Earth for Sale - Only $32 Trillion
Winner Take All
Globalization, as defined by rich people like us, is a very nice thing...
- Jimmy Carter
On the Edge: Living with Global Capitalism
edited by Will Hutton and Anthony Giddens
Every day a whopping $1.5 trillion shuttles back and forth through the stock exchanges of the world. That's quite a slice of the $32 trillion global economy. Moreover, there is really only one big stock exchange, as Wall Street, the City of London and their counterparts in Frankfurt, Zurich, Tokyo and so on trade around the world's clock, intensifying the mobility of electronic capital. It funds economic activities with all manner of unknown repercussions. Which of my investments underpins over-logging in Cameroon, or sweatshop factories in Bangkok, or unsustainable farming in Mexico? Whatever my reservations about the process, I am globalising as much as the rest of us. I am closely enough involved with billions of fellow members to shake financial hands with them or tread on their toes.
The same applies to the environment. If the Chinese, sitting on 1/3 of the planet's coal, burned their stocks to fuel development, that could pump as much carbon dioxide into everyone's atmosphere as would be avoided if Britain and Germany were to get out of fossil fuels altogether. The planetary ecosystem is a seamless continuum, and the winds carry no passports.
These are some of the thoughts prompted by On the Edge, published this week, with its assessment of global and hence unitary capitalism. Of the 100 biggest economic entities in the world, only 1/2 are nation states, the rest being corporations. The world is no longer governed by governments alone and our daily lives - cultural perceptions, social mores, value systems, scientific endeavours - are increasingly determined by business leaders. Where are they leading us? If we want them to change direction, how can we make the message loud enough to be heard?
These issues are explored by 13 contributors, including economist Paul Volcker, investor George Soros, physicist and philosopher Vandana Shiva and journalist Polly Toynbee. They applaud the opportunities afforded by global-scale corporations. But they also alert us to the problems of profit-driven business with its lack of social responsibility and its frequent indifference to externality costs, especially environmental costs, and other risks such as concentrated control of the media. They highlight the socio-economic apartheid of a winner-take-all system where many people will end up in exclusion.
They adverse environmental impacts have been widely documented, even though they attract little attention from international agencies. Notable examples include the inequitable use of tropical genetic resources for agriculture, and carbon dioxide emissions from the fossil fuel industry. According to the American analyst Paul Hawken, US business cause so many spill-over costs - not just cancer from tobacco, pollution from cars, and waste from manufacturing, but also the costs of community disruption - that they would cost society $3 trillion per year, or 5 times their profits. Accountability, anyone?
Fortunately, a host of constraints on business practices are emerging, imposed as much by non-governmental organisations (NGOs) as by governments. In 1975 there were only 1,400 NGOs; today there are well over 30,000. These citizen activists, often globalised themselves, can deploy much muscle in the marketplace: witness the 1995 campaign against Shell's plans to sink the Brent Spar oil platform. Similarly, NGOs have confronted RTZ and De Beers for supporting governments that ignore human rights.
Global capitalism has major implications for science, too. For one thing, there is a parallel globalisation of the scientific community. Courtesy of the Internet and email, scientists can engage in virtual conferencing with colleagues around the world. There has been a quantum advance in academic networking which transcends national boundaries and interests at the touch of a keyboard. This enables scientists to keep pace with the headlong expansion of global capitalism, and to induce scientific constraints on business activities. There will surely be many more GMO-style sagas.
For a second thing, science is increasingly pursued through the largesse of big business, notably in the form of pharmaceutical corporations with mega research budgets. A number of chemical companies control crop seeds and thus our food chains through their biotechnologies.
Scientists are also involved through Britain's third-largest pension fund, the Universities Superannuation Scheme, which, with assets of £20 billion (US30 billion), is to challenge businesses over their environmental performance or unduly low wages.
All in all, this is an illuminating exploration of the fast-changing landscapes of capitalism, with its multiple links to everyone's lifestyles. Primarily directed at the corporate community, it has much to say about what scientists should bear in mind as they interact, whether wittingly or not, with the wider world. The book is not only an educational read, it is entertaining as well, thanks to its vigourous debates. Read it and ponder some of the implications of pursuing science at Earth, Incorporated.
Norman Myers is at Upper Meadow, Old Road, Headington, Oxford OX3 8SZ, UK
Source: Nature sometime in 2000 though I no longer know which week
A Bit about Comparative Advantage
Answer the following question...
Mexico and Canada each produce both oil and apples using only labour. A barrel of oil can be produced with 4 hours of labour in Mexico and 6 hours of labour in Canada. A bushel of apples can be produced with 8 hours of labour in Mexico and 12 hours of labour in Canada. (Linear combinations are possible). Given this information, we can determine Canada has
If you calculate the ratio between apples and oil for Mexico, it is 8/4=2, for Canada it is 12/8=3/2. So it is lower for Canada. That means Canada has a comparative advantage in apples, Mexico in oil. Answer D
The following story is meant to explain some of the insights within the theory of comparative advantage by placing the model into a more familiar setting.
