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  • Writer's pictureOren Levin-Waldman

The Real Consequences of Globalization that Nobody Discusses

We hear a lot about globalization and the toll it has taken on workers’ earnings, their jobs, and overall inequality over the last few decades. And yet, it hasn’t always been clear just what that term means. We naturally assume it to mean that our national economy is situated in a larger world economy and what occurs thousands of miles away impacts us at home. But it isn’t clear just what that means in concrete terms.

For free marketeers who staunchly believe in free trade, globalization is the mark of a healthy economy. It is capitalism running its natural course. But it isn’t the capitalism of Adam Smith whereby firms were assumed to be relatively small enterprises, where many actors in the marketplace would result in competition and that this competition would be self-regulating.

In today’s global economy, firms that are able to move capital and relocate their operations are generally big limited liability corporations. Because we have fewer large scale corporations that can operate at any place in the world, they are better positioned to drive down wages, especially for lower skilled workers. This, of course, contributes to rising wealth and income inequality.

What is going on here? Larger corporations, which in many cases possess monopoly power, especially those that grew because of acquisitions and mergers, possess labor monopsony power. They can set effective wage rates, especially for lower-skilled workers, because they are the biggest, if not sole, purchasers of labor power. In an economy whereby firms are relatively small and there is less monopsony power there can be more competition. Greater competition might just put a break on the suppression of wages.

That capital is free to go anywhere means that operations can be located in regions where wages are low, thereby forcing firms in more developed countries where wages are higher to reduce wages in order to be competitive. And yet, there is more to this. Capital is mobile in a globalized economy because it has by and large been financialized.

When Smith, writing in what was still a pre-commercial economy on the eve of the Industrial Revolution, talked about capitalists, he was largely talking about producers and sellers — property owners who owned their own operations — who in Marx’s later words literally owned the means of production. In the modern globalized economy, firms are owned by shareholders but controlled by what are referred to as money managers, or simply managers.

These managers who are technically employees of the firms make management decisions as though they were owners of property. Their primary obligation is to their shareholders, which also includes the money managers themselves, and this means that their primary task is to increase shareholder value. As many of these money managers are getting compensated through dividend income and stock options in addition to a base salary in the millions, they have every incentive to increase shareholder value because they too will be beneficiaries. Of course, when the company does well, the boards of directors to whom they owe their primary allegiance, will reward them further with bonuses and more stock options.

Perversely, then, in the world of what the late economist Hyman Minsky referred to as money manager capitalism, the typical manager increases share value by suppressing wages, and when necessary relocating operations to locations where tax and regulatory conditions are more favorable to making profits.

Still, we are talking about a world of large corporation, and not necessarily one of small businesses. On the contrary, small businesses have themselves been the victims of globalization. Ironically, then, globalists who espouse free markets, open borders, and free trade also require more governmental intervention to clean up the mess left in the wake of globalization.

The typical globalist simply claims that in the spirit of Joseph Schumpeter’s “creative destruction” whereby the old and obsolete are replaced by the new and technologically advanced, workers should simply retrain so that they can obtain good paying jobs that favors more technically skilled workers. In other words, the low-wage and low-skilled economy, which because of downward pressure on wages at the bottom causes inequality, should be altogether replaced.

In a globalized economy, a culture like the individualized one found in the U.S., the globalist merely holds that workers who have lost out to the changing nature of the economy have nobody but to blame for their plight but themselves. It is their responsibility to be prepared for the new labor market; not the government's responsibility.

Of course, this argument is too convenient. If everybody got the education and training they needed we might have more skilled workers than available jobs, in which case there would be more downward pressure on wages, thereby exacerbating inequality. But the idea that the responsibility lies with individual workers rather than with the state is absurd given that these forces of globalization occurred with the assistance of government policy.

Firms grew in size because the government did not enforce antitrust laws. It will be recalled in Smith’s capitalist world, monopolies in restraint of free trade ought to be broken up in order to protect a competitive marketplace. Capital has been able to move more easily because of tax policies favoring corporate interests, even multinational corporate interests. It is the multinational corporation that has no allegiance to nation states. And of course institutions like unions that protect workers’ rights have been weakened by anti-labor policy. In the United States, this has occurred through right-to-work laws and stacking the National Labor Relations Board with people who were anti-labor,

Although globalization has resulted in economic growth, there have also been serious consequences to workers and their communities. In the United States, good paying jobs, especially in manufacturing have disappeared, and with their disappearance has come a weakening of the middle class. The result has only been rising income inequality, and the consequences are most likely a contributing factor to the polarization that we are seeing in many places around the world between elites and ordinary workers. In the U.S. it is between elites and “deplorables” who feel displaced due to economic change. In Britain it has been between supporters and opponents of Brexit. And in France it has been between Yellow Jacket protesters and their opponents.

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