I have always found Thomas Friedman's columns a little smug, and I'm afraid this seems no different.

One reason is the way he sets up straw men. He suggests that the Pampered Types (who apparently all live or work on university campuses) waste their ivory-towered hours dealing with a simplistic question -- to globalize or not to globalize. On the other hand, the unpampered ones in the trenches getting their hands dirty, like the chief executve of Infosys and the top economic adviser to the Congress Party, are talking about the nitty gritty of "how" to globalize. Now I work in private industry, but I do go near a campus on the way to work, so maybe I'm pampered, but the discussions I hear among critics of corporate-led globalization are at least as multifaceted as those of Mr. Friedman.

A second reason I dislike his columns is the way he abuses hindsight. "Countries that come at [globalization] with the right institutions and governance can get the best out of it and cushion the worst". Which would those countries be? Obviously, whichever are growing fast. A few years ago it might have been South American ones; now it's India and China (odd to see a single-party state implicitly described as one of the "right institutions" in the NYT). In short, it is whoever looks good at the time, and even then complicating factors (such as that growth in India and China preceded the opening of their borders, and that China's isn't that open anyway) are ignored.

Thirdly, it's the way he skirts over the little details with a token dose of down-home optimism. "Do we need to make globalization more fair?...You bet". And with that declaration of solidarity with the world's poor, he's back to talking about the feel-good news again.

But maybe I'm just in a grumpy mood because I've not been pampered enough today.

For the discussion, I'll start by admitting that I am a fan of Globalisation for the kind of reasons eloquently related in Thomas Friedman's account of the trickle-down benefits flowing from India's burgeoning software industry in Bangalore. But that is far from the end of the story. There are at least three features of Globalisation where theory and such as evidence as there is must lead to suspended judgement as to whether downstream outcomes are inevitably beneficial:

(1) Whether national economies with receding barriers to trade and capital mobility will become more volatile.

(2) Whether Globalisation increases the likelihood of winner-take-all outcomes in markets where brands, network externalities, or celebrities are significant factors in attracting sales or scale and scope economies are in business cost functions.

(3) Whether increased tax competition, at least between European economies, leads to the steady erosion of the European Social Market model or its like elsewhere.

Globalization in America consists primarily of sending high-paying union jobs overseas to the delight of countries like Taiwan, China, Japan, Mexico, and now India. We have destroyed our manufacturing base and our middle class so the multinationals have cheap labor and higher profits. This has reduced tax revenues, job security and income, and social security revenue. It has increased profits for those American companies that were able to send their labor costs offshore and been a windfall for those politicians that reaped huge contributions for supporting them.
This has been extraordinarily destructive to American society. Workers and families are worse off than at anytime since the victory of the union movement. Any government that permits companies to commit such actions without taxing them severely and adding high tariffs to offset the loss of jobs, wages, and taxes is certainly the best government business can buy.

It seems to me that an economic analysis would show that if all trade barriers are lifted, then we can expect that world-wide competition for customers would result in two things: (1) the price of manufactured goods should fall to approximately the price of the component raw materials, and (2) the price of labor should fall to subsistence level wages.

Of course, some jobs are not relocatable. We'll never import Presidents and Congressment from India or South Korea, no matter how skilled their people are.

Good lord, you drew 'em out, Brad.

'(2) Whether Globalisation increases the likelihood of winner-take-all outcomes in markets where brands, network externalities, or celebrities are significant factors in attracting sales or scale and scope economies are in business cost functions.'

Hmm. Ok, I'll try to construct a logical chain here:

1) Free trade effectively increases the size of "the market" for a good by combining the individual national markets into one.
2) Increased market sizes reinforce winner-take-all components.
3) Something magical happens.
4) The winner-take-all nature of the market makes everyone poorer.

If this is a strategic-trade related argument you're making here, you might want to look back a couple of posts where Brad pointed to an article whose thesis was that the productivity gains of the ongoing information technology revolution have accrued almost entirely to consumers, not producers. Australia's made out pretty good from IT, and they don't produce jack for the raw components of IT domestically.

'It seems to me that an economic analysis would show that if all trade barriers are lifted, then we can expect that world-wide competition for customers would result in two things: (1) the price of manufactured goods should fall to approximately the price of the component raw materials, and (2) the price of labor should fall to subsistence level wages.'

Uh.....can you point us to this analysis? You do realize you're implying that capital earns virtually 100% of product?

I've always been of the opinion that there are certain columnists who should be required by law to reprint one of their columns from five and ten years ago next to every new one they write, so that we can be given some context for their sweeping generalisations and broad-brush predictions. Friedman is certainly one of those; does anyone have access to a few of his ramblings from the early 1990s on the joys of shock therapy?