A Gardening Story
Suppose it is early spring and it is time to prepare the family backyard garden for the first planting of the year. The father in the household sets aside one Sunday afternoon to do the job but hopes to complete the job as quickly as possible. Preparation of the garden requires the following tasks. First, the soil must be turned over and broken up using the roto-tiller, then the soil must be raked and smoothed. Finally, seeds must be planted or sowed.
This year the father's 7-year-old son is anxious to help. The question at hand is whether the son should be allowed to help if one's only objective is to complete the task in the shortest amount of time possible. At first thought, the father is reluctant to accept help. Clearly each task would take the father less time to complete than the time it would take the son. In other words, the father can perform each task more efficiently than the 7-year-old son. The father estimates that it will take him 3 hours to prepare the garden if he works alone, as shown in the table on the left.
On second thought, the father decides to let his son help according to the following procedure. First the father begins the roto-tilling. Once he has completed half of the garden, the son begins raking the roto-tilled section while the father finishes roto-tilling the rest of the garden plot. After the father finishes roto-tilling he begins planting seeds in the section the son has already raked. Suppose the son rakes slower than the father plants, and that the father completes the sowing process just as the son finishes raking. Note this implies that raking takes the son almost 2 hours compared to one hour for the father. However, because the son's work is done simultaneously with the father's work, it does not add to the total time for the project. Under this plan the time needed to complete the tasks in shown in the table at the right.
Notice that the total time needed to prepare the garden has fallen from 3 hours to 2 hours. The garden is prepared in less time with the son's help than it could have been done independently by the father. In other words, it makes sense to employ the son in (garden) production even though the son is less efficient than the dad in every one of the 3 required tasks. Overall efficiency is enhanced when both resources (the father and son) are fully employed.
This arrangement also clearly benefits both the father and son. The father completes the task in less time and thus winds up with some additional leisure time which the father and son can enjoy together. The son also benefits because he has contributed his skills to a productive activity and will enjoy a sense of accomplishment. Thus both parties benefit from the arrangement.
However, it is important to allocate the tasks correctly between the father and the son. Suppose the father allowed his son to do the roto-tilling instead. In this case the time needed for each task might look like the table at left.
The time needed for roto-tilling has now jumped to 4 hours because we have included time spent travelling to and from the hospital and the time spent in the emergency room! Once the father and son return, the father must complete the remaining tasks on his own. Overall efficiency declines in this case compared to the father acting alone.
This highlights the importance of specialising in production of the task in which you have a comparative advantage. Even though the father can complete all three tasks quicker than his son, his relative advantage in roto-tilling greatly exceeds his advantage in raking and planting. One might say that the father is most-best at roto-tilling while he is least-best at raking and planting. On the other hand, the son is least-worse at raking and planting but most-worse at roto-tilling. Finally, because of the sequential nature of the tasks, the son can remain fully employed only if he works on the middle task, namely raking.
[I have a couple of comments about the Gardening Story. It is a rare 7-year-old who, never having raking before, will keep at it uncomplaining for a full 2 hours. More likely he will develop a blister which will necessitate a trip to the house. His thirst and toilet breaks must also be considered. And - the assumption seems to be made that the son is only half as fast as the father, but that the quality of his raking is equivalent. This, too, I doubt. He will miss a row, leave another half done, stop to chase a squirrel, et cetera. I realise this story is meant to illustrate a point but things like that creep into the real world as well. Training time eats into the comparative advantage on the front end and this should be planned for.]
Interpreting the Theory of Comparative Advantage
The garden story offers an intuitive explanation for the theory of comparative advantage and also provides a useful way of interpreting the model results. The usual way of stating the Ricardian model results is to say that countries will specialise in their comparative advantage good and trade them to the other country such that everyone in both countries benefit. Stated this way it is easy to imagine how it would not hold true in the complex real world.
A better way to state the results is as follows. The Ricardian model shows that if we want to maximise total output in the world then
In this way we might raise the well being of all individuals despite differences in relative productivities. In this description, we do not predict that a result will carry over to the complex real world. Instead we carry the logic of comparative advantage to the real world and ask how things would have to look to achieve a certain result (maximum output and benefits). In the end we should not say that the model of comparative advantage tells us anything about what will happen when two countries begin to trade, instead we should say that the theory tells us some things that can happen.
