Tuesday, October 18, 2005

Surface Tension

I just finished reading Thomas L. Friedman's latest book, The World is Flat: A Brief History of the 21st Century. Insightful analysis, but I offer a few alternative conclusions:

Friedman provides an insightful analysis of the driving forces and implications of the racing pace of globalization and communications technologies. But after his discussions of Google and China and the rest of the usual cast of characters in any good "the knowledge economy is upon us" drama, he offers up the same, lame ending and moral. This is the new passion play of our age: Globalization and affiliated phenomena will offer a brisk challenge that must be overcome if America is to retain its wealth and leadership, but with hard work globalization will make all the world a better place.

To be fair, Friedman recognizes the risks to "human rights" (whatever that means), the risks to the environment, the risks to peace and stability, and the risks to culture and tradition. I don't fault him for failing to acknowledge these arguments, even if his versions are rather anemic. What I do have a problem with is his--and virtually EVERY mainstream pundit's--blind acceptance that Ricardo's theory of comparative advantage is fundamentally sound. This is the unquestioned commandment, mountaintop tablets and all, of our political and economic processes. I think it's bunk.

Basically, Ricardo said that if two countries each focus on the one of two products that they are best at producing (due to economies of place), they will be able to produce this product at a comparative advantage to what it would cost the other country to produce it. If they then trade these products, they will both be enriched overall, because they will have the same two products, but will each have incurred less cost in their production.

There is some validity to this theory in a world where primarily luxury products can be traded, and knowledge and service industries were firmly protected from trade--remember, Ricardo wrote about 200 years ago. Even then, his theory depends on low transaction costs (dubious), and an ignoring of equivalent goods (England couldn't produce Port wine as efficiently as Portugal, but they could produce fine ales with equal efficiency--does the minor disequivallence of these goods justify the significant transaction costs?).

Ricardo's theory of comparative advantage is still quite popular today--I'll argue because it provides intellectual support to a series of policies that greatly enrich the very class of individuals that is capable and tasked with evaluating the merits of the theory. But in today's world, much more than luxury goods can be traded. In fact, nearly everything is fungible and transportable, and transaction costs are at a historic low. Populations can be transported where they are economically most in demand. Intellectual work can be outsourced--law and accounting are increasingly being done in India, even if you still have a friendly American face meet with face to face. This creates a situation where Friedman's language--that the world is flat--is increasingly appropriate. The bottom line is that the human factor in economics is increasingly commoditized--both on the production and consumption end of the spectrums. In a flat world without barriers to trade and capital mobility, there is only surface tension holding back the complete optimization of the human factor. No matter how low American wages go, someone will always be out there in some new China or India, ready and eager to do the work for even less in order to feed their family. And this doesn't just apply to unskilled labor--skilled labor, to include PhD's, even to include innovators, is still a production input to be optimized. Sure, it takes a little longer to overcome the institutional barriers of education, but there is nothing stopping virtually any service from being re-bid to increasingly lower and lower bidders.

There is this myth that at least innovation and highly specialized skills--doctor, lawyer, physicist, etc.--are immune from outsourcing because they depend on specialized institutions of higher learning, of which the best are in America. FALSE: take Microsoft's recent establishment of a post-doctoral institution in China that ruthlessly tests and skims the highest IQ individuals from the population, sets them up in state of the art research facilities at relatively low wages, and then leverages their innovative capabilities by providing ultra-modern connectivity with the rest of the Academy. Goodbye MIT, hello Guangdong. The only factor that determines innovation that can't be taught and relocated as necessary to ensure the bottom line is IQ (or whatever similar metric you prefer), and IQ can be scouted, recruited and relocated anywhere.

There is no limit to how far the human component of the economy can be marginalized, optimized and routinized. The global economy is a system of evolving, hierarchal entities that are structurally bound to focus on the bottom line. Detroit can pay auto-workers good wages, at least until their inefficiencies catch up with them and they have to cut back to compete with the reality of overseas labor options. Costco can offer all their workers good health care, at least until Wall Street hammers them for having a lower profit margin than Wal-Mart. These temporarily inefficient bubbles can last for a little while, but the quickening of global financial transactions, analysis, and capital flow are shortening their already precarious life-spans. If a specialist in New Delhi can read your CAT scan over email, what's to stop internal competition between healthcare providers from bringing her over to the US to take over for all M.D.s at a quarter of the price? It sure isn't "bedside manner"... the call center personnel in India already get more training in that (and American accents) than do most of our doctors. The bottom line is that there is no barrier to the complete marginalization of the human factor in the economy. It is SKYNET come to life, only more real and more dangerous to our humanity--a systemic, structural, machine force that demands ongoing optimization between non-human economic entities, and the last factor to be optimized is the human one. It's like a lens of water on a flat surface that just came in contact with a drop of soap--the surface tension of time is the only thing standing in the way of the juggernaut of hierarchal intensification.


