A sketch of an idea

Over at my very favorite international economics blog, blogmaster Dr. Brad Setser has started a conversation about a recent comment that former Secretary of the Treasury Larry Summers made at the recent World Economic Forum:

Making the intellectual case for free trade and then simply "paying off" some of the losers in globalization, Mr. Summers said, will not work for world leaders trying to sell the current round of global trade talks to a skeptical polity.

"That's the Davos lie," Mr. Summers said during a dinner Friday night.

Here is my interpretation of what "the Davos lie" might be, which I have cross posted in the comments section of Dr. Setser's blog:

In their advocacy of the benefits that would accrue from globalization, the Davos elite underestimated the extent that globalization's success would alter basic international economics parameters. They were particularly purblind about the effect that globalization would have upon their own behavior.

Under the paradigm, the transfer of work to lower-wage countries would "free up labor in advanced economies to move into emerging or non-tradable occupations." However, the speed at which this transfer took place exceeded estimates, removing work from the advanced economies, lowering the wages and benefits that labor could demand.

The elites also missed the syllogism that since multinational corporate labor costs were going to be so much lower, corporate profits were going to be so much higher--and that since corporate profits had increased, the corporate elite was going to reward itself for its probity--and the rest of the elite would see to it also was recognized as worthy of better remuneration as well.

Unless the corporate elites paid their remaining workers a higher wage and forewent paying themselves better, inequality within nations would skyrocket. No amount of retraining and goods price decreases was going to halt the relative decline in the economic status (note the wording: economic status, not the quality of life) of the numerical majority.

The elites, most of which hail from democratic societies, nevertheless failed to appreciate that globalization could not only erode the majority's economic status, it would erode its political status as well. When the elites amass vast fortunes that they can use to buy political influence or pay for deceptive political campaigns, the purportedly sovereign majority finds itself effectively disenfranchised.

Globalization has improved in the aggregate the physical welfare of the populations brought into contact with the new global market. The "Davos lie" was that the number of individuals suffering traumatic adjustment effects would be small and the price of remediation would be limited. The truth was that if the elites did not curb their avarice voluntarily, globalization was going to shift power from labor and government to capital, with unforeseen deleterious effects upon political and economic justice.

Later - For an illustration on how the "Davos lie" plays out in the Japanese context, the Financial Times has published a good article about Japan's stagnating personal consumption.