Testing the Globalisation Model

William Krehm

The world has been launched on a course of absolute free trade and diplomatic passports for speculative money, and globalisation. Not only all barriers, but even speed bumps are being done away with. No one has been over this route before. The only ground for believing that it will bring peace and prosperity to the world is an academic model of the self-balancing market that assumes all actors of such trifling size that nothing they do or leave undone individually can have the slightest effect on price. That in itself is basis enough to qualify the economic theory taught in our universities as a religious faith or charlatanry.

But above all, the present globalisation is not working. It has led to the emergence of a single economic and military superpower, the very antithesis of the infinitesimal actors postulated by marginal theory. It is reproducing the unsustainabiliry of the boom of the nineteen-twenties heightened to paroxysm.

That conclusion is turning up not only in spreading discontent — the mass demonstrations against the globalisation conferences in Seattle and Washington D.C., the outbreak of civil wars, but in the drastic drop in life-spans in Russia over the past decades, the overcapacity in industries such as motor vehicles, the deepening trouble in financial institutions on all continents, the crushing load of consumer debt that precariously sustains the boasted prosperity of the lone superpower.

All this could have been foretold with the help of some simple reasoning requiring only a pencil and paper. All we needed to draw from was the history of the thirties. plus some elementary rules elaborated by non-conventional economists, or readily adapted from other better-grounded disciplines.

Let us apply some of these.

Test One. The Tinbergen Counting Theorem. Some decades ago a Dutch economist Jan Tinbergen, originally trained as a physicist, tried injecting some scientific method into economics. In our first year of high school algebra we learned that if two independent variables can be identified in a problem, the solution must have two variables. One wonk do. If three independent variables have exist in the problem, the solution must have three independent variables, and so forth. This came to be known as “Tinbergen’s counting rule,” honoured by economists in the abstract, but rarely applied.1

Let us apply it to globalisation. The more barriers you remove to trade and the free flow of capital, the greater the number of wild cards in the economic deck. New independent variables are unleashed to surprise us. For example, allow the free flow of speculative capital, and exchange rates become a gamble, which according to the free trade doctrine, can only be countered by higher interest rates. But high interest rates ransacks the public treasury for the benefit of usurers, and bankrupts the economy. That unleashes social unrest which overwhelms us with an entire Pandora~s box of major problems, each with its own independent variables. However, the free market model which is supposed to justify and control all this consists essentially of two independent variables — market supply and demand. By the Tinbergen Test, globalisation as an overriding goal strikes out right there. This in no way rules out specific free trade arrangements.

The number of independent variables in our technologically driven economy is not only open-ended, but the increase of their number speeds up continually. Only systems theory that tracks these independent variables and the subsystems that spring up around them can equip us to handle such problems. There are two constraints to be observed. Each subsystem has its own distinctive code; and no subsystem must be cannibalised by another. The functioning of the whole system requires that each subsystem be kept in working order. An example of such a system is the automobile. It consists of a set of subsystems — the chemical (fuel), the elector-magnetic, the electronic, the mechanical. If any of these ceases to perform, the car won’t move.

What we call the ecology, is actually a complex of different subsystems. Each type of pollution — greenhouse gasses, mercury pollution of our water supply, bacterial pollution of various sorts, has its own limit of tolerance. Averaging them out won’t do. Since every subsystem must have at least one independent variable — in actuality many more — keeping up with the economy must be a dynamic ever-evolving affair. Running it with an eye on two flawed variables — market supply and demand — by a theory deduced not by but from a device in calculus over a century ago is an absurdity.

The next test I have called the Gaussian.

It has not been used by economists before, although it does play an important part in our daily lives. Carl Friedrich Gauss was the greatest mathematician of the 19th century. His concept of modulus congruence subtracts the highest multiple of a given modulus from two or more functions that we are concerned with, and deals only with the remainders. We name the days of our week to modulus seven — after coming to the end of the week we start again with Sunday. Without this intuitive use of modular congruence, we would have gone on giving a new name to every day since the birth of Christ. That would have hopelessly complicated our lives. The equivalent of that turns up in our economic policies.

The only vague allusion to such a test amongst economists that comes to my mind is John Maynard Keynes’s remark — I believe in the General Theory — to the general effect: “Why send cookies from Denmark to Britain and vice versa? Wouldn’t it be simpler to exchange recipes?” Globalisation multiplies needlessly the mileage chalked up on land, sea, and in the air, with the attendant congestion and pollution. The additional costs go to swell the GDP and this is reckoned mistakenly as an increase in our productivity and well-being.

But the applications of Gaussian modular congruence extend to every area of the economy. In fact economists of the third millennium should be redefined largely as practitioners of modular congruence. Since the number of independent variables and hence subsystems in the economy is ever growing, the scope and the need for such Gaussian trade-offs will go on climbing. Recognising this multiplies the options for helpful policy design.