Jason
>>Ok, I'll try to construct a logical chain here:
1) Free trade effectively increases the size of "the market" for a good by combining the individual national markets into one.
2) Increased market sizes reinforce winner-take-all components.
3) Something magical happens.
4) The winner-take-all nature of the market makes everyone poorer

The conclusions of the "logical chain" are yours, not mine. No where did I conclude "everyone" would be poorer - and incidentally, I might have cited Paul Krugman (Peddling Prosperity, p. 149) and his credits there for the reasoning that freer trade may lead to supercelebrities with fewer sources of supply in total. If adjustment costs on the way to a new equilibrium fall upon the poor and there are constraints on redistributing income we are unable to conclude the new situation is necessarily welfare superior to the old - Little: Critique of Welfare Economics (OUP, 1957).

However, there is a class of game-theoretic models of imperfectly competitive markets in industrial products, due to John Sutton (of the LSE), in which increased market size can lead to greater concentration in industrial structures, not less. Readers may be interested to know of Davies and Lyons: Industrial Organization in the European Union (OUP, 1996), chp. 6 by way of an introduction or the opening essays in Louis Phlips (ed): Applied Industrial Economics (CUP,1998). By way of a taster, we can observe that two familiar brands have a major share of the global market for carbonated cola drinks even though the supply technology is essentially very simple - carbonated sweetened water, a dash of flavor and a distribution system plus, of course, advertising. How come?

I am not disputing the evidence that gains from the revolution in information technologies (IT) have primarily benefited consumers, not producers, but then IT production overall is only a minor contributor to GDP. What of all the other industry markets?

As an aside in reply to Jason McCullough and in Bob Briant's defence, I thought it was pretty clear he was asking questions rather than making an argument.

In fact, he was asking questions against his own beliefs as a "fan" of globalization. This struck me (as someone who is anything but a fan of globalization) as a very reasonable and open-minded thing to do. If you are going to start off with a provocative and dismissive sentence like "Good lord, you drew 'em out, Brad.", you really should read the post carefully before trashing it.

Tom - Thanks for that. It seemed to me that we might benefit from a little rigor in the arguments routinely made on behalf of Globalisation if only to tease out the critical assumptions.

Jason,

I said "it seems to me" meaning that it was *my* amateurish economic analysis, not a study by reputable economists.

My point is that I don't understand what mechanism will *prevent* wages from falling indefinitely. Why shouldn't a manufacturer do his manufacturing in the place with the lowest wages?
Yes, that's just manufacturing, so I don't know about other sorts of jobs.

I certainly was not saying that globalization would make everyone poorer. It will certainly make consumer goods cheaper and more plentiful. Therefore, for those who are able to maintain their wage levels, it will greatly increase their prosperity. I believe that it will increase the standard of living of the poorest people in the poorest countries and the richest people in the richest countries.

'There are at least three features of Globalisation where theory and such as evidence as there is must lead to suspended judgement as to whether downstream outcomes are inevitably beneficial:'

Ok, I misread what you were getting at, sorry. I don't see how the downsides of a winner-take-all market will be made worse by free trade, though.

Daryl, what prevents wages from falling indefinitely in the trade between Arkansas and Texas, or in the United States in general?

I believe that it is ultimately government that prevents wages from free-falling. Tax and spend redistributes the wealth. That's the problem with globalization prior to the formation of world government.

Also, as I said in my first post, some jobs are effectively non-relocatable. You can't substitute a plumber in Arkansas for a plumber in New York, because the price of moving him to the job would be more than the savings from using a local plumber.

Anyway, as I said, I'm an amateur, I don't claim to understand the economic mechanisms that determine wages and prices. I'm willing to learn. What is *your* answer to the question: what mechanism keeps wages from free-falling?

Just thinking, for I am not an economist....

What does hold up the prices or incomes of American farmers against foreign competition? Well, productivity can support income. Also, there may be advantages in growing certain crops in certain locations that limit potential competition.

Then, there is organization among farmers that can be used to limit production or to lobby for subsidies and even trade limits.

Kansas may have a small population, but it has 2 senators and they will do their best to represent the interests of farmers who lobby them. The result is likely to be all sorts of government support programs for crops grown by Kansas farmers. Corn farmers are supported against foreign competition.

There are no coffee growers in Kansas, so African growers are left to the own political systems for support.

I guess I should modify my claim: given international competition, I would expect that the wages per unit produced would free-fall. So there is a productivity loophole. If I can produce 10,000 widgets per day, I can make a nice living even if I'm only paid 5 cents per widget.

But if wages for manufacturing jobs are to be kept high by productivity gains, doesn't that by definition mean that fewer people will be needed to satisfy the demand?

Productivity gains may at present be cutting the work force needed in several major industries. Why should even automobile manufacturers be adding to employment at present, though demand is very high?

Do we need more farm families, though seasonal workers are in demand?

