similar conclusion that they want to hear.

[Per Kurowski]

Talking about tenures... there should be a fixed number of them and each year there should be a lottery to pick out a couple of them who would lose all their rights, thrown out on the street and never be able to return ... just so to keep up a connection with real life.

Just the sheer possibility of losing a tenure based on no particular fault of their own, could do wonders for the educational system, infusing it with a minimum required dose of uncertainty, and thereby allowing tenured professors to at least to understand the concept of anxiety.

[notsneaky]

"I believe this is the fundamental reason why their consequences are often perceived so differently."

Either that or it's just easier to blame them foreigners. (The fact that for many people there's an uncanny correlation between their views on trade, immigration and the magnitude of foreign aid is some anecdotal evidence for this)

In other words, I agree with John V above. Or in some more other words, I think that what you describe above characterizes the concerns of the ... "non populist" left globalization-skeptic. But it has nothing to do with the Lou Dobbs style globalization-skepticism.

[michael webster]

This is pretty interesting.

Why cannot economists talk about regulatory differences that might seem appealing to some firms?

Don't they make the case for their being a market in corporate governance?

[Publius]

I agree with most of your comments, but I take issue with your understanding of fairness:

"I think I would have pretty good reason to feel cheated."

I contend that you, like most people (if not all), are interested in fairness only within the group that would provide you with optimal benefits.

You want to be treated fairly relevant to others who could have your job, but why would you define fairness so narrowly?

I believe we confine our if you weren't simply interested in enhancing your personal position (rather The systems in which we expect all to be treated fairly based on our own selfish desire to maximize our position (or those who we associate with), rather than an objective analysis of fairness.

If fairness is what you were after, the number one target on your hit list would not be the hiring of professors – that wouldn’t make the top 1,000. Yet that fairness justification is used time and time again; ask an opponent of affirmative action why he is dedicating so much time and money to his cause, and he’ll argue it’s an issue of fairness. I think that case is fairly transparent, but it is the same habit of post-hoc justification used to lend moral weight to what is a shallow and selfish desire.

Cries of “it’s not fair!” rarely signal an issue of fairness; it’s usually just an issue of self-interest, cloaked in the nobility of fairness, justice, and other abstract concepts.

I am all about fairness, but I don’t see how exactly this means I should prevent even one company from opening a factory in a poor nation and increasing their wages 5x (but still under an American min. wage).

If we are to be “fair,” we would let the wages for American “routine producer” jobs continue to fall, opening up the borders to immigrants who have been treated far more “unfairly,” promoting the outsourcing of jobs, and buying only farm products made in Africa. If Lou Dobbs likes it, it’s probably not fair.

Hopefully, I’ve made my point. People say they want things to more fair, but they don’t. On my own blog I should have a post in the near future that looks at Robert Reich’s twisted notion of economic justice as it applies to the nation, but I’d like to see your take on how exactly you define fairness and it’s role in the work of nations and the international community. (DISCLAIMER: Ignoring the Robin Hanson rule, let me state that I agree that the government has a role to play in market design, that markets in their “natural” state are not the most efficient, and that markets, on their own, cannot always create the coordination needed to enhance their power.)

[DC]

"for many people there's an uncanny correlation between their views on trade, immigration and the magnitude of foreign aid"

Maybe so but we don't hear calls for cuts in foreign aid getting the same hearing as trade do we?

[robertdfeinman]

Finally an economist "gets it". Globalization is inherently unfair because there is no world government with enforcement power to prevent the strong from taking advantage of the poor.

The critics of the IMF and WB have been pointing out for several decades now how far the playing field has been tilted (mostly in favor of the US). That the western powers are now willing to abide by some of the rulings of the WTO means nothing. A few million paid out over softwood imports or the like is worth the cover that it provides for the really important trade deals.

To ensure that international bodies don't get too prominent the US has signed bilateral deals with many states, thus bypassing the WTO altogether. What sort of a fair deal can a country get when the US makes it an "offer it can't refuse"?

Those in the weak states haven't been fooled, they just don't have any way to change things.

[terence]

Notsneaky: "Either that or it's just easier to blame them foreigners."

Or the Joe Public actually has a reasonable grasp of the law of supply and demand when it comes to labour markets. The idea that competition with millions of low paid Chinese workers will make Joe worse off has intuitive appeal even to someone who has never seen supply and demand curves on a graph. This, and risk aversion (i.e. I like the job I got), is - I think - what worries a lot of blue collar anti-globalisation folks.

Sure you can argue that they'll still benefit through changes in relative prices, and you can argue that international trade is only a small factor driving rising inequality in the US (although, of course, this may well be changing) - but I think it's that intuitive sense* that this can't be good which gets so many people on board.

In short: pro-globalisers need to find more convincing ways of dissuading people from concerns which aren't real and addressing those that are.

