Globalisation - How it all started and where it is headed

Ever since the English king Henry VIII ( circa 1533) broke away from the Vatican and set up the Church of England, Vatican wanted to teach England a lesson and was egging on the rulers of Spain to wage wars against Britain. There were many wars throughout Europe as a result, in the medieval times. The Protestant movement of 16th Century took over the Church of England and consolidated its the moving away from the Vatican during the Edward the VI. This was important for the age of reason to emerge 100 years later.

The years between 1770 and 1820 is called by economic historians as the Age of Reason. It was during this period that new ideas and inventions started shaping statecraft. Philosophers and logicians started wondering about the process of wealth creation and distribution. Originally their writings were more like discourses on ethics and moral science but without bringing GOD into the picture. The hold of the church had already begun to weaken amongst the Anglo-Saxons; the rulers and monarchs of countries like Britain,  France and Germany had started to keep the Church at arm's length unlike in countries like Spain and Italy where the Vatican held sway.  They had started to listen less to the clergy and more to writers and philosophers. The role of universities like Oxford and Cambridge is notable in this sense and many new ideas and insights were coming from the annals of these institutions. These universities taught the works of Greek philosophers, Socrates, Plato and Aristotle,  who spread reason thousand plus years earlier in their own didactic style. The idea of ‘economic value’ in its utilitarian sense took root and the focus was on the ‘wealth of the society as a whole’ as opposed to seeing wealth and well being were seen as outcomes of inheritance and the prerogative of the ruling elite. Initial ideas the social effect of Trade and Commerce, especially foreign trade was discussed by philosophers. English philosopher John Locke ( c.1700) was probably the first one to enquire into the process of how commodity prices were arrived at and he reasoned that commodity prices were determined by the actions of buyers and sellers dealing in a commodity and the ratio between them had a direct influence on its price.  

The traders of Amsterdam and London were bringing in goods from the East and making fabulous profits. Wealth and its creation, hitherto looked down upon under the influence of the church gave rise to the new ‘Protestant work-ethic’ —one of valuing diligence and persistence as opposed to towing the fatalistic beliefs propounded by the Church.  The rulers cosied up to the trading classes for they wanted money for the wars and conquests. What was good for the East India Company was good for the rulers of Britain. However, the emerging ideas of this “Age of Reason” had put paid to their ambitions. 

In those days of mercantilism, countries sought to maximise the inflow of Gold through exports and limit imports as it resulted in the outward flow of gold.  One of the biggies of the East India Company, I forgot the name, argued for restraint on Corn imports from France.    

Even as early as the 1770s, David Hume, in many ways the mentor of Adam Smith, denounced trade protectionism as an anachronism and argued that countries should go for a win-win strategy and not just seek to export more and import less. 

Adam Smith, in 1776, expounded on the 'invisible hand of the markets’ as the source of societal wealth and with Spain being the largest market for British goods, the English Queen at that time was dissuaded against notions of waging war on Spain and thereby spoiling the biggest market that England had. This was in spite of the fact that England had become very very strong in the previous 100 years and could successfully challenge and block Spanish merchant ships  in international sea lanes. The once Spanish Armadas were easy meat for the British with their ship-building abilities leap-frogging those of the catholic church dominated countries. The Anglo-Spanish wars came to an end in 1808. The Church Reformists had won decisively. The Napoleonic wars also ended in 1815 with the Napolean’s defeat in the Battle of Waterloo. Britain was not at war for the next 100 years, until 1914, when the first world war broke out.

With calm restored on the political front, the traders and the rulers jointly innovated- the law to legally incorporate a Joint Stock Company was passed in British Parliament (c. 1844), Laws concerning Shipping Registers, Insurance, Factoring, Bearer Bonds, cheques, Bills of Exchange,  documents of Title to Goods and many other devices and customs of commerce were enacted. 

The year of 1776 is most significant for three important happenings - The American Declaration of Independence, James Watts invention of the steam engine and last but not the least, the publication of Adam Smith’s “An Inquiry into the Nature and Cause of Death of Nations”, or “Wealth of Nations” for short.  ( You can download for free from Amazon.com if you have a kindle ).  The study of economics which was disparaged as the “Gospel of Mammon” was given its due place.  The discipline of Economics, originally called “Political Economy” was born.  

