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Trading as If Community Matters
by David Morris, Institute for Local Self-Reliance
Free trade is the first global religion. Buddhist, Catholic, Jewish or Islamic, we all worship at the altar of free trade. However, unlike other religions, free trade's testament contains only one Commandment: "Thou Shalt Put No Obstacles in the Way of Any Resource Flow". Mobility has become synonymous with virtue.
To free traders, economies grow and prosperity results from encouraging absentee ownership and transporting ever-greater quantities of materials and products over ever-longer distances. We have built economies that separate the farmer from the kitchen, the worker and the owner from the workplace, the banker from the borrower and the depositor, and, ultimately, the citizen from the government.
Community itself is viewed as an enemy of progress because, inasmuch as we are loyal to one another, we favor stability and continuity and preservation, all of which inhibit the flow of resources. The head of Gulf & Western insists, "All such allegiances are viewed as expendable under the new rules. You cannot be emotionally bound to any particular asset."
This brave new world of globalism reluctantly accepts a need for cohesive communities only as emotional support systems to nurse the wounds inflicted by unregulated mobility. Communities become refuges that provide succor as planetary corporations and planetary bankers move assets around a planetary chessboard.
Let me make myself perfectly clear at the outset. Trade is beneficial. Many of the theoretical foundations of the free trade doctrine are sensible and defensible. Trade does allow us to specialize in what we do best, thereby boosting productivity. Bigger production units do tend to produce products at a lower cost. Competition does spur innovation and in many industries, given the scale necessary for adequate production and research and development, vibrant competition demands international markets.
The question is not whether the planetary economy is here to stay. It is. The question is whether we should create rules that maximize or minimize long distribution lines. The question is whether we should create rules that enable or disable a sense of community. The question is whether we should create rules that give voters the right to influence their future or whether we want to pre-empt local and national authority to encourage greater resource flows.
The Problems of Globalism
Newspapers, business magazines and economics textbooks bombard us with information about the benefits of globalism and mobility and separation. The strongest argument the free-trader has is the apparent lockstep of increased trade and increased prosperity over the past 150 years. But no one has ever proved a causal relationship between increased trade and increased prosperity. Two centuries of trade have exacerbated inequalities in world living standards. According to Swiss economist Paul Bairoch, in 1750 per capita GNP was about the same in the developed countries as in the underdeveloped nations. In 1930 the ratio was about 4 to 1 in favor of developed nations. Today it is over 8 to 1.
Inequality is both a cause and an effect of globalism. Inequality within one country is a cause of globalism because it reduces the number of people with sufficient purchasing power. Thus a producer must sell to wealthy people in many countries to achieve the scale of production necessary to produce goods at a relatively low cost. Inequality is an effect of globalism because export industries employ few workers who earn disproportionately high wages and because developed countries tend to take out more capital from Third World countries than they invest in them. The apparent link between expanded trade and higher living standards has been broken in the last 20 years. Trade as a percentage of national economies has doubled in the US and in many Latin American countries since 1970 but the standard of living and real wages of these countries has fallen.
The question is whether we should create rules that enable or disable a sense of community. The question is whether we should create rules that give voters the right to influence their future or whether we want to pre-empt local and national authority to encourage greater resource flows.
Separation and long distance trade imposes many costs that are borne, not by the corporations, but by households and the community as a whole. If we were to take into account the full costs of separation and long distance trade, we may conclude that localism, not globalism, is a more cost-effective goal.
At least six kinds of costs are excluded from the calculus of most policy analysts.
1. Separating the person who makes the decision from the person who feels the impact of the decision encourages inefficient decisions. Corporate subsidiaries are often closed not because they are unprofitable but because they do not meet the lofty profit goals of the mother company. The corporate balance sheet looks better but the community balance sheet looks worse. If these plants were locally owned or owned by their workers, experience shows that they would be kept open longer and be more productive. Absentee owners make decisions based on a narrow consideration of costs and benefits.
Separating authority from responsibility damages the environment. Waste disposal has reached such epic proportions partly because we have refused to take responsibility for our own wastes. If we had to dump our wastes in our own backyards, we would dramatically reduce the amount of waste and its toxicity.
