In Defense of Global Capitalism

In Defense of Global Capitalism
Johan Norberg

Capitalism, Free enterprise. Free trade – Social aspects. Globalization –
Economic aspects. Poverty – Developing countries.
ISBN 1-930865-46-5 (cloth : alk. Paper)
ISBN 1-930865-47-3 (paper : alk. Paper)
Cato Institute Copyright 20003

Farmers seek tariffs. Manufacturers seek import quotas. Unions favor minimum wage laws. Developing countries try isolating their infant economies. Those who seek to use government for their own ends are few but focused. Those who are harmed by those actions are many but defuse. Globalization and freedom will not defend themselves. "So if the trend toward greater globalization is to continue, an ideological defense will be needed for freedom from borders and controls." Johan Norberg has constructed a powerful tool in that defense. His facts, emotions and clear writing come together well in his 2003 book In Defense of Global Capitalism.


Global capitalism or globalization is the right to do across boarders that which you can do across the street. It has always been easy to say that free trade helps; it is another to prove it. History now seems to have done it. During the 20th and 21st century we saw the establishment and the dismantling of controlled economies in the USSR, China and eastern Asia. Even with the similar geographies and cultures, North Korea and East Germany languished under socialist policies while South Korea and West Germany thrived. Asian tigers were some of the first to open their economies, reduce tariffs and deregulate foreign trade. For example, Hong Kong went so far as to allow its citizens to open a business first and register later. Their success has been dramatic. In Contrast Africa has 14 of the world’s 20 least free economies. The failures are obvious. Another example is China. Although the "green revolution" helped produce more food, it required the privatization of farm production to truly spark growth and an amazing reduction in poverty. India has partially ended restrictions on trade, and in those areas, millions of jobs were opened for the poor and gave hope to the hopeless.


But free market capitalism remains under attack from a wide variety of sources. Norberg takes on each and every detractor head on. Is globalization bad for culture? Aren’t the rich getting richer on the back of the poor? Doesn’t capitalism result in greater inequality? Is world hunger becoming a bigger problem? Doesn’t free trade mean a "race to the bottom?" How about those companies that pollute and employ young children?



Cultural integration has been taking place from the time of the nomads to the advent of international corporations. We gain from the innovations which result when we learn from other societies. Actually ancient cultures are given a greater opportunity to survive through access to wider markets for their particular goods and services.


While it is true that trade results in the rich getting richer, Norberg correctly points out that the poor benefit as well. Abject poverty is most persistent where trade is the least. Research shows that economic growth results from increased trade, and growth is the best cure for poverty. It is no accident that poverty thrives more often at inland locations away from greater trading opportunities.


Inequality of income and assets are a problem between the richest and poorest nations. We know that the spread of capitalism has resulted in the accumulation of great wealth. "The uneven distribution of wealth in the world is due to the uneven distribution of capitalism." (P154) Look at the nations that have little wealth and great poverty and you will find countries that have intentionally excluded themselves from trade and/or the right to private ownership of property. If you want to do something about inequality, increase free trade.


World hunger and famine are far less prevalent today than ever before. The substantial increases in food output has not been from an increase in the number of farms but from improvements in agricultural efficiency. The "green revolution" has reduced the number of undernourished people in the developing world from 37% to 18% between 1970 and 1996. After Chairman Mao died in China, its people were given the right to lease land from the government. It was so successful that "...nearly all farmland passed into private hands in what may have been the biggest privatization in history." (If China was the largest, I would suggest that Abraham Lincoln’s Homestead Act, where he gave away the western USA, was the second largest.) Twenty years ago China was fighting one of the world’s worst famines and now it is selling farming surplus. The end of starvation flows from the desire of a farmer to get rich.


There are many who say they support free trade "but" they fear the "race to the bottom." They are saying that business will simply send all of their investments to places where salaries are the lowest. If that were true, first of all, Nigeria would have the largest business boom, which it does not, and secondly, unemployment in the developed world would be rising, which it is not. Businesses seek and pay for productivity. They generally spend a great deal of money on plants and equipment and therefore their primary goal is to obtain the most productive employees. It is no surprise that the United States still has the most productive and the highest paid workforce in the world notwithstanding many years of competition with an exploding third world economy. It is interesting to note that the average wage in the developing world has increased from 10% of American wages in 1960 to 30% in 1992. We accept competition locally with great success; free trade internationally would have the same result.


Child labor and the environment present challenging problems. However, both improve in wealthier economies. If you impose trade restrictions, you hurt the progress of the poor and everyone’s ability to help the environment. Think about a family that must send its children to work in order to eat. Maybe it is a factory making shoes for Americans. Our refusal to open up our trading policies is not going to stop that family in their attempts to survive. Their children will be sent to work somewhere. And they will probably be subjected to years of less productive and more dangerous labor.


