Has the world become flat?

"Economics is a social science."
  • Transcript


Jagdish Bhagwati: Well I could give you an academic answer as to which way the things are going. But let me give you an answer from the point of view, the fact that economics is a social science. It’s about society. Therefore it’s about amelioration of the human condition. So to me, that is the central focus of where economics ought to be. It’s more or less the English focus which I learned. It’s also the focus I learned at MIT, which is where I came and spent a little time. Because that’s the most English school in the United States actually, in terms of its orientation towards solving problems, which matter rather than doing mathematical pyrotechnics and so on.

The most important challenge facing us today, I think, is globalization. In the sense that I think things have changed very dramatically in the system and the world economy. Part of it is, of course, what is sometimes called the death of distance. People are much closer. A lot of economies have gotten much more integrated into the world economy as a result. We have reduced a lot of barriers to transactions. That’s manmade. We have also improved technology. That is manmade too.

But on the other hand, it’s something which is not, which is not policy. It is in fact technology which is really changing the conditions under which we live.

I mean imagine in the 19th century. I read somewhere there were 12 deliveries of the mail in London. On horseback, of course. Then it got steadily less. And then we had, two, I think, was the last when I was studying in England. There were two. And then I think now there is one. Now we’ve got e-mails. We’ve got delivery every second, right?

In fact one of the most distracting things in the world is to have your Blackberry with you, because it’s very hard to control your impulse to see if somebody sent you something. So what we now have is a tremendous growth of technology, under which transactions have become so much more easy, and more dramatic, and instantaneous and so on. This is really the way to do it.

My student Paul Krugman, who is a major economist of the younger generation, and writes an interesting column in the New York Times. His major work – for which I hope he will get the Nobel Prize one day – is on economic geography. Meaning people actually transacting face-to-face with one another, right? So people having to be in the same physiological space.

And I often tease him because it’s a privilege of a professor to tease his students – particularly the ones he admires. And I say, “You know Paul, you’re just behind the curve. Geography has now become history.”

It’s gone because today, very rarely do you really need people to be together in the same place. You look at a number of people writing papers together. Hardly anybody writes papers together with the people who are in the same department. Most of them are doing it with people who are skillions [sic] of miles away.

Because endowments, technology, everything is changing all the time. What I mean is that at any one point of time, you have a certain set of endowments which you have accumulated, you have shaped and so on, which then define what you’re good at.

But once you do that, then we economists say – and this goes back to Adam Smith at its very essence over 200 years ago – “Maybe I can do everything better than you can.” Like I can maybe interview better than you do. I can teach better than you do. But clearly my greatest advantage over you certainly is in teaching, certainly not in; I may be a little bit better than you at interviewing.

You know there’s this Jewish joke about someone asks somebody, “Can you play the violin?” And the answer by this Jewish wit is that, “Well maybe I can, but I’ve never tried.” So maybe I’m a better interviewer, but I’ve never tried it.

But let’s grant it for arguments’ sake what economics teaches you – international economics – is that what _________ pointed out, was that if I specialize in where my advantage over you is greater, and therefore teach and leave you to do the interviewing, we’ll both be better off. Because we’ll have more of each of these two activities. And if each activity or each good is actually a good, not a bad like __________, then you are going to be better off. So that’s the fundamental case.

Now today people are worried about this case, and we can come back to that later in the discussion and try and see how the modern world looks. But the greatest argument against it today is that there are two sets of arguments. And let me just say one is the social criticisms. There are many young people who are altruistic and empathetic, and they worry about the effects of globalization on women’s rights; on democracy; on poverty in the poorer countries; on indigenous cultures, like Eva Morales, you know that globalizing is going to wipe it out.

Then Monsieur __________ in France worries about mainstream culture – that the French culture will be wiped out. And also French agriculture for that matter. So it’s a double jeopardy for the French.

And so there are a variety of such things. And those I will say are mainly the concerns of the young and idealistic people. And they really form the most important part of the world in my view. Then there are the fears and self-interest driven critics of globalization. Those are the AFL-CIO, or the presidential candidates today in the United States who, of course, reflect AFL-CIO fears and so on. They are worried about how trading with the outside world, having multinational corporation investing abroad and so on, how all of that is going to really undermine our wages of our unskilled workers; maybe even of the middle class in some cases. There are some people who worry about that.

But I would say that ties up with my original worry of what’s going to happen with the bottom 30 percent? I’m a Democrat in the U.S. political configuration. I have always worried about the bottom 30 percent. If this is true, it’s a serious downside. But I don’t believe it is true. But this is something which a lot of people feel, and that’s the biggest challenge of globalization today in the rich countries. 

No. It can never be flat. And today in Tom Friedman’s book, as it was in the time of Copernicus, it’s ironic that he’s using a phrase which is actually cock-eyed. I mean that’s no barrier to be taken on. I tell you why it is. Because what he’s suggesting – this is Friedman’s phrase – he’s suggesting basically that all countries can more or less produce the same things. And to put it in terms of analogy, that somehow India and China, which can now do almost anything we do, that they’re going to come down like Russell Crowe with Roman legions and trample over all our __________ and take all our jobs away.

So he coaxed people from Bangalore, which is where this great IT sector has materialized. And he quotes a friend of mine, __________, who runs a major firm called Emphasis which is one of the two major firms. And that guy is utterly brilliant. And he says things like, which Tom Freedman quotes, which is that, “We can do anything that the Americans can do.” So he’s flexing his muscles like Popeye. But Popeye does it on spinach. And ________ is doing it on IT.

