What impact does globalization have on democracy, especially as economic issues pose serious challenges for democracies? Many consider "globalization" to be a "buzzword," a term used often in debates on modern day politics and economics, but whose meaning is obscured through overuse. Globalization most directly refers to the "globalization of trade and finance," and the increase of "migration flows," meaning the removal of boundaries and restrictions to foreign imports of goods, services and foreign investment, as well as an increase in immigration (legal and illegal) as trade and investment are concentrated in certain regions of the world. Migrant flows can be international, for example, in the case of the US and Mexico, but also within nations like India or China, as people migrate to cities from the countryside looking for work.
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| US-Mexico border crossing at San Ysidro in San Diego, California |
The current era of globalization begins roughly around the end of World War II in 1945, but since the late 1970s has intensified, reflected in the increased volume of trade, financial transactions, and immigration, but also changes in institutions, ideologies, as well as technological innovations. Global flows of goods, capital, and people are supported by institutions (established laws, customs, or norms) at all levels: international institutions like the United Nations (UN), International Monetary Fund (IMF), World Trade Organization (WTO), G20, regional institutions in a certain geographic area of the world, like the European Union (EU), North American Free Trade Agreement (NAFTA), or the Association of Southeast Asian States (ASEAN), but also domestic institutions like the spending and tax policies of national and local governments, financial, public health, and environmental regulations, political parties, even labor unions and universities.
International trade has been increasing steadily since 1945. Steady growth due, in large part, to the US spear-heading efforts to lower tariffs on imports beginning in the 1930s, with the Reciprocal Trade Agreements Act (RTAA), and the General Agreement on Tariffs and Trade (GATT), an international treaty passed in 1944. Tariffs have decreased, even as other "non-tariff barriers" remain for trade. As a result, trade has increased even more than world GDP (Gross Domestic Product) as the chart below shows:
Trade is also a significant share of World GDP. Trade in services has also grown, although most trade is still in goods.
Increased trade also increases conflicts between states. For example, the US has run a large trade deficit since the late 1970s, meaning it imports more than it exports, leading to several conflicts with states it runs a large deficit with like Japan and China. The deficit with China is also a result of "outsourcing" high-paying manufacturing jobs in developed economies to low-wage developing countries. This has increased the profits of US corporations, who pay less "labor costs," but lowered the wages of US workers, while shrinking the manufacturing sector of the economy (measured as a share of GDP).
Why does outsourcing occur, and why does it seem like it is a force that cannot be stopped? There are conflicting interpretations over this. According to economists Paul Samuelson and Wolfgang Stopler, trade benefits owners of "abundant factors of production," either, land, labor or capital, and hurts owners when they are scarce. So, in theory, trade benefits workers in labor abundant countries like China and India, who export goods requiring a lot of physical labor, or labor-intensive, and see their incomes go up, but hurts workers where labor is scarce, meaning they will be unemployed because the cost of labor is too high. On the other hand, trade also benefits owners of capital in capital abundant countries like the US, who will export capital-intensive goods (that require large investments) but hurts owners of capital in scarce countries, like underdeveloped countries whose finances are dominated by foreign investors. This is known as the theory of "comparative advantage," developed by David Ricardo, in the early 19th century, who argued if all states trade according to their comparative advantages, they would all benefit. However, it has always been difficult to determine what a country's comparative advantage was. Swedish economists, Eli Heckscher and Bertil Olin, developed the Heckscher-Olin model, stating that comparative advantage in trade can be determined through the endowments of "factors of production," again, land, labor, and capital, though there are alternative theories as well, like the "specific factors model" we will discuss later in the the class. Comparative advantage helps explain both the phenomenon of outsourcing, and the preferences of workers and financial institutions regarding trade.
However, Karl Marx, the influential political economist and philosopher of the 19th century, objected to what he called "the holy trinity" (in reference to the Holy Trinity of Catholic theology) for obscuring the true source of value which is labor (this is known as the "labor theory of value"). As the Marxist journal Socialist Studies explains:
What of land? The theory that rent is the reward for the landlord contributing land is a self-evident fallacy because the land will obviously survive the burial of all private landowners. Land, in any case, has to be ploughed [sic] and harvested and raw materials have to be mined. This function is carried out by workers expending socially necessary labour [sic] time.
Defenders of this specious theory ignore the fact that the workers's labour power is not only a commodity but part of capital what Marx called variable capital. The peculiarity of variable capital is that it produces a surplus value over and above the value necessary to maintain and reproduce the working class and their dependents.
What is called profit, interest, and rent do not explain the origin of the surplus but only how it is distributed. There is no comparability between capital, land and labour. The first is a relationship within a historically defined social system based upon the private ownership of the means of production and distribution; the second is inert; the third is active in that it produces social wealth. Land, raw resources and machinery do not create social wealth. What does create social wealth is the application of social labour to land, raw resources and machinery (Socialist Studies, "Capitalist Theories of Profit").According to this view, the "holy trinity" theory creates a fictitious equality between land, labor, and capital, and treats each as if they were "persons" that contribute to the creation of wealth, rather than labor (or labour in the UK) which is the true source of value. Marx wrote in the third volume of Capital that the Trinitarian theory of profits:
completes the mystification of the capitalist mode of production, the bewitched, distorted and up-side-down world haunted by Monsieur le Capital and Madam la Terre, who are at the same time social characters and mere things.This shows there are immense differences in how you approach the study of globalization, or understand the causes of complex events like outsourcing, depending on the theoretical point of view one adopts. For Marxists, outsourcing is a result of the capitalists' need to extract "surplus value" by having workers produce more than the value of their wages. The longer they are forced to work, and the less they are paid, the more profits capitalists can squeeze out of the workforce. Outsourcing accomplishes both since workers are forced to work very hard (the "sweat shop" being typical of this) and paid very low wages, whether it be in China, Vietnam, Mexico, or elsewhere.