There is too little job creation in America at present, same for Japan, and the problem is worse in Europe.

Imagine China wishing to find work for a hundred million rural families who will not be needed for food production in coming years. As China becomes more productive in agriculture there will be a tremendous labor migration to urban areas. This of course is already happening.

I agreed with the first post--Friedman is pompous and arrogant. No one reading his column would ever guess that the latest Nobel Prize winner in economics has said that some (not all, but some) of the points made by antiglobalization critics are correct. No one would know that Stiglitz harshly criticized the IMF for its lack of transparency and its Hooverite approach to economics, while Friedman (if my memory is correct) portrayed the IMF as heroes. No one reading Friedman's column would know he attacked Malaysia for imposing capital controls in the late 90's, a policy which seems to have worked. You wouldn't know that Friedman's book treats CEO's as veritable fountains of wisdom and truth. You wouldn't know that Friedman (again, if memory serves) says nothing in his book about people so destitute they need outside help merely to stay alive (the sort of help that Jeffrey Sachs and others recommend). Nah, just trust the market to do everything. There is no alternative.

But yeah, other than that it was a great column.

>> My point is that I don't understand what mechanism will *prevent* wages from falling indefinitely. Why shouldn't a manufacturer do his manufacturing in the place with the lowest wages?

Well, why don't they do so in fact? Why aren't US manufacturers flooding into Haiti to get the low wages there? (And why does the great majority of the competition faced by US manufacturers come not from low-wage countries but from high-wage ones such as Japan, Germany, etc.?)

Because manufacturers don't want low-wage workers -- they want highly productive workers, so they can produce the most relative to cost.

This means both that the workers themselves must be productive as individuals (as in "educated" --workers on auto assembly lines must know some serious math these days) and that they need to be working in an area where there is good quality transportation, communication, finance, legal structures, and so on. All these factors contribute to worker productivity.

Because wages tend to the level of productivity (due to competition!) in fact wages go up in developing areas of the world and there are more high-wage people in the world every year -- the opposite of the supposition that competition must drive wages down.

>> I guess I should modify my claim: given international competition, I would expect that the wages per unit produced would free-fall...

And yet real wages rise.

>> But if wages for manufacturing jobs are to be kept high by productivity gains, doesn't that by definition mean that fewer people will be needed to satisfy the demand?

When has total demand ever been satisfied? For more on this we can refer to the Krugman of the good old days. http://web.mit.edu/krugman/www/hotdog.html

Jim,

So, it can all work if (1) productivity rises indefinitely, and (2) demand rises indefinitely.

I don't believe that (1) is actually possible, and I don't believe that (2) is actually desirable.

What Jim said. ;0

An attempt at my own answer: wages are determined by the supply and demand for labor. Take the production of all exportable goods as one labor market. Now assume that you have 2 countries, one which earns $1/hour and one that earns $10/hour, which do not trade at all. What happens when you combine the markets? Note that the total supply and demand for labor haven't changed; why should the equilibrium price for labor be *lower* than $1/hour, which is kind of what you're implying?

You won't even get the first-pass result that the wage for both countries would go to some sort of weighted average, like $2/hour; as more productive workers earn more for their employers, and therefore have more bargaining power, the initially $10/hour country should retain a wage premium over the other.

Jim,

Thanks for the pointer to the Krugman article, by the way.

Jason, you write:

Now assume that you have 2 countries, one
which earns $1/hour and one that earns
$10/hour, which do not trade at all. What
happens when you combine the markets?
Note that the total supply and demand for
labor haven't changed; why should the
equilibrium price for labor be *lower*
than $1/hour, which is kind of what
you're implying?

I'm not implying that---I'm implying that
wages will fall in the country with the
highest wages and will rise in the country
with the lowest wages.

But competition for jobs *can* lower the price
of wages, just as competition for customers can
lower the price of long distance service, or
airline tickets, or whatever. The jobs go to
the lowest bidder (well, to the extent that the
jobs are relocatable, and ignoring the costs
of moving jobs around). What prevents workers from bidding their wages ever lower is unions and government intervention, neither of which are worth much in a global labor market.

Some earlier post asked: "Why doesn't this
already happen in the US?" It *does* happen here.
Manufacturing jobs are leaving the north are moving south, where wages are lower, taxes are lower, environmental protections are lower, and unions are not so well-established. For example, automobile factories are closing down in Michigan, but new ones are opening in Tennessee and Georgia.

>> I'm not implying that---I'm implying that wages will fall in the country with the highest wages and will rise in the country with the lowest wages.

You'll have to reconcile that with the fact that for the last 50 years wages have risen in the highest-wage countries and in developing low-wage countries too -- to the point that a number of formerly low-wage countries have become high-wage countries.

See the stats in the international section of the BLS web site, for instance.

