19/12/2012 by Don Quijones
“The economy is there to serve the fundamental needs of society, which are prosperity, stability and contentment… If you have a situation whereby the economy grows but you create poverty and unemployment and you destabilise society, you’re in trouble.”
The above quote comes from the most unlikely of sources: the late Sir James Goldsmith, one of the wealtiest and most influential business magnates of the late 20th century.
The year was 1994, the occasion an interview with Charlie Rose on the potential impact of the soon-to-be-signed General Agreement on Tariffs and Trade(GATT).
Goldsmith laid out in simple terms the dangers of what he saw as unfettered globalisation, warning of the perils of NAFTA, GATT and the merging of sovereign European nations into the EU. He predicted that the only possible beneficiaries of unbridled global free trade would be the major multinational corporations who would have free rein to roam the globe in pursuit of the cheapest labor:
“The top 100 companies account for one-third of all foreign direct investment. Now, how do they operate? They’re no longer linked to the United States or to France or to Britain. They operate by farming out their production to whatever country produces most cheaply, where they can get the biggest return on capital and pay the lowest part to labour.”
The interview also features a fiery debate between Goldsmith and Laura Tyson, then chairwoman of President Bill Clinton’s Council of Economic Advisors which was leading the case for U.S. adoption of GATT. Goldsmith emerges the clear victor, especially in light of the accuracy of many of his predictions.
For her part, Tyson comes across as a free-trade ideologue hopelessly out of her depth against one of the world’s shrewdest business men, whose knowledge of business and economics derived from real-world experience, not idealized theoretical models.
Tackling issues as broad and diverse as unemployment, agribusiness, unemployment and financial innovation, Goldsmith’s warnings are eerily prescient:
On the impact of GATT: “What will happen is that more American products will be sold abroad which have been manufactured in low-cost areas. Therefore they will carry a U.S. name, they will have a U.S. manufacturing company, the corporations that make them will make tremendous profits but workforces will be eliminated.”
On the jobless recovery: “In France the economy has grown by 80 percent. The number of unemployed has gone from 420,000 to 5.1 million… What is the good of having an economy that grows by 80 percent if your unemployed – the people excluded from active economic life – goes from 420,000 to 5.1 million.”
On the liberalization of agriculture: “If GATT succeeds and were able to impose modern methods of agriculture worldwide so as to bring them to the levels, say, of Canada and Australia, 2 billion people out of 3.1 billion people would be uprooted from the land and chased into the towns… It would be a far greater disaster than any war.”
On the financial industry and derivatives: “I think our financial system is extremely fragile. You can see it in the volatility of currencies, you can see all sorts of weaknesses. There’s an incredible amount of danger in things like derivatives. I think we are moving towards the outer limits of acceptable risk taking… I think the world GNP is somewhere in the figure of 30 trillion dollars and I believe the derivates outstanding are at 90, which to a large degree are purely speculative.” (The derivatives market is now estimated to be worth anywhere in the region of 600 trillion to 1 quadrillion dollars).
The son of a wealthy French-British family and himself an immensely successful and at times ruthless financier and corporate raider, Goldsmith was an unlikely defender of the world’s poor and middle classes. Perhaps it was a result of his genuine, deep-seated conservatism that he feared – as most of us should – the spectre of untamed globalization.
Unfortunately, Goldsmith’s warnings went unheeded by most of the world’s economists and policy makers, as laments the U.S. economist and former Assistant Treasury Secretary Paul Craig Roberts:
“Sir James called it correct, as did Roger Milliken. They predicted that the working and middle classes in the US and Europe would be ruined by the greed of Wall Street and corporations, who would boost corporate earnings by replacing their domestic work forces with foreign labor, which could be paid a fraction of labor’s productivity as a result of the foreign country’s low living standard and large excess supply of labor. Anytime there is an excess supply of labor, or the ability of corporations to pay labor less than its productivity, the corporations bank the difference, share prices rise, and Wall Street and shareholders are happy.”
“All of this was over the heads of ‘free trade’ ideologues, who threw accusations such as ‘protectionist’ at Goldsmith, Milliken, Daly, Gomory, McMillion, and myself. These ‘free trade’ ideologues are economically incompetent. They do not know that the justification for free trade is based on the principle of comparative advantage, which means that a country specializes in those economic activities in which it performs best and trades for those goods that other countries do best. Instead, the ideologues think that free trade means the freedom of capital to seek absolute advantage abroad in lowest factor cost. In other words, the free trade incompetents have never read David Ricardo, who formalized the case for free trade.”