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Criticism of the Social State is Irrational

"Paul A. Samuelson, one of the most important econmists of the 20th century, worries about the state of the US economy. He fears falling wages..`We in the US are on the way to a plutocratic democracy. Neither Bush nor Kerry can stop outsourcing'."

Nobel Prize Winner for Economics Questions Globalization

By Karl Mueller

[This article originally published in: Zeit-Fragen Nr.38, October 4, 2004 is translated from the German on the World Wide Web,  http://www.zeit-fragen.ch/.]

In an interview with the German business paper "Handelsblatt" (September 20), US economics professor Paul A. Samuelson urged slowing down the speed of globalization. In a still unpublished article for an economics journal in the US, Samuelson demonstrates that shifting jobs to low-wage countries can lead to short-term and permanent economic damage. "This is like a fairy-tale. When an opinion is popular, everyone seems to fall asleep somehow. Economists argue all the time. Only with free trade does everyone seem agreed. Nevertheless an economic debate on outsourcing is long overdue."

Outsourcing or off-shoring means that factories or services are often shifted abroad. Samuelson criticizes the idea of free trade theoreticians that outsourcing ultimately benefits everyone. "They (the free trade theoreticians) claim that the profits are axiomatically made available to the losers. Thus everyone profits in the long-term at the end of the day." Economic history shows that "distribution of profits does not remain equal".

89-year old Paul A. Samuelson is regarded as one of the most important economists of the 20th century. He has filled numerous public offices and was an economic advisor of President Kennedy. In 1970 he was awarded the Nobel Prize for economics.


In the interview, Samuelson expressed alarm about the state of the US economy. He fears falling wages and sees the framing conditions for the necessary changes of course as unfulfilled: "We in the US are on the way to a plutocratic democracy. Neither Bush nor Kerry can stop outsourcing."

Samuelson does not argue for an economic screening and is sympathetic for the European social state model. Sweden, for example, has skidded somewhat in the world rankings of economic output on account of its expenditures for the welfare state. However "Sweden is not poor and its prosperity is relatively evenly distributed." Germany could have long slowed down the speed of globalization. "But this became more difficult after the eastern expansion of the European Union."


With his critical opinion, Samuelson refers to current US economic and financial policy, specifically US Federal Reserve chief Alan Greenspan and the advisor of US president Bush, Gregory Mankiw. Both are defenders of neoliberal theory. He recalls indirectly the weak spots of the most famous theoretician of the free trade theory, the Brit David Ricardo.

More than 200 years ago, Ricardo formulated the theory that free trade would be advantageous for all participating countries in the sense of an international division of labor. The initial assumption is that countries specialize best where they can produce most efficiently in the international comparison. These exports should then be exported and the other necessary products imported with the export returns. This theory was formulated to justify the nascent British world empire and its imperialist free trade policy.

All participants profit from this worldwide economic order on the basis of the "comparative cost advantage" described by Ricardo. Ricardo's example of wine-producing Portugal and cotton-producing England has become famous. Economic order is better, Ricardo said, if Portugal specializes in wine and England in cotton.

However this example also makes clear a central weak spot of the theory. Cotton production in England was a vital motor of industrialization. Wine production left Portugal in the state of an agricultural country for many centuries - with fatal consequences over the last two centuries. In their book "The 10 Globalization Lies. Alternatives to the Omnipotence of the Market" (1998), Gerald Boxberger and Harald Klimenta pointed to these and other weak spots of Ricardo's theory. When politicians, economists and others hold to this theory, the question can be asked whether this is only out of ignorance or because of other motives.


When for example the director of the "German Institute for Economic Research", Klaus Zimmermann urged in an interview with Netzeitung (August 12) that the "Hartz IV" law be enforced even against the will of the demonstrators "because there are no alternatives" and added that "globalization requires a greater disparity between poor and rich" since Germany's competitiveness can only be maintained this way, Zimmermann must be asked whether he advocates social dismantling out of ignorance or from other motives.

The 20 to 80 society comes to mind when Zimmermann adds that the share of poorly trained workers in Germany will increase in the coming years, that one of Germany's main problems is underpayment of trained workers and overpayment of untrained workers and that the widening income gap is inevitable.

Zimmermann says clearly: "Redistribution - for example through transfer payments - is only possible to a trifling extent in the context of globalization. The social state will not disappear. An adjustment will take place on a lower level."


What motivates an "outsourcing expert" like Bernd Schaefer, manager of the German language division of TPI Eurosourcing? In an interview with Netzeitung from July 12, Schaefer said a bad conscience in shifting jobs is "typically German". The US, Great Britain and even Switzerland do not have any mentality problems with outsourcing and off-shoring.

A shift in trained services could be on the agenda for Germany alongside more shifts in productive branches of industry. The new EU member states could offer their services in addition to India. However the problem is that shifting jobs is discussed "much more politically" in Germany. "The result is that we need a longer time before we make decisions... While we can survive with our businesses in competition on the market, our wage cost level does not fit."

Obviously it is disturbing that there is still a public interest bond of property and a social state bond of politics in Germany. There are passionate polemical arguments against these bonds on the ground of false themes and dubious interests, not on the ground of a better theory. Whoever resists does not only do this in his own interest."


In their book "The Globalization Trap. The Attack on Democracy and Prosperity" (1996), the authors Hans-Peter Martin and Harald Schumann told about a meeting and a discussion of former top politicians, active managers and economists that occurred in the Fairmont Hotel in San Francisco in September 1995 on invitation of Mikhail Gorbatchev:

"The pragmatists in the Fairmont reduce the future to a pair of numbers and a concept: `20 to 80' and `tittytainment'. 20 percent of the population able to work will be enough in the coming century to keep the world economy going. `More workers are not needed', magnate Washington SyCip said. A fifth of all job-seekers will suffice to produce all the goods and bring the high-grade services that the world society can afford. This 20 percent will participate actively in life, earning and consuming - in whatever country. [... ]

Social engagement of businesses is too much to expect in the global competitive pressure. The unemployed must worry about other things. At any rate, corporate directors expect that people in industrial countries will soon clean the streets for almost nothing or eke out a meager living as house-cleaners. Ultimately the industrial age with its mass prosperity will be no more than a "flash" in the history of the economy!.."

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