Global business deserves a peaceful May Day

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Globalisation is not the cause of poverty and inequality in the world economy. Poor people are poor not because they participate too much in international trade but because they participate too little.

It looks as though Merrill Lynch, Mercedes and McDonald’s may survive this May Day without broken windows. And just as well. Merrill is still emerging from the aftermath of its dotcom excesses, Mercedes is mired in the problems of its injudicious international expansion, and McDonald’s new chief executive must refocus the business on healthier products. These symbols of capitalist oppression have enough to cope with.

Free of the noise of chanted slogans and breaking glass, I would like to take a quiet moment to reiterate that globalisation is not the cause of poverty and inequality in the world economy, and that poor people are poor not because they participate too much in international trade but because they participate too little.

Consider Adam Smith’s most important contribution to economic thought, which was not the metaphor of the invisible hand, but his recognition that the division of labour was the foundation of a complex modern economy. In a pin factory he visited, “one man draws out the wire, another straightens it, a third cuts it, a fourth points it, a fifth guides it at the top for receiving the head, but if they had all wrought separately, they certainly would not each of them have made 20, perhaps not one, pin a day”.

The process was more productive because of economies of scale from focusing on particular operations. Different individuals have, or develop, skills that can be applied to distinct tasks. Trade between specialised individuals and companies underpins modern prosperity and globalisation the international extension.

If you produce for your own consumption, you will have to spend most of your time meeting basic needs, including growing food and gathering fuel. Only in the time left over can you pursue other endeavours, economic or cultural. Self-sufficient agriculture is not very productive, so there is not much time left. So the incomes of the people who grow their own food consists only of the value of the food they grow.

But for most of history and still for most people in the world today, production remains largely for an individual’s use, or for the use of a small group. This is why most people have been, and still are, poor. In the past, inequalities were limited because productivity in gathering fuel does not differ much. The only way to be rich in a primitive society was to be a king or tribal chief with the coercive authority to eat food grown by someone else. But once some people become brain surgeons and others servers in fast food restaurants, there is another source of income inequality because there are greater differences in effectiveness among brain surgeons than among fast food servers.

Why are able people in poor countries often doing lousy jobs for little money? The more extensive the local division of labour, the more alternatives there are to self-sufficient agriculture and the richer someone is likely to be. But there are fewer alternatives for those in poor countries. Sewing trainers or assembling printed circuits is a common job because almost anyone can do it and those who will do it most cheaply are those for whom the principal alternative is growing their own food.

Adam Smith could never have imagined how far the process of specialisation through the division of labour would go. In his era, trade was mostly governed by the availability of resources. The damp Lancashire climate favoured British production of textiles which could be exchanged for wine from Portugal, where the vines ripened well. Most of world trade today is a result of narrow specialisation among companies in developed countries. Germany and the US exchange Mercedes cars for McDonald’s fast food and Merrill Lynch financial services. Eighteenth-century businesses, like the pin factory, exploited scale economies. Today, companies enjoy competitive advantages based on their own distinctive capabilities.

The essence of economic globalisation is specialisation by function and by skill on an unprecedented scale. I cannot tell you how to get rich but I can tell you how to stay poor. Do not become involved in the global marketplace.

John Kay’s book, The Truth about Markets, is published this week in paperback (Penguin, £8.99)

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