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The Winds Of Global Change: Which Way Are They Blowing?

Regulatory Comments and Testimony

Title

The Winds Of Global Change: Which Way Are They Blowing?

The Globalization Debate

We are living in the best of times, and the worst of times. On the one hand, innovative forces are transforming the world, creating massive opportunities for economic and civil liberties here and abroad.

 

Free trade, global communications and most significantly of all, the Internet, are massively reducing the costs of information. E-commerce opens the windows of the world, bringing knowledge and opportunities into even the most repressive regimes. Capital, labor, knowledge, information all flow around the world more freely and swiftly today than at any time in history.

 

The information revolution is having a powerful effect, as George Yeo, the finance minister of Singapore has noted. Governments can still oppress, over-tax, and over-regulate, but if they do, eventually the smarter citizens will vote with their feet. Globalization creates competition among governments, forcing them to be more accountable to their citizens, and less oppressive. This is good for individuals across the globe.

 

But globalization is also unleashing what economist Joseph Schumpeter called the “destructive storm of competition.” Reactionary forces are arising accordingly, seeking to suppress these positive pressures on the governments of the world. They cloak their naked efforts to retain power in highly moral terms. They seek merely to “harmonize” regulations, to block “illegal” flows of capital, goods, knowledge and people, to check the multinational corporation, to “level” the playing field, to achieve “transparency” and “facilitate the participation of all elements of civil society.” The rhetoric is moral, but the reality is realpolitik!

 

Thus, globalization means that we stand at a turning point in the history of western civilization. Will the changes we are undergoing help to eliminate statist sentiments and tendencies that have suppressed individual and economic liberties around the world, and even here within the United States? Or will we create a global regulatory and welfare state that will impose its “just and equitable” order on all mankind?

 

So, the global struggle to determine that question is now underway, and it will likely be resolved within the next few decades. That we win this struggle is critical. To see how that might be done, let us review how those seeking to expand Leviathan succeeded before.

 

The Progressive Victory and the Evolution of America’s Regulatory/Welfare State

 

Much like today, America in the late 19th century was a Frontier Economy. The nature and scope of economic activity was changing rapidly in unforeseen ways. The emerging scale and scope of the national corporation disrupted the cozy stability that had existed between local businesses and local/state political entities. 

 

Social critics saw all this as threatening the nature of American life. America, they argued, had existed as a series of “island communities” in which voluntary institutions, which Alexis de Tocqueville observed and pondered, were able to fill the gaps left by the market and limited government. As these islands were merged into a national economy, the progressives argued, the traditional voluntary approach could no longer fulfill that mission. As Roland Marchand notes in his 1998 book, Creating the Corporate Soul: “This momentous shift in the balance of social forces created a crisis of legitimacy for the large corporation…not primarily legal legitimacy…[Corporations posed]…a threat to the nexus of relationships comprising these island communities” (pp. 2-3).

 

At this time, a progressive alliance of intellectuals, businessmen and politicians began to advocate the creation of the federal regulatory and welfare state. 

 

Businessmen concerned with “cutthroat” (that is, “effective”) competition sought government regulation. (Nobel Prize-winning economist George Stigler has long argued that competition, like exercise, is universally agreed to be good for other people.)

 

Likewise, in this new and changing economy, state and local politicians found it harder to tax and regulate national companies: When the goose can walk, it’s harder to extract rents. They saw federal power as a means to restore their rent-seeking power.

 

The role of intellectuals in this process was critical. As Schumpeter noted, intellectuals are the Achilles Heels of capitalism. Envious of their entrepreneurial brethren, they rushed to demonize modern corporations as robber barons, monopolists, purveyors of unsafe products, and providers of unsafe employment. Upton Sinclair and other intellectual figures inflamed and rationalized populist reactions against the market. As economist Ludwig von Mises noted, the businessman has been arrested, tried and convicted; the crime will be announced at an appropriate time.

 

Another progressive, Richard Ely, created the American Economics Association to “combat the pernicious theory of laissez faire capitalism.” Intellectuals involved in the progressive movement saw the regulatory state as a way of achieving Jeffersonian goals via Hamiltonian methods. They thought that we could resolve the problems that had limited political intervention in the past (lack of knowledge, corruption) by means of independent regulatory agencies, high employment standards, and an ethos of civil service fostered by the interventionist state. 

 

The compromise that came out of the 19th century was, then, the[AU1]  welfare and regulatory state. We can contrast the American regulatory state with European socialism, which has an element of honesty about it. When one nationalizes a firm in Europe, the state assumes responsibility for its performance, but the American regulatory state, America’s form of socialism, is different. When a regulated firm errs, the presumption is that there has been inadequate regulation. 

