NATIONALISM VS GLOBALISM
In the previous notes I have attempted to describe how inflation is measured, how companies react to price increases, causing increased inflation, and how the inflation in the US relates to the inflation in the EU and the world in general.
Here I would like to compare nationalism to globalism. This is not a discussion about Capitalism vs. Socialism. I reject the notion that economic globalism runs counter to capitalism. I believe that the integration of markets and economies on a global basis has been due to capitalism and accomplished independent of the governmental structure of individual countries.
Every player in the global economy has their own unique political/economic system, each of which has elements of both capitalism and socialism. I have written in the past about this issue, but to summarize here, the US and other capitalist democracies have incorporated multiple socialist institutions including Public Education, the FDIC, National Health Insurance, Farm Subsidies, Medicare, Medicaid, Social Security, Public Pensions, Subsidized Housing and Rent Controls, and Public Utilities. And even the most state-controlled economies like Russia, Vietnam, and China have initiated programs to advance entrepreneurship and have independent businesses that are privately owned. All countries are a mix of these economic systems. We may prefer ours, but we need to acknowledge that it occupies only a single data point within a world-wide spectrum.
Capitalism is usually defined as an economic system in which property is owned and controlled by private actors based on their personal interests who freely set prices in open markets. The essential driver is the motive to make profits. The market determines how the two parties to an exchange agree on terms.
With regards to the place the US occupies on the economic spectrum, most experts actually rate some other countries as MORE capitalist than the US including Singapore, Switzerland, Taiwan, and Ireland.
Self-interest is the primary motivation in a capitalist system, and the freedom to choose from whom to purchase materials for the construction of products, and to whom to sell those products drives economic growth. In free markets, companies operate with little or no regulation. In mixed economies there is a blend which includes governmental regulations to correct market failures such as pollution, or worker safety, or exploitation. Most modern democracies have such mixed economies.
Those more sophisticated than me can further refine the definitions of capitalism and the different “flavors” that have been implemented around the world.
HOW DOES CAPITALISM INFLUENCE PURCHASING DECISIONS?
For the purposes of this discussion, I would like to focus on the basic precepts of capitalism, namely that private owners of production companies are motivated to reduce the costs of their production in order to attain the largest market advantage, while maximizing their profits to generate the highest economic returns to the owners/investors.
If we go back to that glass bottle company in New Jersey, how does capitalism work?
Suppose the company needs to purchase silica sand. It searches the market to find the best source. That search considers:
- the quality of the sand (because better quality with less contaminants reduces the costs of preparing the material for glass production, increases efficiency of production and produces more product per pound),
- the cost of transporting that silica sand to the factory in NJ (does it need to be trucked in, or can it be brought in by railcar? Is the source closer to the factory so that those transportation costs are lower?),
- the reliability of the source (do they fulfill their orders on time, in full, and with the quality expected from initial samples?)
- the price demanded by the supplier, and
- any taxes or fees imposed on those purchases.
The source has the same motivation, to make the greatest profit for providing those materials to their customers, in this case the bottle manufacturer. Their costs include
- the capital invested to acquire ownership of the quarry,
- the labor to extract the material,
- the reliability of the customer (will they pay their bill on time without demands?)
- the cost to pack and ship the material, and
- a factor to account for the limited overall amount of the resource that can be extracted over time before it is exhausted.
Capitalism, therefore, may direct the glass bottle company to purchase its silica sand from a foreign source. The cost advantage may be a result of cleaner sand, lower labor costs, overall reduced shipping cost, or lower profit requirements of the supplier. These should be irrelevant to the capitalistic company whose motivation is to provide the market with the best product at the lowest cost.
Whether the source company makes a “fair” profit, or whether the state or country in which that source company resides purchases an equal amount from the glass manufacturer as they make from the sales from the source is irrelevant. There is no factor of “reciprocity” that drives decisions made by individual companies in the model.
This analysis suggests that the intrusion of governmental regulations to influence the market runs counter to the free market concept of capitalism. From this perspective, tariffs are a governmental regulation designed to manipulate the market by state-controlled methods.
A true free market should include ALL sources. Governmental intrusions designed to influence markets should not be part of capitalism.
ARE COUNTRIES ENEMIES OR COMPETITVE PARTNERS?
We need to widen our perspective about markets. Markets should not have arbitrary boundaries but should be open to all customers and suppliers.
From this perspective, purchasing material from Illinois, a blue state, has no advantage over purchasing it from Indiana, a red state even if the customer/manufacturer has a political bias. By the same analogy, purchasing it from Canada or the US should have no political bias attached. And that construct should apply to other countries as their political systems shift further from the Capitalist side to the Socialist side. From a strictly capitalist viewpoint there should be no motivation to purchase from the UK, a capitalist democracy, than from Denmark, a socialist democracy, and therefore from moderately socialist countries like Sri Lanka and Laos, or strictly socialist countries like China and Vietnam.
A capitalist manufacturer’s purchasing decisions should be based on product value to him/her, not on political bias, no matter how small or how large. If not, where within the political spectrum do we draw the line?
