Globalization: Intended and actual

By Emanuel Derman
August 24, 2011

I had thought globalization was a good idea. The developed world was rich, and it seemed as though outsourcing was going to diminish the wealth discrepancy between the rich and poor, decreasing the slope of the wealth line between the USA and the developing world.

 

 

Globalization (Intended)

This is more or less what happened, actually. China and India are indeed richer.

But, what went wrong, in the USA and other parts of the west, seems to have been the following. If you look recursively at the USA  in the chart above, you see that the slope of the wealth line between the rich and poor within the outsourcing USA actually increased.

 

Globalization (Actual)

The slope of the wealth line  increased even as the slope of the world’s wealth line decreased.

How it got that way is a big part of the current problem. When the slope within a country becomes too large, the country itself becomes unstable, which, nowadays, makes the whole world unstable.

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This is only surprising if you think of the entire US economy as an abstract point, equating everyone’s experience to the national average. Apparently, you are innovating by representing the US with as many as TWO distinct points, much less as a (nearly)-continuous wealth distribution.

The extra supply of labor brought into the global economy lowered the cost of labor leading to greater returns to capital at the expense of labor. American capital benefits from this gain, while American labor is lowered toward the new global mean. Other forces have been at work, but certainly it seems intuitive that globalization would not be a force for greater *equality* within the US.

American workers used to benefit somewhat unfairly from being ‘close to’ American capital. That advantage has been eroding steadily for decades now. But our political culture equates all Americans to the children of Lake Wobegon: we are ALL going to be above the global average. Too bad that is mathematically impossible.

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