Nuclear power is a case in point. Nuclear reactors exist only because federal governments have guaranteed that communities that host nuclear power plants will not have to host radioactive waste dumps. If those who benefit from nuclear electricity had to assume the responsibility of storing and guarding nuclear wastes, does anyone doubt that nuclear reactors would never have been constructed and the current global crisis of nuclear waste disposal would never have occurred?
2. Physical transportation is invasive. Transporting people and goods demands that we trespass on someone else's territory. The only exercise of governmental authority that both conservatives and liberals agree upon is the taking of private property to construct highways, ports, airports and canals. Few people willingly give up their homes, their farms, their neighborhoods. Their property must be seized, in some cases at gunpoint. On the international level, access to transportation lines has justified many invasions, from the US marine incursions into Panama in the early and late part of this century, to the Japanese invasion of south Asia in 1940 to protect ocean access to oil supplies, to the recent use of the US naval fleet to protect access to mideast oil.
3. Physical transportation is polluting. Transporting people and goods imposes significant harmful environmental impacts. According to one Dutch report, as many as 4 percent of the people of industrialized countries suffer health problems from airplane noise. Highways also generate high noise levels, compact the soil, and produce harmful runoff to surrounding vegetation and groundwater. No matter how benign the fuels we burn to power our transportation systems, they significantly contribute to air and water pollution.
4. Bigger systems are insensitive to the needs of localities. Planetary corporations prefer uniformity over diversity. The free traders demand uniform standards to encourage a single global market. The term they use is harmonization. If Germany and France want to link up their railroads, it is reasonable to demand that tracks on both sides of the border have the same gauge. But the quest for harmonization is now reaching extremes. In 1986, Spain decreed that all computer keyboards sold there had to have a key with a tilde over the n. The European Commission has told Spain to eliminate the tilde regulation because it is an interference with the free trade in computer keyboards. As New York Times reporter Alan Riding noted, "The Eurocrats argued that their intent was merely to promote free trade and that the tilde, well, just happened to stand in the way."
In 1990, in the spirit of harmonization, the European Commission was advised that national holidays also constituted a barrier to efficiency. It appears that 35 days a year there is a holiday somewhere in Europe, but on only two days, Christmas and New Year, are holidays celebrated in all countries. Free traders wonder how continental corporations can operate efficiently if at any given moment one of their branches is taking a holiday.
The free traders talk about the need to "level the playing field" in order to promote fair global competition. As one Canadian critic of free trade has observed, a level playing field is one without any distinguishing characteristics.
5. Bigger is undemocratic. The bigger the unit of authority the more remote it is from its members and therefore from the participation and influence of its members. Planetary corporations are rarely responsive to their workers or their host communities. Free trade agreements are negotiated in secret and the agreements preempt the right of communities, whether at the local or national level, to exercise authority over their own affairs. Democracy means allowing people to establish the rules that govern the use of resources. Free trade diminishes the reach of voters.
6. Long distance systems breed insecurity. Long distance systems are more fragile and vulnerable to breakdown. As the world economies become increasingly interconnected, a breakdown in any one part of the system causes repercussions in all parts of the system.
We become dependent on the good will of others. Adam Smith himself opposed the free flow of resources when it endangered national security. As he wrote in The Wealth of Nations, "The Government of no great nation, even though it could get warships more cheaply built, or guns and ammunition more cheaply manufactured, abroad than at home, and could thereby relieve its own taxpayers, would adopt this course, except in some minor degree. Without dockyards and arsenals of its own, it would feel itself too dependent on the amity of foreign nations, and at the mercy of any large combination of hostile Powers." The notion of national security can easily be extended to include protection of domestic farmland or minerals or key factories.
Mobility breeds insecurity. In the United States, mobility is a way of life. We have been called "consumers of change". The entire population moves on average once every 6 years and company workforces can turn over every 2 years. Is it any surprise that the three best selling medicines treat stress: ulcers (Tagamet), hypertension (Inderal), and anxiety (Valium)?
The Solution: A Global Village & a Globe of Villages
The solution isn't to return to self-sufficient agrarian communities. We cannot isolate ourselves and practice autarchy. But we can generate a much greater proportion of our wealth internal to our borders and under a greater degree of local control and ownership.