>> But competition for jobs *can* lower the price of wages, just as competition for customers can lower the price of long distance service...

You miss the point that "competition for jobs" does *not* take place on the basis of wage cost but on the basis of productivity -- the ability to produce the most value relative to total cost. Wage cost is only one element of productivity. The other things I mentioned before -- like worker skill & education, and infrastructure in transport, communications, law, etc., all increase productivity too -- and of course they improve in correspondence to generally increasing wages.

Employers will very happily increase wages by $X if productivity increases by >$X as a result because they get more skilled workers and/or the rest. Employers will also abandon low-wage areas were they can't get the productivity they need. (Haiti, which has the lowest wages about anywhere, couldn't even keep the baseball-making business, in which wages represent the about the highest percentage of the value of total output you can find.)

OTOH, retail price competition obviously does take place on the basis of retail cost. So the parallel is not valid.

>> Some earlier post asked: "Why doesn't this already happen in the US?" It *does* happen here. Manufacturing jobs are leaving the north are moving south...

They sure aren't moving to low-wage countries like Haiti. (US wages even in the south are higher than in even most of the *developed* world.) And competition faced by US manufacturers continues to come overwhelmingly from the highest-wage, not lowest-wage, countries.

Jim,

You wrote: "You miss the point that 'competition for jobs' does *not* take place on the basis of wage cost but on the basis of productivity"

I didn't miss that point---I *made* that point, in my correction to my original post. Yes, if productivity can increase indefinitely, and demand can similarly increase indefinitely, then things will be fine. I just have doubts about both of those conditionals.

But the evidence seems to show that jobs have been lost, from the North to the South of the US, from the US to Mexico, from Mexico to China. Japan has lost manufacturing jobs in recent years to Korea and China. You're right, that the absolute most destitute countries don't get the jobs, because they don't have they have infrastructure and educational systems to support precision industries.

I agree that *some* wages have been going up in the US, namely the wages of the brightest, most ambitious, highest educated people. The wages of people in the bottom 50 percent have remained pretty stagnant in recent years. Yes, we can work harder at training people to get along in the high-tech world, but no matter how much training we give people, half of the human race will always be below average.

'I agree that *some* wages have been going up in the US, namely the wages of the brightest, most ambitious, highest educated people. The wages of people in the bottom 50 percent have remained pretty stagnant in recent years. Yes, we can work harder at training people to get along in the high-tech world, but no matter how much training we give people, half of the human race will always be below average.'

Manufacturing wages have had little or no growth, but manufacturing is an shrinking portion of the economy. Services have been booming; there's nothing special about manufacturing. Yes, the poor got the shaft during the 1980s, but they had real gains in the 1990s.

Disclaimer: I'm an Indian working in the IT industry. My economics will at best be as good as Paul O'Neill's.

I too agree with the first post - Friedman is being a bit naive and is citing the wrong examples though I agree with his basic premise that globalization is good. His obsession with the Indian IT industry is inexplicable. Granted, IT has been a rare, though over-quoted, success for India. But then, what else ? Success of software industry doesn't mean that globalization has worked miracles for India. In fact, India has hardly begun globalizing or liberlizing its domestic economy. Friedman's statement - "countries that come at it with the right institutions and governance can get the best out of it and cushion the worst" - implies that India and China have got it all right. I don't know about China, but institutions aren't that robust in India. Nor is governance that great. Recently, the federal govt. reneged on its earlier promise of privatising some state-run oil refineries. Financial institutions, most of them state controlled, are saddled with huge bad debts. Government finances are in terrible shape. My understanding is that whatever economic growth India has achieved is mostly because of some fortunate accidents (like its inability to service external debts in 1991 that prompted the then govt. to relax the industrial license requirements) rather than a clever economic planning by any government. Most reasonble persons would agree that globalization DOES succeed when it is accompanied by a high degree of internal economic liberlization and indepedent regulatory institutions. Where Mr. Friedman went wrong, I guess, is in picking his examples. India has certainly not achieved the ecomonomic growth that would make it a model. Nor would I pick China, whatever be its growth rate, as an economic model given its political restrictions. How about South Korea ?

"My point is that I don't understand what mechanism will *prevent* wages from falling indefinitely. Why shouldn't a manufacturer do his manufacturing in the place with the lowest wages?"

Just a few possible reasons:

1) The workers have low wages because they're not very valuable (e.g., because of lack of education, poor health, or poor work habits).

2) Owner can't get materials into or out of his factory (either because of poor infrastructure, government interference, or lawlessness).

3) Owner can't build/buy factory in first place (e.g., long delays in permitting).

4) Owner has his factory or his products taken from him without compensation (by the government or bandits), or fears this will happen.

5) Owner's profits are limited (e.g., by price or wage controls).