Globalization: Capital Rules

Socialism is not dead, and capitalism is not dying—these two just merged and mutated (not evolved, since evolution implies betterment) into the phenomenon of globalization, for the rules of the game (the rules of capital) are the same that Adam Smith and Karl Marx recognized for political economy with their respective theories. Nevertheless, despite being the same, the application of the rules has changed because the players, the fields, and the world have changed, requiring a renewed and updated analysis of political economy in order to understand properly our globalized world. This has been the goal of the subsequent critics of Smith and Marx in their respective times, such as Joseph Schumpeter with “Capitalism, Socialism, and Democracy” (CSD) and Friedrich Hayek with “The Road to Serfdom” (RS) around World War II. These authors attempt to explain, in different academic or scientific levels, the new implications and questions raised by capitalism and socialism in unlike settings to those examined by Smith and Marx: what is the role of the individual in politics and economics? What should be the role of government? What about freedom? Globalization is the ultimate instance in which these issues can be studied, as explored by journalist Thomas Friedman with “The World is Flat” (WF) at beginning of the 21st century—the dawn of our new, truly globalized world.

So how is our new world? According to Friedman, “the world is flat.” (WF:47), which means that, in a sense, the way economy works is becoming less and less convoluted. It is more and more simplified in a linear fashion because different factors (tagged as “flatteners” [WF: 48])         contribute to build a new world order in which material and “intangible” (WF: 330-336) capitals set the rules of the system beyond Smithian or Marxist considerations, yet closely linked to both. Friedman’s proposition is a vision as much as it is a theory (in the best of the Schumpeterian notions of these [CSD: 76]), since his observations are not only grounded upon real life examples, but also have influences from the theories of Hayek and Schumpeter, which have helped shape the political economy of our times. However, our globalized, “flat” world is far from idealistic, for it still presents several issues that refuse to have a definitive solution, thus challenging nations to resolve them before the problems disrupt the system.

But, how did the world become flat? Thanks to several flatteners that converged, building a platform for a new type of progress: globalization (WF: 80, 176). The flatteners are easy to analyze and understand because they correspond to specific events, product, or practices, which nonetheless possess a greater significance for political economy than their mere occurrence.

The first flattener mentioned is the decline of communism/socialism, epitomized by the fall of the Berlin Wall in 1989 (WF: 48-55). Many people considered this to evidence the triumph of capitalism, contrary to the usual notion that “capitalism leads to socialism” partially sponsored by Schumpeter (CSD: 131-134), while also proving Hayek’s axiom that any sort of collectivism (central-planning government) (RS: 49-79) prompts a totalitarian state like the Soviet Union, regardless of good intentions (RS: 97-111). The erasure of the clear dichotomy between capitalism and socialism/communism, and the apparent victory of the former, can be regarded as the original triggers of globalization and its consequences.

However, Friedman extends (maybe because the timeframes overlap) this “first flattener” to a product too—the personal computer, which appeared in the mid 80’s and would be the material basis of the information revolution that transformed business, society, and the world by the turn of the century (WF: 48-55).

The second flattener was yet another product: Netscape, the computer program that allowed all personal computers to link by standardizing the protocols needed for such task (WF: 56-71). In other words, Netscape meant the birth of a worldwide web—the Internet as we know it today, serving as medium to exchange information almost instantly and without cost throughout the world.

The third flattener was the development of software, which then complemented the connectivity possible thanks to Netscape by making the exchanged information usable (WF: 71-81). Software like Word and Excel standardized the way and the documents with which people worked, allowing for an improved and more productive workflow in and between companies, despite national borders or linguistic barriers, since Word looks and works the same in the U.S., Latin America, India, or China. This flattener meant the conversion of information into almost a material capital, redefining completely the notions of commodities, labor, and services forged by Smith.