Outsourcing has increased at the same time as "global supply chains" have arisen as a new mode of production, displacing the earlier, centralized mode, often known as Fordism, after Henry Ford who pioneered the idea of assembly line production. In the so-called post-Fordist era of production, manufactured goods, like consumer electronics, are produced piece by piece (as components) in several different countries, then assembled in one location (e.g. China), before being shipped overseas to US or European stores. According to John Ravenhill, 80 per cent of the Dominican Republic's exports are in processing and assembling components together. The economist Robert Reich gives a breakdown of what he calls the "anatomy of an iPhone," showing that only a small portion of the phone is actually made in China, despite being assembled in China
At the same time as manufacturing is outsourced, the profits of US agricultural businesses (or agribusiness) and construction are dependent on low-wage labor provided by immigrants, especially illegal immigrants from Mexico. Again, in economic terms, labor-scarce countries like the US will "import" labor (immigration), while labor abundant countries like India and China will tend to "push" out laborers of different kind, who will then emigrate where labor is relatively scarce or in demand. There is, as Michael Hiscox points out, a two-tiered structure between "skilled" and "unskilled" labor as well. Domestic workers tend to be opposed to laws that permit immigration in competing skill level, and cites the AFL-CIO's opposition to lax treatment of illegal immigrants as evidence, or the American Medical Association (AMA) being opposed to more visas for foreign doctors. The US economy, traditionally land abundant, but labor scarce, has always been dependent on immigrant labor, even during the time of chattel slavery, with "indentured servants," sometimes falsely referred to as "white slaves," but especially during the period between 1870-1920, when the US grew to become the largest industrialized economy in the world, and now capital abundant. After this, due to restrictive immigration laws and the infamous "national origins" quota system, the influx of immigrants slowed, and made up less of the overall population, until the passage of the 1965 Immigration Act which removed the quota system (but not all restrictions), after which immigration has continued to grow:
Trump and supporters, blame outsourcing and illegal immigrants for low wages, but this is as much the result of low income taxes on the wealthy (who pay themselves bigger salaries), deregulation, and other policies of the state to deliberately keep wages low, in accordance with neoliberal theory. It also overlooks the positive contributions that immigrants make to the economy. It also conceals the fact it is becoming harder for US corporations to be profitable, that they cannot be profitable, for the most part, if they actually paid employees higher wages. This is also due to the high healthcare costs American employers have to pay, compared to other countries with a single-payer healthcare system. However, single-payer healthcare, and things like a "living wage," still presume the existence of institutions like wage labor and money.
It is important to note that most FDI occurs between developed countries. The result has been to drastically increase the profits of finance, raise the profile of "transnational corporations" (TNCs), even while older industrial economies have declined, and less developed countries have been recipients of investments but also face the costs of financial crises when investment is suddenly withdrawn. Trade between TNCs makes up as much as two thirds of all global trade. Much has been made of "emerging markets" in developing economies as sources of FDI, but as this chart shows, most FDI is still limited from one developed economy to another, leading to some to argue that "triadization" (the triad of US, EU, and Japan) rather than globalization is a more accurate term. The globalization of finance has increased the power of TNCs, even after the crash of 2008, the power of banks and TNCs have continued to grow, as governments in all countries are unwilling to risk any kind of serious confrontation with large owners of capital. Globalization of finance, as economists Ronald Rogowski and Jeffrey Frieden, point out, allows owners of capital to "exit" economies unfavorable to capital, and thus constrains the sovereignty of the state to regulate financial flows, or raise taxes. As a result, both deregulation of finance and lowering taxes on income, capital gains, and corporations has been the norm in most states since the 1980s. Those who say the nation-state is dead or irrelevant as a political entity, may be overstating the case however. Peter Katzenstein and Dani Rodrik, have written extensively on the role of the state in international trade, demonstrating openness to trade increases state spending, but spending makes industries competitive, while providing social insurance, thus allowing more openness to trade (less resistance to openness), in contrast to conventional neoliberal wisdom.
One of the major effects of globalized trade, finance and immigration, has been the increase in income and wealth inequality, as shown in the work of Thomas Piketty and Emmanuel Saez. Recently, former President Obama spoke of inequality at a speech given to honor Nelson Mandela in South Africa, to be fair Obama does not address the fact that inequality increased under his term as President, and was not able to do much to reverse that trend, as shown in this commentary on his speech by Leo Panitch and Paul Jay.
https://www.youtube.com/watch?v=0De24c0tyqs&t=1200s
The charts below show how inequality has increased, in terms of the share of income given to the top 10 percent income earners, clearly this share has increased dramatically since the 1980s, even exceeding the pre-Great Depression peak in the late 1920s. However, this is also a global trend as the other chart shows, as even states like Germany and France have seen this increase as well, although not as much as in the US or UK (Great Britain). Actually, this illustrates nicely how globalization and domestic politics interact, since there are clearly global trends that affect all states, but the domestic institutions also shape how states respond to these forces, and their ultimate outcome, and help explain why there are differences between states in these regards.
Growing inequality, among other factors, has created significant resistance and hostility towards globalization throughout the world. Economic growth in developed economies has been quite sluggish the last decade, since the crash of 2008, even as developing countries continue to grow.
