“Globalization” claims that it can deliver optimal resource allocation by removing the barriers to “free trade”. Furthermore it promises sustainable growth, increased employment and a higher standard of living.
But what is the reality? In my opinion, “globalization” is not only based on a faulty theoretical foundation, it has not, cannot and will not deliver sustainable growth, increased employment, or higher standards of living — except for shareholders of the Transnational Corporations (TNCs). On the contrary, I expect it will be a great disaster for humanity, both North and South. It will be stopped eventually, when the truth of its nature is revealed for all to see, but not before it has done tremendous damage.
Let us begin with the theoretical foundations. Economist Herman Daly points out the following:
“In neoclassical economics, the efficient allocation of resources depends on the counting and internalization of all costs. Costs are internalized if they are directly paid by those entities responsible for them – as when, for example, a manufacturer pays for the disposal of its factory wastes and raises its prices to cover that expense.” 1
But costs in the modern world are not internalized, because it has never been possible to reach international agreement on how to do it without losing your competitive position to another country that won’t play along. The result is that we get a distorted use of resources that rewards those who exploit the situation by producing the wrong things at the wrong prices and are able to pass on the real costs of running their businesses to the general public .
The “free trade system” could more tellingly be called the “free ride system”, because TNC’s do not have to include in their product costs all the indirect costs they cause society, such as pollution of the land, sea and air, ozone holes, disappearing topsoil, exploding health costs, allergies, global warming, destruction of species, pesticides in food, antibiotic-resistant bacteria, crime, unemployment, escalating social costs, etc., etc. If they did, it would hardly be justified, as we often see today, to transport goods half way across the world and sell them below the cost of locally produced goods. Many of the most common, and most damaging products on the market, would never be manufactured if they were priced at their real costs to society as a whole. The road to success in global business today is to find a way to pass on as many of your costs as possible to the public, preferably to another country’s public. The most profitable companies at this time are those that are most successful at getting someone else to pay the real costs of their doing business.
Another way of putting this is as follows. A fundamental axiom in Operations Research, which is valid for any optimization problem, is that proper resource allocation requires that benefits and costs must accrue to the same decision maker. Otherwise, you get distortion, i.e. the wrong solution, from a total point of view. And this kind of distortion is precisely what happens with the TNC’s because of the failure to internalize costs. A corporation has many so-called “stakeholders” – i.e. people who have an intrinsic interest in the decisions made by the corporation. These include the shareholders, the employees, the customers, the suppliers, the government’s Tax Department, and not least, the local community. However, “globalization” maximizes only the profits to the shareholders, while all the other stakeholders are left bearing the costs, for example, cleaning up the environment and dealing with unemployment when the corporation decides to move on to a more attractive, i.e. cheaper, location.
So while globalization maximizes the benefits to shareholders, and penalizes the other stakeholders, it is by no means clear whether there is any positive benefit at all in “free ride markets” to society as a whole. Indeed, there are indications that the marginal costs to the environment alone now exceed any benefits to the shareholders. “Globalization” should rightly be called Shareholder Protectionism, since that is really what it is all about. However, the clever use of “newspeak” by the TNC’s, reminiscent of George Orwell’s novel, “1984”, sends the public a much different, positive sounding message. Unfortunately, both the public, and our politicians, have, under the powerful influence of the business community, taken globalization on board as their agenda for our common future.