February 5, 2007
Globalization and Inequality
Arnold Kling
The theory is the Stolper-Samuelson Theorem. Stripped to its essentials this says that we would expect the process of globalization to have the following effect: it will lower wages in the US and raise corporate profits (more precisely, returns to capital). In the poor countries that the US is trading with it will have the opposite effect: it will lower returns to capital and raise wages.
One might also change the wording to read "earnings of high-skilled workers" instead of corporate profits and "earnings of low-skilled workers" instead of wages. The point is that high-earning foreigners must now compete with high-earning Americans; meanwhile, low-skilled Americans must now compete with low-skilled foreigners. The result, Worstall says, will be to narrow the distribution of income worldwide, but to widen it within the United States.
The elasticity of supply of labour in Western economies has been drastically increased by the addition to their labour force of hundreds of millions of Chinese, Indian and Indonesian workers who have for practical purposes become part of the Western labour market due to the vastly reduced cost of bringing their output to Western product markets. There is, as yet, no matching increase in the supply of capital, even though its accumulation has accelerated somewhat. Elementary reasoning leads one to expect that income distribution in the West will tilt in favour of capital. The facts bear out this expectation. The Inequality Machine of capitalism is guilty as charged....The factor price equalisation theorem is hard at work thanks to the fusion of insulated compartments into an open world economy. Here, the Inequality Machine is producing more equality on a colossal scale by lifting the Eastern very poor to near the level of the Western poor. Nothing else, no development programme, no "war on poverty," no humanitarian campaign is in sight that would be remotely capable of doing the job. The envious and the morally indignant may hate capitalism for making the rich richer, but would they rather have the very poor remain very poor?
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