The New Global Economy

Noam Chomsky

Excerpted from The Prosperous Few and the Restless Many, 1993

last night. There were panhandlers, people asking for money, people sleeping in the doorways of buildings. This morning, in the subway station at Harvard Square, there was more of the same.

The specter of poverty and despair has become increasingly obvious to the middle and upper class. You just can’t avoid it as you could years ago, when it was limited to a certain section of town. This has a lot to do with the pauperization (the internal Third Worldization, I think you call it) of the United States.

There are several factors involved. About twenty years ago there was a big change in the world order, partly symbolized by Richard Nixon’s dismantling of the postwar economic system. He recognized that US dominance of the global system had declined, and that in the new "tripolar" world order (with Japan and German-based Europe playing a larger role), the US could no longer serve-in effect-as the world’s banker.

That led to a lot more pressure on corporate profits in the US and, consequently, to a big attack on social welfare gains. The crumbs that were permitted to ordinary people had to be taken away. Everything had to go to the rich.

There was also a tremendous expansion of unregulated capital in the world. In 1971, Nixon dismantled the Bretton Woods system, thereby deregulating currencies. That, and a number of other changes, tremendously expanded the amount of unregulated capital in the world, and accelerated what’s called the globalization (or the internationalization) of the economy.

That’s a fancy way of saying that you export jobs to high-repression, low-wage areas-which undercuts the opportunities for productive labor at home. It’s a way of increasing corporate profits, of course. And it’s much easier to do with a free flow of capital, advances in telecommunications, etc.

There are two important consequences of globalization. First, it extends the Third World model to industrial countries. In the Third World, there’s a two-tiered society-a sector of extreme wealth and privilege, and a sector of huge misery and despair among useless, superfluous people.

That division is deepened by the policies dictated by the West. It imposes a neoliberal "free market" system that directs resources to the wealthy and to foreign investors, with the idea that something will trickle down by magic, some time after the Messiah comes.

You can see this happening everywhere in the industrial world, but most strikingly in the three English-speaking countries. In the 1980s, England under Thatcher, the United States under the Reaganites and Australia under a Labor government adopted some of the doctrines they preached for the Third World.

Of course, they would never really play this game completely. It would be too harmful to the rich. But they flirted with it. And they suffered. That is, the general population suffered.

Take, for example, South Central Los Angeles. It had factories once. They moved to Eastern Europe, Mexico, Indonesia-where you can get peasant women flocking off the land. But the rich did fine, just like they do in the Third World.

The second consequence, which is also important, has to do with governing structures. Throughout history, the structures of government have tended to coalesce around other forms of power-in modern times, primarily around economic power. So, when you have national economies, you get national states. We now have an international economy and we’re moving towards an international state-which means, finally, an international executive.

To quote the business press, we’re creating "a new imperial age" with a "de facto world government." It has its own institutions-like the International Monetary Fund (IMF) and the World Bank, trading structures like NAFTA and GATT [the North American Free Trade Agreement and the General Agreement on Tariffs and Trade], executive meetings like the G-7 [the seven richest industrial countries-the US, Canada, Japan, Germany, Britain, France and Italy-who meet regularly to discuss economic policy] and the European Community bureaucracy.

As you’d expect, this whole structure of decision making answers basically to the transnational corporations, international banks, etc. It’s also an effective blow against democracy. All these structures raise decision making to the executive level, leaving what’s called a "democratic deficit"-parliaments and populations with less influence.

Not only that, but the general population doesn’t know what’s happening, and it doesn’t even know that it doesn’t know. One result is a kind of alienation from institutions. People feel that nothing works for them.

Sure it doesn’t. They don’t even know what’s going on at that remote and secret level of decision making. That’s a real success in the long term task of depriving formal democratic structures of any substance.

At Clinton’s Little Rock economic conference and elsewhere, there was much talk of economic recovery and restoring competitiveness. Political economist Gar Alperovitz wrote in the New York Times that what’s being proposed is "not likely to make a dent in our deeper economic problems. We may simply be in for a long, painful era of unresolved economic decay." Would you agree?

I haven’t seen that piece yet, but the Financial Times [of London, the world’s leading business journal] has been talking with some pleasure of the fiscal conservatism shown by Clinton and his advisors.

There are serious issues here. First of all, we have to be careful in the use of terms. When someone says America is in for a long period of decline, we have to decide what we mean by "America." If we mean the geographical area of the United States, I’m sure that’s right. The policies now being discussed will have only a cosmetic effect. There has been decline and there will be further decline. The country is acquiring many of the characteristics of a Third World society.