Howard Campbell said...

Doctors and $--I worked at Gleiberman Research Worldwide (don't try and google that name, I'm writing in character--If you want to Google, see the research company featured in The Corporation, or just remove the Gee from Gee Willagore of the aforementioned name--sorry for being cryptic, just protecting my litigious ass) in the mid '90s. Doctors in California, over 2,000 of them, were paid $200-$600 for a half-hour of their time to participate in a research study. I was one of the interviewers for the pre-test, to make sure the questionnaire didn't have errors. At the end of the interview, I asked them if they would take less money for specific procedures. In the pretest, the majority of doctors said yes. When the various studies came back, the vast majority of doctors said that they would take less money for multiple procedures.

Can you guess what happened? Suddenly, HMOs and PPOs made radical changes to their doctor compensations.

Supply and Demand is blind. Duh. If ever anybody asks you, in an anonymouse survey, if you would take less money, or pay more, say no. I'm no lawyer, so maybe I can't legally give this council.

But, the point above about elite professions not being protected is valid.

The myth of scarcity, a major force Buckminster Fuller noted in our current charade of an economy, has many implications. As that myth disolves, many elites won't be so elite and may view the world differently.

The real scarcity has always been equality.

Please forgive my rant and lack of focus.

Sal said...

I would add the following two points to your fine discussion. One is that the clamor for the free flow of capital is inversely proportional to the clamor for the free flow of labor. As barriers to capital flow are being dismantled, borders are becoming more stringent (EU excepted). So apparently free market proponents are not quite as free market as they would have you believe. It then follows that an alternative agenda is at play and I think you've covered that.

The other point is that we are about to see transportation costs start rising as we pass peak oil production. Because there is no reason to believe that the information infrastructure will be abandoned due to its relatively low maintenance cost and good productivity, we may see an inversion of value between direct manual labor and information labor. So while it may continue to be profitable to have your CAT scans analyzed by a doctor in China, it may no longer be profitable to stock Wal-Mart shelves with Chinese items as local manufacturing regains the benefit of proximity.

Jeff Vail said...

Absolutely...peak oil will have a major impact on globalization. I think that the stage of the 21st century will be set by the failure of globalization to realize its promise, as exacerbated by the peak oil phenomena. Exactly how the two relate with regards to timing is yet to be seen, but I think that the degree that the anti-globalization movement resorts to violence will largely be a factor of how much globalization continues before it is halted by peak oil. More globalization will fuel more resistance. If the resistance gets strong enough before the impact of peak oil really hits us, then both camps will become increasingly ideological and polarized, and the conflict will continue and be exacerbated by the impacts of peak oil. However, if peak impact comes very soon, there might be hope for a more peaceful transition to a post-peak economy.

Just thoughts...

Peter said...

I agree with you about the lame ending in Freidman's book. It starts off strong with his analysis of the 10 or 12 driving forces behind globalism then starts to sputter and makes it to the finish line on little more than fumes.

Here's one other disconcerting point about his book. Throughout it, on almost every page, the implicit and explicit message is that we will have to work harder and longer just to keep from falling behind. As I read through it the image of someone torturing a gerbil by spinning its wheel faster and faster kept appearing in my head.

Look, I'm self-employed and actually enjoy my work. I currently put about 12 hours a day into it 6 days a week. But at some point enough is enough. Do we really want a life where things are so hyper-competitive that we have no time for living?

Sometime this past year Bush was shown on TV talking to a woman who had to hold down three low-paying jobs just to feed her family and keep a roof over their heads. The clueless Bush thought this was a wonderful way to live.

When I was growing up back in the sixties, only one parent needed to work. That one salary provided for a pretty good life for the entire family in the vast majority of cases.

Not anymore.