As David Harvey points out, the era of neoliberalism, since the 1980s, has seen both slower global growth and growth for developed countries, than the first thirty years after World War II. Growth for emerging markets is higher under the neoliberal era, but most of the growth in gross domestic product (GDP) is through TNCs operating in these markets. Optimistic reports in the US on the "recovery" of the economy since the crash are based on low unemployment figures, claiming to have reached "full employment," however stagnation of wages continues, and undermines the conventional wisdom which states low unemployment will raise wages. Stagnant wages being another long term trend in the US and other developed economies for decades, even as economic productivity increases. Furthermore, as the Marxist economist, Richard Wolff, points out, the process by how the government determines unemployment is a joke. Basically, the Department of Labor will ask unemployed people if they are looking for work, if they answer that they are looking for work, then they are considered among the "unemployed," if they answer that they are not looking for work, then they are not simply counted anymore, and are not considered part of the workforce. So, the cruel joke behind the low unemployment numbers is that many people have simply dropped out of the workforce, thus lowering the number of unemployed but only in a negative way, not by actual positive growth. For those unemployed that have found jobs, in almost all cases, they are being paid less, have less benefits, many "employed" are actually part-time employees who are entitled to even less than full-time employees. This also helps explain why wages are stagnant even though the official unemployment rate is low, something which, in my opinion, cuts right to the heart of the lies and BS we are given about how the system works.Corporate profits have been high for decades, even more so under the Obama and Trump administrations, but as Michael Hudson points out, these profits are made from unproductive sectors of the economy like the FIRE (Finance, Insurance, Real Estate) sector, an example of "junk economics," or what he would call "rent-seeking," an attempt to obtain economic resources (rent) without the reciprocal benefits of creating wealth, merely redistributing existing wealth. Furthermore, the growth of profits and stagnation of wages is consistent with the Marxist labor theory of value, which states that profits are made through extracting a "surplus" from the workforce, however Marx defines a surplus as rents and interest payments as well as profits.
This is also reflected in the weak inflation reports, forcing central banks like the Federal Reserve to revise their inflation estimates repeatedly over the last decade, weak inflation being a result of weak consumer demand, in other words, people are not buying things. The prices of healthcare and education, tradable commodities in a capitalist system, have continued to increase, as governments have slashed their social expenditures repeatedly over the last several decades, and of course again, after 2008, as many state governments were affected by the crash as well. Since people have to spend more of their incomes on health, education, and housing as well, it also helps explain why consumer demand is so weak. The UN has already declared this the "weakest" economic recovery on record. As a result of stagnant wages and massive increases in spending on housing, healthcare, and education the level of consumer debt has risen drastically as people "max out" their credit cards, and take on other debts like student loans, in a desperate attempt to stay afloat in this economy.
However, globalization provides benefits since it creates, according to Robert Keohane and Joseph Nye, "complex interdependence," meaning the economies of the world are linked together through "multiple channels", along with TNCs, and transnational organizations that operate across national boundaries, so that what happens in one economy has consequences for the others. In theory, this leads to peace as countries relinquish warfare and turn to "soft power," as Nye calls it, to resolve disputes and conflicts, also working through international organizations, whether truly global organizations like the UN, or regional organizations, also in an environment where "supra-national" states like the EU exist. Liberals like Keohane and Nye argue that peace can be maintained even within a competitive system of nation-states all vying for resources, strategic "spheres of influence," and ultimately power, provided the multiple channels of interdependence remain strong.
However, with the rise of Trumpism as a global phenomenon (meaning the appeal economic populism with blatant racism and xenophobia), not just in the US, but the UK, France, Germany, Italy, Russia, Poland, Hungary, and more the future of interdependence is now faced with its greatest threat since the 1930s. Already, things like "trade wars," which many neoliberals did not think could happen, are happening. A trade war is when one country raises tariffs on imports from another country, followed by retaliation from that country who raises tariffs against the first country. Trump has already done this with China, placing tariffs on $34 billion worth of Chinese imports, who has retaliated against the US, prompting Trump to threaten to impose $500 billion in tariffs. A similar conflict is playing out with the US and Europe, who Trump considers to be a threat to the US. Trump is citing national security concerns as his justification for all tariffs, like steel and aluminum.
Besides trade wars and "economic nationalism," the other main aspect of this "authoritarian populism," is xenophobia (fear of people from different countries), and anti-immigrant rhetoric, scapegoating illegal immigrants for stealing jobs and lowering wages, as well as according to Trump, and his crazed followers, a host of other social problems, all of which, apparently, is the fault of illegal immigrants. As Richard Wolin, professor of history at the Graduate Center, argues, Trump's rhetoric and appeal is vastly similar to the tactics of earlier fascist agitators, as described in the Studies in Prejudice series from the 1930s, culminating in the landmark study, The Authoritarian Personality. Wolin says:
Both then and now, one of the professional agitator’s central goals has been to infantilize his followers. By doing so, he accomplishes a twofold end: He turns them into pliable material for his own demagogic aims and simultaneously induces them to act against their real material interests. To achieve this, the demagogue meretriciously seizes on pressing and legitimate social problems — unemployment, social inequality, the aloofness and unconcern of professional politicians — to mystify their real source and to exaggerate their extent. By depicting the current situation in the blackest of all possible terms, the agitator heightens the despair of his listeners to the point where they are putty in his hands.
The demagogue’s recourse to oratorical hyperbole and hyper-emotionalism proves to be an effective means of sowing confusion and disorientation in the mind of the average, downtrodden citizen, binding him or her more effectively to the demagogue as political Messiah. As Horkheimer observed in his introduction to the Studies in Prejudice series: "The demagogue sets the pattern for that most contemporary phenomenon, the deindividualized, incoherent, and fully malleable personality structure into which antidemocratic forces seek to transform man."
This is not to say, all opposition to globalization is right-wing or conservative, there are left-wing socialist reform movements like "Occupy" that have opposed globalization as well, or at least the neoliberal idea of globalization, and raised awareness over issues of inequality, and have given rise to the "democratic socialist" movement. It is not surprising that there would be similarities in these movements, authoritarian or fascist movements portray themselves as "populists" and even copy aspects of left-wing movements to do so, as the Nazis did in the 1930s. To be fair, most left-wing movements do not have any great solution to trade conflicts either, like the large US trade deficit, and the rhetoric of Bernie Sanders sounds eerily similar to Trump on issues of trade.
Large economies like the United States, China, and the EU, have the biggest impact on the world economy, and if these economies are doing well it generally has positive effects for other economies, but if they suffer a downturn it impacts all nations as well. In recent memory, of course, there is the global financial crisis that began in 2008. Although it was set off by a crash in the US housing market due to excessive mortgage defaults, the interdependent nature of the global economy meant that nations across the world also went into a financial crisis because they were so heavily invested in the US economy, and in fact had bought many of the "bad" mortgage loans as an investment. This is due in part to the "securitization" of these mortgages, a financial instrument created in the 1970s, in theory, to spread risk.
