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).

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