Philadelphia, PA

Dear Fields, 

Trade within the global economy is a plus in several ways. First of all, it allows for specializations, as the classical argument goes, such that, eventually, products and services will be produced in those places best suited to produce them, that is, by the cheapest producers. By producing only those goods and services that a given country is best able or suited to produce, each country will benefit by lower prices while still getting everything wanted. Secondly, it belongs to the classical arguments for free trade that, by means of it, countries become interdependent; and being able to deal with each other effectively through trade they come to better understand each other and the tendency toward international conflicts is reduced.  That is the theory, at least, and in degree it holds true. 

Still, I am inclined to believe that these benefits are an initial manifestation of global trade and interdependence and that continued, driving increases in world trade can produce opposite results. In the first place, one needs to consider the politics of globalization, and this tends to strongly empower the more conservative forces world wide. This effect is largely based in finance and world-wide flows of investment funds. If someone is going to put large sums of money into a foreign country, then they want to be pretty sure that they will be able to get it out again. That implies that they must be on reasonably good terms with the more conservative folks inside the country where investment is to be made. In somewhat this way, globalization tends to become a matter of trading favors, internationally, among big money interests to the detriment of competing interests. The clearest sign of this is the growing inequalities worldwide. 

While it is true that increased contact among diverse nations can help produce greater mutual understanding and broadening cooperation, this seems not to always be the case. The national elites are more likely to develop a comfortable cosmopolitanism, but those further down the economic ladder are more likely to see disadvantages. Moreover, bringing  very different peoples into ever more intimate contact also stands to produce reactions of distaste or rejection. Mutual understanding is not impossible or undesirable, but it can be a very long, drawn out social- political process. Since so much money is at stake, however, there is bound to be a competitive rush which tends to ignore, minimize of denigrate these negative mutual reactions. In somewhat this way, the economic competitions tend to undermine better political solutions to problems arising. 

I understand that when war broke out between Great Britain and Germany in 1914, they were, in fact, each the biggest international customer of the other. The point would seem to demonstrate that international economic interdependence is not a sure-fire guarantee that hostilities will not develop. In our current epoch of globalization, though, the greater dangers seem to be in east Asia. However, the unrest, rebellion and conflict in the Arab and Muslim world today seems to be a parallel to the uprising of the Madhi in Africa a century or more ago. 

H.G. Callaway

Thanks for the answer, Dr. Callaway. It is important to recognize, however, that Ricardo's comparative advantage approach, as interpreted by mainstream economics, is emprically untenable - competitive advantage, on the other hand, is indeed something that is manifested - whether this is 'good' or 'bad' is a value judgement that depends on one's class position within the world economy.

In my view, from an economic standpoint, globalization encompasses forces to spearhead neoliberalism, which has its roots in in the late 1960’s, when capital movements began to undermine the Bretton Woods preoccupation with capital controls. US officials began actively encouraging the growth of the Euromarket—the pool of unregulated dollar reserves concentrated in the City of London.

With traditionally marginalized segments of the population in core capitalist countries demanding social, political, and economic rights, and with national liberation movements in the periphery overthrowing oppressive governments, calls for expanded role of the state in meeting citizen’s needs dramatically circumscribed global capital accumulation. Pressures for higher nominal wages spawned wage-price spirals. Consequently, the rate of profit fell in core capitalist countries (Dumenil and Levy, 2004: 24) The globalization of finance via the Euromarket became the means for international financial markets to allow industrial enterprise to rebuild the conditions for future profitability. In 1974, Nixon closed the gold window and loosened capital controls. This marked the end of the Bretton Woods arrangement and the breakdown of the social structure of accumulation that specifically rested on material expansion, entrenching the so-called Wall-Street-IMF/WorldBank-Treasury complex, constituted by the so-called Washington Consensus. As such, neoliberalism, promoted by globalization, is the core issue undermining better political solutions to contradictions arising...

Duménil, G. & D. Lévy (2004): Capital Resurgent. Boston: Harvard Universtiy Press.

Neoliberalism has been one of the most discussed topics of the 21st century. In many respects, the concept has been used as a ubiquitous catchphrase conveying a sense fundamental transformation of various dimensions of social life. It is espoused that given the intensification of integration, through the proliferation of capital mobility and the aggrandizement of transnational corporations (TNC’s), countries are forced into ‘prisoner’s dilemma’ type situations in which the capacity for progressive reform along Keynesian lines is limited, if nonexistent. The assumption is that the capacity is strained to sustain welfare-state institutions. This culturally hegemonic social construction is an ideological mask; the foregone conclusion is a self-fulfilling mythology.

In general, neoliberals contend that financial liberalization and privatization guarantee the most efficient utilization of capital by freeing up the market mechanism for long term sustainable growth. Calculated co-ordination by the World Bank, IMF and the US treasury department to promote neoliberal doctrine has, however, resulted in the majority of the world’s population being denied the human right of adequately commanding the productive resources requisite for sustaining high standards of living. Social outcomes like distributive justice, gender equity, basic access to socially acceptable housing, nutritious food, education, freedom from poverty and discrimination, and social inclusion have been far from reached.

Neoliberalism propels governments to adopt policies aimed at maintaining credibility in financial markets for the attraction and securing of short-term capital. The recipe for disaster is fiscal restraint, tight monetary policy, and the protection of high interest rates to prevent inflationary pressures from undermining the value of real return on financial assets. Macroeconomic policy is supposed to be designed in such a way that the interests of those who own financial assets (wealthy households) are prioritized over those who are forced to sell their labor power for sustenance. As a result, the trigger threat of capital fight significantly limits the space for attention to social welfare to be embedded.