The platform set by computers, internet, and software lead to the fourth flattener, a practice known as open-sourcing (WF: 81-103), in which people gather and work upon communally-owned and communally-managed projects, such as Wikipedia, the open-source encyclopedia.  This could be regarded as the first instance in which the division between capitalism and socialism blurs, for open-sourcing follows the individualistic entrepreneurial principles of capitalism highlighted by Hayek (RS: 37-48), fused with socialist ownership principles.

The platform also led to the fifth flattener: out-sourcing (WF: 103-113), the practice of relying on a foreign company for a service that used to be done inside a company, thanks to the Internet and the new-found value of information as a commodity. In the case of companies from the US and India , for example, services such as data-entry accounting and telephone “hot-lines” entail the transformation of information into documents or concrete services, both which can be exported and re-imported in the same way of manufactured goods.

Exported manufacturing, tagged as off-shoring, happened to be the sixth flattener promoted by companies around the world (WF: 114-127). Today, the cheapest way to manufacture a product might not be in a factory close to the primary resource, but in one overseas. China is the best example of this, with its cheap labor and pseudo-ideal manufacturing conditions which have attracted the interest of companies that are not Chinese. In our globalized world, it can be cheaper for companies to transport materials and products to ideal locations for their manufacture or marketing than locally investing to meet such conditions.

The matter of transportation and distribution was precisely the seventh flattener, with the label of supply-chaining (WF: 128-141), which means basically to get products to the customers who need them, or simply to supply services promptly, both in the fastest and most efficient way possible. Friedman identifies Wal-Mart as the trailblazing company of such practice, since supply-chaining made the superstore-chain grow strong and spread around the world, delivering products and services according to the needs and preferences of its customers in specific locations, even across borders.

The eighth flattener was in-sourcing (WF: 141-150), the practice of enhancing productivity by simplifying logistics. In-sourcing companies turn other companies’ issues into their business by solving them. Friedman analyzes the transnational company UPS as an exemplary in-sourcing case, for it evolved from a delivery-service company to one which provides logistical solutions to other companies, such as Toshiba and its tech-support case, improving their efficiency.

The ninth flattener was Google and the crowning of internet as ultimate informing tool (WF: 150-159). In our globalized world, information is not only a product or a capital as suggested before, but also the most important resource. The power of knowledge is no longer exclusive, hard to get, or bound to any sort of paid education, but rather freely available and accessible to everyone and anyone connected to the Internet thanks to online search engines like Google.

The tenth flattener, according to Friedman, is a bundle of enhancers to all the previous ones—digitalization, personalization, mobility, and virtualization (WF: 159-172). These “steroids” are epitomized by modern cellphones such as the iPod, since these carry digital music which once used to be materialized in vinyl records; many people own and use them; they remain mobile because they are wireless; and they therefore keep the whole world connected virtually either via phone calls or through the internet.

The ultimate statement behind Friedman’s analysis of the flatteners is that the technological developments of the last two decades have influenced the construction of a new world order (WF: 177-181). This is not unlike Smith, Marx, or Schumpeter, who all argued (though each with slight differences) that technology affects political economy the most—specially Schumpeter and his notion of “creative destruction,” in which capitalist economic systems are systematically destroyed and renewed because of new technologies, techniques, and practices introduced by entrepreneurs, who are sponsored by the banking system (CSD: 81-86).

The new world order that Friedman talks about includes “new players” who used to be locked out of the game (i.e. China, India), but that now contribute to the global economic system, even in “new fields,” such as data-mining, which have been developed or discovered in this globalization process. Capital still rules the game, but the field is broader, with more players in it (WF: 181-200).

Nevertheless, globalization creates and fails to resolve certain socioeconomic matters, leaving these on a list that needs to be “sorted out” (WF: 201-205). For instance, the new social order that Friedman describes blurs both Marxist and Smithian social categorizations, making unclear who takes advantage of whom; who is the exploiter or the exploited—the winners or losers in globalization (WF: 205-208). Does the US win by using cheap Chinese labor, or does the US lose by empowering China in this way?