According to John Ravenhill in the book Global Political Economy, on the day Lehman Brothers declared bankruptcy (Sept. 15, 2008):The news triggered a massive sell-off of shares on Wall Street, the Dow Jones Index shedding more than 500 points (4.4 per cent), the biggest fall since the terrorist attack of September 11, 2001...In 2009, world output fell by 0.8 per cent, the first such fall since the 1930s; and world trade declined by more than 12 per cent. Inflows of foreign direct investment (FDI) fell by approximately 40 per cent in 2009 (Ravenhill 2014, p. 4)
The global recession was the largest since the Great Depression of the 1930s, and more severe in many regards, with global trade and output falling more sharply in 2008 than in the 1930s. Stock markets fell by over 50 per cent as compared to 10 per cent in the 1930s. Although the US, EU, and other industrialized countries saw the biggest declines, less developed countries suffered too, many of whom suffered through the "Asian financial crisis" of the late 1990s:
Among the less developed economies, some worst affected were those such as Singapore and Taiwan which were the most dependent on international trade. Although China and India continued to grow strongly (at 8.7 per cent and 5.6 per cent, respectively), the 36 per cent decline in the price of oil, and the 19 per cent decline in the prices of non-fuel commodities in 2008, a repercussion of the drop in world manufacturing output, had a sever impact on many less developed economies. Output in Mexico slumped by nearly 7 per cent, in Brazil by 0.4 per cent, while growth rates in Africa declined from the 2008 figure of 5 per cent to under 2 per cent (p. 4)
Ravenhill goes on to examine the impact of the recession on people and on governments' attempts to deal with it:
The World Bank estimated that the recession would increase the number of people living in poverty by 65 million...
The International Monetary Fund (IMF)...suggested that the crisis-induced write-down of bad loans by financial institutions will total around US$3.4 trillion (including $230 billion in mortgage lending in the US alone)––imposing a potentially massive burden on the public purse for the recapitalization of these institutions...The IMF anticipated that the average budget deficit in industrialized economies was 10 per cent of gross domestic production (GDP) in 2009, and 8.5 per cent in 2010. As a consequence, the ratio of public debt to GDP exceeded 100 per cent in many of the eurozone economies, the United States, and Japan (where it was in excess of 200 per cent in 2012)...The steep increase in sovereign debt threatened the credit ratings of some countries, particularly those in southern and eastern Europe, and left all governments with a challenge as to how to reconcile income and expenditure in the future (p.5).
As mentioned already, interdependence between states drastically increased the extent of the crisis worldwide. As Ravenhill says: "the World Trade Organization (WTO) noted, the rapid spread of the recession worldwide was caused in part by the increasing presence of global supply chains in countries' trade" (p. 5), along with the "globalization of finance." Since so many states are connected through supply chains, they are all affected by the decline in trade and production, much more than in the 1930s, however states like India and China also helped absorb this impact, since their economies continued to grow and stimulated trade from other countries. Globalization of finance meant that bad mortgages were sold to investors throughout the world, as Ravenhill says, in far off places like Australia, Norway, and especially Iceland whose banks were particularly hit hard, plus many US state and municipal governments. The complexity of the financial instruments used like "derivatives" or "collateralized debt obligations," also made it hard to determine who owned what, and what their liabilities were, which only added to the financial panic.
In the 1930s, governments tried to shift the costs of the depression onto other countries, and this led to the depression getting worse. This was avoided for the most part after 2008, still one example that may stand out is China's refusal to allow its currency to appreciate or increase in value relative to the US dollar. This has the effect of keeping the prices of Chinese imports low relative to the US, and other countries. For many years, China has been labeled a "currency manipulator" by many interests in the US, Democrats in Congress, and also by Trump who picked up this narrative and rode it to the White House.
The response to the crisis was "bail outs" of banks, followed by "stimulus." This was done in the US under the Obama administration, but also worldwide especially among the group known as the G20: US, United Kingdom, France, Germany, Japan, Italy, Canada, Russia, China, India, Mexico, Brazil, Argentina, South Africa, Turkey, Saudi Arabia, South Korea, Indonesia, Australia, and the European Union. Ravenilll explains it here:
At the national level, most G20 economies implemented stimulus packages that the IMF estimated were equivalent to 1.5 per cent of their GDP in 2009 and 1.25 per cent in 2010. Half of the G20 countries cut personal income taxes; a third cut indirect taxes such as value-added taxes and excise duties. Three-quarters of the G20 members increased government expenditures on infrastructure, primarily on transportation networks...Many also increased expenditures on programs for the most vulnerable (p.6).Ravenhill sees the stimulus largely as a success and testifies to the "global governance" that exists now that was lacking in the 1930s. However, many of the emergency measures used by governments including low and zero interest rates, and "quantitative easing" are still being used, or were until recently. As mentioned, consumer demand is low, and according to the UN, the recovery after 2008 is the weakest recovery on record from a major economic recession.
Most mainstream economists and political commentators failed to see the crisis coming, and failed to anticipate the rise of Trumpism, or things like Brexit, so it is no surprise they also failed to anticipate trade wars, and things happening in the present, and in all likelihood, another major crash is on its way as well. These failures stem not from lack of intelligence (maybe in some cases) but from ideological blinders that prevent otherwise intelligent people from seeing what is obvious to others, who to be fair have their own ideological beliefs––but some ideologies are better than others. This is true both of Trump's chief economic advisor, Larry Kudlow, who I would not accuse of being intelligent, saying things before the crash like: "There's no recession coming. The pessimistas were wrong. It's not going to happen...The Bush boom is alive and well. It's finishing up its sixth consecutive year with more to come. Yes, its still the greatest story never told." Obviously, these kind of penetrating insights are what got him his job.