And so you know, Tom [Friedman], of course, __________. And he takes it all down. But this translated by Tom’s readers, and to some extent even by Tom Friedman, into a completely different proposition, which is that therefore, Indians will wind up doing everything that the Americans are doing. But that’s simply impossible because the road has many hills and many pot holes.

Let me give you two examples, because it’s important for people to understand those. I’ll give you one cultural one and one political one.

The cultural one I’ll take Japan, and we will _______ exactly the same way as ________ that we are worried about India and China. We really thought the Japanese would take over everything. You just have to go back through the ‘80s and read the literature, and you’ll find that there’s this palpable fear of that kind. Well the Japanese are still terribly good at manufacturers. It seems it fits into their culture’s tender loving care. They had shoddy products in the ‘30s; but this is an artisan culture of perfectionism.

You see their traditional art and so on. Even the way they do the tea ceremony and the way they arrange their flowers. So there is a certain equilibrium in their life which translates into this artisan culture. So they have tender loving care. They produce beautiful products. They take care of consumers.

There’s no question of taking people to court. I sold you a shoddy product. Well that’s your problem now. So if you need to take me to court, I’ll file a countersuit. This is our way.

That’s not their way. So there you see a very dramatic ability to compete – to do very well in manufactures. And despite their upheavals in the last 15 years on macro economics and so on, they’ve obtained that advantage.

And I remember my good friend Larry Summers, who was U.S. Secretary of the Treasury and then president at Harvard, I remember him once saying in the days when we were; very tense about Japan, he said very gleefully once, and I also read in the Financial Times, that the last time that the Japanese produced anything interesting was a Sony walkman. Next to it, Financial Times produced another story saying Honda had just invented a fantastic engine which cut down on CO2 emissions dramatically. And that was enough of a commentary on poor Larry.

So the Japanese are very good at that. But what are they not good at? The first I’m talking about lack of flatness, they have an edge on us in manufactures and innovation of that kind. 

And then completely at the other end, where we have a huge advantage is where you need rapid response. And because of the IT sector, you have to have in finance and so on, either you responded within a few hours, or certainly a few days, they’re gonna be ___________ travel on to other suppliers.

And the Japanese are still sorting it out in their minds and so forth. They simply can’t do it. It’s like trying to run a 33 RPM record on a 78 speed. It simply is not possible.

So 15 years have passed, and they could not do their finance. And they could not do, as a result, macro economics. They were in a deep slump. But now they’ve opened up to getting foreign expertise.

So that was the cultural example.

Now we take the political example, and that’s very clear in contrasting India with China for example. India is a robust, noisy democracy.  ___________, the great author, he called it “a multitude of mutinies” – meaning each one is a law unto himself just like Americans are. That is a very noisy democracy. So we have IT sector taking off in a big way. In a democratic set up you can have as much software; there’s no censorship and so forth.

But you take China, they can’t do it. They have got hardware. They do very good hardware, because that’s manufacturers. But they can’t do software, because software means ___________, the ability to undercut the political system. So they haven’t developed software. They are way behind on that.

And that in turn, of course, is repercussions for China’s growth and so forth. Because they have a lot of modern growth is IT-dependent, or shooting out from IT. But there again, you have clear contrasts.

Tom actually, I don’t want to appear immodest, but Tom took an idea which I’d put out in the New Republic almost 13 years ago. It was a review article, a long one. And the question was, “A New Epoch?” with a question mark. And there I said today, competition has gotten quite fierce. Everybody talks about it.

I have never met a CEO who is not worried about somebody stealing up on him or her from somewhere. But it is not necessarily India or China. It may be Poland. It may be Brazil. It may be even France, or Germany, and so on.

What has happened is that today, multi-nationals slosh everywhere. People have access to __________ textbooks and so on. Interest rates, because of the flows of funds, have become closer to one another across the world. Given all of that, I didn’t use the word “flatness”. I said competition is now more intense. I called it kaleidoscopic in the sense that today, I have an advantage.

Like I am Boeing and I have an advantage over Airbus. But tomorrow Airbus might get advantage over me. They are sort of neck-to-neck close.

To take one example, which is Boeing is getting an advantage over Airbus because AAirbus came up with this crazy idea of creating a gigantic ship flowing; Queen Mary, Queen Elizabeth going through the sky. Can you imagine two of those landing at Rome Airport? You know already right now you’ve got to wait for four hours to clear the customs. If two, three landed at Rome Airport, you’ll be eating pizzas in the queue for two days running before you get into Rome.

I think the key today is volatility. And I think Tom misses that out. Tom is thinking of we have lost comparative advantage. It doesn’t mean anything. No, no, no. We haven’t done that.

The analogy is not Russell Crowe and the Gladiator, but it’s more like Braveheart. There are people coming in; you know Mel Gibson when he is on the ropes. He’s collecting all the different clans and so on. The enemy is getting the clans, you see. So there are all kinds of people from different directions coming in, and we really have to be on our toes all the time. And that has major repercussions about the way they gain from trade, and the way we have to cope with these consequences.

I think that is really the important aspect of globalization which I am worried about – that there is volatility. If there’s volatility, labor has to worry because our traditional conception was once you’ve got a job, you’ve kind of got it for life. Hopefully right? I mean many people did have long tenures.

I remember in Cambridge, England when we were all graduating, I had no interest in an English job. But all my English friends, the first question they asked, “What’s your pension plan like?”


Recorded On: Aug 14, 2007