Norberg’s passion increases to an appropriate crescendo when he speaks about the impact of the European Union and American tariffs on developing countries. The West is certainly capable of competing with anyone in the world. Eliminating tariffs and other trade barriers would actually force our industries to become even more efficient. One of the main benefits of such efficiency would be to reduce our cost of living, which is the best way to give poor people a salary increase. The pace of our own economies would improve with greater trade. But none of that compares to the damage our tariffs and trade restrictions are doing to developing world. They suppress any competitive advantage farmers and industries may have in developing countries. "One study estimated that the world economy would gain about $70 billion a year from a 40 percent tariff reduction, and that some 75 percent of the total gains would be harvested by the developing countries. That would equal the total amount of international development assistance to the developing countries, and it is almost three times the monthly income of all the world’s absolutely poor taken together." (P157) A British Labor government white paper suggests that a 50% reduction in tariffs would result in "...a growth of prosperity in the developing countries by something like $150 billion, or three times as much as global development assistance." (P162) Reducing trade barriers is a win-win for both the western industries and the developing world.
The right of peaceful people to migrate is key to any discussion of poverty. Exhibit one is China where millions of its citizens relocated to the coast for better paying jobs. People, like goods and services, must be able to move to where the jobs are located. Anti-globalization forces however claim that indigenous cultures would be hurt by immigration. The problem with that argument is that most cultures are already the result of centuries of migration and international contacts. Despite the complaints of unions and conservatives, immigration is beneficial to the American economy. More workers means more taxes. They also strengthen the Social Security system by adding to the worker-to-retiree ratio. I would loved to have heard more from Norberg on the immigration issue. For example I would love to be a fly on the wall in a debate between Johan Norberg and Edgar Browning author of Stealing From Each Other. How The Welfare State Robs Americans of Money and Spirit. They have so much in common and yet they disagree so drastically on the immigration issue.


Anyone who has an interest in poverty, has a great deal to learn from Johan Norberg’s In Defense of Global Capitalism. It is and will remain a powerful tool to oppose those who would restrict the right to trade and move around the world.

Stealing From Each Other

Stealing From Each Other. How The Welfare State Robs Americans of Money and Spirit
by Edgar K. Browning 2008

Public Welfare, Social Policy, References and Index
ISBN 978-0-313-34822-8
(Alk. Paper)
Praeger Publishers

A single mom without a job in Philadelphia (1996) was eligible to receive the equivalent of $19,217 (equivalent value) from Medicaid, food stamps, housing assistance, AFDC and the Earned Income Tax Credit. With a $5,000 per year job she added only $1,500. With a $10,000 per year job she ended up with $18,253, less than no job at all. Incentives work.

While Edgar Browning very effectively discusses welfare disincentives, he has a much bigger objective in Stealing From Each Other. His goal is to calculate where the country would have been without more than 50 years of government intervention into income redistribution. He estimates that without our egalitarian policies, everyone’s income would have been 25% higher and income taxes would have been 75% lower. But because Browning is very careful and cautious with the numbers and the analysis, he leaves out of his book any visceral description of life with disposable income 1/3 higher. Workers would have been able to afford to save before buying a home or a car. The financial reward for work, supporting yourself, staying in school, and delaying parenting until marriage would have been absolutely irresistible. Poverty itself would have been reduced to a rarity. That’s what Browning thinks we have "stolen" from one another.

In order to arrive at his conclusion that all Federal egalitarian policies should be terminated he covers, the morality of market based compensation, an accurate assessment of the magnitude of poverty, the impact of welfare type programs on the poor and a calculation of the financial impact of egalitarian policies on the economy as a whole.

Generally the free exchange of labor for a paycheck results in fair compensation. Earnings really are related to your productivity. Those who study harder, get more experience, develop more skills, and work harder are paid more. Contrary to popular mythology people who make lots of money work harder; a lot harder. The top 1/5th work 700% more hours than the bottom 1/5th. Productivity, supply and demand are not just abstract concepts from an economics book but affect real people’s incomes. For example, men are paid more for doing dangerous jobs (they sustain 92% of all work related deaths) because so few people are willing to do them. This book destroys many other popular mythologies about the impacts of racism or sexism on employment and compensation. For example, as long as some employers are not racist, salaries are bid up to each individual’s productivity. Statistics show little or no differential between the incomes of similarly situated people. Likewise we have persistent myths about income extremes. Many groups blindly parrot government statistics that the top 1/5th of households earn incomes 12 times the bottom 1/5th. The problem is consumption studies show only a 2:1 ratio and lifetime longitudinal studies show income differentials of only 3.2 to 1. After reading these statistics you come away with a real understanding that actual market compensation is, for the most part, both just and fair. Governments can alter the results but it does so at the risk of making compensation unfair.

Even though compensation may be fair, poverty is certainly with us. How big is the problem? Start with the history. From 1939 to 1970 the official level of poverty declined steadily to 12.6%. From then on it has remained fairly constant. However, those official statistics are remarkably incorrect and misleading. On the surface, there are currently about 37 million people living below the poverty line. But they are not the same people over time. After only 3 years 70% have moved up. Others have taken their place. Many people experience bouts of poverty. Young people join the workforce at the bottom. New immigrants arrive and look for work. Injured, sick and others rejoin the workforce. The official statistics are like looking at a single snap shot, while a better view would be looking at a family album.

