Nobel gurus fear globalisation is going horribly wrong ?  

Posted by Big Gav

While I rarely agree with Ambrose Evans-Pritchard's conclusions I generally enjoy reading his column in the UK Daily Telegraph as he does consistently ponder interesting topics. The start to his latest column - Nobel gurus fear globalisation is going horribly wrong - is somewhat baffling however it does improve as you get into it (ignoring a few red herrings like claiming globalisation has pushed up wages for some workers everywhere).

The idea that it could be surprising that globalisation is widening inequality everywhere (while the income differentials between countries as a whole narrow) is baffling. Global free trade and movement of capital forces labour forces everywhere to compete against one another, slowly equalising wages. Neoliberal capitalism itself creates a huge gulf in the incomes between the owners of capital and those with none. Surely this is simple to understand (and nowadays, to observe).

It is interesting, however, that he discusses income redistribution within rich countries to soften the blow on labour. I think there is a slow dawning of understanding amongst the elites that the current model is going to break at some point - and re-instituting some ideas from the past (public transport/ living wages / negative income taxes / shorter working weeks etc supplemented with some new ideas like paying people to keep their children in school) might have to be done to ensure the stability of the system...

David Ricardo's Theory of Comparative Advantage has broken down after 200 years, or so I learned at the Lindau forum of Nobel laureates in Bavaria.

The theory published in 1817 has been a guiding principle of free trade, taken as a given by every student of economics in the modern era. It has served us well, but just as Newton's theories ran into limits and were overtaken by Einstein's relativity, comparative advantage no longer explains the world.

Under Ricardo's model, inequality was supposed to narrow within countries as globalisation accelerated exponentially in the Nineties. Instead it is getting wider. The Gini coefficient measuring the spread between rich and poor is narrowing between countries, but is widening almost everywhere within countries, leading to a corrosive concentration of wealth.

"Globalisation today is very different from the 19th century," said Eric Maskin, winner of the Nobel Prize in 2007. Ricardo described a world where free trade in goods was opening up, but labour markets remained largely closed. This is no longer the case. Globalisation bids up the wages of high-skilled engineers or software analysts towards international levels wherever they live. ...

Prof Maskin said it would be a counsel of despair to turn away from globalisation. The last quarter-century has led to a surge in living standards for the emerging world as a whole. Yet it must be tamed. An answer lies in Brazil, one of the few countries to buck the trend and lower its Gini index.

One of the tricks was a scheme introduced twelve years ago to make "conditional cash transfers" to poor families provided their children stay in school up to the age of 17, and must be vaccinated. The idea is spreading to Africa and the Mid-East. Another trick is to build public transport linking the poorest slums with the places where the jobs can be found, usually far away. This is the task of microeconomics, one brick at a time.

The Maskin theory is not to be confused with "labour arbitrage", in which global multinationals take a greater share of the pie in profits by playing off cheap workers in Asia against blue-collar workers in the West – holding down wages in the US and Europe.

That too is going on. It may cure itself over time. It has not down so yet. Sir James Mirrlees, who won the Prize in 1996 for work on incentives, advocates outright subsidies for poorer workers in the West to stop them falling out of the bottom. "Just as you have social security taxes on employment, you could have negative taxes. Housing subsidies already work in this way in the UK," he told me.

Prof Mirrlees says capital controls may be needed to right the ship, warning Europe could be trapped in high unemployment for "years to come", unless they keep their capital at home for their own use. "The Europeans don't yet seem to have realised this," he said.

There is an enduring myth – a self-serving one – that inequality is a price we must pay to achieve higher growth. Advocates posit a trade-off effect. They argue that "levelling" pulls down everybody and damages the economy in the end.

Prof Joseph Stiglitz says the data proves otherwise. "We now realise that less inequality leads to greater stability, growth, and economic efficiency. They compliment each other," he told the Lindau forum. "We are seeing an ever-increasing concentration of wealth. It is fundamentally different from what occurred in the 19th century and up to the First World War, when real wages were rising. What we have seen with globalisation since the Eighties is stagnation in real wages," he said.

Prof Stiglitz, a former chief economist for the World Bank and winner of the Prize in 2001, said real median pay for full-time male workers has fallen back to levels last seen 40 years ago, yet productivity has risen 100pc over the same period. The workers have been excluded from all the gains, or as he puts it, we now live in an "inherited plutocracy" where the rich accumulate ever more in a perverse dynamic that will not necessarily self-correct. It may continue until we change the way society is organised, that is to say until we change our laws, spending policies, and taxation.

His preference is the "Scandinavian Dream" but there are many ways to skin a cat. It is not a Left/Right issue. It is common sense. Democracies will not last long with the wealth concentration of pre-modern despotisms.


"The theory published in 1817 has been a guiding principle of free trade, taken as a given by every student of economics in the modern era. It has served us well, but just as Newton's theories ran into limits and were overtaken by Einstein's relativity, comparative advantage no longer explains the world. "

I get annoyed when economics gets compared to physical science (or scientists). Isn't one of the problems of economics its eager adoption of the maths of the physical sciences without having any way of modelling actual human behavior in a meaningful historical context? Sure all these game theory exercises might win a Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, but do they actually describe reality?

The answer appears to be, no, or not well, or only theoretically under some rather unique (often unrealistic) set of conditions/assumptions.

The reason these potentially outdated theories ARE taken as a given is because often, it appears the students aren't taught any thing else!

A new link for the bucket?

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