_____________________
*Intuitive sense, partially add backed by quite a lot of what trade theory actually says.

[crack]

Publius:

I am all about fairness, but I don’t see how exactly this means I should prevent even one company from opening a factory in a poor nation and increasing their wages 5x (but still under an American min. wage).

Wages aren't the only difference. Environmental, safety, and prison labor, among others, also affect the relative cost of labor. Workers rightly believe that trade agreements that don't take into account such things end up harming their competitiveness irrespective of their abilities. Once those advantages, in addition to wage differences, take away their jobs its a short trip to becoming anti-trade and even anti-foreigner. The root is still that trade agreements protect capital (IP enforcement) and don't protect labor (safety and enviromental concerns).

[Denis Drew]

Outsource enough jobs and that floods the home market with extra workers – a labor market in the American case where labor has uniquely little collective bargaining power due to thorough de-unionization.

I guess that outsourcing our jobs on a scale that can grow prosperity for nation of 1.3 billion people, almost by definition must have caused a flood in the labor market here.

But labor here also has “insourcing” as I (a cab driver) call it to deal with. Meatpacking companies build plants seemingly incongruously far from any source of domestic labor. Build them and Mexicans will come – at half the pay and next to no benefits. Ditto for a minimum wage of $5.15/hr for which American born workers simply will not show up.

So today’s American workers may face not only a flooded labor market due to workers who will work cheap someplace else – but they are also beset in the labor market place by an additional flood workers who will work cheap right here.
***************
Additionally, even if lower income earners recouped enough money from buying cheap foreign manufactures to make up for some of their lost pay – upper incomes gain equally from cheap priced manufactures without any trade off in lost pay for the most part: ratcheting up inequality.

Inequality or not, lower incomes do not get any break in the price of expensive goods and services produced by upper income Americans so their pay loss to globalization is mostly unrecouped.
*************
For all this, I don’t believe the root of American labor’s deprivations is not mostly globalization or immigrations. It is labor’s gaping lack of understanding of the need to collective bargain from a strong position in a free market – not to just work hard and play by the rules and believe you will get your fair share.

Dual-answer whenever American labor wakes up: 1) sector-wide labor agreements (collective-collective bargaining: the only answer to the race to the bottom) and, I think, 2) revolving (like every four years) union certification and RE-certification elections in every workplace (the only way to keep some union leaders permanently on their toes I am afraid – no need to fear decertification with sector-wide agreements: non union firms are forced to work under conditions negotiated by union terms).

[notsneaky]

"Or the Joe Public actually has a reasonable grasp of the law of supply and demand when it comes to labour markets"

But not when it comes to technological innovation?

[letterhead]

Taking it to the real world... $4bn in US cotton subsidies pushes down global prices, affecting markets as far away as Africa... African cotton farmers in many countries, end up living on starvation wages as a result. Just one example among many. Same with corn subsidies, which overwhelmingly go to big agribusiness.

On the flip side, yes, jobs go to the least regulated, lowest cost regions. Resulting in more gains for global businesses. They get subsidies at home, and ship jobs overseas to cheap unregulated markets.

Globalization anxiety is not mass hysteria, it's a mass reality check for policy makers... as well as the spin doctors (those in my profession) who help them make their case and maintain the lock on power.

[mik]

Super Libertarian Free Marketer Cowen blames pig-headed furriner hating rednecks for low popularity of Globalism. All the while collecting his Government paycheck in a job with Total Job Secuirity.

But amazenly Cowen fails to produce any evidence for his assertion. None, zilch.

Is this how economists debate?

By asserting any nonsense they feel asserting?

And how Cowen knows about rednecks? It is my understanding that the only plain folks Cowen come in contact with are workers in high brow restaurants Cowen visits so often.

[mik]

Same with corn subsidies, which overwhelmingly go to big agribusiness.

There is no corn subsidies currently, market price is too high for that.

If farmers in Africa or anywhere cannot make it at current (very high) corn prices, they should not be in that business.

[mik]

"Same with corn subsidies, which overwhelmingly go to big agribusiness."

There is no corn subsidies currently, market price is too high for that.

If farmers in Africa or anywhere cannot make it at current (very high) corn prices, they should not be in that business.

[alex]

notsneaky: "But not when it comes to technological innovation?"

Oh please, not the old canard that trade and technology have the same effect. With a narrow enough focus on first order economic effects and willfully ignoring the practical differences, I can almost see the false equivalence. Fortunately Joe six-pack's supposed naivety shields him from such sophistry.

First off, technology makes new things possible. Electric lights, cars, trains, air travel, computers, the Internet, modern medicine, refrigeration, air conditioning, indoor toilets, hot and cold running water, etc., etc., etc. Our supposedly naive friend Joe understands that all these things are only possible because of technology. And, not being entirely ignorant of history he knows that technological progress is ongoing. He can see with his own eyes that it's progressed during his lifetime. For a special treat he can recall those old fart stories he heard as a kid from his grandparents about all the things they didn't have. Sometimes technology can screw him out of a job, but its overall effect is desirable.