Interestingly, given already present gender inequalities in labour markets and unequal power relationships within the household, neoliberalism forces women to assume greater responsibilities in cushioning families from economic insecurity. This has had the unintended consequence of pushing women into the informal sector of employment, maximizing susceptibility to egregious labor rights violations and physical abuse.

In response to the widespread social dislocation caused by neoliberal dogma, the Post-Washington consensus has initiated a new outlook under the rubric of ‘New Institutional Economics' (NIE). NIE proposes the wider role of government to guarantee the conditions for markets to in fact work, as they supposedly should through the promotion of market-friendly civil societies and the encouraging of a democratic political culture. The Post-Washington consensus, like the Washington consensus, however, still promotes highly regressive macroeconomic policy. The only real difference is the facilitation of appropriate assessments, and the proliferation of that pathetic euphemism 'social capital', rather than forced upon structural adjustments, so institutions that do support liberalization and deregulation do not ensue disproportionate effects on the poor. Yet, in the final instance, this is just window washing (Fine & Lapavitsas, 2004).

Fine, Ben and Costas Lapavitsas. 2004. “Social Capital and Capitalist Economies.” South Eastern Europe Journal of Economics 1(1):17–34.

In the quantitative finance literature, there is another strand concerning globalization (integration) effects. The evidence is that globalization (integration) can be confused with the contagion effect since both have a tendency to increase cross-correlations among stock markets, especially during crisis periods. This is a very interesting issue because a number of studies assert that cross-market correlations vary over time, thereby making the benefits of international portfolio choice and diversification questionable.

Philadelphia, PA

Dear Fields, 

Many thanks for your reply and kind words. You will perhaps forgive my less technical approach to the related problems, which is predicated on a philosophical, common-sense and moral approach. Certainly, I think there is no solution to related problems in simple adaptation to the contemporary international financial and commercial environment.  Instead plausible solutions require some sort of regulation, or if this is not politically possible, then the alternative is to slow down or stop the growth of international trade and related financial expansion. Over-reaction is certainly a danger in the present context,  and we should recall in this connection the massive and devastating contraction of world trade at the time of the great depression of the 1930's --a consequence of "beggar your neighbor" protectionism. 

Looking to address contemporary problems and the growing inequalities in particular, we have to avoid "throwing out the baby with the bathwater."  We want to preserve the international trading system insofar as this is compatible with solving outstanding problems. But if international financial interests believe they are going to have things all their own way, then I suspect they will be in for a big surprise. I believe we need competitive room for more local and smaller banks focused on evaluation of smaller scale and local business projects. 

H.G. Callaway

Dear Joanna.

Chaotic behavior describes and explains all possible market developments and the mere differences lie not in the causets but their expansions and the exponential rate at which prices escape from the trigger. These can be the result of small as well as large perturbations in the system. Very little is said about the most global market, namely the foreign currency market, impacting and affecting all participants everywhere and all at the same time. Cross-crosses correlations vary over time, of course, as evidenced in studies  reported by analysts and big traders. This is the fastest changing market of all, a real Formula 1. There is no case of divergent outcomes, there are mere winners and losers. The only divergence observable is in the performance of big names vs. the public (or retailers) and the statistics of that is not prone to countries, longitude or latitude, climate or the Human Development Index. Simply said bigger fare better. One can expect similar outcomes elsewhere, in other markets, but with a considerable lag due to the nature of those and more prominent dissipative forces. Naturally the lag between markets developments will probably be ever existent. It would be practical to reflect to what an extent other than currency markets mirror the behavioral patterns of  the free floating  currency systems, particularly so the talk is about some outstanding problems, regulations, policies and politics. I just wonder, do we not overtrust the protective role of various institutions, do we have an evidenced reason to believe that markets (and especially global markets) can be wholly attributed to the activity of man who created them? Chaotic systems exhibit the power (or the ability) of self-organization according to some rules which come to our awareness only over time, sometimes very late, some may  not even be suspected of being the intrinsic holistic property. My final reference I want to make ius the drama from January 15 and the sudden devaluation of the euro versus the Swiss franc. You mentioned globalization  confused with the contagion effect. Given the fact that all CHF related crosses underwent huge changes in the matter of minutes besides EURCHF, for example CHFPLN and the correlations were close to something like 100% for no fundamental reason, would you still distinguish globalization from the contagion effect?                    

First we need to define what is globalization. I found on internet several definitions including not only free global trade, but also capital movement, migration, penetration of business, cultural interdependence, etc.

Even if physics, to get stability (for a body on uneven surface), one needs friction. Generally, globalization emerged when several frictions (protectionism), restrictions for migration, laws preventing free mobility of capital or setting a firm in a foreign country have been reduced or completely abolished. Besides that, emergence of internet and mobile phones made international links cheaper.

All those factors have contributed to transition from a set of national economies (with few and costly linkages to globalized international economy.

In international trade theory, countries have advantages in different factors. Free mobility of those factors allowed for a movement to new equilibrium, where even small disadvantage can cause ruining of domestic industry. Hence, more divergences in micro structures of economies of different countries.

Globalized financial markets have accelerated those changes making them often chaotic. There is excessive volatility of currency driven not so much by evolution of purchasing power but mostly by animal spirit of traders. Bad luck for some country (like Greece today) can result in huge debts, hat are growing over time due to high interest rate caused by rick premium...