Capitalism, Globalization, and Inequality

1. Capitalism, Globalization, and Inequality Professor Matthew Christ Graduate School USA Washington, DC

2. Capitalism is a Product of “Enlightened” Self-Interest “Every individual … neither intends to promote the public interest, nor knows how much he is promoting it … He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.” – Adam Smith

3. Capitalism is based on voluntary trade “Man has almost constant occasion for the help of his brethren, and it is vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favor, and show them that it is for their own advantage to do for him what he requires of them … It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” – Adam Smith

4. Focus on Specialization, Comparative Advantage, and Trade “It is a maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy... All of them find it for their interest to employ their whole industry in a way in which they have some advantage over their neighbors, and to purchase with a part of its produce, or what is the same thing, with the price of part of it, whatever else they have occasion for.” – Adam Smith

5. Minimal Government Regulation “Little else is requisite to carry a state to the highest degrees of opulence from the lowest barbarism, but peace, easy taxes, and tolerable administration of justice. … The natural effort of every individual to better his own condition, when suffered to exert itself with freedom and security is so powerful a principle that it is alone, and without any assistance … capable of carrying on the society to wealth and prosperity…” - Adam Smith

6. Moral Behavior There can be no proper motive for hurting our neighbor, there can be no incitement to do evil to another, which mankind will go along with…. To disturb his happiness merely because it stands in the way of our own, to take from him what is of real use to him merely because it may be of equal or of more use to us, or to indulge, in this manner, at the expense of other people, the natural preference which every man has for his own happiness above that of other people, is what no impartial spectator can go along with. - Adam Smith

7. Fundamental Tenets Motivation – Self-Interest Property - Private Direction and Coordination – Free Enterprise Resource Allocation – Free Market Regulation - Competition Government - Limited

8. Fundamental Assumptions Rational Consumer Market of Individuals Full and Accurate Information All Costs and Benefits Reflected in Transaction (price) Income Fairly Distributed Institutions Functioning as Designed (Implicit Assumption)

9. Capitalism in Practice Irrational Consumers Market Concentration and Power Limited, Inaccurate, and Asymmetric Information Explicit Costs Only Unequal Income Distribution Dysfunctional Institutions

10. Globalization The movement towards the expansion of economic and social ties between countries through the spread of corporate institutions and the capitalist philosophy that leads to the shrinking of the world in economic terms. Includes transfer of wealth, natural resources, information, population, the integration of financial markets, and political and economic unions

11. Economic Integration The increasing reliance of economies on each other The opportunities to be able to buy and sell in any country in the world The opportunities for labor and capital to locate anywhere in the world The growth of global markets in finance The increase in transaction speed The decrease in transaction costs

12. Economic Integration • Result of: • Technology • Global Communication Networks • Internet Access • Growth of economic cooperation – trading blocs (EU, NAFTA, etc.) • Collapse of the Soviet Union and the Communist Bloc • Global Movement to Free Trade

13. Globalization Benefits • Increased consumer choice • Lower price • Capital mobility • Greater potential for growth • Increase international economies of scale • Increase efficiencies • Greater employment opportunities

14. Disadvantages of Globalization • Increase in gap between the rich and the poor • Dominance of global trade by the rich, northern hemisphere countries • Lack of accountability • Lack of opportunities for the poor to be able to have access to markets • Exploitation of workers and growers • Inability of infant industries to survive • Global transfer of resource wealth • “Brain Drain”

15. Implicit Costs of Globalization • Damage to the environment? • Exploitation of labor? • Monopoly power • Economic degradation • Non-renewable resources • Damage to cultures

16. Shortcomings of Capitalism on a Global Scale Irrational Consumers Global Market Concentration and Power Limited, Inaccurate, and Asymmetric Information Explicit Costs Only Unequal Income Distribution – National and Global Dysfunctional Global Institutions

17. Global Wealth Distribution

18. Inequality Increasing

19. And In Developing Economies

20. Global Problem? “These growing inequalities are not acceptable,” said Rahul Bajaj, chairman of Bajaj Group, who valued his holdings in the Mumbai-based conglomerate at $1 billion. “The rich have done much better than the poor, and that creates problems.” “The global social-economic order will change, if we want it or not,” Victor Pinchukwrote in an e-mail. In a second e-mail, he said businesses should concentrate on both maximizing profits and assuring “a more just distribution of wealth.” Mega-Rich Occupy Davos as 0.01% Decry Income Gap By Matthew G. Miller - Jan 25, 2012

21. Or Not? • Deripaska, 44, said if Davos participants can find “new ways out of the global political and economy instability” at this year’s meeting, “criticism will go down.” • Mega-Rich Occupy Davos as 0.01% Decry Income Gap • By Matthew G. Miller - Jan 25, 2012

22. Sustainable Capitalism – An Answer? Long-Term Time Horizon Implicit Costs Included Natural Capital Social Responsibility Corporate Accountability Enlightened Social Interest Environmental, Social, Governance Metrics

23. To Paraphrase Winston Churchill: “It has been said that capitalism is the worst form of economics except all the others that have been tried.” Responsible for immense global growth, development, and innovation Reduction in global poverty, eradication of disease, increase in literacy The most participatory system (market) A dynamic and changing system Your future!

24. Questions?