Is the age of Milton Friedman’s dream of global integration and free markets coming to an end?
The most powerful voice for globalisation had deep reservations, however, about a common currency and unfettered migration – the very cornerstones of the now-fracturing European project
Between 1980 and 2005, the world embraced the free market policies of Milton Friedman. A new age of globalisation ushered in economic integration of trade flows, capital flows, and migration at an accelerated pace.
Living standards rose sharply, while life expectancy, infant mortality, educational attainment, and democracy improved, and absolute poverty declined. These were not coincidences.
These developments played out through China’s opening, Europe’s deep regional economic integration, and the integration of financial markets among the rich economies and to varying degrees some emerging economies.
Nonetheless, global integration has undoubtedly had other characteristics or consequences beyond improving people’s lives:
● First, the entry of a vast unskilled labour force into the world economy suddenly made the existing stocks of physical capital, highly skilled workers, and prime real estate scarcer, producing windfall returns on these investments. The wages of unskilled workers, however, stagnated worldwide.
The result has been rising inequality between labour incomes and of non-human capital incomes in many rich economies. But these are two sides of the same coin – the dual manifestations of the same economic process.
Over time both human and non-human capital will adjust, restoring the original equilibrium. What is not clear is how long this process will take and what society would do to compensate those left behind.
● Second, globalisation on the recent scale should be viewed primarily as a one-off event, a blip (albeit big and long one) in the trajectory of an on-going process of global economic integration that resumed after World War II.
Eventually the rising returns to all forms of capital will moderate and return to their original levels. How long this will take depends on how quickly the supply sides respond.
Physical capital is likely to adjust most rapidly. Human capital associated with skill augmentation will take decades, although it could be helped in some regions by allowing appropriate migration.
The supply response of prime real estate will depend on location and regulatory controls. Studies in rich countries have found that housing supply is far less responsive than the supply of physical capital. This confirms the significance of regulatory controls on housing supply as a critical factor in the rising inequality of non-human capital incomes.
● Third, the problems associated with globalisation are not solely economic, but also relate to political economy.
Economic losses have been concentrated primarily among a small segment of the population in a few affected areas. But the benefits of cheaper imports from globalisation have been spread across the population.
A recent study of 40 countries found people on high incomes would lose 28 per cent of their purchasing power if borders were closed to trade.
But the poorest 10 per cent of consumers would lose 63 per cent of their spending power, because they buy relatively more imported goods. A less open world would hurt the poor most of all.
This situation can drastically alter the political economy. Dispersed beneficiaries do not translate into effective lobbies and votes and have no impact on politics; concentrated losers do.
● Fourth, in Europe the situation is even more complicated by unfettered internal migration and the straitjacket of a common currency. Governments have been compelled towards deeper integration while lacking sufficient capacity to respond to serious domestic dislocations.
Milton Friedman, the most powerful voice for globalisation, had deep reservations about a common currency and unfettered migration. He advocated free floating exchange rates to restore external imbalances. Monetary and fiscal policy could then be used to preserve the internal balance which affects inflation and employment.
Friedman also argued that unfettered migration should only be allowed if it was not motivated to take advantage of welfare subsidies. Otherwise, the incentives for migration will be distorted and society will eventually find it unaffordable and rebel against it.
The European project has now imploded on itself. It remains questionable if her members will one day again march united under one banner.
The objectives of deep economic integration are to enlarge freedom of choice and promote economic prosperity. And by so doing to improve the lot of the poor in the world. This goal has been achieved.
But free market ideas are temporarily out of favour in the corridors of power. Hillary Clinton has disowned the Trans Pacific Partnership she once supported. Donald Trump threatens protectionism, and wants to take jobs back from China and build a wall to keep Mexicans out. Theresa May told her party: “If you believe you’re a citizen of the world, you’re a citizen of nowhere. You don’t understand what the very word ‘citizenship’ means.”
But if the UK begins to turn away the immigrant talents who have come to call London home, then Britain would have exited Europe to nowhere.
Richard Wong Yue-chim is the Philip Wong Kennedy Wong professor in political economy at the University of Hong Kong