A plane in Malaysia has gone missing and everyone is presuming…you know. Aside from the obvious tragedy that goes along with the loss of any human life, I always find it interesting that news outlets frame a story like this by how many Americans may or may not have been on board. I don’t fault them for it, it genuinely is what Americans are interested in knowing. I won’t get into a discussion of what’s ethical in how we should care about different peoples. Instead, I think it’s useful to focus on how this phenomenon has broader implications.

David Hume had “Concentric Circles of Loyalty and Empathy” that basically observed this: if I was told my pinky finger was going to be cut off tomorrow, I wouldn’t be able to sleep; if I was told five people halfway around the world that I have never met and know nothing about are going to die, I probably wouldn’t lose any sleep over it. Then there’s everything in between. Generally speaking, people care about themselves the most. If you want to get annoying about it we can say the first concentric circle is one’s immediate family. After that, you go outward to tribe, village, country, and then all of humanity. Hume observed this centuries ago and I think it’s still largely true.

But there’s a new reality that changes it. Because of globalization, we are more connected to those five people halfway across the world. We might know more about their country, do business with them, or see them on the news. Even the simplest exposure can make us feel more connected and empathetic to them. Jagdish Bhagwati argued in his book In Defense of Globalization that globalization itself fuels most anti-globalization. Globalization has made people empathize more with those starving kids in Africa, so westerners now want to stop a force that allegedly causes those children to starve. If we didn’t feel connected to them, they’d be out in a concentric circle totally irrelevant to us. Today, I think the concentric circles are getting more and more mushed together.

I’ve always found the “buy American” or “buy local” movements to be steeped in a weird nationalism exposing people’s allegiance to group identities. There’s more to these than just “looking out for your people” (people might trust American goods more than Chinese ones or buy local thinking it reduces environmental harm from shipping, for example). But when people tell me they follow these mantras I’m always forced to ask “why should I care more about Americans or people in Austin/Scotland/Chicago?” After all, buying anything is local somewhere. If I buy American for the sake of buying from people whom I share a passport that signifies an arbitrary identity caused by legal borders, I’m just discriminating against people of other nationalities.

As people get richer I think we have less reason to be distrusting. I don’t assume people are going to rob me, the guy I give my credit card to is going to steal my info, or that a product online will show up at my house completely different than the description. It could be that long ago we cared most about our family then tribe then village etc because we knew them best and felt a connection. We felt we could trust them. Perhaps it was a instinctual defense mechanism.

But I don’t think it’s necessary anymore. We do business with people all around the world, we marry people from all around the world, live amongst people from all around the world, experience media from all around the world. It only makes sense that as people feel more connected the concentric circles become blurrier. Humanity is humanity, and hopefully these national borders will become more arbitrary.

“The rich are getting richer and the poor are getting poorer”, self-proclaimed critics of globalization – by which I assume they mean economic liberalization – often argue. While the world hasn’t exclusively seen trade and markets liberalized everywhere, and poverty hasn’t decreased in every village and tribe around the world, there has undoubtedly been a strong move towards economic liberalization in the last thirty or so years. Coinciding with this has been:

Furthermore, by region:

What can we attribute the tremendous dip for “East Asia” to? Has China become more protectionist? Has India increased regulation of industries? Has Singapore dramatically increased wealth distribution? Generally speaking, no. These countries have all shifted away from collectivist, planned economies and more towards market-based systems.

Some regions have improved more than others. Some places are worse off than they were a few decades ago. Fine, blame the IMF, World Bank, or western corporatism. But this doesn’t negate the fact that “globalization” has decreased the number living in poverty by 400 million (even though world population grew).

A paper by Maxim Pinkovskiy and Xavier Sala-i-Martin remarks:

Using the official $1/day line, we estimate that world poverty rates have fallen by 80% from 0.268 in 1970 to 0.054 in 2006. The corresponding total number of poor has fallen from 403 million in 1970 to 152 million in 2006.

Globalization might not be as glorious of a story as its supporters say it is, but those numbers are hard to argue with. “Poor getting poorer”?

I was having a polite conversation with someone today when they mentioned that protectionism, unlike free trade, creates jobs and prosperity by shutting off competition to domestic firms and workers. If Japan didn’t make cars, my peer argued, then jobs would spring up in Great Britain (or America) to make those cars. Quite low hanging fruit, I have to say.

I’d like to exclusively address the gains from free trade from comparative advantage. And rather than go over an economics lesson, I’ll make reference to Frederic Bastiat‘s tongue-in-cheek “candlestick maker’s petition”. In it, Bastiat argues from the point of view of a candlestick maker that a competitor is “flooding the domestic market with an incredibly low price” and that eliminating this competitor will encourage growth in other industries.

The competitor he is talking about is the sun. If the government managed to block out the sun, protectionists could argue, industries will have to fill in for the resources the sun provided:

If France consumes more tallow, there will have to be more cattle and sheep, and, consequently, we shall see an increase in cleared fields, meat, wool, leather, and especially manure, the basis of all agricultural wealth.

If France consumes more oil, we shall see an expansion in the cultivation of the poppy, the olive, and rapeseed. These rich yet soil-exhausting plants will come at just the right time to enable us to put to profitable use the increased fertility that the breeding of cattle will impart to the land.

The “petition” points out, pretty well I might add, the absurdities of thinking that eliminating competition is good for the general welfare of society.

Read all of Bastiat’s Petition here.

Joseph Stiglitz, in Globalization and Its Discontents, was definitely on to something when he criticized developed countries for preaching liberalization of trade and then hypocritically sheltering themselves behinds walls of protectionism. Developed countries subsidize certain goods – think of agricultural subsidies in America – to crowd out foreign competition, or they can enact tariffs that make foreign goods more expensive and have the foreign goods effectively lose their comparative advantage.

