The Commanding Heights

Episode 1: The Battle of Ideas

The commanding heights deals with who between the government and the private firms controls the economy. In episode one, the opposing ideas are between government-controlled economy as advocated by John Keynes, and free market as advocated by Friedrich von Hayek. 20^th century economies have been mostly socialist until after 1974 when leading western governments started to lean towards free-market. Governments were following Keynesian economics that advocated government intervention and macro managing of the economy. Keynes contended that an economy without government control became uncontrollable in the hands of a few and to the detriment of the larger populations. Consequently, governments created and owned large and inefficient firms, which expected to be bailed out in the event of financial trouble. Policies supported large monopolistic companies, curbed unemployment through wage and subsidy controls, and used monetary policies to curb inflation. After 1945, most economies adopted a socialist system which was stable in the Eastern Block but unstable in the Western Block. In 1948 West Germany which was having severe inflation and shortages leading to black market, the director of economics abolished price and wage control, which resulted in an end to black market and economic prosperity.

Hayek stated that too much government control leads to totalitarianism, f or example, when the airline industry was regulated, government set high prices and penalties for infringement of prices. In free market the government levies less tax, cuts on spending, and leaves the economic initiative to firms. Hayek witnessed the effects of stagflation, or stagnation accompanied by inflation, which resulted in high unemployment in Vienna in the 1970’s. With the socialist market economic order collapsing, Reagan in America and Thatcher in Britain turned to free market amid opposition from state corporation workers and coal miners. Some economists fear that globalization of trade leads to terrorism by the disadvantaged communities, while other economists argue that free market controls inflation by introducing competition, choice and reducing unemployment in countries that attract new investors.

Episode Two: The Agony of Reform

Recession of major economies led to new economic thinking towards globalization and economic interdependence, but also created new levels of terrorism. In the 1980’s America and Britain started to deregulate the market through privatization of national industries. Most world economic powers soon followed suit by abandoning socialism in favor of free market. Socialism had succeeded in the Soviet Union through state planning, military might, low wages and free labor by prisoners, but workers were unproductive because they lacked incentive and just waited for their government wages. The economy spent more on military than public services, but Gorbachev started change through gradual political reforms called “perestroika”, that enabled free market to operate within the economy. In India, the government controlled, planned, and protected the market to an extent that foreign companies and imports could not enter the country. The people had to suffer shoddy services, goods, and grand corruption. In Latin America, many governments insulated their economies from external competition, which barred ideas, innovations, technology, and encouraged unproductivity. Hyperinflation was experienced in Bolivia, Argentina, Chile and other countries and had to be tackled by shock therapy, which included, controlling government expenditure, lowering import tariffs, allowing competition, and reducing state participation in economic activities.

Episode 3: The New Rules of the Game

Regardless of political system, the world has embraced free market and opened their economies to external competition. Globalization enables companies to establish in foreign countries, turning the world into a single market where everybody is a stakeholder and nobody has overall control. The Free Trade Agreement for North America improved the economy of Mexico with many American companies investing in North Mexico, a million new jobs created, and 280 billion dollar increase in exports. American companies decreased their cost of labor, experienced fewer trade actions, and lowered the cost of goods.

United States Pension funds worth over 11 trillion dollars, became major global investors, leading to fears of Americanization of the world economies, for example, California’s pension fund commands 5% of the French stock market. Supply of goods and services has become more reliable, because countries can choose between efficiency and importation. Entrepreneurs are motivated by profit, workers are motivated by compensation, while governments collect more revenue from a larger pool of taxpayers. Globalization ended the cold war and the Persian Gulf crisis, encouraged cultural mixing and integration, and increased tourism. Technology has aided funds transfer across borders in seconds, as in the case of the 50 billion dollar bailout of Mexico by US in 1994.

Under socialist economies, fiscal discipline has been poor, and government has a bloated budget. Relaxation of immigration laws has encouraged an influx of international software engineers to Silicon Valley. International banks can lend money at lower interest rates but higher risksm as happened in the 1990’s where Thailand real estate owners borrowed over 200 billion dollars. Poor internal capital markets laws led to a free fall in the currency, hyperinflation and unemployment, which spilled over into Malaysia, Indonesia, Singapore, and South Korea.

Globalization has resulted in globalized solutions especially by the IMF and World Bank, and stronger governments have to shore up failing economies, in order to also protect their investments in the weaker governments. Financial systems cushion other sectors, as in the case of Long Term Capital Market that was rescued from collapse by private banks. Developing economies benefit from increased employment in open markets, but workers in the developed countries suffer job cuts and wage freezes. The 1999 WTO meeting in Seattle scuttled because of these differences and street protests by workers’ unions.

Conclusion: Effects of Globalization

Globalization highlights global poverty, which in turn enables a poor country like Tanzania to sell to richer countries and compete favorably because of lower cost of labor. Such trade improves world peace and standards of living. Ideally, the perfect competition on the global market gives no advantage to one firm over another, but instead reduces the economic advantage and forces some firms out of the market. In reality, American and European countries have a competitive edge on technology, economies of scale, capital and marketing resources over developing countries. Chinese, Latin American and African economies have competitive advantage on labor costs which attracts western firms and increases employment. In order to increase their profit, western firms have to reduce their cost of labor by transferring their production to the cheaper labor markets or source some production components from the cheaper markets. Globalization increases a firm’s market share because it is able to sell to the foreign market as well.

Monopolistic competition may arise from globalization when a firm gains a strong foothold in external markets, as is the case with the major soft drink makers. In monopolistic competition the demand curve for a firm is downward sloping, and advertising is the key to sustaining profit. In monopolistic competition, advertising increases both cost and demand, as is the case with tourism promotion between, say, South Africa and Tanzania.

With monopoly, there is no close substitute for a product and there are barriers to competition, there is little incentive to improve product, and methods of production are inefficient. When  governments in China, India, Eastern Block, Latin America and Africa created monopolies in order to protect their national interest, like employment and supply, they ended up undermining quality and price, and made firms uncompetitive.