Persistent poverty is a huge problem but the numbers are very different. Some studies show that 1.5% to 4.9% of the population are very poor and stay poor. Browning estimates that this group is 1-3%. Why are they poor? There are several reasons. Entry level wages have not kept up; the number of single moms have tripled between 1960 and 2003; workforce participation by those in the bottom quintile since 1960 has dropped in half, and our country has absorbed lots of immigrants. Statistically avoiding persistent poverty is rather straight forward: finish high school, marry before having kids, and stay employed. You may still experience bouts of poverty, but not long term.

Why are there now so many single moms and why has workforce participation dropped? Browning suggests that these can be explained, in large part, by the disincentives created by the government’s egalitarian policies. Therefore although these policies may have reduced overall poverty as evidenced by consumption studies, their effect has also been to leave us with a hard core of millions of very poor people. Isn’t our goal self-sufficiency? At what cost do we maintain these policies? Browning takes on the challenge of determining whether we would be better off without them.

Do the egalitarian policies actually help the poor? On the surface the answer must be yes. People would not sign up if they didn’t see the advantage. Statistically the bottom quintile consumes almost twice as much as their reported incomes. Some of the credit must then go to the 85 different federal, state and local anti-poverty programs. But here again this is a static view of poverty. If people stayed poor all the time then income redistribution would make sense. But that’s not the case. People move up and down all the time. They spend more of their time being "not poor." If we are taking more from them when they are not poor than what they receive when they are poor; are we helping them? Could they have saved more during good times? When you consider the impact of taxes, Social Security, minimum wage laws, the jobs never created and the technologies never invented, most of the poor are injured by the existence of our welfare programs.

Over the last half century, the diversion of our incomes to everything from Social Security to Medicare to welfare has decreased our savings, capital and productivity. Our incomes would therefore have been 10% higher. Each household in 2005 would have had an additional $12, 175 more income per year. By removing egalitarianism from our tax system and moving to a proportional income tax system, Browning concludes that GDP would have been 9% higher due to increased labor, capital and technology. Without the bloated egalitarian government budgets of $620 billion per year, our country could have avoided its addiction to deficit spending. GDP would have been another 3.5% higher just by eliminating the economic drag from deficit financing. Then Browning guesstimates that eliminating the myriad of other policies like minimum wage laws and unemployment insurance that GDP would have been yet another 2.5% higher.

Taken together that means that virtually everyone’s income would have been 25% higher. But that’s not all. Without $620 billion in annual spending, almost all income tax rates would be 75% lower. That means that everyone’s spendable income would have been one third higher.
All Browning asks is that the Federal Government (not the states) give up all egalitarian policies. As amazing as all this sounds he is no Pollyanna. He has done excellent research into exiting economic literature and where that is lacking he makes bold but realistic guesses as to the consequences of each of his suggestions.

Having given the book excellent marks on virtually every topic, I part company with him on the issue of immigration. He says that immigration increased the supply of labor, causing native incomes to be 3.2% lower. Citing George J. Borjas and the Congressional Budget Office he claims that immigration has increased the number of uneducated workers by 82% and estimates that unskilled wages are 10% below what they should be. Where do I start to respond? Immigration does not change the supply of labor. It changes only the location of labor. In this world of "in-sourcing" and "out-sourcing," can it be asserted that our labor force isn’t already competing with factories around the world? The real villain is the government’s prohibition on immigrant employment. Without the right of immigrants to work, there is no upward mobility. If you confine humans to bottom rung jobs, you will create a log jam. Millions of immigrants are confined to entry level jobs. This is the real cause of lower entry level wages. Please don’t tell me that people who came here risking life and limb aren’t ambitious to move up the employment ladder. Immigrants throughout history have always been great innovators even when they started out poor and uneducated. We have added millions of newborn children. Should we restrict childbirth to increase wages? But my central problem is with Browning’s statement that: " Putting more and more immigrants to work does not raise the average standard of living of natives..." I thought that everyone gains from every voluntary exchange; that transactions are not zero sum games, and that all of our productivity adds to the total GDP. I don’t understand how Browning argues that the efforts of those at the top income levels add to the economy but not those at the bottom. Immigration is not a cause of poverty nor a drain on our economy. (It may be a drain on government coffers but that is a different subject.)

Taking from one for the purpose of giving to another is the same as what a thief does. A thief is not justified by his needs. Nor does a democratic majority vote make it moral. Government’s redistribution of income cannot be morally justified as an organized charity. The reason is its inherent inefficiency. Think of a bucket brigade scooping water from the deep end of a swimming pool. The run along the sides, spilling most of the water, and then throwing the rest into the shallow end. Today the poor and all of us suffer the consequences of the leaky bucket we have used for the last half century in our effort to be charitable. Edgar Browning is convincing that real charitable efforts would be better.