A Light Dawns on Economists

Academic economists, a tribe as devout and cloistered as the Trappists, may finally be accepting a truth divined years ago by Midwestern workers -- that globalization and the free-market theology from which it springs can do more harm than good.

This blog has harped on this heresy, mostly because its author spends time in old factory towns talking with workers whose jobs just decamped to China, who dutifully punched a time clock for twenty years, who worked hard and loyally and now wonder what they did wrong. My book also reported this, and a recent blog discussed the thinking of a Nobel Prize-winning economist, Michael Spence, who says it's trade and globalization -- not other factors, like automation -- that cause so much of the job loss and declining wages among American workers.

Spence seems to have lit a spark among mainstream economists. A recent online article in the New York Times reported that "many economists see globalization as a major cause of the income slowdown in this country." This article links to several academic reports, all worth reading for those who want to dive into the literature on the subject. But the bottom line is the same.

Globalization has its pluses, such as cheaper goods made abroad, not to mention rising living standards in formerly Third World countries. But it also kills jobs in the U.S., cuts incomes, impoverishes communities, undermines economies. In most of the United States, and certainly in the Midwest, the costs have outweighed the benefits. The more exposed a region is to globalization and foreign trade, the harder this impact.

As I said, the people who live on the front lines of globalization figured this out a long time ago. So why is this shift in academic thinking so delayed -- and so important?

It's important because it shapes national economic policy. Past and present Obama Administration economists, such as Larry Summers, Timothy Geithner and Austan Goolsbee, are all orthodox economists with a true-believer's faith in free trade and unfettered markets. They make policy. They advise the president (himself a denizen of the mecca of orthodox economics, the University of Chicago). If American policy toward trade and globalization is going to change, the thinking of these gurus has to change first.

But why has it taken so long?

Economists like to present their discipline as a science, governed by immutable rules. It's not. Unlike a science, its insights change with the seasons. It's nice to know how economies work, so we can devise useful policies. But these policies depend on the context, must be adapted to different needs, have different outcomes at different times: sometimes they work, and sometimes they don't. Scientific laws work all the time, under every circumstance: they can be replicated and, if true, are immune to disproof. Economic "laws," like the insights of sociologists or political scientists, are so subject to other influences that any honest economist knows that his recommendations are no more than informed suggestions, best offered modestly.

Unfortunately, modesty among economists is a rare economy. Over the years, the free-market and free-trade mantra has become as much theology as science. Economists have taken often useful suggestions and turned them into immutable laws. The result is a deliberate blindness when the real world doesn't match the picture emerging from their equations and theories.

Most economic theories are built around a kernel of observable fact. The trouble is that economists take this fact and expand it into a theory that stretches far beyond the fact. Even Karl Marx had some good ideas, but the Soviets took these ideas to their illogical extreme, building a structure of Marxism-Leninism that left no room for the market.

Ditto for the free-market economists. We have learned over the years that markets work, that trade stimulates growth, that innovation properly applied creates jobs. We have also learned that the market is a powerful force, capable of enriching many and also impoverishing many. We have also learned that government has a role, both to promote the smooth working of the market and to protect its victims.

In other words, there's a balance here. Economics exists to serve society. But too many economists, especially those of the Chicago School, have emulated the Marxist-Leninists by taking their good ideas to the extreme. If markets are beneficial, then they are always right, and any interference by government is not only bad policy but offends nature. If trade enriches societies, then free trade must rule, whatever the impact on people -- like so many American workers -- swamped in its wake. 

In practical terms, this means that globalization -- the expansion of the free market to encompass the globe -- must be allowed to run free. Anything that interferes with it is "protectionism," which is the ultimate cussword in the economic lexicon. If some people are being left behind in this process, it must be their own fault: they lack the skills or education to compete in this "knowledge economy:" if they were to go get the skills and education, all would be well. In this reading, it's not the market or free trade that is at fault: the market theology does not admit this possibility. Maybe it's automation or technology, which may be hard on those who lack the skills but which raise the economy's productivity, which in turn creates a better life for everyone, at least in the long run.

Anyone who's been paying attention the past twenty years know this just isn't happening. For the first time in history, increased industrial productivity through technical innovation is producing fewer jobs, not more. This raised technical level is creating demand for educated and skilled workers who can demand a good salary. But for the most part, the relatively few jobs created by this increased productivity -- doing more with less -- are lower-skilled and lower-paid (see New York Times article Majority of New Jobs Pay Low Wages, Study Finds).

What the orthodox economists miss is the fact that this automation is linked to globalization just as tightly as is trade. This is not just a matter of domestic industries automating to compete with American rivals. Instead, many American companies automate specifically to compete with low-cost competitors abroad. The only thing cheaper than a Chinese worker often is a machine, and it's these machines -- not workers -- that companies are hiring.

Blaming "unskilled" workers for their own joblessness, as many free-market economists do, is not only heartless, but wrong. It's not that these displaced workers are dumb or unskilled. They are every bit as smart and skilled as the Mexicans and Chinese who now hold their jobs. These jobs went away not because they could be done better somewhere else, only because they could be done cheaper.

(The theological devotion to markets and free trade has less to do with economists' political leanings than you'd think. Liberal economists are more comfortable with Keynesian-style government intervention than more conservative economists. But even liberal economists like Paul Krugman, indoctrinated with the free-trade gospel as undergrads, have trouble rejecting it now. As noted above, many of Obama's economists are as orthodox as so many libertarians.)

No one's talking about raising the drawbridge and creating a Fortress America, sealed off from world markets. But Spence and others are suggesting that a nation like the U.S., with a relatively high-wage economy that both provides and depends on a high standard of living, may need help -- a little protectionism here, a few subsidies there, an industrial policy all around -- to cope with this new global economy.

To which those Midwestern workers can only say, "It's about time." 

 

Comments

[Linnaeus]

Great post. One could even argue that no functioning capitalist economy has ever practiced orthodox free trade or operated along the lines of an orthodox free market.

[Chris Barnett]

Richard, I'd take some issue with your description of economics, as I don't think the discipline exists to serve society any more than any other discipline. I think it exists to describe how things happen in a systematic way; it is not necessarily "economics" to set national policy based on ground truths. It's politics.
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The "science" part is describing with some precision how things work, based upon observation and measurement. The field is reasonably good at that. Someone trained in the discipline is unsurprised that corporations seek to lower their costs of production by relocating labor-intensive production to places where it's cheaper...as long as other costs (quality, inventory, risk to capital) don't rise to eat up the savings.
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"Globalization" might properly be described as including the set of changes you describe: trade liberalization, increased flow of information, rising demand in developing countries, reasonably safe and stable capital and debt markets, and an overall lower risk of doing business internationally. All of those factors reduce the constraints on moving production to other countries. These are objective, measurable, know-able things.
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This does not mean that "orthodox economists" are ignorant of the human costs of change. However, I think the best way to ameliorate the human costs is by using "national priority" block-grant funding, locally applied.
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Let's stipulate that broad national-policy federal- program solutions often have had "massive unintended consequences". (See Medicaid, Medicare, Social Security, AFDC, Fannie Mae/Freddie Mac.) My preference boils down to "socialize the problem but localize the solution".
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What is wrong (in a practical or moral sense) with a free(r) national/world market and a close-to-the-people social safety net coexisting? Presumably, a growing and still-rich economy can afford to take care of the left-behind and left-out and help them gain new productive skills.