But if we’re talking about US-based corporations, then it’s probably not right. In fact, the indications are to the contrary-their share in manufacturing production, for example, has been stable or is probably even increasing, while the share of the US itself has declined. That’s an automatic consequence of sending productive labor elsewhere.

General Motors, as the press constantly reports, is closing some 24 factories in North America. But in the small print you read that it’s opening new factories-including, for example, a $700 million high-tech factory in East Germany. That’s an area of huge unemployment where GM can pay 40% of the wages of Western Europe and none of the benefits.

There was a nice story on the front page of the Financial Times, in which they described what a great idea this was. As they put it, GM doesn’t have to worry about the "pampered" West European workers any longer-they can just get highly exploited workers now that East Germany is being pushed back to its traditional Third World status. It’s the same in Mexico, Thailand, etc.

The prescription for our economic problems is more of the same-"leave it to the market." There’s such endless trumpeting of the free market that it assumes almost a myth-like quality. "It’ll correct the problems. " Are there any alternatives 7

We have to first separate ideology from practice, because to talk about a free market at this point is something of a joke. Outside of ideologues, the academy and the press, no one thinks that capitalism is a viable system, and nobody has thought that for sixty or seventy years-if ever.

Herman Daly and Robert Goodland, two World Bank economists, circulated an interesting study recently. In it they point out that received economic theory-the standard theory
on which decisions are supposed to be based- pictures a free market sea with tiny little islands of individual firms. These islands, of course, aren’t internally free-they’re centrally managed.

But that’s okay, because these are just tiny little islands on the sea. We’re supposed to believe that these firms aren’t much different than a mom-and-pop store down the street.

Daly and Goodland point out that by now the islands are approaching the scale of the sea. A large percentage of cross-border transactions are within a single firm, hardly "trade" in any meaningful sense. What you have is centrally managed transactions, with a very visible hand-major corporate structures- directing it. And we have to add a further point-that the sea itself bears only a partial resemblance to free trade.

So you could say that one alternative to the free market system is the one we already have, because we often don’t rely on the market where powerful interests would be damaged. Our actual economic policy is a mixture of protectionist, interventionist, free market and liberal measures. And it’s directed primarily to the needs of those who implement social policy, who are mostly the wealthy and the powerful.

For example, the US has always had an active state industrial policy, just like every other industrial country. It’s been understood that a system of private enterprise can survive only if there is extensive government intervention. It’s needed to regulate disorderly markets and protect private capital from the destructive effects of the market system, and to organize a public subsidy for targeting advanced sectors of industry, etc.

But nobody called it industrial policy, because for half a century it has been masked within the Pentagon system. Internationally, the Pentagon was an intervention force, but domestically it was a method by which the government could coordinate the private economy, provide welfare to major corporations, subsidize them, arrange the flow of taxpayer money to research and development, provide a state guaranteed market for excess production, target advanced industries for development, etc. Just about every successful and flourishing aspect of the US economy has relied on this kind of government involvement.

At the Little Rock conference I heard Clinton talking about structural problems and rebuilding the infrastructure. One attendee, Ann Markusen, a Rutgers economist and author of the book Dismantling the Cold War Economy, talked about the excesses of the Pentagon system and the distortions and damages that it has caused to the US economy. So it seems that there’s at least some discussion of these issues, which is something I don’t recall ever before.

The reason is that they can’t maintain the Pentagon-based system as readily as before. They’ve got to start talking about it, because the mask is dropping. It’s very difficult now to get people to lower their consumption or their aspirations in order to divert investment funds to high-technology industry on the pretext that the Russians are coming.

So the system is in trouble. Economists and bankers have been pointing out openly for some
time that one of the main reasons why the current recovery is so sluggish is that the government hasn’t been able to resort to increased military spending with all of its multiplier effects-the traditional pump-priming mechanism of economic stimulation. Although there are various efforts to continue this (in my opinion, the current operation in Somalia is one such effort to do some public relations work for the Pentagon), it’s just not possible the way it used to be.

There’s another fact to consider. The cutting edge of technology and industry has for some time been shifting in another direction, away from the electronics-based industry of the post war period and towards biology-based industry and commerce.

Biotechnology, genetic engineering, seed and drug design (even designing animal species), etc. is expected to be a huge growth industry with enormous profits. It’s potentially vastly more important than electronics-in fact, compared to the potential of biotechnology (which may extend to the essentials of life), electronics is sort of a frill.

But it’s hard to disguise government involvement in these areas behind the Pentagon cover. Even if the Russians were still there, you couldn’t do that.

