[samgheb]

I have an exam question about

“What are the effects of globalization on inequality in the individual countries and between countries?”

So the question is two-folded. The argument I have heard is that it is because of technology and the mobility of capital that we see those less capable in the developed country being left behind and that in the developing country that receives the investments it will naturally make some people rich and by definition creating inequality. Is this correct and is there in any reliable literature on this you can recommend?

For this purpose I’m not going to discuss the ethics of inequality at all

[jmherbener]

If globalization means the further integration of everyone in the world into the system of private property and contract, then globalization will reduce income inequality for two reasons. First, differences in the price of the same things tends to be arbitraged away in the market. If wages are higher in one country and lower in another for the same labor, then globalization will bring them together. This would be true for all types of labor, including that of CEOs. The same is true of interest returns on capital investment. capitalists would tend to earn the same rate of return on similar investments anywhere in the world. Second, profits earned by entrepreneurs are imputed to wages and land rents over time. If an entrepreneur is earning sizable profit, then other entrepreneurs strive to earn them also by producing similar products. To do so, they bid up the prices of inputs. In this process, the profits diminish as wages and land rents rise.

These processes have been manifest in China for several decades. The capital accumulation processes has lifted half a billion people out of poverty in China over the last 30 years. It’s perverse to interpret such facts as claiming that the rich are getter richer and the less capable are being left behind.

Here are a few articles:

http://mises.org/daily/2361

https://www.mises.org/daily/490/content/

[samgheb]

What about what happens in within countries?

Let’s take a hypothetical scenario:

Country A is rich and Country B is poor with a lot of equality.

B opens its economy and invites investments from A and the ruling elite is replaced by a new class of entrepreneurs. These entrepreneurs will then go from being in the bottom to being in the top. The actual living standards of the the poor will also be raised but the few entrepreneurs will surely be much much better off no matter what the poor does. In this sense is it not correct to say that globalization increases inequality in a country even if it equalizes it between countries A and B?

I mean I remember Friedman and other free market people basically making the point that you can live in a closed economy and where most people are somewhat equally poor or in one where everybody is better off and some in the top are much better off. Although my teachers assume a priori that inequaliy=bad and this is assumed but my assignment is a purely analytic one. I am not to make ethical judgements here.

[jmherbener]

Income distribution is continuously being changed in the market economy as changes in underlying conditions bring forth adjustments in production. In each case, those who satisfy consumer demands more fully with their resources have higher incomes and those who do so less fully have lower incomes. Unless one looks at income distribution for everyone involved in the market, If one picks and chooses which persons to include in the calculation of income distribution, then one can render any result.

If there is a rich country isolated economically from a poor country and they integrate, then incomes for people in both countries will become more equal. If it’s legitimate to look at incomes in just one country in calculating the income distribution produced by some system, then it’s legitimate to look at incomes in just one province or one town or just between two persons. If the inequality of income in a system is to be calculated by taking a select group out of the whole, then it would be a simple matter to show extreme income inequality or perfect income equality in any system.

[gpm2313]

Samgheb,

In addition to the references provided by Dr. Herbener you might also want to look at pages 487-498 from Human Action where Mises provides an excellent analysis of the benefits derived by the developing countries from the international capital market and how the presence of these markets actually lifts the living standards of the citizens of these poorer countries.

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