Let me cite a simple example. For the last thirty years governments have been preoccupied primarily with “licking inflation.” But monetarist orthodoxy has reduced the means of achieving this to raising interest rates. By increasing the financing costs of the state and shrinking its revenues at the same time, it plays havoc with solvency of both the state and the economy as a whole. The Gaussian solution would be to work out schemes that would point these two parameters downward — one affecting the revenue of the state and the other its spending — in equal degree. Accordingly, the direct effect oh the two on the treasury would cancel out. Their indirect effects, however, would benefit the economy as a whole and spare innocent parties from the “friendly fire” of misconceived policy.2

In 1977 I first proposed “tax-bonds” as an instance of policy based on modulus congruence. Certain classes of taxpayers would be granted the option, rather than paying taxes on a portion of their taxable income, to invest it in long-term “tax-bonds” yielding a rate considerably less than market. This would not defer such taxation but replace it. ft would decrease both the revenue of the government, but also the average interest rate on its debt. Both these items could be calculated to balance each other so that their direct effects on the fisc would cancel our. But the beneficent effects of lower taxation and lower average interest rates on the entire economy would be wholly a bonus.

“A hedging feature could be included. Over the longer term the growing proportion of the public sector within the economy leads to an upward structural gradient. Together, the lower taxation and lower interest rate are likely to attenuate this. To the extent that they do, the government will have achieved a more stable price level without resorting to higher interest rates. If that effect appears only in disappointing degree, the government will be able to console itself the shrinkage of the real value of the principal of the tax-bonds when redeemed.3

An insurance-feature can be incorporated into the scheme. The tax-free status of the investment will be available only to the original tax-bond owner. If he chooses to sell his tax-bond before maturity, he will suffer a discount since he cannot pass on the tax-exemption feature to the purchaser. However, there could be provision for the resale of the tax-bond to the government without discount in the case of a serious lengthy illness in the vendor’s family, long involuntary unemployment, or the death of a breadwinner.

Most important is the realisation that the pursuit of globalisation leads to a harmful congestion not only of geographic but of economic and social space. The aggressive market logic, without basis in contemporary or historical reality, encounters ever new independent variables in the needless mileage it runs up and the resulting congestion of both geographic and economic spaces. The Tinbergen Test is being tried to the disaster point.

That introduces another factor, and another test. Who benefits from so persistent a perversity in eradicating just about everything the world learned about converting raw capitalism into a more people-friendly mixed economy? Obviously, speculative finance benefits by globalisation, from wholesale privatisations, deregulation, regressive taxes and user fees, the suppression of all defenses of domestic economies, from revolving-door facilities for quick entries and getaways of footloose finance. What is at stake is something that free-market theory denies the existence of — the factor of raw power that could hardly exist without the ability to impose the belief system to make the current globalisation possible.

That power has emerged in all its nakedness with the crumbling of the Soviet Empire which in certain areas by its very existence exercised a certain restraining balance. What has occurred since the disappearance of the rival superpower resembles an overwhelming flood when a major dam collapses. To properly appreciate what has happened, the Dominant Revenue concept of the late French economist, Francois Perroux, is indispensable.

Note how perfectly Perroux’s definition of the “dominant revenue,” published in 1966 before the phenomenon had reached full flower, captures the present situation.4

“The European Occident has passed through successive periods of development, each characrerised by a typical morphology of distribution and by a dominant revenue. In turn the dominant revenue has been that of the landowners, then industrial profit, then financial and industrial profits in a mixed economy, in which the rate and mass of profit are functions of a complex combination of pubic and private, of market and extra-market actions.

“During a specific period of development, the dominant revenue is that one to which the others adapt themselves. In an apologetic doctrine, it is presented as the revenue that, by the rate and mass which it achieves, determines whether the given economy functions properly. In the institutional framework corresponding to the given dominant revenue, that in fact is the case; but in another context it would be otherwise.

That provides us with yet another vital test in assessing policy. Rather that accepting the bare assertions and promises of official economists, we must ask whom a given measures profits. Right at the beginning we must check for conflicts of interest. To declare interest rates the one stabilising tool is an outrage. Accept it, and there is no way of disentangling economic policy from the interests of speculative finance.

The very nature of economic theory stands in need of rethinking. Now that the globalisation model is patently failing, putting it to such basic tests will be an important step towards that goal.

1 Tinbergen was awarded the so-called Nobel Peace Prize for Economics for his work in econometrics, which unfortunately is less solidly grounded.

2 “We must learn to do more of our economic reasoning in terms of net effect; we must train ourselves in the methods of modular congruence arithmetic.

When two functions are congruent to modulus k, their difference is divisible by k. They ace written f(x) —g(x)= (mod. k). They are each made up of a multiple of k plus the same remainder. In this calculus it is the common remainder alone is of importance.

“Applied to economic reasoning modular congruence would focus our attention on the net effect of two inverse operations. it would establish the lemma that only the net effect of the effort is likely to be useful. The multiples of the modulus will probably be contraproductive, unless the contrary is proved.

Thus, whatever the quantum of public services delivered, it is desirable char the fiscal turnover be kept to a minimum. A policy format in which the state taxes an industry with one hand and subsidises it with the other is burdensome. Taxing and subsidising at the same time must be seen as similar to running a heating system against an air-conditioner.” William Krehm, Babel’s Tower — The Dynamics of Economic Breakdown, Toronto, 1977, p. 80.

3 Krehm, ibid, p. 86.

4 L ‘Entreprise et l’economie du XXe siecle (La Revue Economique, Presses Universitaires de France, 1966. p. 958.

—from Economic Reform, January 2000