This means redefining community as a place that exercises real authority and produces real wealth. Yet it also means creating information systems that allow these communities to interact with other communities. Two metaphors describe and define a sustainable future: a global village and a globe of villages.
A planetary information network links together materially self-reliant regions and communities. We import a good idea from anywhere, but produce our physical wealth near home. We create rules that maximize the long distance trade of electrons and photons, the elemental underpinning of the information economy, but minimize long distance trade of molecules, the elemental underpinning of the goods economy.
Rules designed to enable rather than disable community will treat each factor of production differently. Free traders do not do this. They preach the gospel of unlimited mobility regardless of the kind of resource—labor, raw materials, finished products, capital and information. But if we are creating rules as if community and democracy and environmental protection were important, we would design a much more sophisticated strategy that approaches each factor of production differently.
Labor. Labor is the only factor of production to which even the most ardent free traders hesitate to fully apply his or her theory. Conventional definitions of efficiency make no distinction between allowing a factory to move from Minneapolis to Tijuana and allowing the residents of Tijuana to migrate to Minneapolis and work for the same wages they received in Mexico. The enormous political and social consequences of allowing unregulated migration stops most, but not all, free traders from proposing to open up all borders.
Some argue that opening up all borders would help poorer countries, but this is wrongheaded. It puts the cart before the horse. People rarely migrate, either within or between countries, because they want to, but rather because they have to. People don't want to leave their jobs and their communities, their roots and their friends. They must move because a freeway comes through their community, or their employer forces them to transfer between plants, or national development policies depress farm income and force people out of rural areas and toward the export based coastal areas. Far better to encourage development policies that foster productive communities than deal with the enormously higher costs of massive migration.
Raw Materials. A sustainable economy would significantly reduce the quantity of raw materials it consumes and substitute renewable for non-renewable resources. The average North American consumes about 22 tons of raw materials a year, twice as much as the average European or Japanese and up to 100 times more than the average rural dweller on the planet. If the world were to approach US material consumption standards, the carrying capacity of natural systems would clearly be overloaded.
Raising efficiency, especially in energy, could reduce by 25-50% the amount of raw materials needed to achieve the same standard of living. Recycling 50-75% of our used materials would further reduce our need for material imports and would create a pool of used materials to supply local and regional scrap based industries. Recycling, and especially reusing, encourages the miniaturization and regionalization of economies.
Substituting direct and indirect solar energy for fossil fuels has an equally decentralizing dynamic. Technologies that harness wind and sunlight are small in scale and highly dispersed. Solar cells may be installed on rooftops and walls. Plant matter, which is stored solar energy, can be used both as a fuel and a chemical. Different regions will rely on different kinds of plant matter because of climate variations. Unlike fossil fuels, plant matter is bulky and expensive to transport. Thus the use of biomass encourages smaller processing and manufacturing facilities located not only closer to their raw material providers but to their ultimate customers.
Intermediate and Finished Products. Mass production was the technology of the 20th century. Manufacturers produced hundreds of thousands of a single product and sold that product to national and international markets. Flexible manufacturing will be the technology of the 21st century. The term "economies of scope" is already replacing the term "economies of scale" in business texts. New manufacturing units will produce small quantities of many kind of products and as a result, could serve regional rather than global markets.
Technological dynamics now encourage smaller scale production units. Desk top publishing has dramatically decreased the cost of production of typeset quality publications. Desk top foundries and desk top manufacturing is on the way.
In the 21st century, information will be the most important component of production and this too will encourage smaller scaled production units. A highly motivated, involved and educated labor force will be a critical competitive factor. As Alonzo L. McDonald, former CEO of McKinsey & Company has written, "When it comes to motivating people and using their brainpower you hit diseconomies of scale early."
Information. Unlike physical transportation, information transportation imposes few negative social and environmental burdens. The digital highways of the future do not require seizing someone's land. The electromagnetic spectrum is a renewable, albeit finite resource. As information becomes an ever-greater portion of our economy, we can substitute telecommunications for physical transportation.
