GLOBALIZATION AND THE U.S.                             


In “The Wealth of Nations” (1776), Adam Smith defined the two goals of political economy, “…first, to provide a plentiful revenue or subsistence for the people…and secondly, to supply the state or commonwealth with a revenue sufficient for the public services.” 1 When advocating the social arrangements to make these possible, Karl Marx was no great political economist. However, he well described the world-wide dynamics that the industrial revolution was unleashing:

The discovery of America, the rounding of the Cape, opened up fresh grounds for the rising bourgeoisie. The East-Indian and Chinese markets, the colonisation of America, trade with the colonies, the increase in the means of exchange and commodities generally, gave to commerce, to navigation, to industry, an impulse never before known…

…steam and machinery revolutionised industrial production. The place of manufacture was taken by the giant, Modern Industry, the place of the industrial middle class, by industrial millionaires, the leaders of whole industrial armies, the modern bourgeois.

Modern industry has established the world-market, for which the discovery of America paved the way. This market has given an immense development to commerce, to navigation, to communication by land…and pushed into the background every class handed down from the Middle Ages. 2

In Marxian economics, labor is the source of all product value. Economic competition, however, forced capitalists to substitute increasing amounts of capital (labor embedded in the means of production) for workers’ wages, leading to the impoverishment of the proletariat, and eventually to revolution. In contrast, neoclassical economics concerns itself with the workings of what the Economist calls the “marvelous machine.” Neoclassical economics does not privilege labor, concerning itself mainly with the technical issues of supply, demand, and the policy determinates of output. The ultimate goal of Marxian social analysis was to free workers from an exploitation that Marx precisely defined by formula. The ultimate goal of neoclassical economics is to maximize GDP output, and therefore social happiness.

We discuss Marx because he placed at the center of his analysis, labor. Differential labor costs now drive the engine of globalization, impacting people in both developed and developing societies. Significantly for the United States, we discuss China. 

Steven Rattner helped restructure General Motors in 2008. In the July/August 2011 Foreign Affairs Magazine, he set forth the 2009 labor costs of building cars at various G.M. locations, there being decreasing differences in productivity.    

                                                                 2009 Labor Costs/Hour               

    United States









Labor costs in the U.S. are 12X those of China’s; an Asian Development Bank study of Apple IPOD assembly costs estimates that labor costs in the U.S. are 10X higher. It is this labor cost differential that incents the multinationals to build assembly plants abroad. Furthermore, due to technological change, the U.S. also has to compete against low-wage, highly skilled workers. The goal of the capitalist system is simple and somewhat impersonal, Max [Profits]. The highly competitive nature of this system requires large manufacturing companies to produce abroad. If they don’t, their competitors will eat their lunch (put them out of business).

The data above is a simple statement of costs. The reality of how Min [Costs] happens is, of course, very much more complicated. Our viewpoint of markets and economic activity is that they are social systems; it is therefore relevant what people say and do.  The following discusses China as an example of modernization and economic adaption. We write about China because it is now very relevant to the U.S. We hope our readers will take the following only literally.



The Modernization of China

In the mid 1700s, the British sought to expand their trading empire in China. Their presence was not exactly welcome. By 1760, they were restricted to an enclave in Canton. In 1793, George III (that one) sent Lord George McCartney to the Qianlong emperor to ask for expanded British trading rights and diplomatic representation in Beijing. The Qianlong emperor’s reply was a classic:

We have never valued ingenious articles, nor do we have the slightest need of your country’s manufacturers. Therefore, O king, as regards your request to send someone to remain at the capital, while it is not in harmony with the regulations of the Celestial Empire we also feel very much that it is of no advantage to your country. 3




Unlike Japan, China did not learn from its environment. How is China adapting now? This leads to a perspective of its complex society, and what the U.S. must do to compete.