By contrast, he knows that a T-shirt or a car or a computer program made on the other side of the planet could have been made here in the USA (except that maybe you'd have to pay the workers something more than pocket lint).

And he may even have crawled out from under his rock long enough to have heard about an obscure thing called the "trade deficit". Hmmm, he says, that theory that we'll import T-shirts and export computers is a load of horse puckies, because we now import the computers too.

Let's see, re-enact Smoot-Hawley and we'd suffer a big economic setback. Roll things back to before the Industrial Revolution and we wouldn't be that far from living in caves. And dumb ol' Joe doesn't see that those are the same.

[terence]

"But not when it comes to technological innovation?"

Well the Luddites had their trouble with this too, as have a variety of minor's groups over the years. People are happy enough to blame technology as well when they see it as a clear and present threat.

I'd kindof agree with Alex too that getting one's head around the benefits technology has to offer (for the simple fact that we can go out an buy them) *is* easier than for the purported benefits of trade.

[Gulzar]

Dani,
Your analysis is from the perspective of the developed economies, whereas let me speculate on the view from the side of the developing economies.

1. The operative condition is not so much the quality of embedded institutions, as the issue of uniformity or homogenity in the "rules of the game". In many developing markets too, opposition to international trade arises from the absence of a "level playing field" - larger and well supported MNCs swamping domestic manufacturers, heavily subsidized farm products driving out local farmers, competition and government procurement policies that weigh in favour of larger firms, unregulated financial markets that spawn dubious practices etc. Yes, these are also perceived as "regulatory arbitrage" - depends on which side of the fence you are in!

2. The logical next step in this analysis would appear to be that we need to harmonize the rules of the game, so as to increase the domestic acceptability of globalization and international trade. While this may increase the acceptability in the developed countries (though I suspect, it will not, given the previous point), it will only increase the suspicion and resistance in the developing economies. We have seen this story enacted before!

It is impossible to bridge these contrasting views easily or soon. Till then, international trade and globalization will have to be driven by more uniform sharing of trade benefits, both between and within countries, and by having adequate enough social safety nets that can cushion those hardest hit by trade and globalization. In the meantime, we can progressively strive towards increasing the "embeddedness".

The full post is available here
http://gulzar05.blogspot.com/2008/06/domestic-vs-international-trade.html

[saifedean]

How ironic that you would use the example of Harvard hiring a plagiarist, because, well Harvard has on its booked a demonstrable plagiarist. Alan Dershowitz has very clearly and demonstrably plagiarized a book. You can verify this to your heart's content here: http://www.normanfinkelstein.com/article.php?pg=11&ar=1

[Mike Moffatt]

"So the "us" and "them" characterization that Tyler attributes to irrational nativism perhaps has more to do with the absence of a common set of international rules on labor standards, environment, consumer safety, and so on."

This leads me to ask a couple questions:

1. Do you seriously believe that the U.S. has higher standards in these areas than say.. the EU? Canada? South Korea? I'd like to see your evidence in that area.

Example: Asian countries, on average, are far, far ahead of the United States in adoption GHS (Globally Harmonized System of Classification and Labelling of Chemicals). So is Rodrik saying that the U.S. shouldn't have freer trade because the U.S. is slower in adopting international standards than, say, Taiwan?

2. Do you think that California should have free trade with, say, Louisiana? Or does he think that the two states have even remotely equivalent standards in environmental law? Given my experience with state-level environmental law, I can't see how you can conclude U.S. states have even roughly equivalent systems. So should there be more trade barriers between California and southeastern states?

[Christopher Colaninno]

It's simply about losing "American jobs" to "them" and that ain't good because Americans need those jobs and without "those jobs", we're going to hell in a hand basket. Businesses are simply seen as "sell outs" to "their citizens".

If they agree with your explanation, it's only because it arrives at a similar conclusion that they want to hear.

That’s wrong.

It’s widely understood that many of our trading partners have minimal labor protections, pollute more then American companies, and in general pay massively lower wages then American firms do to domestic workers.

Also for people a little further up the information chain, say Ohio Democratic Party primary voters, it’s understood most Democratic politicians would insist on adding Labor and environmental trade standards to new trade agreements.

[Christopher Colaninno]

There were supposed to be italics around the first two paragraph on the last comment

[Mike Moffatt]

"It’s widely understood that many of our trading partners have minimal labor protections, pollute more then American companies, and in general pay massively lower wages then American firms do to domestic workers."

The minimum wage is many U.S. states is significantly lower than it is in Canada, a major trading partner of the United States.

Do you believe the Canadian government should put an export tariff on, say, oil exports until the minimum wage in Minnesota approaches Ontario standards?

[Chris Moore]

Since they see themselves as "positive" scientists I don't think a lot of economists are comfortable with acknowledging that fair and unfair exist. So, it's a lot easier to label their critics as "irrational" than acknowledge that they are studying a messy social science.