When it comes to information, we very much want a global delivery system. Yet here too we want to protect and nurture a sense of community. That means that when it comes to intellectual property, richer nations should reward poorer ones for the cumulative wisdom of their peoples. When over hundreds of years, tribes have identified medicinal plants, pharmaceutical corporations of industrialized countries should pay them a fair royalty for that wisdom. Patent laws should not exclude nations from having access to important technologies and medicines.
Today, information is increasingly owned by planetary corporations. Access to these information systems is increasingly on the basis of one's ability to pay. A global village demands a more horizontal network of information flows. Global rules concerning information systems should stress the need for public access. The global village should encourage not only universal access but universal productive capacity. Currently, information providers, whether phone or cable or over-the-air broadcast companies, use the term "interactive" to mean the customer can use a touchpad to order items. The household and individual is still defined as a consumer. We need rules that encourage the new information highways to include equipment in all buildings that allows the residents to produce information products and deliver them to worldwide buyers.
Capital. For thousands of years money served only as a medium of exchange. Until 1970, the volume of money changing hands internationally was about equal to the volume of world trade in real goods and tourism. Today the value of currency exchanges on a single day exceeds the value of world trade in an entire year. Money itself has become the largest component of international trade. The symbolic world of money now dwarfs and manipulates the real world of commerce. The comparative price of goods is now influenced more by changes in exchange rates than by variations in productivity levels.
The international flow of money makes it easier to attract capital to new ventures and may slightly reduce the cost of capital. On the other hand, this unregulated torrent of currency destabilizes world economies and requires businesses to pay an insurance premium to protect them from adverse changes in exchange rates.
The footloose nature of capital means that banks, once knowledgeable about their depositors and their customers, now invest in long distance ventures and attract depositors through global advertising. Small businesses and local residents are overlooked in the rush to lend to more attractive global borrowers. As we have discovered in the US in the savings and loan debacle, separating the lender from the client can result in an enormous social cost. We need rules that encourage locally generated wealth to be invested at home. When capital is allowed to move freely, we need rules that allow nations and states to protect themselves against foreign or absentee ownership of key domestic resources.
Rules that Foster Community
We have become a global economy. As a result, global rules are necessary to govern the flow of commerce. It is useless to oppose trade agreements. On one issue we and the free traders agree. The global economy doesn't work well. It needs a new design. Free traders favor rules that embrace only one value: enhanced mobility. We favor rules that enhance a variety of values: democracy, environmental protection, community.
On the national level we have many precedents for this. The US is a free trade zone, but we have enacted national legislation that in many cases encourages community and humanly scaled institutions and small businesses and local control. Recently Congress raised the federal tax on wines but exempted small wineries. The federal Community Reinvestment Act encourages banks to loan a substantial portion of their locally generated deposits back to their host communities. Many national environmental laws create minimum but not maximum standards. Cities and states are allowed to exceed these standards. In the 1930s Congress enacted national minimum wage and maximum hour standards but again allowed states to exceed these standards
On the international level precedents also exist. The existing GATT rules allow nations to practice supply management as part of their agricultural policy. This means that they establish fair prices for their farmers by limiting the supply of farm products allowed into the market. US farm policy favors lowering the price of crops and paying farmers a subsidy out of taxpayers' pockets to allow them to stay in business. Supply management raises the price of crops to enable the farmer to make a fair wage but doesn't rely on taxpayer subsidies. Supply management works only when nations can protect their domestic farmers from lower priced imports. GATT rules now allow such protections.
The European Community, as part of its new internal free trade treaty, has adopted the concept of subsidiarity. That medieval concept means that one should not give to higher levels of government authority better be exercised by lower levels. What the family can do, the community should not do. What the community can do, the state cannot do. What the state can do, the European Commission should not do. Subsidiarity is a way of promoting cultural and environmental diversity.
We need to develop new rules to govern the way we extract, consume and dispose of resources. Precedents exist for writing rules that channel entrepreneurial energy and scientific inventiveness in a direction that enhances a sense of place and a sustainable future. A global village and a globe of villages. Two metaphors for two complementary strategies for a sustainable, democratic future.
Copyright Institute for Local Self-Reliance, 1993. All rights reserved.