Chinese civilization is about 4,500 years old and has its uniqueness. The polar opposite of Mideastern societies, China places the state as the only major collective above the family. The result is a dynamic that is not unlike that which occurs in large corporations, cycles of centralization and decentralization. At the end of the Cultural Revolution in 1976, the central government necessarily devolved a large amount of responsibility to the provinces, many of which had continued to tolerate a degree of private enterprise. In the words of MIT Sloan School economist Yasheng Huang (2008), central government reform policies, “ …accommodated the spontaneous actions on the ground.” 4

Economic growth is a bottom-up activity because it relies upon a knowledge of local profit opportunities. Thus in the decade of the 1980s, capitalism in China grew in the agricultural provinces of China, not in the more politicized metropolitan centers of Beijing and Shanghai. For instance, Huang writes that Zhejiang province, “…is home to half to China’s largest private-sector firms…what is often lost in the Zhejiang story is that the province was poor and deeply agrarian in the 1970s…Today it…is the bastion of Chinese capitalism. Its businesses dominate European markets in garments…and the region has begun to venture into electronics and petrochemical products. …All (its) wealth was built on a rural foundation.” 5

In the 1990s, a newly conservative national leadership began to emphasize urban China rather than rural China, and sought more foreign direct investment. As a result, “…fiscal recentralization in 1994 …substantially reduced the autonomy of the provinces.” 6 Credit constraints on rural enterprenurship were tightened. In periods beginning in 1981 and ending in 2001, the private sector’s share of fixed-asset investments declined from 21.4% to 13.3%, in favor of the state-owned enterprises. 7 Thus, there are lots of new skyscrapers (there is something universal about the appeal of real estate) in Shanghai, but less investment in the rural areas. As a result of regionalism and changes in economic policy, the forms of corporate ownership in China are extremely complicated. 

Tsai (2007) lists five major models of corporate ownership that vary by locality:

1)      The Zhejiang model, self-reliant growth driven by private business and private finance.

2)      The Sunan model, local government takes on a role of providing land, credit, and guidance to collective firms.

3)      The South China model, combining elements of both above with an emphasis on foreign trade and high levels of foreign direct investment.

4)      The State Dominated model, found in major industrial centers such as Shanghai and not favoring private enterprise.

5)      The Limited Rural Development model, the state invests directly in local economic development. 8

We mention this for a purpose. China’s economy is like a hummingbird. It manages to fly despite theory because it is socially organized to compete in manufacturing exports with low labor costs, with a model Max [Employment] – regardless of the efficiencies inherent in the model Max [Profits]. Like many other developing countries, China is furthermore working furiously to produce higher-valued products by education and government programs.


A state-owned firm, Shanghai Zhenhua Heavy Industry Co. Ltd (ignore the music), manufactured the eastern span of the San Francisco Bay Bridge. 9  The main contractor is Fluor Corporation, a U.S. multinational. It’s website describes the project. What is really relevant is the behavior the market system incents. Fluor won its contract bid, based upon cost. If it had sourced the bridge from a U.S. supplier, it probably would not have won the bid.



What Can the U.S. Do?

What can the U.S. do to compete against China’s large advantage of lower costs and increasing sophistication? To draw a football analogy, a home team that executes the same play, regardless of what the competition does, will surely lose. In 1945 with around 50 % of world GDP measured by purchasing power parity, the U.S. could determine the world’s economic system; now it accounts for only 21%. 10  Regardless of the rhetoric, the U.S. now has to adapt itself to the world, that includes China and many other developing countries.

What might that adaption be? To ascertain the truth of any proposition, push it to the extreme and consider the consequences. Consider the pure capitalist and socialist models. The capitalist model lets unfettered markets determine resource allocation. The problem with this model is first that unfettered markets can make big mistakes, and then they correct violently. The second problem is that it assumes the mobility of capital and labor, ensuring the full employment of resources. In a world of national boundaries, the capital is mobile while labor is not. The pure capitalist model will result in continued high U.S. unemployment; as capital and know-how, aided by technology, continue to move abroad. There may be ghost towns out west, but in the past everyone could have moved to Los Angeles. According to the Commerce Department, between 2000 and 2009 the multinationals cut 2.9 million jobs in the U.S. and added 2.4 million overseas. 11

At the other extreme, the socialist model is also problematic. Under the socialist model everyone had jobs centrally assigned, but they produced junk that could not compete in world markets. Germans have a knack for producing world-class exports? Not always. The West German Treuhand discovered that most of East German industry had to be scrapped and that only the Carl Zeiss Optical Works in Jena produced a world-class product.