Adam Smith was the first to explain the efficacy of markets and the division of labour. In explaining the latter he notes, “To take an example, from a very trifling manufacture, but one in which the division of labour has been very often taken notice of, the trade of a pin-maker. A workman not educated in the business ( not aware of the division labour that has rendered it a distinct trade) , …  could scarce, perhaps with his utmost industry, make one pin a day and certainly could not make twenty.  …. . If one man draws out the wire, another straight it; a third cuts it, a fourth points it; a fifth grinds it at the top for receiving the head; to make head requires two or three distinct operations; to put it on is a peculiar business …. And the important business of making a pin is, in this manner, divided into eighteen distinct operations …  ten persons could make upwards of forty-eight thousand pins. But if they had all wrought separately and independently, and without any of them having been educated to this peculiar business, they could not each of them made twenty, perhaps not one pin a day. “

He further explains how all this division of labour and the resulting efficiencies of scale is limited by the size of the market. What to do with forty-eight thousand pins made in a day if there is no market to sell it? Very logical indeed. It is in explaining 'the invisible hand of the Markets’ that he excels. Explaining the origins of money, he delves deep into money as the “Medium of Exchange” and its use in facilitating the exchange of values represented in the goods.  In explaining the idea of VALUE, he observes two different meanings- one “Value in Use” and another “Value in Exchange” and explains how Water, though having high value in use has no value in exchange while the reverse is true for diamond.

Of four factors of production —land, labour, capital and organisation, he opined that it was Labour that added significant value to the output. This recognised for the first time the dignity of labour and its importance in wealth creation. It had a tremendous impact on social transformation in the ensuing years. The French Revolution and the calls of  “Liberty, Equality and Fraternity” rocked the ruling elites in Britain and France with the storming of Bastille in 1789. Social reforms were set in motion. First signs of ‘Welfarism' as state policy started appearing.  Trade Unions which were under severe repression were given legal recognition In 1824. Strikes were declared legal for the first time.

Nation-states had begun to replace monarchies all over Europe and the focus was on science, innovation and trade. Adam Smiths proposals for liberalising trade were adopted by British Prime Minister William Pitt. Later David Ricardo took forward these ideas and established the importance of Foreign Trade as a vehicle of global prosperity. The Theory of Comparative Advantage propounded by him explained how by specialising what they did best and by opening up to trade the size of the cake could become larger for everybody to enjoy. By that time, Britain was importing a lot of corn cheaply from France to the detriment of British traders and farmers. There was local lobbying against these imports and the infamous “Corn Laws” to restrain corn imports were passed by the British parliament. David Ricardo was particularly critical of these laws and they were rescinded. Remember just a decade earlier France and Britain were sworn enemies, but the imperatives of trade had made hostilities harmful for trade.  

 J. B. Say formulated his famous Theory of Supply - "Supply created its own Demand”,  and while this idea was widely believed for some time,  very soon there was also empirical evidence to overproduction and lack of demand leading to depression.   This basic see-saw nature of the system was explained by the French economist Sismondi as "Business Cycle” when USA had its first major depression in 1819.  He was the first to see the limitation of the ‘Market’ in the sense that universal competition or the effort to always produce more and more—always at a lower price,  as the reason for business failures through over production. ( like the Indian car market now)        

Formulation of Price Theories under various types of markets ( Oligopoly, Monopoly, Perfect Market etc.) under Alfred Marshall also followed suit strengthening the arguments in favour of unregulated markets as the tool for price discovery and efficient allocation of resources between various factors of production.

It was in this dawn of this age of reason, the seeds of the present-day Globalization was sown. Marx ( c 1880)  stirred the pot with his own  Labour Theory of Value. The Marxist framework of dialectic materialism sought to explain all progression of history in its light. However, it was no less global or rational than the theories of Adam Smith.

We have ever since seen the consistent expansion of Markets and the movement of international capital across nation-states in trillions of dollars. As a repudiation of this market-based economic rationalism and its substitute, the socialist system has been an unmitigated disaster. It failed on both fronts—economic and political. Britain threw away all vestiges of state socialism in the 1980s under Margret Thatcher, USSR collapsed in 1990s and India paid the price of ‘Mixed Economy’ of ‘Nehru-Indira’ era when it almost collapsed in 1990 when there was no foreign exchange to pay for the next consignment of Petroleum products. It was due to the political sagacity of Narshima Rao that we are still one nation today as an economic collapse at that time would have ended the concept of India. The socialists have just to show Venezuela and Cuba to show to the world-both examples of socialist dystopia.

