Globalization Reconsidered

If you take any introductory economics course, the instructor will explain to you a concept known as “comparative advantage.”  The idea, famously described by David Ricardo in 1817, defends free trade on the grounds that even if one country is better at producing everything than another country, it is to both countries’ advantage to trade.  Ricardo gives a hypothetical example involving England and Portugal, in which Portugal is able to produce both wine and cloth more efficiently than England.  In England, it is harder to produce wine than cloth, while in Portugal it is easy to produce both.  It is then cheaper still for Portugal to specialize in wine and import cloth, even though it is cheaper in absolute terms to produce cloth.  This is because there is an opportunity cost to producing one product versus another.

There are several problems with this.  First of all, as Herman Daly has pointed out, Ricardo was assuming the immobility of capital across borders.  He believed that there was a “natural disinclination” among people to leave their country of origin to establish businesses abroad.  He apparently could not have conceived of the globalized world today in which major corporations headquartered in the United States would outsource their manufacturing sites overseas to exploit cheap labor.

A Matter of Interest

It’s been a while since my last post, but I thought I’d throw out another interesting idea I’ve been studying.  I’ve made posts about monetary reform here, and talked about the idea of debt-free money, as advocated by the American Monetary Institute.  However, while that proposal tackles the debt problem, it still takes interest as a given.  It’s come to my attention recently that interest needn’t be an essential part of the monetary system.

Under the current monetary system, most of the money supply is created as debt.  When banks create loans, they take a fraction of their deposits to loan out.  But after they loan  the money out, that money stays in their ledger as money to lend out further.  Essentially, that money has been duplicated – created out of nothing but debt.  But banks only create the principal for the loan, while charging interest on it.  Where does the money come from to pay off the interest?  It has to come from other loans.  Thus, we have a game of musical chairs in which debt must be paid off with more debt.  So long as the music keeps playing, the cycle can continue.  But if a shock occurs in the system, as it inevitably does with the 18-year land cycle, money is literally destroyed as people default on their debts.  Wealth is then transferred to the lenders as people who default on their debts have their wealth repossessed.