I was reading a story in the Chicago Booth Review called “Globalization is close to its ‘holy cow’ moment” (http://review.chicagobooth.edu/economics/2018/article/globalization-close-its-holy-cow-moment) when I had a bit of a “holy cow” moment of my own. Richard Baldwin (the author) didn’t come out and say it, but I was easily able to draw the conclusion that globalization is not a new concept, just a new label on a very old process.
A base assertion of his thesis is that globalization is a form of arbitrage (where “arbitrage takes advantage of a variation in price between markets”) where producers look to optimize on the availability of labor, skill and capital by producing product in the location and with the resources that are most efficient. I am not doing justice to Professor Baldwin’s analysis in any (clarity, depth or breadth) dimension and I suggest you read the article to understand the full substance of his argument. That said, the nugget that I have shared with you provides a reasonable foundation for the argument I am about to make.
Some further background. When I was in college, I took a course from William McNeil, a history professor who asserted that there are seminal events in history that change the world. One such event was the invention of the moldboard plow. He suggested that the invention of the moldboard plow (around 1000 CE) allowed farmers, for the first time in history, to produce product as scale and enable them to be productive enough to feed others who were then free to pursue other activities that in turn allow cities to rise and western civilization to progress. Think about that, it is mind-blowing that an invention as simple as the moldboard plow could be a key driver in the success of Western Civilization!
If you buy into that, and I hope you do, I don’t think it is a stretch to say that like globalization the moldboard plow caused an opportunity for arbitrage where the price of labor changed and people who had been farmers were able to take advantage (or were forced depending on your point of view) to find new work. Luckily, there was new work to be found—in the cities.
Those who were willing to learn the new skills required by a changing economy found their life and prospects for their children much improved. This assertion isn’t meant to suggest that the dislocation caused by the introduction of a transformative technology (in this case the moldboard plow) didn’t affect some portion of the population (very) negatively. Sound familiar. I remind you this was 1000 CE.
Fast forward 700 years and the industrial revolution caused similarly caused opportunity for arbitrage (and associated dislocation) as civilization moved from craft production to mass production. The product of a factory was significantly less expensive to produce and (as the concept of interchangeable parts was implemented and refined) of much higher quality. In a similar fashion to what we saw with the introduction of the moldboard plow, the production of work product consolidated from hundreds or thousands of craftsmen to a relatively small number of factories. Once again dislocation. Over the course of 150 years manufacturing matured and improved the lot of generations of the world’s civilization. As with the previous agricultural dislocation, once again, some portion of the population didn’t fair as well as others.
Similarly, globalization has taken advantage of a relatively new mechanisms to geographically (on a global scale) arbitrage wages, skills and capital to move production (of both goods and ideas) to the location that is most efficient and effective in terms of delivering product that is both cost efficient, and timely while being appealing to the consumer. While most of what I have read attributes this latest wave of dislocation (i.e. globalization) to the Internet, I would suggest that it has been made possible more generally by information technology solutions that include the Internet.
To wit, I remember being amazed and impressed when I ordered a Mac Mini from Apple (on a web-page that was hosted in California. Movements later I received a communication from a factory in China indicating that the order had been received and the unit scheduled for manufacture. The next day, I received an email from FedEx indicating that they had picked up the unit in China, that it would clear US customs in Hong Kong, travel through Memphis and be delivered to me in 2 days. The story of how that Mac Mini got created is a lot more complex, and it speaks to the capabilities that have been developed and honed as companies work to be more competitive and arbitrage wages, skills, experience and many other attributes on a global scale.
I have long argued that the dislocation we are now seeing with both globalization and technology are analogous to previous dislocations, but until I read Baldwin’s article, I didn’t have a solid paradigm (that of arbitrage) upon which to properly support my assertion.
Baldwin’s closing on the “The future of Globalization” is chilling. He suggests both an acceleration of the activity and that the phenomenon will spread to “professional and service-sector”. To that, I say, to late, it already has. My experiences with H1B visas and outsourcing or software development suggest that other countries are being more successful at producing the knowledge workers that today’s technology-based businesses need and that it is painfully easy to arbitrage the market and leverage markets that are more effective at producing the workers of the future.
I will close by saying that there are:
- Workers in the U.S. have the potential to compete effectively in the world labor market; and
- Actions we can take (but are not) to reduce the negative affects of this dislocation and we don’t we are both callus and not very good students of history.
I will talk about some of the things that we can do to keep the U.S. competitive in my next post.
Copyright 2018 Howard Niden
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