This assessment may influence our view of foreign countries. In a world in which economies are integrated, where we need lumber from Canada, rare earth magnets from China, clothing from India and Vietnam, fruit from Mexico and South America, appliances from Germany, wine from France, computers from Taiwan, large equipment from Japan and Korea, etc., each country supplies products to other countries based on their ability to grow, mine, or produce those products most efficiently. Since each country relies on the other countries to provide them with products that they need, and provide markets for products that they produce, there is a tremendous motivation to reduce hostility between those countries. These two-way motivations are a strong obstacle to conflict.
One danger to this model is to view foreign countries as enemies rather than as competitive partners.
If we view foreign countries as enemies, we may believe that we have to fight each and every one of them. Any deals we make with them must be wins for us and losses for them. If they take over market share, we lose market share. If they make moves to acquire other foreign markets, we must respond by attacking them.
China is seen as an “evil” country, an enemy, and a military threat. It is true that from our perspective, the political system is China is repugnant. We believe that the communist model suppresses individuals and takes advantage of workers.
But, Is China a military threat to the US? Are there indications that China has global ambitions to take over Europe, or Africa, or Russia? An alternative view is that China, just like any capitalist entity, wants to expand its market, developing customer bases for its products which would allow it to expand its economy and benefit its citizens. From a capitalist perspective, this is a valid action. We might object to the idea that in this case the “company” is the central government, but doesn’t it have the right to try to compete?
WHAT ABOUT CHINA?
Do Chinese workers work in horrible conditions?
We all have impressions of life in China. Sometimes those impressions are based on past images, books, and articles. And sometimes those impressions are outdated.
Amie and I visited China several years ago, and one of the most startling experiences for me was walking in Beijing. Based on previous images and impressions, I had expected swarms of bicycles crowding the streets. I could not have been more wrong. Bicycles are no longer allowed in Beijing. The streets are filled with cars, mostly 4-door sedans.
I have also spoken to a number of people who purchase products from or manufacture them in China. They tell me that the image of workers slaving in unheated, non-air-conditioned, dirty factories is also a myth. The Chinese government, in their effort to create a world-class manufacturing system has invested in the best equipment (often purchased from Germany and Switzerland) and clean and safe factories. Labor laws require work weeks of 44 hours with at least 1 day off per week.
Now, to be absolutely clear, I am not endorsing the Chinese system, and I am not claiming that ALL factories are models of modernity. My point here is that the myths that we choose to incorporate into our personal world views do not always align with reality.
The US is 7th in average annual income, superseded by Monaco, Switzerland, and Bermuda for example, while there are dozens of countries whose average annual income is less than China, including Mexico, Argentina, and Turkey.
If the Chinese system is creating factories with state-of-the-art equipment, and with a labor force that earns far less than that of the US (but more than dozens of other countries), are they creating a marketplace that can provide better and cheaper materials and components for US manufacturers? Is that fair from a capitalist perspective?
It is also true that the Chinese government underwrites the costs of a lot of these factories and the materials that they use to create products. But should that be an issue for a true capitalist manufacturer? Or is that more analogous to companies using markets to finance retooling? From a capitalist perspective, should that factor into their purchasing decisions? And is it different from the US government giving Farm Subsidies to agribusiness to support prices?
SHOULD COMPANIES MAKE PURCHASES BASED ON POLITICAL VIEWS?
Should a manufacturer refuse to purchase material made in Iceland because all of their electricity comes from geothermal sources and is far less expensive to deliver to their manufacturers than countries that import fossil fuels to power their plants? Does that give Iceland an unfair advantage?
Likewise, India and Bangladesh have invested huge sums in creating a textile industry. They have modern, fully amortized factories, staffed with skilled labor. That gives them a tremendous advantage in making and marketing those textiles.
Germany has developed their machinery and chemical industries.
Vietnam dominates sneakers and electronics assembly.
Switzerland produces the best precision equipment.
Cocoa? Go to Ghana.
Copper? Go to Zambia.
Do you want fruits and vegetables in the northern hemisphere during winter? Go to South America
Etc. Etc.
GLOBALISM OR NATIONALISM?
If we view Economic Globalism from this standpoint, we see that there is no difference between one country in the EU purchasing products from another country in the EU or going out of that bloc and purchasing from Brazil, the US, India, or Japan. None of those alternative countries have economic or political systems matching those of the individual EU countries. Each country, like each state in the US has a unique set of laws and regulations. Choosing from whom to purchase materials or components for your own use should be independent of those differences and, one would hope, would be independent of the decisions of those states or countries to purchase your products.
Imposing Economic Nationalistic regulations to restrict the ability to purchase or sell products across state or national borders runs totally counter to basic capitalist precepts.
Economic Nationalism is de facto isolationism. And companies in an isolated country, whose markets are intended to serve that country’s population, do not grow; they have little incentive to innovate; and they are greatly restricted in their ability to shop for better prices. Furthermore, when resources are scarce, because the natural materials are limited in that country, or the climate is not conducive to growing those agricultural products, or there is insufficient skilled labor to staff the factories, there becomes a pressure to absorb other countries to satisfy those needs, whether by treaty, or by force.
Economic Globalism supports capitalism; Economic Nationalism foments conflict.