The Ricardian Model - Assumptions and Results
The modern version of the Ricardian model and its results are typically presented by constructing and analysing an economic model of an international economy. In its most simple form the model assumes two countries producing 2 goods using labour as the only factor of production. Goods are assumed homogeneous (identical) across firms and countries. Labour is homogeneous within a country but heterogeneous (non-identical) across countries. Goods can be transported costlessly between countries. Labour can be reallocated costlessly between industries within a country but cannot move between countries. Labour is always fully employed. Production technology differences across industries and across countries and are reflected in labour productivity parameters. The labour and goods markets are assumed to be perfectly competitive in both countries. Firms are assumed to maximise profit while consumers (workers) are assumed to maximise utility.
The primary issue in the analysis of this model is what happens when each country moves from autarky (no trade) to free trade with the other country. In other words what are the effects of trade? The main things we care about are trade's effects on the prices of the goods in each country, the production levels of the goods, employment levels in each industry, the pattern of trade (who exports and who imports what), consumption levels in each country, wages and incomes, and the welfare effects both nationally and individually.
Using the model one can show that, in autarky, each country will produce some of each good. Because of the technology differences, relative prices of the two goods will differ between countries. The price of each country's comparative advantage good will be lower than the price of the same good in the other country. If one country has an absolute advantage in the production of both goods (as assumed by Ricardo) then real wages of workers (that is, the purchasing power of wages) in that country will be higher in both industries compared to wages in the other country. In other words, workers in the technologically advanced country would enjoy a higher standard of living than in the technologically inferior country. The reason for this is that wages are based on productivity, thus in the country that is more productive, workers get higher wages.
The next step in the analysis is to assume that trade between countries is suddenly liberalised and made free. The initial differences in relative prices of the goods between countries in autarky will stimulate trade between the countries. Since the differences in prices arise directly out of differences in technology between countries, it is the differences in technology that cause trade in the model. Profit-seeking firms in each country's comparative advantage industry would recognise that the price of their good is higher in the other country. Since transportation costs are zero, more profit can be made through export than with sales domestically. Thus each country would export the good in which they have a comparative advantage. Trade flows would increase until the price of each good is equal across countries. In the end, the price of each country's export good (its comparative advantage good) will rise and the price of its import good (its comparative disadvantage good) will fall.
The higher price received for each country's comparative advantage good would lead each country to specialise in that good. To accomplish this, labour would have to move from the comparative disadvantaged industry into the comparative advantage industry. This implies that one industry goes out of business in each country. However, because the model assumes full employment and costless mobility of labour, all of these workers are immediately gainfully employed in the other industry.
One striking result here is that even when one country is technologically superior to the other in both industries, one of these industries would go out of business when opening to free trade. Thus, technological superiority is not enough to guarantee continued production of a good in free trade. A country must have a comparative advantage in production of a good, rather than an absolute advantage, to guarantee continued production in free trade. From the perspective of a less developed country, the developed countries' superior technology need not imply that LDC industries cannot compete in international markets.
Another striking result is that the technologically superior country's comparative advantage industry survives while the same industry disappears in the other country, even though the workers in the other country's industry has lower wages. In other words, low wages in another country in a particular industry is not sufficient information to know which country's industry would perish under free trade. From the perspective of a developed country, freer trade may not result in a domestic industry's decline just because the foreign firms pay their workers lower wages.
The movement to free trade generates an improvement in welfare in both countries both individually and nationally. Specialisation and trade will increase the set of consumption possibilities, compared with autarky, and will make possible an increase in consumption of both goods, nationally. These aggregate gains are often described as improvements in production and consumption efficiency. Free trade raises aggregate world production efficiency because more of both goods are likely to be produced with the same number of workers. Free trade also improves aggregate consumption efficiency, which implies that consumers have a more pleasing set of choices and prices available to them.
Real wages (and incomes) of individual workers are also shown to rise in both countries. Thus, every worker can consume more of both goods in free trade compared with autarky. In short, everybody benefits from free trade in both countries. In the Ricardian model trade is truly a win-win situation.
Source: internationalecon.com Suranovic, Steven, International Trade Theory and Policy: The Ricardian Model of Comparative Advantage, The International Economics Study Center, © 1997-2005, internationalecon.com/v1.0/ch40/ch40.html.
A couple of assumptions I believe could cause problems later - that goods are identical across firms and countries and that labour can be reallocated costlessly between industries within a country. Country A may cease making washing machine because Country B has a comparative advantage in their manufacture. Country A shuts down her plant and imports washers from Country B. But Country B, with a history of political instability, becomes embroiled in a civil war. Output and quality both drop. Country A no longer has a plant - nor expertise, nor sources of raw materials. Country A had to retrain all its former washing machine plant employees. This was more costly than anticipated because they had an average age of 42+. Now, all computer literate; none are willing to return to manufacturing unless they're paid more.
Considering the problems with the Gardening Story as well, I would conclude that the Ricardian theory of comparative advantage identifies the most efficient allocation of resources at a given point in time. But the future isn't always what we assume. True comparative advantage implementation sees to me to prune future flexibility a bit...