Another issue, close to Schumpeter’s vision of a new social order deprived of “protective strata” (CSD: 134-139), is the decline of complex hierarchical structures within corporations and institutions, which Friedman identifies in the form of two phenomena: the transition from rank-dependant, command-obey hierarchies to mutual-cooperation structures (WF: 212-213), and the transformation of the consumption system. The latter means that instead of a cycle where producer/boss interact only with consumer/workers (in the Schumpeterian design [CSD: 81-86]), there is a third piece of the puzzle: companies, acting as regulating entities of their own between the other two (WF: 214-216).

Companies, thence, might have the biggest role in the globalized world, for they are not necessarily bound to national limits—transnational corporations can be virtually boundless (WF: 208-212), regardless of geographical barriers that could have had importance in the past (CSD: 111-120). Private corporations, with their private interests, are the ones doing the inner innovations (WF:340-345); rearing the entrepreneurs that revolutionize the world (363-367); growing from small companies to big corporations (almost in a monopolistic ideal [CSD: 78-80, 87-106; WF: 345-350]) or breaking down to get closer to their customers and workers (WF: 350-352); and even allying in order to improve (WF: 353-356). Private corporations implement the flatteners of the world, fixing their inefficiency spawned from human elements and bureaucracies (CSD: 200-218). For example (one mentioned by both Friedman (WF: 236) and Schumpeter), the railroads in the United States, which boosted the economy, were a product of corporations and entrepreneurs striving for progress, with a subsequent crash that nonetheless left the country connected (CSD: 63-71).

The problem with the private interest of corporations, which Friedman fails to point out directly but that Schumpeter discussed, lies upon the fact that corporations seek increase of profit, not of general welfare (CSD: 72-76). Even when this might lead to a stage in which “everybody is free and better off” despite inequalities (in a Hayekian notion [RS: 221-239]), Friedman recognizes that the best-case scenario involves “socially-aware” corporations (WF: 297-302), specially transnational ones, for these can then have an assured, positive impact in their communities and the world.

What should governments do in the face of corporate power? Governments must balance and complement the influence of corporations, ensuring competitiveness, both among companies and among nations (WF: 277-280). All political leadership must aim at this for a positive globalized ambience (WF: 280-285).

First, according to Hayek, government must ensure the rule of law necessary for capitalism to work and for freedom to exist (RS: 80-96). Friedman, more specifically, refers to this task as a matter of preventing the abuse of legal gaps in different states by transnational corporations or individuals (WF: 370-375). A specific example mentioned is copyright infringement and its country-relativity (WF: 217-129), which has meant almost an “evaporation of the substance of property” upon ideas and other creative works (CSD: 139-142, 156). Second, Friedman argues, government must take care of social issues that would hardly be addressed by private interests. In Schumpeterian terms, central planning (CSD: 172.186) is needed for matters such as education (which happens to be in crisis in the US regarding scientific, college, and basic levels [WF: 250-275] and which could be pinned on a decline of parenting and cultural values [WF: 303-306; CSD: 157-160]), welfare (WF: 293-297), and the unleashing of markets (WF: 313-315); all which promote employment (WF: 284-288), amend resource limitations (WF: 407-413), and prevent counterproductive phenomena like “the curse of oil” which stagnates developing countries dependant of and rich in oil (WF: 460).

This selected central planning would reduce inequalities among people and nations (WF: 316-323), enhancing cultural traits and values that make a specific nation more competitive (tagged as “glocalization” by Friedman [WF: 324-329], and “cultural indeterminateness by Schumpeter [CSD: 170-171]). Government, in this terms of collective action, would also be taking care of those “left behind” in the process of globalization, such as the sick (WF: 375-382) and the disempowered (WF: 382-391)—avoiding resentment or frustration (WF: 391-406) that prompt the abuse of liberties and technologies provided by globalization in order to attack it (WF: 429-436). Rather, government must make sure that everyone enjoys the comfort and niceties (i.e. McDonald’s) provided by globalization, as a way of conflict prevention (WF: 419-425).