In the 1930s and after, the dominant ideas, or paradigm, about economics and politics, or "political economy," were the economic theories of John Maynard Keynes, emphasizing "full employment" and spending by the state to maintain full employment (even running deficits to do so). Keynesian theory gave the impression that governments could manage the economy by "curing" unemployment through public spending, and when employment was high to "cure" inflation by reducing spending, like two levers on a giant machine. In the 1970s, in response to both high unemployment and high inflation (known as stagflation), attributed to the failures of Keynesian policies, a set of political and economic beliefs, supposedly, based on the 18th century thinker Adam Smith's idea of the "invisible hand" of the market became dominant, also known as "neoliberalism" according to the Marxist geographer David Harvey, or "market fundamentalism" according to the economist and former World Bank head Joseph Stiglitz. The development of these ideologies preceded changes in institutions, and influenced how they changed, for example from policies favoring high taxes and high social expenditures by the state (Keynesianism), to low taxes and decreased public spending for most national governments (neoliberalism), or the IMF changing from a policy favoring "fixed exchange rates" (set by government authorities) to "floating exchange rates" (determined by the market) to determine the value of national currencies like the dollar ($) or the yen (¥) relative to each other. Technology, specifically, revolutionary developments in communications and transportation, are also a big part of the globalization story, serving as the material underpinning to make this all happen. In other words, globalization would not be possible without technological developments from the computer to the large container ship, as well as in the production process itself, or creating new industries like biotechnology. Technology has influenced how ideologies are circulated since the invention of the printing press, and shapes their content as well, leading to the question how do newer technologies like television news networks and the Internet change ideologies? All of these trends have increased immensely over the last 40 years or so, since the 1970s.
Trade supposedly resembled Ricardo's comparative advantage, where agricultural countries would export raw materials to developed economies, who export manufactured goods. Despite this, trade was quite limited and had not increased much over several centuries leading up to World War I. The first liberal global economy ended in 1914, with the onset of World War I. After the war there were attempts to rebuild this system, with the US being expected to take the lead, as the largest economy in the world, but majority opinion in the US tended towards "isolationism" seeking to avoid international commitment.
Globalization today cannot be understood without the dense network of institutions that make globalization possible, but in the earlier phase of globalization, there were hardly any international institutions. One of the major institutions of the liberal global economy was the "gold standard" maintained by bankers in London, which became the standard for all international trade. In order to have trade across national boundaries there needs to be a standard to determine the value of currency. If you are an American investor seeking to buy products in the UK you would need to convert dollars into the British currency the pound. The gold standard allows this to happen because if you already knew the value of dollars in gold (or how many dollars equals an ounce of gold) and the value of the pound in gold, you could then figure out how many dollars equal a pound and vice versa. For it to work however, governments have to agree to convert their currency into gold. Bankers tried to resurrect the gold standard after the war, but in reality most currencies were "misaligned" by governments leading to trade conflicts between states. When the depression hit in the 1930s, the UK imposed "exchange controls" and for the first time refused to convert into gold. This along with a series of high tariffs against imports, imposed by all the industrialized countries, basically brought a definitive end to the liberal global economy, and many historians argue, led to the growth of fascism and communism, and eventually to World War II.
After World War II, the US began playing a more dominant role in world affairs, especially as the Cold War came in the late 1940s, pitting communist countries like the Soviet Union and the People's Republic of China against the US, Japan, and Western Europe. Strange, considering the Soviets were allies with the US during the war, and Japan and Germany were enemies. The US helps finance the reconstruction of Germany and Japan after the war, along with most of Europe through the "Marshall Plan," allowing the creation of the "developmental state" in Japan, and "social market economy" in West Germany, as well as more controversial things like allowing many former Nazis and Japanese to resume positions in government and administration.
In 1944, the Bretton Woods conference is held, out of which come plans to re-create the liberal global economy, but instead of letting private actors like banks take the lead, national governments would lead international initiatives. As John Ruggie has argued there were two defining characteristics of the post-war order: multilateralism and embedded liberalism. The crowing achievement of multilateralism (many-sides) was the creation of the United Nations which allowed all the nations of the world to participate in the UN General Assembly as equals (although not in the Security Council). At its founding there were only 51 members, today 193. National governments would also play more of a role, both domestically in the form of social welfare states, and internationally through organizations like the IMF and the World Bank. The idea of embedded liberalism comes from Karl Polyani in his book The Great Transformation, who shows how markets developed during the course of the 19th century, becoming "autonomous" from the societies in which they originated, leading to the crisis of the 1930s, and a reaction against this, by re-embedding markets in a social context. This is known as a "dialectical" theory since it looks at social change as being driven by opposing forces that react to each other. The contemporary period being another phase or "moment" in this dialectic where markets have once again become autonomous. Although there were plans to create an International Trade Organization, these plans were scrapped and instead a treaty known as the General Agreement on Tariffs and Trade (GATT) was passed instead; the WTO would come around much later in the 1990s. The major focus of this "international regime", often known as the Bretton Woods System (BWS), would be lowering tariffs, and increasing trade, but finance would be kept, for the most part, within national borders. The US also pressured countries like the UK and France to give up their colonial empires, both of whom planned to hold on to their colonies after war. The US keeps the gold standard, but helps create a new system, with the IMF overseeing, that allows states to fix, or peg, their currencies at certain levels, now using the dollar as a common standard of value, allowing the state more control in setting the value of currencies, rather than just relying on gold. Being able to convert currencies into another currency, something done by the state, as well as "price stability," the idea that prices in countries will not widely fluctuate from one day to the next, are important preconditions for global trade to grow. The IMF would also serve as "lender of last resort" and provide loans to countries struggling with debt payments, also known as the "balance of payments," although in practice, often the US would provide loans directly (through American banks). With these institutions in place, the world economy grew, as did trade between countries.
