Saturday, April 30, 2016

How Globalization Enriches the Money Power While Undermining the Prosperity of Almost Everyone Else

Globalization is driven by international corporations seeking what in economics jargon is known as "increasing returns to scale." What "increasing returns to scale" means is an increase in profit margin with increasing market share. A consequence of the increasing returns to scale achieved by some corporations through globalization is the retardation or reversal of economic development in all but the most advanced sectors of the most advanced economies.

How returns increase with scale, i.e., how profit margins expand with market share, is easily understood by considering the case of Microsoft, one of the corporations that has profited mightily from globalization. If Microsoft spends $100 million on upgrading a software package or developing a videogame, the cost to Microsoft of the first copy of that product is $100 million. However, the second copy that Microsoft sells, if delivered over the Internet, costs only pennies. Thus, if the sale price of the software is $100, then the break even point for Microsoft is a million copies. At two million copies, Microsoft has a profit of one hundred percent. At ten million copies, Microsoft has a profit of one thousand percent. That's the magic of increasing returns to scale.

No wonder, then, that the global corporations are willing to do almost anything, including buying the allegiance of governments, to grab a greater share of the global market. Besides software developers, the companies that benefit from increasing returns to scale include: book publishers, movie makers, Internet pornographers, drug manufacturers and the the producers of consumer electronics, household appliances, and cars, all of which have high first-copy development costs.

How globalization affects the middle class of the Third World.
Image source.
Achieving increased returns to scale means having governments in place that will press for the elimination of trade barriers and regulatory regimes that restrict global sales. The result is to crush start-ups and less well capitalized competition throughout the world. The Russians, for example, had serviceable, if clunky cars (and many other products) of their own manufacture prior to the collapse of the Soviet Union. However, after the collapse, domestic industries were hammered as state assets were looted and much of the cash thus realized expended in conspicuous consumption of imports — Mercedes, BMW and other high-end foreign brands. As a result, many of the indigenous domestic industries were destroyed and the workers made redundant, often dying prematurely as a result, while the globalized corporations that destroyed them enjoyed increased returns to scale.

The same dynamics occur wherever global competition is let loose against weak domestic producers, as is occurring in Ukraine under the economically suicidal oligarchy headed by the US and Nazi backed billionaire, Petro Poroshenko. But the damage is not confined to less developed economies. In Europe and North America, for example, globalization has devastated local manufacturers of shoes and shirts, computers and car parts to name but a few of those unable to compete against low-wage Asian sweatshops. Thus, while shareholders in Microsoft, Apple, IBM, GE, and WalMart, to name but a few, have pocketed trillions in capital gains since Bill Clinton and his European counterparts signed the 1994 GATT agreement that kicked off the current round of globalization, workers in the west have suffered falling or stagnant wages, or long-term unemployment as a direct result. Moreover, the impact on Western workers has been greatly exacerbated by mass immigration of cheap labor from the Third World, the other deadly, indeed genocidal, aspect of globalization.

 Thus, throughout the ex-Soviet Union and the Third World, globalization has meant the reversal of economic development. In these countries, the most advance industries have mostly been crushed in the competition with giants of the First World, to be replaced by either sweatshops paying mere pennies an hour, or primary industries, including farming, forestry and mining. In either case, the returns to scale are negative, thus driving a continual reduction in standard of living.  For example, a country may earn foreign income by logging its forests and exporting the products, but as production grows, prime forests are depleted forcing the resort to lower quality timber that yields lower returns on investment in labor, roads, machinery, etc. The same negative return to scale emerge in both agriculture and mining, as the best resources become fully exploited and further expansion of the industry depends on the resort to poorer land or lower grade mines.

The current drive for globalization, thus chiefly serves only one interest: that of the Money Power. To ordinary folk in every country, rich or poor, globalization has proved detrimental to human welfare. Thus now is the time to restore the independence of democratic nation states free from the control of the Money Power and free to develop national economic policies that serve the interests of the people, not those of bankers software billionaires, and sweatshop operators.


Erik Reinert: How Rich Countries Got Rich . . . and Why Poor Countries Stay Poor

Andy Grove: How America Can Create Jobs

CanSpeccy: Europe, the Perils of Complacency

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