However, Friedman warns, much like Hayek, that these governmental efforts must not sacrifice any freedom for security (RS: 132-147), either economic (i.e. protectionism [WF: 243-249]) or of any other type, for freedom is needed for capitalism and must not be killed for central planning (CSD: 167, 174) because that leads to totalitarianism (RS: 112-131). Even when freedom empowers terrorists by providing them with opportunities and tools (WF: 436-438), renouncing to liberties would bring (according to Hayek) worse consequences: the distortion of truth (RS: 168-182), ethics, and leadership (RS: 148-167), and frictions among nations because of a “we/they” mentality fostered by collectivism (RS: 240-260). The frictions would efface the tolerance needed for the constructive free trade characteristic of globalization (WF: 225-236). There must not be a transition from capitalism to socialism (since this has been historically proven to fail [CSD: 219-231, 234-284]), but a balance between the two guaranteeing social welfare and democratic freedom.

Freedom is, implicitly for Friedman and Schumpeter and explicitly for Hayek, the reason and the goal of political economy (RS: 28-36)—globalization has been reached through freedom while it furthers freedom. Thanks to globalization, anyone can be “special or specialized” (WF: 237-245); everyone is an entrepreneur (WF: 464) in a world in which only imagination and ambition are the limits and capital rules of the game (RS: 13-27; WF: 441-469).

Still, this ideal of freedom and government has been radicalized in the real world, both in support and in opposition, causing government to fulfill inaccurately its preventive and promoting roles amid its people. For instance, the Savings & Loans Bailout in the 80’s in the United States is a case that not only had repercussions and similarities to the current worldwide financial crisis—this crisis also showed the evils of neo-liberalism and central planning, while the lesser of many evils (governmental collective action) became the solution to save the American economic system from crumbling down. The S&L crisis occurred because the deregulations and legal reforms that preceded it (under neoliberal principles) actually aimed at promoting loaning in an attempt to boost the economy (a sort of central-planning device). In a sense, politicians misapplied the rule of law, taking away the preventive measures that kept the financial system in order, while forcing in innovation, some “creativity,” in the savings and loans, confident that the market would miraculously improve with this. The deregulations, however, proved to be more of a destructive construction than a Schumpeterian creative destruction, for these prompted several wrongful and corrupt practices by loaning institutions (specially with mortgage credits, just like the current crisis) that eventually lead to the “burst of the bubble” and the bankruptcy of many S&L companies. Such bubble burst, when compared to the “dot-com” burst of the 90’s-2000’s or the railroads’ burst, differs from the aforementioned cases in two aspects: the financial burst leaves no material infrastructure (except for lots of unpaid houses), and it affects a key element of the economic system—the banks and financial institutions supporting the entrepreneurs who are supposed to bring the creative destruction that renews the system (CSD: 81-86). Since such a crucial part of the economic system had been hit, it had to be rescued in order to save all the economy from stalling and breaking down. Therefore, the bankrupt companies had to be absorbed by the government (CSD: 188-199), paying their debts, setting new regulating institutions, and doing legal reforms again in an attempt to fix the problem and apply some damage control—same as the financial crisis nowadays, but at national and international levels, crashing after the exploitation of cross-national legal gaps and financial speculation.

The S&L bailout (as any other bailout), though socialist in appearance and operation, was just a swift collectivist remedy to keep capitalism functioning before it got too broken. Such is the capital rule of globalization: capitalism propels freedom and progress, with socialism maintaining the course steady for the whole world.


Works Cited

WF: Friedman, Thomas. The World is Flat. New York: Farrar, Strauss, & Giroux, 2006.

RS: Hayek, Friedrich. The Road to Serfdom. Chicago: University of Chicago Press, 1944.

CSD: Schumpeter, Joseph. Capitalism, Socialism, and Democracy. New York: HarperPerennial, 1942.

Smith, Adam. An Inquiry into the Nature and Causes of the Wealth of Nations. Indiana: Liberty Press, 1976.

Marx, Karl. Selected Writings. Indiana: Hackett, 1994.

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