Until the 1970s, the BWS worked well in terms of economic stability and growth for developed countries, developing countries continued to struggle to grow with exceptions in East Asia. By the early 1970s, economic advantages the US had over other economies, like Germany and Japan, evened out to a large extent, reducing the profitability of US corporations. "Intra-industry trade," trade between countries of similar products became more the dominant trend. Inflation had grown so much in the US by that point that it was forced to go off the gold standard, thus ending that system and beginning the era of "floating exchange rates" where currency values are determined by the market, not the state. To compensate for lack of profits, many of the restrictions placed on FDI after World War II were removed allowing investors to pursue higher rates of return on their investments. The so-called risk/reward ratio was revised in this period, where the rewards of financial transactions increased, so did the risks of a crash.
The BWS, was based on the New Deal policies of the 1930s, in turn, based on "Keynesian" economic theory, or "demand-side" economics, began to break down in the late 1960s. The costs of the Vietnam War, rising social expenditures, and the circulation of dollars overseas (also impacted by the war) had "overheated" the economy, contributing to high inflation, along with other causes, as Harvey says:
Toward the end of the1960s, global capitalism was falling into disarray. A significant recession occurred in early 1973––the first since the great slump of the 1930s. The oil embargo and oil price hike that followed later that year in the wake of the Arab-Israeli war exacerbated critical problems. The embedded capitalism of the postwar period, with its heavy emphasis on an uneasy compact between capital and labor brokered by an interventionist state that paid great attention to the social (i.e., welfare programs) and individual wage, was no longer working. The Bretton Woods accord set up to regulate international trade and finance was finally abandoned in favor of floating exchange rates in 1973. That system had generated high rates of growth in the advanced capitalist countries and generated some spillover benefits––most obviously to Japan but also unevenly to South America and to some other countries of South East Asia––during the "golden age" of capitalism during the 1950s and early 1960s. By the next decade, however, the preexisting arrangements were exhausted and a new alternative was urgently needed to restart the process of capital accumulation (Harvey 2007, p. 27).What is important to remember about neoliberalism, is that it is, first and foremost, a political strategy for control, and Harvey deserves credit for having a political theory of neoliberalism. It is not about making the economy "better," so much as it is restoring the power of the ruling class. For example, Trump's tax cuts (supported by many Democrats) are not meant to make the economy grow faster or create higher paying jobs, but to further cement the power of the ruling class, a ruling class which feels its hold on power slipping, probably for the first time since the 1960s. People who only debate the economic benefits or costs of tax cuts completely miss this crucial aspect. Taxes in the US are low by any comparative standard, that is low in comparison to other developed countries, and low even compared to US standards. As the chart below shows, income taxes on the highest earners were much higher in the 1950s and 60s (taxed at 90 percent during the Republican Eisenhower administration):
This also speaks to the importance of "framing" as discussed by the linguistic theorist George Lakoff, who argues in his book Don't Think of an Elephant, that Republicans (whose symbol is the elephant) have been able to frame most political debates, that is, to define the terms of debate, since the 1980s. His main point being, once liberals have conceded to conservative framing of debates, then conservatives have already won the debate, whether on foreign policy, the economy, crime, immigration, etc. For example, Alexandria Ocasio-Cortez has generated a lot of attention and may signal the emergence of a democratic socialist movement in the US, but has already conceded to conservative framings of "securing our borders" and has been evasive over questions of foreign policy like keeping US troops in Iraq.
Low taxes on the wealthy, Piketty argues, are one of the primary causes of growing inequality. Power is consolidated through economic means. Basically, the more money you have, the more power you have, not much of a stretch in imagination for anyone familiar with life in the United States. One problem of American political culture (liberalism) is that it teaches people to think in economic terms, not political. Harvey explains the political threat to the ruling class here, as shown in the revolutionary upheavals in the 60s and 70s:
The crisis of capital accumulation of the 1970s affected everyone through a combination of rising unemployment and accelerating inflation. Discontent was widespread, and the conjoining of labor and urban social movements throughout much of the advanced capitalist world augured a socialist alternative to the social compromise between capital and labor that had grounded capital accumulation so successfully in the postwar period. Communist and socialist parties were gaining ground across much of Europe, and even in the United States popular forces were agitating for widespread reforms and state intervention in everything ranging from environmental protection to occupational safety and health and consumer protection from corporate malfeasance. There was, in this, a clear political threat to the ruling classes everywhere, both in advanced capitalist countries, like Italy and France, and in many developing countries, like Mexico and Argentina.
Beyond political changes, the economic threat to the position of the ruling classes was now becoming palpable. One condition of the postwar settlement in almost all countries was to restrain the economic power of the upper classes and for labor to be accorded a much larger share of the economic pie. In the United States, for example, that share of national income taken by the top 1 percent of earners fell from a prewar high of 16 percent to less than 8 percent by the end of the Second World War and stayed close to that level for nearly three decades. While growth was strong such restraints seemed not to matter, but when growth collapsed in the 1970s, even as real interest rates went negative and dividends and profits shrunk, ruling classes felt threatened. They had to move decisively if they were to protect their power from political and economic annihilation (pp. 27-28).The imposition of neoliberalism was to counter this political threat, and reassert control. At first, neoliberalism developed in what would seem like isolated events having nothing to do with each other, the IMF switching to floating exchange rates in 1973; a military dictatorship seizes power in Chile in 1973, supported by the US; the near bankruptcy of New York City in 1975. By the 1980s, neoliberalism took a dramatic step forward with the elections, first of Margaret Thatcher in the United Kingdom in 1979, and Ronald Reagan in the United States in 1980. The election of Ronald Reagan (supported by many working class people) was the death of the New Deal in the United States, and the next few decades after have seen a reversal of all the economic gains made, and the collapse of labor unions as a political force. Reagan's victory was made possible in part by a reaction against the counter-culture of the 1960s and 70s. Also, as Harvey explains here, by a supposed need for fiscal discipline, and an attack on the so-called liberal media and academic establishment:
The recession of 1973 to 1975 diminished tax revenues at all levels at a time of rising demand for social expenditures. Deficits emerged everywhere as a key problem. Something had to be done about the fiscal crisis of the state; the restoration of monetary discipline was essential. That conviction empowered financial institutions that controlled the lines of credit to government. In 1975, they refused to rollover New York City's debt and forced that city to the edge of bankruptcy. A powerful cabal of bankers joined together with the state to tighten control over the city. This meant curbing the aspirations of municipal unions, layoffs in public employment, wage freezes, cutbacks in social provision (education, public health, and transportation services), and the imposition of user fees (tuition was introduced in the CUNY university system for the first time). The bailout entailed the construction of new institutions that had first rights to city revenues in order to payoff bond holders: whatever was left went into the city budget for essential services. The final indignity was a requirement that municipal unions invest their pension funds in city bonds. This ensured that unions moderate their demands to avoid the danger of losing their pension funds to city bankruptcy (p. 30).