The practical solution, everywhere, is a mixed economy that includes both private initiative and state involvement in varying degrees. But the mixture should, and of course will, depend upon each nation’s culture. In the West the general logical rule is the excluded middle, an object is either an A or a B. This does not necessarily lead to an ideologically rigid capitalism. Because that rule can still be fulfilled with the idea that everything should be in its proper place in a logical hierarchy. There is a role for private enterprise, essentially to make things happen in the short-term. There is a separate role for government to make collaborative long-term investments (we use this word very precisely) in education, infrastructure, R&D, and to pick, as private industry does but at a different level, the winners and some inevitable losers. These investments, as President Obama says, will help us "up our game." Furthermore, trade policy should be conducted under the principle of generalized reciprocity. 12

Many discussions in Washington boil down to this: 1) Let the multinationals continue to export jobs abroad freely in the name of efficiency and shareholder value. 2) Continue to spend money on social programs in the distant hope the economy will recover. Neither of these ideological derived “solutions” deal with the underlying problem. There has to be a solution to the underlying structural jobs problem. We quote Andy Grove, former Chairman and founder of Intel:



Our fundamental economic beliefs which we have elevated from a conviction based on observation to an unquestioned truism, is that the free market is the best of all economic systems-the freer the better. Our generation has seen the decisive victory of free-market principles over planned economies. So we stick with this belief, largely oblivious to emerging evidence that while free markets beat planned economies, there may be room for a modification that is even better.

Such evidence stares at us from the performance of several Asian countries in the past few decades. These countries seem to understand that job creation must be the No. 1 objective of state economic policy. The government plays a strategic role in setting the priorities and arraying the forces and organization necessary to achieve this goal. The rapid development of the Asian economies provides numerous illustrations. In a thorough study of the industrial development of East Asia, Robert Wade of the London School of Economics found that these economies turned in precedent-shattering economic performances over the ‘70s and ‘80s in large part because of the effective involvement of the government in targeting the growth of manufacturing industries. 13


In the July/August 2011 Foreign Affairs Magazine, economist Michael Spence more generally writes:


The late American economist Paul Samuelson once said, “Every good cause is worth some inefficiency.” Surely equity and social cohesion are among them. The challenge for the U.S. economy will be to find a place in the rapidly evolving global economy that retains its dynamism and openness while providing all Americans with rewarding employment opportunities and a reasonable degree of equity. This is not a problem to which there are easy answers. As the issue becomes more pressing, ideology and orthodoxy must be set aside, and creativity, flexibility, and pragmatism must be encouraged. The United States will not be able to deduce its way toward the solutions; it will have to experiment its way forward. 


In the 8/30/11 NYT, MIT President Susan Hockfield more specifically writes:

The United States became the world’s largest economy because we invented products and then made them with new processes. With design and fabrication side by side, insights from the factory floor flowed back to the drawing board. Today, our most important task is to restart this virtuous cycle of invention and manufacturing.

Rebuilding our manufacturing capacity requires the demolition of the idea that the United States can thrive on its service sector alone. We need to create at least 20 million jobs in the next decade to offset the effects of the recession and to address our $500 billion trade deficit in manufactured goods. These problems are related, given that the service sector accounts for only 20 percent of world trade.

To make our economy grow, sell more goods to the world, and replenish the work force, we need to restore manufacturing – not the assembly-line jobs of the past, but the high-tech advanced manufacturing of the future….

The United States remains a top producer of advanced technology products. But our dominance has eroded. Ten years ago, we enjoyed a trade surplus in advanced technology manufactured goods; today, that category accounts for an $81 billion annual trade deficit. Countries that used to make inexpensive goods at low cost have developed the capacity to produce high-value goods, making it ever more tempting for American companies to design at home but manufacture abroad.

This not only destroys manufacturing jobs, but also saps our inventive advantage….

The prospect of good manufacturing jobs in the United States is not a fantasy. Germany and Japan enjoy high wages and run major surpluses in manufactured goods; so can we. Our economy will thrive only when we make what we invent.


So, what’s going to help the situation in the short-run? In the 9/2/11 CNN, Harvard’s Kenneth Rogoff said infrastructure projects, properly financed, and certainly not cutting the budget – which would reduce demand. Other than that, economic growth is going to be determined by the long-term fundamentals such as education and, we might add, entrepreneurship and some forms of industrial and trade policy.