Recently, there was a discussion on another board about whether life was better now or back in the sixties. Someone responded with, "Of course now is better. Just look at all the electronics we have!"

With many people thinking like this, the human race is most likely doomed to extinction.

I just finished A Theory of Power and wanted to say it's one of the most eye-opening books I have read in decades. I am plugging it on my blog at http://smartstartup.typepad.com/ .

PS To submit this simple comment I was forced to invest 5 minutes of my time registering as a blogger with this service. So if there's a link attached to my post to another blog, ignore it. It's just something the system forced me to do to complete the registration. Can you not reset the configuration to enable posts by non-registered users? Most blogs allow a delay option so that the blog site owner can approve/disapprove comments.

Anonymous said...

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M. Simon said...

Have you considered applying for a Nobel Prize?

You have demolished the foundation of current leading economic theory.

BTW that Bucky Fuller was one smart feller. He was sure scientific socialism would beat capitalism in the Cold War. i.e. he was a technical genius. About economics he knew zero.

It happens a lot.

M. Simon said...


Of course equality is scarce. There is a simple reason for that: brains are scarce.

Systems biased towards equality tend to be stagnant. France has had 10% unemployment for the last ten years. Germany is in a similar fix.

It would not bother me in the least if wealth at the top increased by 50X if it would increase wealth at the bottom by 2X.

Joshua said...

M. Simon,

You apparently "know zero" about both technical and economic matters and even less about how people are nominated for Nobel Prizes. You didn't manage to write one paragraph that didn't betray your ignorance or contain a logical fallacy.

No wonder you think brains are scarce.

Hats off to you for having the courage to post anyway. Would you consider putting some of your obvious surplus of smug self-satisfaction on eBay? I'm sure it would fetch a high price in spite of the abundant supply. After all, everyone loves (the illusion of being) a winner.

BillG said...

Please see Jeff Smith's Institute for Economic Democracy...


Plunder by trade...

Chapter One of Economic Democracy

Consider this:

* You are in America producing one widget an hour and are paid $10 an hour.
* I am in Indonesia producing one widget an hour and am paid $1 an hour.
* We are equally productive but we have a 10 times pay differential.
* We ignore monopoly patent costs which only increase the discrepancy and price theses widgets at the labor cost of production. (Capital is but stored labor so all justified costs are labor costs.)
* I must work 10 hours to buy one of your widgets. In that same 10 hours you earn $100 and can buy 100 of my widgets.

The difference in retained wealth is not mathematical it is exponential (high pay divided by the low pay squared).

When you do this math remember the key is the buying power gained in the same working timespan by equally-productive labor producing products for trades between countries.

* If the well-paid nation is paid twice that of the low-paid nation, in direct trades between them the well-paid nation accumulates 4 units of wealth and the low-paid accumulates 1 unit of wealth.
* At 4 times the pay differential for equally productive labor the high-paid nation retains $25 and the low-paid nation retains $1.
* At a 20 times pay differential the high-paid nation retains $400 while the low-paid nation retains $1.

Anonymous said...

We never flew or even taken a slow boat to China but we did do business with them - we exported computer items- not imported.
Actually, you do not need to take a plane anywhere these days to find the other worlds. All you have to do is take a few cabs in our major cities and you will find out about everything that goes on in the world.
For example, a cab driver in Chicago who immigrated from the Middle East told us he chose to be a slave rather than being in circumstances where he had to kill someone.
Another cab driver from Eastern Europe told us that he was going back home soon because he was sick of working twelve hours a day and not getting ahead in America. He said he was poor back home too but at least he had some leisure time.

Friedman most likley has a limosine picking him up at airports and I wonder if he ever talks to the driver even then.
Friedman's Flat World is an illusion. Friedman as a top evangelist for Free Traders is a false prophet writing false parables of the Free Traders who use impoverished destitute workers for the sake of power and money.
The real commodities of Free Trade are human beings who are put on a global trading block to compete with one another for the same jobs.
Even if everyone in the world was provided an education and a computer it would be meaningless if they are all competing for the same jobs. It is impossible to have any level playing fields as long as production, factories and the outsourcing of jobs is the core of Free Trade and not products per se.
Explore the lost worlds in the Globalist Free Trader Flat World of Friedman at http://tapsearch.com/flatworld/ http://tapsearch.com/flipflatworld/

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