Attacks on fiscal deficits, and "irresponsible" governments, took place as there was an attack on left-wing media and the counter-culture. The attack on the media and education took two forms: first you have the growth of conservative media, in talk radio, later through Fox News, the Internet, social media, as well as private research institutions, or "think tanks" like the American Enterprise Institute, or Heritage Foundation (supposedly creating the framework later used for Obamacare). You also have a kind of hollowing out (some would say selling out) of liberal and radical institutions that become more conservative.
"Radical" publications like the New York Review of Books fall into line. Universities with a history of radical politics, like the CUNY Graduate Center or the New School become more conservative in some ways, and more expensive. Harvey calls this period the "restoration of class power." In the 1960s, the most influential Marxist thinker in the US, Herbert Marcuse, wrote an essay "Liberation from the Affluent Society" (1967), that speaks to how much things have changed. Today, the affluent society is no more than 20 percent, at most, of American society, at least half the population lives in poverty. Marcuse was a mentor to Angela Davis, and influenced the Black Panther Party in the 1960s, who probably had a more systematic grasp of how society works than many activists do now. There is a strong history between Marxist theory, class struggle, and African-American political struggles, many of the Black Panthers were Marxist, Angela Davis was a member of the Communist Party USA, as well as novelists like Richard Wright, even W.E.B. DuBois joined the Communist Party in the 1950s, mostly to oppose the McCarthyite anti-communist witch hunts at that time. The current generation of African-American intellectuals and political activists have largely abandoned Marxist theory however, with some notable exceptions like Cornel West.
As mentioned before, the economic track record of neoliberalism is not good, at least not for most people. Since the end of World War II, and after, the countries that have grown the most: Germany, Japan, South Korea, Taiwan, and China, all disregard the neoliberal approach to development. Much has been made of China moving away from the institution of "central planning" in favor of the market, what Chinese leaders call "socialism with Chinese characteristics" (or Harvey calls "neoliberalism with Chinese characteristics"). This is true, but China is still far from neoliberalism, as many industries are controlled by state-owned firms like energy and telecommunications, and the regulation of business is still greater than in neoliberal states, of course the "party-state" exists as well. China does have other features of a neoliberal economy as it has its own wealth gap between rich and poor to contend with. As Stephen Haggard and Dani Rodrik have shown, countries that have followed neoliberalism, in many cases pressured by the US and IMF, like Mexico, Brazil, Argentina, post-apartheid South Africa, and others have not grown as much as East Asian states, with similar results as in the US, expanding inequality, and a reduction in living standards for most of the working class population. Probably, no more infamous example is Russia, when the Soviet Union collapsed, beginning "shock therapy" with almost no transitional period. The result, of course, is the Putin "kleptocracy" we see today.
China's political economy today is closer to the Japanese "developmental state," than the neoliberal state, as is South Korea, Taiwan, and Singapore as well. Japan's political economy was similarly defined by close collusion between the state and business. Perhaps, the most important institution created by this relationship was the regulation of finance, specifically allowing firms to pursue more long-term growth strategies for development, allowing Japanese firms to become dominant in many areas from steel, to autos, to semiconductors and consumer electronics. Many like Chalmers Johnson, have focused on aspects of the Japanese bureaucracy, like the Ministry of International Trade and Industry (MITI), as being efficient in promoting economic growth, but more recent research suggests that bureaucrats were just as prone to corruption and cronyism, again, the most important factor seems to be the regulation of finance. In any case, Japan's developmental state imploded in the 1990s, though by that point it had become more liberal (including financial deregulation). This implosion was due, in part, to Japan being forced to revalue its currency in accordance with US demands to lower their trade deficit. This is similar to the conflict today with China, and the Japanese experience is instructive. In this case, Japan revalued its currency to make it stronger, this had a short term, but not long term effect reducing the US trade deficit (on the theory a strong currency makes imports more expensive), but actually led to an "asset bubble" in Japan, particularly in real estate. This bubble popped (sound familiar), sending the Japanese economy into a spiral, as most of its banks were loaded with bad mortgage loans, that arguably it has never recovered from, as the economy has grown very little since then, for two decades now. Of course, this is exactly what the US expects China to do, but it is easy to see why they would be reluctant. Trade conflicts with Japan were quite intense in the 1980s, but seem to serve only as a warm up for the much larger conflict with China, who surpasses Japan in terms of the volume of trade, and where Japan was an ally (and could be forced to do things), the US has no leverage over China. So, the conflict with China is almost like Japan and the Soviet Union rolled into one, of course the Soviets never had the kind of economic interdependence the US has with China, who owns trillion of dollars worth of US debt, and again depends on cheap Chinese imports.
Germany has had numerous social conflicts to contend with, since German reunification in 1989, as well as its own immigration issues, in this case with Turkish migrants. Still, Germany being at the center of the EU, the de facto head, has brought many benefits, including allowing German bankers to basically set the fiscal and monetary policies of most of Europe. The origins of the EU go back to the European Economic Community, encouraged by the US to create a free trade zone around Western Europe, and a prohibitive tariff elsewhere. That the US would accept a policy that discriminated against US imports can only be explained by the Cold War politics of the day, in short, the US saw this as the best and fastest way to rebuild Europe, so that it could stand as a bulwark against the Soviet Union, a role it still plays today with Russia. This also took shape in the North Atlantic Treaty Organization (NATO) forming a military alliance between the US and Western Europe (now expanding into Eastern Europe), where the US pledged to come to the defense of any country attacked.