President Obama recently practiced such hypocrisy by enacting a 35% tariff on low-grade Chinese car tires. As The Economist points out,

The number of jobs affected is barely a rounding error in measurements of the mighty American workforce…But in geopolitical terms, it is a whopper.

I shant go into much obvious detail about the actual net job gains from free trade, so I’ll elaborate on the second point of The Economist’s point: the political consequences.

The infamous Smoot-Hawley Tariff Act was passed in the midst of the Great Depression in an attempt to revive the American workforce. Accepted economic wisdom regarding Smoot is that it not only didn’t solve unemployment, it made it worse. The same situation could occur with this tariff on tires. China could start a trade war and impose tariffs on American goods. Suddenly, one retaliation leads to another and the walls of inefficient protectionism begin to grow larger.

The possible trade war is also accompanied by the increasingly hypocritical reputation of America in terms of trade liberalization. Why would anyone listen to American recommendations for free trade when they don’t practice it themselves? Whatever happened to Obama’s cry of restoring America’s credibility around the world?

Several news sources have pointed to political pressure from the United Steelworkers Union in order to get support for healthcare reform, but I haven’t seen any concrete evidence for that so I won’t believe it just yet.

Obama should be calling on all countries to lower trade barriers. But he’s got to practice what he preaches.

In an ode to Marginal Revolution, check out these links:

Globalization and rising incomes, critics charge, necessarily yield more environmental harm. In In Defense of Globalization, Jagdish Bhagwati makes an argument for the opposite – that growth, measured by increased incomes, can actually help the environment. This might seem counter-intuitive. After all, as we make more money, we consume more, which means we cause more pollution and create more trash.

But think about it for a second. As people satisfy their basic needs of food, shelter, water, etc., they become less concerned with an extra dollar and care more about things like parks and pretty things.

This bell curve, essentially a Kuznets curve for the environment, demonstrates the idea:

Gene Grossman and Alan Krueger, two economists, found that peak sulfur dioxide levels in various cities around the world were when median income was around $5,000 to $6,000. Once a city made more than this, the locals not only switched to cleaner technology but also became more concerned with the natural environment. Bhagwati adds:

Several historical examples can also be adduced: the reduction in smog today compared to what the industrial revolution produced in European cities in the nineteenth century, and the reduced deforestation of the United States compared to a century ago.

One need only look to China, where pollution is horrible but arguably necessary to get to a certain level of wealth in order to “clean up”. Similarly, Switzerland, the Netherlands, and Scandanavian countries all have very impressive environmental records; these developed countries, over centuries, have reached a point in their GDP where clean water/air and national parks are more desirable than 50 more bucks. However, the marginal difference in income for developed countries is relatively huge for developing countries, so the developing countries are more willing to put up with a degree of environmental harm.

While I personally agree with the idea that growth can help the environment, I think the lingering question is whether that “peak” level of things like CO2 is permissible or whether we must stop pollution from even reaching there.

I finished Joseph Stiglitz‘s Globalization and Its Discontents. In Stiglitz’s words, it argued that:

The Problem is not with globalization, but with how it has been managed.

Here are the thoughts I jotted down while reading it (yes, there are a lot of them):

  • Stiglitz acknowledges the benefits of privitization and how, when necessary criteria are met regarding property rights and good government, private firms operate better than government.
  • The IMF ruins capital by controlling the money supply.
  • Rich countries practice hypocritical protectionism by using things like the IMF to make developing countries lower trade barriers while not doing so themselves. I couldn’t agree more.
  • His claims supporting the “infant industry argument” aren’t too compelling.
  • “The reason that Wal-Mart is successful is that it provides goods to consumers at lower prices.”
  • Believes the invisble hand doesn’t exist because the critera implied by it – perfect information, perfect competition – aren’t there. But he fails to explain why market economies are better at dispersing resources than centrally planned ones. In other words, he doesn’t disprove Hayek’s theory of spontaneous order.
  • He blames a lot of the East Asian Crisis of the 90’s on currency speculators. I am very suspicious of this.
  • Stiglitz met with Chinese government officials to discuss their transition to a market economy. No one (rightly) ever accuses Stiglitz of being an aid to the Tianeman Square Massacre. But for some reason Naomi Klein accused Milton Friedman of being complacent to Pinochet’s human rights violations because Friedman had a 40 minute meeting with Pinochet’s advisors. Naomi Klein is such an idiot.
  • Stiglitz thought that Alan Greenspan cared too much about inflation. This book was written in 2001, before the current economic crisis. Most people now accuse Greenspan of letting a huge bubble be created by extremely loose monetary policy. I just thought that was interesting.
  • His recommendation for a “gradual” approach to the market-oriented reforms in poor countries: “Development encompasses not just resources and capital but a transformation of society.” I think this can be applied to Iraq –  we can’t force our values on countries.
  • People getting richer helps the environment.
  • Makes a case in the “Way Ahead” chapter for preserving local cultures. I disagree tremendously. I think that as long as cultural change is caused by voluntary actions, whatever happens shouldn’t be altered. (If Japan suddenly only had American food because that’s what the consumer demand was, why is that bad?)

Stiglitz’s book was pretty good in convincing me that the IMF and World Bank are counter-productive. But I’m excited to hear some rebuttals to his other ideas about globalization from Jagdish Bhagwati’s In Defense of Globalization, which I’ll read next.

Anyone who has read Globalization and Its Discontents is encouraged to criticize the points I made or add their two cents in the comment section below.