 

Still, America did resist the worst aspects of all this. Our traditional skepticism of centralized political power, our federalist system, our still-extant belief in the Constitution (not perfect but far better than what we have now), and our still vigorous voluntary associations entailed a relatively slow growth of the regulatory/welfare state.

This set the stage for the steady growth of government throughout most of the 20th century, where most all new social concerns (the environment, for example) were addressed politically. Traditional problem areas such as education, poverty or disability moved decisively into the political sphere. In all areas, this constituted a steady erosion of the Founders’ understanding of government as necessary but dangerous. 

 

Perhaps most significantly, the statists’ success weakened America’s voluntary sector. The progressives viewed the Tocquevillian tradition as hopelessly inadequate to address the needs of a modern society. One of the most influential progressives of the 19th century, Herbert Croly, noted in The Promise of American Life, published in 1909: “To conceive of a better American future as a consummation which will take care of itself—as the necessary result of our customary conditions, institutions, and ideas—persistence in such a conception is admirably designed to deprive American life of any promise at all” (quoted by Virginia Postrel noted in her insightful book, The Future and Its Enemies). 

 

In effect, progressivism entailed that the state become the “moral force” necessary to resolve those problems falling outside the ambit of the market. This was a repudiation of the Tocquevillian view of America where voluntary institutional arrangements provided the answer to the problems that progressivism attempted to solve with government. Thus, America seemed to be headed down what F.A. Hayek called “the road to serfdom”—gradually ceding away its liberty in a hapless attempt to find (or create) “heaven on earth.”

 

Yet the success of the progressives was not complete, nor has it proved lasting. In part, the very optimism of the progressives proved their downfall. Believing in the supremacy of their ideas, they championed economic and technological progress. Yet these dynamic forces have forced modern progressives into (perhaps temporary) retreat. Although many medical, chemical and agricultural advances are delayed or blocked by the EPA, the FDA or the USDA, other sectors have escaped control and grown massively.  The software sector roared past before the government knew it existed although they are now playing catch up with their Alcoa-like attack on Microsoft. Institutional innovations—the discount store, consumer credit, supermarkets, “junk” bonds and “derivatives”—all these and many more innovations have forced American industry into an ever more efficient path. America simply bypassed much of the rigidities created by the regulatory state.

 

With time, America’s socialist experiment, like its European counterpart, failed. Transportation regulation was criticized by the left as well as the right. Grey Panthers joined free market advocates in asking why individuals couldn’t obtain interests on their banking accounts. Regulatory socialism proved as corrupt, as inept, and as dangerous to individual liberties as its European counterpart.  It was the moral—as well as economic—failure of the regulatory state that led to its demise.

 

Domestic and global competition also forced American firms to seek ways to loosen the regulatory burdens they faced. Moreover, America’s mobility and openness made it difficult for oppressive states of the union to survive; the Rust Belt found itself losing out to the Sun Belt.

 

What we see with globalization is that it makes government even more accountable. Increasingly, political rules must yield offsetting value or they cannot survive. The trend of globalization and its competitive pressures likewise poses a threat to the world’s elite, who are fiercely fighting back to protect their privileges and prerogatives.

 

The Globalization Fight of Today: A Replay of U.S. Progressivism

 

Today, the world faces unprecedented change. The scope and scale of trade and communications make the world a much more communal place. People, knowledge, and capital flow around the world at e-speed, and industry is reorganizing in response. We see that, increasingly, the multinational corporation is replacing the national corporation. That realization creates the same fear and brings up the same concerns that brought about the progressive movement. Now it is the “national island communities” that will be disrupted, the multinationals that will exploit the poor, produce unsafe products, and create monopolies. The same array of reactionary forces has reemerged in response to change.

 

For instance, many businesses—especially those in Europe—are fearful of the fierce competitive pressures that now confront them. Operating within the heavily taxed and regulated economies of the developed world, they seek protection from the “unfair” competition of firms operating in the developing world.  These businessmen, responding to global competitive pressures (as U.S. businesses did much earlier), seek to slow and weaken global competitive pressures to gain time to adapt, perhaps for these arduous tasks to be completed by their successors. To paraphrase Saint Augustine, they seem to say “Oh God, make us competitive, but not yet!”