The EU formed in the 90s, during the height of neoliberalism after the Cold War, and bears many of these features. Although many of the European states are "social democratic," a kind of state-run capitalism, they are also embedded in the neoliberal structure of the EU, which imposes significant restraints on government budgets, in order to preserve the value of the Euro, the common currency shared by EU members. Since the crash of 2008, this has resulted in an incredibly unpopular "austerity" policy requiring troubled governments in Greece, and elsewhere, to drastically cut their budgets. Politically, the EU has a governing body and legislature, but its powers are limited, so the EU is strong economically speaking, but weaker in terms of political integration. There is naturally reluctance to turn over political power from national governments to a supra-national (basically super national) government. On the other hand, the political goals of the EU has always been to create a European political identity, rather than the destructive nationalisms of the past. This goal is undermined if the EU only has a shadowy existence in the lives of people, or worse if it is perceived as a negative influence. Otherwise, the EU puts Europe on more of an equal footing with the US and China, in terms of GDP, trade, and investment, and the US, in terms of population. There are also states modeled after this, like the African Union, and Union of South American Nation, but, at this point even the future of the EU is in doubt, and these states are not as legitimized as that.
In the US, as shown, inequality has increased, growth has been slower over the last thirty years, and the economy as a whole is consumed by banking, insurance, real estate, and other "unproductive," even "parasitic" industries, according to Michael Hudson. On the other hand, high tech industries (employing a small number of people) have made important advancements for healthcare and revolutionized communication, though many of these achievements were made possible through government funded research, as Robert Wade has shown.
Ultimately, neoliberalism is, as Harvey says, defined by "accumulation by dispossession," meaning the dominant mode for accumulating capital, always a constant in a capitalist system, now takes shape in dispossessing the working class of their wealth and property, while working them harder to extract more surplus. Harvey argues in the 1950s-70s this accumulation was done by expansion of manufacturing and consumer demand. Now, in the privatized and financialized world, accumulation is done through dispossession, literally transferring wealth from the working class to the upper classes, similar to what Marx called "primitive accumulation" in the early development of capitalism (another indication we are going back into the past). He defines this by several characteristics, as follows:
(1) the commodification and privatization of land and the forceful expulsion of peasant populations (as in Mexico and India in recent times); (2) conversion of various forms of property rights (common, collective, state, etc.) into exclusive private property rights; (3) suppression of the rights to the commons; (4) commodification of labor power the suppression of alternative (indigenous) forms of production and consumption; (5) colonial, neocolonial, and imperial processes of appropriation of assets (including natural resources); (6) monetization of exchange and taxation, particularly of land; (7) the slave trade (which continues, particularly in the sex industry); and (8) usury, the national debt, and most devastating of all, the use of the credit system as radical means of primitive accumulation (pp. 34-35).Harvey then simplifies this to four basic attributes: Privatization, Financialization, Management of Crises, and State Redistributions.
Harvey then focus on the alternatives, or the resistance to neoliberalism. Here, he seems less sure of himself. He mentions the possibility of a rise in worker based political movements, but cannot really point to examples. He looks to less "traditional" groups like the Zapatistas in Mexico, but is unsure of their potential as well. There are a multitude of different social movements and groups active now, but how many of them actually have a grasp on how society works as a whole? Certainly, the Democratic Party, supposedly the party of the working class in the US, has failed to provide much resistance to neoliberalism. If anything, the high point of neoliberalism was during the Clinton administration in the 90s, and despite promising "hope and change," neoliberalism is even more powerful after the Obama administration. This is not unique to the US, as liberal and socialist parties throughout the advanced capitalist world have collapsed, as voters have turned on them, including the Labour Party in the UK, the Socialist Party in France, the Social Democratic Party in Germany, and more. Although there does seem to be potential outside of the party system, in the world of social movements, until these movements have a proper understanding of the dynamics of society, including class struggle, their impact will be limited, easily countered and neutralized, and even worse as they fail, feed into an even stronger backlash against groups who seek change. Many have questioned whether the nation-state is still meaningful in today's globalized world. As mentioned, I think it is important to look at the intersections between globalization and domestic institutions, the nation-state does matter, and does help explain variations between states. This is not to say that people should just listen to whatever national political elites say, just the opposite, it is probably more effective for social movements to influence national governments, than international institutions. On the other hand, international institutions can play a role influencing national governments, as Malcolm X advocated the UN investigate the human rights abuses of African-Americans in the US, while cautioning against "white moderates" and the Democratic Party.
There is an institutional and ideological fight against neoliberalism, and another level for activists. All three are going on at the same time. There are efforts to make changes within the institutions, but so far these attempts have been limited, whether it's in the IMF or the Democratic Party, the neoliberal elites are still in control of these institutions. In terms of ideology, neoliberal ideology is strong and is supported by most media and educational institutions, but there is also strong ideological resistance to neoliberalism, helped by the Internet, despite attempts to privatize and censor the internet, nourished by the best aspects of popular culture, and the political traditions of radicalism, Marxist and others. Many of these traditions, and almost all popular culture, influenced by African-Americans, have helped create the institutions of modern American national identity, with a flexibility and inclusiveness, as noted by Randolph Bourne and G.K. Chesterton, that is lacking in European nations, or other nations like Japan. Finally, there has been a revival of activism on a variety of issues, where acts of civil disobedience have shown the limits of the power of authorities, and emboldened others by their courageous acts. All three moments of this struggle have to be united to some extent. Activism and civil disobedience are important, but people also have to "connect the dots" between these movements, many of which often become focused on single issues or piecemeal reform, rather than revolutionary changes. Finally, all is for nothing, unless actual institutions are changed as well, and a change that must come through a democratic process, not elites and saviors.
The Temptations – Ball of Confusion (That's What the World is Today):
https://www.youtube.com/watch?v=-9poCAuYT-s
Next class, we talk more about American political institutions, beginning with Congress.
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