There are differences between the two political parties about what should be done. The Reagan-Bush types, who are more fanatically ideological, have their heads in the sand about it to some extent. They are a bit more dogmatic. The Clinton people are more up front about these needs. That’s one of the main reasons why Clinton had substantial business support.

Take the question of "infrastructure" or "human capital"-a kind of vulgar way of saying keep people alive and allow them to have an education. By now the business community is well aware that they’ve got problems with that.

The Wall Street Journal, for example, was the most extreme advocate of Reaganite lunacies for ten years. They’re now publishing articles in which they’re bemoaning the consequences- without, of course, conceding that they’re their consequences.

They had a big news article on the collapse of California’s educational system, which they’re very upset about. Businessmen in the San Diego area have relied on the state system-on a public subsidy-to provide them with skilled workers, junior managers, applied research, etc. Now the system is in collapse.

The reason is obvious-the large cutbacks in social spending in the federal budget, and the fiscal and other measures that greatly increased the federal debt (which the Wall Street Journal supported), simply transferred the burden of keeping people alive and functioning to the states. The states are unable to support that burden. They’re in serious trouble and have tried to hand down the problem to the municipalities, which are also in serious trouble.

The same is true if you’re a rich business man living in a rich suburb here in the Boston area. You would like to be able to get into your limousine and drive downtown and have a road. But the road has potholes. That’s no good. You also want to be able to walk around the city and go to the theater without getting knifed.

So now businessmen are complaining. They want the government to get back into the business of providing them with what they need. That’s going to mean a reversal of the fanaticism that the Wall Street Journal and others like it have been applauding all these years.

Talking about it is one thing, but do they really have a clue about what to do?

I think they do have a clue. If you listen to smart economists like Bob Solow, who started the Little Rock conference off, they have some pretty reasonable ideas.

What they want to do is done openly by Japan and Germany and every functioning economy-namely, rely on government initiatives to provide the basis for private profit. In the periphery of Japan-for example in South Korea and Taiwan-we’ve been seeing a move out of the Third World pattern to an industrial society through massive state intervention.

Not only is the state there powerful enough to control labor, but it’s powerful enough to control capital. In the 1980s, Latin America had a huge problem of capital flight because they’re open to international capital markets. South Korea has no such problem-they have the death penalty for capital flight. Like any sane planners, they use market systems for allocating resources, but very much under planned central direction.

The US has been doing it indirectly through the Pentagon system, which is kind of inefficient. It won’t work as well any more anyway, so they’d like to do it openly. The question is whether that can be done. One problem is that the enormous debt created during the Reagan years-at the federal, state, corporate, local and even household levels-makes it extremely difficult to launch constructive programs.

There’s no capital available.

That’s right. In fact, that was probably part of the purpose of the Reaganite borrow-and spend program.

To eliminate capital?

Recall that about ten years ago, when David Stockman [director of the Office of Management and Budget in the early Reagan years] was kicked out, he had some interviews with economic journalist William Greider. There Stockman pretty much said that the idea was to try to put a cap on social spending, simply by debt. There would always be plenty to subsidize the rich. But they wouldn’t be able to pay aid to mothers with dependent children-only aid to dependent corporate executives.

Incidentally, the debt itself, just the numbers, may not be such a huge problem. We’ve had bigger debts than that-not in numbers, but relative to the GNP [the gross national product]-in the past. The exact amount of the debt is a bit of a statistical artifact. You can make it different things depending on how you count. Whatever it is, it’s not something that couldn’t be dealt with.

The question is-what was done with the borrowing? If the borrowing in the last ten years had been used for constructive purposes-say for investment or infrastructure-we’d be quite well off. But the borrowing was used for enrichment of the rich-for consumption (which meant lots of imports, building up the trade deficit), financial manipulation and speculation. All of these are very harmful to the economy.

There’s another problem, a cultural and ideological problem. The government has for years relied on a propaganda system that denies these truths. It’s other countries that have government involvement and social services-we’re rugged individualists. So IBM doesn’t get any thing from the government. In fact, they get plenty, but it’s through the Pentagon.

The propaganda system has also whipped up hysteria about taxation (though we’re undertaxed by comparative standards) and about bureaucracies that interfere with profits-say, by protecting worker and consumer interests. Pointy-headed bureaucrats who funnel a public subsidy to industry and banks are just fine, of course.

Propaganda aside, the population is, by comparative standards, pretty individualistic and kind of dissident and doesn’t take orders very well, so it’s not going to be easy to sell state industrial policy to people. These cultural factors are significant.