China took to capitalism with a vengeance in the 1980s; the basic motivation of the Chinese Communist Party leadership was to hold on to power and continue its lordship over its people. Deng Xiaoping’s famous remark “I do not care if the cat is black or white so long as it catches mice” was the last nail on the communist coffin. The Maoist shibboleths of the past were swept away with one big broom. It embarked upon rapid globalisation through the capitalist route, inviting global capital in trillions of dollars,, especially American capital in a big way. So totalitarian and so ruthless are they in the execution and so cunning in their currency manipulation and foreign policy depredations that now in the time of Coronavirus,  all of us in the world feel that the philosophy of ‘rational self-interest’ propounded by Adam Smith has led us into unwilling partnership with Chinese mercantilism.  It is the irony of the times that the most ruthless Communist Regime that killed 50 million ( yes 50 million) in the 1950s is the greatest proponent of global trade, albeit in its owns terms.

Global warming, climate change and this Coronovirus all seem to point to something—that this model is unsustainable. The focus has to be on the Community and not on limitless expansion of material means of wellbeing through the market mechanism and global movement of capital. Do I sound like Gandhiji now? We have to look back to see why this apparently ‘rational’ system has now run its course. The metaphysics of Adam Smith’s economics can be best understood from of 'Wealth of Nations’ ( loc 238 in Kindle): “ It is not from the benevolence of the butcher, the brewer, or the baker that we expect our diner, but from their regard to their own interest. We address ourselves, not to their humanity, but to their self-love, and never talk to them of our own necessities, but their own advantages”.  

This is "Homo Economicus” or ‘economic man’. This idea assumes that every individual makes decisions in self-interest and they choose options that offer them maximum utility with least effort. Later on, JM Keynes put individual greed on the pedestal, as the driving factor of all economic growth and through that human welfare through an expansion of material means of well-being. The enlightened self-interest of individual firms operating acting to maximise their individual interests has led to the concentration of all production in a totalitarian state that does not follow any norms of civilised behaviour in statecraft claiming that their unique system of social organisation is the new rationality while actually, it is the one man’s ambition to rule the world through the Chinese Communist Party without any checks and balances.

As a result. there is no concept of self-limitation in modern economics. The idea of full-employment is supposed to happen naturally when the whole economic system operates on full equilibrium when all factors of production are fully and optimally deployed. 

One of the key thinkers in the area was Gandhi who saw the dangers of producing to the needs of the market. His dictum “The world has everything for ones need, but not everyone’s greed’ should be the metaphysics of the new sustainable economics of the future; a model which places a premium on the protection of natural resources limits carbon and methane emissions.  Rapacious and ever-expanding consumption as the fulcrum around which the economic system must spin; otherwise it is all misery of recession and joblessness,  playing into the hands of a monstrous totalitarian regime which is a danger to world peace, burning down the world’s resources to the extent of extinction of species-- is no rationality.

It is now left to future generations to collect the debris of the misdeeds of the globalised generation of which I was a member. 

There is no ‘Business-As-Usual’ in global economics anymore,  a paradigm shift is required and new models that put a premium on the local community need to be incubated and implemented. The start has to be made with getting out of global supply chains of both finance, goods and services.  Surprisingly there is one functioning example of the Gandhian model in the world, that too in the Mecca of capitalism and rabid consumption, the Amish community of USA. It is time to learn from them, as my wife keeps saying.

PS

The English literature of the early 1800s  is worth reading. I would recommend readers to Thomas Hardy’s “Away from the Madding Crowd” set in the early 1800s  and “North and  South” by Elizabeth Gaskell set in pre-1850 England - the early years of Industrial Revolution. In the Thomas Hardy’s novel ( which I picked up in the pavement in Melbourne recently before the garbage collectors arrived !) I was surprised to note that a farmer whose main occupation was sheep rearing could insure his sheep against mass deaths. The hero of the novel, one  Gabriel Oak, fails to do so and loses all his wealth when his own apprentice sheepdog drives the entire herd down a ditch one night. He had not insured and the financial ruin pushes him to penury--I do not think our wandering sheep farmers get insurance yet!. The later explores the clash of interests between the Factory Owners and  Labour. Though both are love stories, they are set in this “Age of Reason” and give valuable insights into the economic issues of those times. The market scene elaborated by Hardy is fun to read.