Political economy and globalization

Before we continue to talk about the economics, let’s first talk about politics. Politics and economics are never separated in the real world, because making more money is only half of the economy. How to divide the money is the other half, and that’s decided by politics.

This was supposed to be obvious by classical economists like Adam Smith and Ricardo, but somehow this connection was forgotten by neoclassical economists. Just another example the neoclassical economists liked to throw out everything that doesn’t suit their mathematical models, even though their use of mathematics often made Newton and Leibniz turned in their graves.

For example, economists generally believe globalization is good for American economy. But talk to anybody on the street, it’s difficult to find somebody still pro-globalization now. What’s the best way to understand what’s happening in America now? The rise of Tea Party, the anti-globalization movement, the currency and trade conflicts with China etc. I said in another post a while ago, that this is all about employment. I’m sorry. I made a mistake. This is not even about employment anymore. American voters are so angry, they just want to slash the fat cats until they know better now.

Globalization is about making a bigger pie, but it doesn’t guarantee everybody getting a bigger piece of it. That’s what happened in America. American economy has grown 60% since 1990s, but the income of the middle and lower half of the population remained stagnant. In other words, the social contract for Americans as a whole to focus on the economic growth has been broken. The focus is now on how to divide the pie more equally. The best way to describe this is probably an old Ricardo and Marx style ‘class struggle’. And Marx is right about in a ‘class struggle’, those who seek compromise will be left in the middle and cross fired, even when it’s the best place for the whole.

If you have been following my discussion with brightness, you are probably familiar with my description of this kind of collaboration break-down as deadlocks. A deadlock is a situation wherein two or more competing parties are each waiting for the other to give in, and thus neither ever does. To continue the imaginary scene, Alice and Bob are having a dinner. Unfortunately, Alice has only a knife and Bob has only a fork. Neither of them can eat until one of them gives up what he/she has, but neither of them will, because once he/she gives up what he posses to the other the other (Alice gives her knife to Bob!), the other one(Bob) will eat all the food. That’s the best strategy for both of them because even though they don’t get to eat anything, at least the other party won’t get anything either. But if a stranger comes by at the time and threatens to eat the dinner, or at least they think so, the game will be changed, the no-lose strategy becomes a strategy of no win. I think that’s why you saw a rare bipartisanship in passing a bill targeting China’s currency policy.

Some economy analysts still think a trade war is impossible because it’s not good for anybody. I think they are too economy centric. Most Americans believe only big corporations benefit from the globalization now. American voters will continue to bash the big corporate fat cats until they spit out some profits. I anticipate America to close up quite a bit in the next decade or two and won’t open up again until this internal conflict resolved.