The Adam Smith Address: What Difference Does Globalization Make

In the discussion about the impact of world trade and capital flows on the economy, much misinformation has been offered from people unfamiliar with both economic analysis and economic data that are readily available. Globalization makes very little difference in the determinants of overall national income, and redistribution has not been from labor to capital but rather from less skilled labor to more skilled. International trade has played a minor role in this redistribution. The focus in the debate should be on the facts- not the pronouncements of so-called experts.

I am delighted and honored to be here, and deeply grateful to the National Association of Business Economists for presenting me with the Adam Smith award. This means more to me than you may think. I have been unusually noisy for a serious academic over the past few years, and some of what I have had to say has not been particularly popular. In fact, a story about me in the British newspaper The Guardianbore the headline, "Lunch with the irritating professor." It is a great source of comfort to me to know that the members of the NABE, while they may not always agree with everything I say, understand that my polemics have had a serious purpose - that I am not being irritating for its own sake, nor for the sake of the notoriety it brings, but rather because I am trying to rescue economic discourse from the rather sad state into which it has lately fallen.

WORLD TRADE, CAPITAL FLOWS AND THE ECONOMY

Today I want to talk about a topic that has been central both to my polemics and to some of my research over the past several years: the impact of growing world trade and capital flows - of "globalization" -on both the real economy and the way we look at that economy. This is hardly a new topic; indeed, we might argue that concerns over globalization are where economics as we know it began. As an amateur intellectual historian, I claim that modern economics actually dates from a few years before Adam Smith's Wealth Of Nations; the key breakthrough was not by Adam Smith but by his good friend David Hume, whose Of the balance of trade - which argued that trade imbalances are self-correcting - had many of the key features of good economic analysis. In particular, Hume's work even today retains one feature I have learned is often a good sign that you are on the right track: people who regard themselves as sophisticated about economics, but lack the patience or humility to actually learn anything about the subject, continue to find Hume's argument absolutely infuriating. Any 200-year-old idea that can still reduce self-important people to spluttering fury must have some merit!

But while international trade is hardly a new idea in economics, over the past fifteen years or so concerns about globalization have captured the imagination of the public - or perhaps I should say have captured the imagination of policy intellectuals, the small but influential minority that largely defines the conventional wisdom of the moment.

I'd like to illustrate the flavor of much recent debate about the subject by quoting a recent, typical sample of writing about globalization. This particular quote is from Michael Lind. As many of you may know, he is a young writer who has achieved considerable prominence in the past year, with a well-reviewed recent book about America's social and economic future and a new job as senior editor at The New Republic. Here is what he had to say in Harper's, last June:

"Many advocates of free trade claim that higher productivity growth in the United States will offset pressure on wages caused by the global sweatshop economy, but the appealing theory falls victim to an unpleasant fact. Productivity has been going up, without resulting wage gains for American workers. Between 1977 and 1992, the average productivity of American workers increased by more than 30 percent, while the average real wage fell by 13 percent. The logic is inescapable. No matter how much productivity increases, wages will fall if there is an abundance of workers competing for a scarcity of jobs - and abundance of the sort created by the globalization of the labor pool for U.S.-based corporations."

The writing here is unusually vigorous, but the ideas should sound familiar. What we have here is a picture of a world in which the mobility of goods and capital means that the old rules no longer apply, in which high productivity no longer means high wages, because there is always somebody elsewhere willing to do the same job for far less money. I chose Lind's version because of the colorful language and for some other reasons that will become clear in a moment, but I could have found more or less the same view in any of dozens of articles, by Lester Thurow, Robert Reich, Edward Luttwak, Sir James Goldsmith, etc.

What is nice about Michael Lind's version is that it is an unusually clear illustration of some typical features of the current concern about globalization.

CORRECTING THE ERRORS

The first thing that is obvious from this quotation, if you are at all familiar with U.S. economic data, is that Mr. Lind doesn't know much about economics. In particular, the passage I just quoted turns out to be a classic example of what happens when someone who doesn't understand what economic statistics mean or how to use them tries to sound like an economic expert.

Let me briefly describe the howlers in his statement. That 30 percent increase in productivity took place only in the manufacturing sector; anyone who has even a bit of familiarity with recent economic trends knows that vigorous manufacturing productivity growth has been offset by near-stagnation elsewhere. In fact, over Lind's period overall business sector productivity rose only 13 percent. The 15 percent decline in wages is similarly misleading, for at least two reasons: it omits growing benefits, and it applies only to blue-collar workers. A better indicator is real hourly compensation, which actually rose 2 percent. And it turns out that even the gap between 13 percent productivity increase and 2 percent compensation growth does not mean that labor's share in national income fell over the period; in fact, it rose slightly. (The discrepancy between productivity and compensation growth turns out to be an index number issue. Mainly, it is because the implicit deflator for business sector output gives a big weight to computers, which play little role in the CPI, while the CPI gives a big weight to housing, which is not part of business sector output.)

In other words, the massive redistribution of income away from labor and toward capital that is the core of Mr. Lind's argument is a figment of his imagination - it simply didn't happen.