Decoding a Euro-Diplomat Takes More than a Dictionary
If there is one thing interpreters working for the European Union dread, it is attempts at humour. It is not just that jokes are hard to translate; because of the time needed for interpretation, they can prompt laughter at the wrong moment. A speaker once began with an anecdote, and then mourned a dead colleague - to be met by a gale of giggles, as listeners got his joke.
The time-lags have grown worse with the expansion of the EU, to make a total of 25 countries. Finding interpreters who can translate directly from Estonian to Portuguese is well-nigh impossible. So now speeches are translated in relays, first into English and then into a third language. If only everybody would agree to speak one or two official tongues, it would be easier. Or would it? In fact, misunderstandings can abound even when all parties speak fluent English or French. Cultural differences mean that a literal understanding of what someone says is often a world away from real understanding. For example, how many non-Brits could decode the irony (and literary allusion) which lies behind the expression "up to a point", which is used to mean "no, not in the slightest"?
The problem is now so widely recognised that informal guides to what the French or the English really mean, when they are speaking their mother tongues, have been drawn up by other nationalities. Two modest examples recently fell into your correspondent's hands. Both are genuine.
One was written for the Dutch, trying to do business with the British. Another was written by British diplomats, as a guide to the language used by their French counterparts. The fact that the Dutch - so eerily fluent in English - should need a guide to Britspeak is particularly striking. But the problem - to judge by the guide, which was spotted on an office wall in the European Court of Justice - is that Brits make their points in an indirect manner that the plain-speaking Nederlanders find baffling. Hence the guide's warning that when a Briton says "I hear what you say", the foreign listener may understand: "He accepts my point of view." In fact, the British speaker means: "I disagree and I do not want to discuss it any further." Similarly the phrase "with the greatest respect" when used by an Englishman is recognisable to a compatriot as an icy put-down, correctly translated by the guide as meaning "I think you are wrong, or a fool."
The guide also points out helpfully that when a Briton says "by the way/incidentally", he is usually understood by foreigners as meaning "this is not very important", whereas in fact he means, "The primary purpose of our discussion is..." On the other hand, the phrase "I'll bear it in mind" means "I'll do nothing about it"; while "Correct me if I'm wrong" means "I'm right, please don't contradict me."
Fog in the Channel
The British guide to what the French really mean has a narrower aim: it was written specifically for officials attending the meetings of the European Union's Council of Ministers, where diplomats haggle over legal texts. The boredom and frustration which this sort of exercise can induce comes through very clearly in the authors' sarcastic observations.
No less obvious is the fact that ideas about plain speaking do not travel easily across the Channel. As the Brits see things, a Frenchman who says "je serai clair" (which literally means "I will be clear") should be understood as meaning: "I will be rude". Also evident is the Anglo-Saxons' contempt for spectacular gestures à la française. The phrase "Il faut la visibilité Européenne" ("We need European visibility") is rendered as: "The EU must indulge in some pointless, annoying and, with luck, damaging international grand-standing." The British also suggest that the sentence "Il faut trouver une solution pragmatique" (literal translation: "We must find a pragmatic solution") should be understood as meaning: "Warning: I am about to propose a highly complex, theoretical, legalistic and unworkable way forward."
The British, the French and the Dutch are old sparring partners who know each other's little ways. So the capacity for misunderstanding is amplified when nationalities that are less familiar with each other come into contact. Often the problems are less to do with the meaning of words than with their unexpected impact on an audience. Take the European summit last December, when it fell to Silvio Berlusconi, the Italian prime minister, to try to wrap up sensitive negotiations over a proposed constitution for the European Union.
When EU leaders filed into lunch, they were braced for tough negotiation; so they were startled when Mr Berlusconi suggested that they discuss "football and women" - and that Gerhard Schröder, the German chancellor, should lead the discussion, as he has been married four times. Some European diplomats concluded that Mr Berlusconi must have been deliberately baiting Mr Schröder. But when the Italian leader was questioned about his chairmanship at a press conference, he grew hot under the collar, pointing out that he would hardly have become a billionaire unless he were fully capable of chairing a meeting. And indeed his defenders say that in Italian business circles it can be perfectly normal to set a jocular and relaxed tone before a difficult meeting, by discussing last night's football, or even teasing your colleagues about their love lives.
These sorts of misunderstandings are unlikely to be erased even if all Europe's political leaders and bureaucrats were both willing and able to speak English. But ever-inventive Brussels is coming up with a solution of sorts through the emergence of "Euro-speak" - a form of dead, bureaucratic English. The joy of phrases like "qualified majority voting", "the community method" and "the commission's sole right of initiative" is that they are completely meaningless to all ordinary Europeans - whether in translation or in the original. But, crucially, they are crystal-clear to insiders.
Source: economist.com From The Economist print edition 2 September 2004 © The Economist Newspaper and The Economist Group all rights reserved
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