 

The politicians of the world, eager to protect their regulatory, taxing, and capital manipulation regimes, endorse ways to restrain and control the new global economy. The intellectuals realize that their utopian regulatory rules are non-viable in a global economy. Yet, they have benefited greatly from the regulatory/welfare state, and wish to retain the prestige, privileges and power bestowed on them by progressivism. Organized as NGOs–non-governmental organizations–they claim the power to speak for the moral values of the world. They find many in the business and political world eager to grant them such representative powers.

 

This decline in fortune suggests why intellectuals have moved from technological optimism to Malthusian pessimism. When intellectuals viewed the future as theirs, they favored the forces of change. Now that they see the future as turning against them, they have become reactionaries. They have adopted the Malthusian “Terrible Toos” view of the world: Too many people, too much consumption, too great a reliance on technology, we understand too little. Such a view becomes a useful tool in their struggle to control change. The policies that flow from this view—population, affluence and technology control—all require regulations and thus the perpetuation of the elite. We might note in contrast that these policies might easily be viewed as encouraging death, poverty and ignorance!

 

The mechanisms to translate all this into effective world governance are still evolving, but center around a complex system of international treaties, often environmental in nature, that seek to control trade and other economic activities for “moral” purposes. They have created plausible arguments for their policies—the Precautionary Principle and Sustainable Development. 

 

The Precautionary Principle is an argument that if something might go wrong, then it is appropriate to impose restraints to ensure that it doesn’t. Since all activities entail risks, this principle makes it possible to block any specific type of trade. For example, the Basel Agreement (one of many multinational environmental agreements) blocks trade between the developing nations of the world and the OECD (developing) nations based on the view that the poorer countries would not be capable of providing quality waste management services. In fact, of course, the goal is to ensure the economic rewards available to European and American businesses that fear competition from poorer nations. The occupation of trash collection and disposal has been a traditional path out of poverty—but it has now been blocked by the anti-progress globalization forces. Biotechnology, wildlife trade, chemicals and metals—all now are limited potentially by such multinational agreements.

 

One non-environmental example of such a policy is the effort to impose labor rules on the economies of the developing world. According to Mexican President Ernesto Zedillo: “Proponents of global labor standards…seem decided to ignore the fact that frequently the alternative for those workers is extreme poverty or a marginal occupation in the urban informal sector of the economy, where hardly any labor right can be made effective.”

 

The principle of sustainable development parallels the precautionary principle. This rule argues that mankind is consuming too much of the earth’s resources and we must impose consumption restraints today, lest we find ourselves having to suffer rationing tomorrow. Again, the burden of such constraints is imposed on the developing world by the developed world. Europe and the United States cut much of their forests during their development periods (although they’ve since largely grown back) but developing nations are not granted that freedom if we accept sustainable development. Malthusians seem to view the world as an ecological museum for our benefit, where the poor are to be relegated to zoo attendants.

 

Nothing is more threatening to human health or the environment than hindering the forces of economic and technological change that have made today possible. Luckily, and for the first time since World War II, many of the world’s developing nations now realize the value of economic liberty in creating economic well-being.

 

Zedillo put this well in a recent speech: “What is now clear from the historical evidence of the last century is that in every case where a poor nation has significantly overcome its poverty, this has been achieved while engaging in production for export markets and opening itself to the influx of foreign goods, investment and technology; that is, by participating in globalization.”  

 

It is this issue that gives us the opportunity to gain the moral high ground against the global regulatory state. If the Malthusian policies now being urged upon us under the various globalization initiatives are enacted, the world may well experience the horrors of the regulatory despotism described by Alexis de Tocqueville:

 

Above this race of men stands an immense and tutelary power, which takes upon itself alone to secure their gratification and to watch over their fate. That power is absolute, minute, regular, provident, and mild. It would be like the authority of a parent if, like that authority, its object was to prepare men for manhood; but it seeks, on the contrary, to keep them in perpetual childhood: it is well content that the people should rejoice, provided they think of nothing but rejoicing. For their happiness such a government willingly labors, but it chooses to be the sole agent and the only arbiter of that happiness; it provides for their security, foresees and supplies their necessities, facilitates their pleasures, manages their principal concerns, directs their industry, regulates the descent of property, and subdivides their inheritances: what remains, but to spare them all the care of thinking and all the trouble of living?                                                                                    

 

The problem with a global regulatory state is that it would face no competition. It would have no reason to reconsider the risks of slowing change, of economic and technological stagnation that such a force might create.  Some societies have chosen that path in the path—China in the 15th century, Japan after its civil wars—and the results were stability until the outside world intervened. Yet, if the global governance becomes a reality where will that outside force be seen? Can the world expect anything but stasis in a world closed to competitive pressures?