In Europe there’s been a kind of social con tract. It’s now declining, but it has been largely imposed by the strength of the unions, the organized work force and the relative weakness of the business community (which, for historical reasons, isn’t as dominant in Europe as it has been here). European governments do see primarily to the needs of private wealth, but they also have created a not insubstantial safety net for the rest of the population. They have general health care, reasonable services, etc.

We haven’t had that, in part because we don’t have the same organized work force, and we have a much more class-conscious and dominant business community.

Japan achieved pretty much the same results as Europe, but primarily because of the highly authoritarian culture. People just do what they’re told. So you tell them to cut back consumption- they have a very low standard of living, considering their wealth-work hard, etc. and people just do it. That’s not so easy to do here.

Given the economic situation, it would seem to be a propitious moment for the left, the progressive movement, to come forward with some concrete proposals. Yet the left seems to be either bogged down in internecine warfare or in a reactive mode. It’s not proactive.

What people call the "left" (the peace and justice movements, whatever they are) has expanded a lot over the years. They tend to be very localized. On particular issues they focus and achieve things.

But there’s not much of a broader vision, or of institutional structure. The left can’t coalesce around unions because the unions are essentially gone. To the extent that there’s any formal structure, it’s usually something like the church.

There’s virtually no functioning left intelligentsia [intellectuals viewed as a distinct group or class]. Nobody’s talking much about what should be done, or is even available to give talks. The class
warfare of the last decades has been fairly successful in weakening popular organizations. People are isolated.

I should also say that the policy issues that have to be faced are quite deep. It’s always nice to have reforms. It would be nice to have more money for starving children. But there are some objective problems which you and I would have to face if we ran the country.

One problem was kindly pointed out to the Clinton administration by a front page article in the Wall Street Journal the other day. It mentioned what might happen if the administration gets any funny ideas about taking some of their own rhetoric seriously-like spending money for social programs. (Granted, that’s not very likely, but just in case anybody has some funny ideas.)

The United States is so deeply in hock to the international financial community (because of the debt) that they have a lock on US policy. If something happens here-say, increasing workers’ salaries-that the bondholders don’t like and will cut down their short-term profit, they’ll just start withdrawing from the US bond market.

That will drive interest rates up, which will drive the economy down, which will increase the deficit. The Journal points out that Clinton’s twenty-billion-dollar spending program could be turned into a twenty-billion-dollar cost to the government, to the debt, just by slight changes in the purchase and sale of bonds.

So social policy, even in a country as rich and powerful as the United States (which is the richest and most powerful of them all), is mortgaged to the international wealthy sectors here
and abroad. Those are issues that have to be dealt with-and that means facing problems of revolutionary change.

There are doubtless many debates over this issue. All those debates assume that investors have the right to decide what happens. So we have to make things as attractive as possible to them. But as long as the investors have the right to decide what happens, nothing much is going to change.

It’s like trying to decide whether to change from proportional representation to some other kind of representation in the state-run parliament of a totalitarian state. That might change things a little, but it’s not going to matter much.

Until you get to the source of power, which ultimately is investment decisions, other changes are cosmetic and can only take place in a limited way. If they go too far, the investors will just make other choices, and there’s nothing much you can do about it.

To challenge the right of investors to determine who lives, who dies, and how they live and die-that would be a significant move toward Enlightenment ideals (actually the classical liberal ideal). That would be revolutionary.

I’d like you to address another factor at work here. Psychologically, it’s a lot easier to criticize some thing than to promote something constructive. There’s a completely different dynamic at work.

You can see a lot of things that are wrong. Small changes you can propose. But to be realistic, substantial change (which will really alter the large-scale direction of things and overcome
major problems) will require profound democratization of the society and the economic system.

A business or a big corporation is a fascist structure internally. Power is at the top. Orders go from top to bottom. You either follow the orders or get out.

The concentration of power in such structures means that everything in the ideological or political domains is sharply constrained. It’s not totally controlled, by any means. But it’s sharply constrained. Those are just facts.

The international economy imposes other kinds of constraints. You can’t overlook those things-they’re just true. If anybody bothered to read Adam Smith instead of prating about him, they’d see he pointed out that social policy is class-based. He took the class analysis for granted.

If you studied the canon properly at the University of Chicago [home of Milton Friedman and other right-wing economists], you learned that Adam Smith denounced the mercantilist system and colonialism because he was in favor of free trade. That’s only half the truth. The other half is that he pointed out that the mercantilist system and colonialism were very beneficial to the "merchants and manufacturers…the principal architects of policy" but were harmful to the people of England.

In short, it was a class-based policy which worked for the rich and powerful in England. The people of England paid the costs. He was opposed to that because he was an enlightened intellectual, but he recognized it. Unless you recognize it, you’re just not in the real world.