New World Order - October 2011

It has been slightly more than three decades since I earned my undergraduate business degree. But I still remember the first time I heard three simple theories that forever changed my view of the international business world and globalization.

In my Banking class, I learned of the concept of the Multiplier Effect in which money spent by a business or consumer will multiply up and around the economy to have a greater total impact than just that of the original spender. And the multiplier can have worldwide impacts when developing countries have new wealth and consumer demand for others goods.

In my Logistic class, I learned about the Economic Order Quantity in which a business can efficiently calculate when to order goods from its suppliers and how much to order to effectively meet anticipated customer demand. I was amazed at how acquisition costs from a foreign supplier could sometimes be more cost effective than obtaining goods from domestic suppliers even when Just In Time ordering became a daily management strategy.

And in my Economic class, I learned about the concept of Comparative Advantage in which a consumer or business will naturally seek the best value for any goods or services to be purchased worldwide. That is why given the total costs of natural resources, labor, and government regulations, the invisible hand of the marketplace all too often finds foreign manufacturing sources better than domestic firms.

Of those three theories, the last one on comparative advantage has been the hardest for most liberal economists and politicians to accept. My friends on the left seem to think it is almost treasonous for corporations to produce their goods or provide their services from overseas if that is where the comparative advantage can be found rather than here at home and simply will not accept that businesses are only trying to provide such goods and services at prices that consumers are willing to pay.

Whenever I ask these globalization doubters should the American consumer be forced to buy goods and services made in America through high tariffs on imported goods and the resulting higher prices in stores, they never have an answer. Perhaps my good friend Gary will answer this question in his opposing column on this topic. They usually just say if American workers cannot earn decent wages, how can we expect them to buy higher priced American goods?

Certainly many other issues come into play when evaluating the benefits of sourcing from overseas and I am not deaf to the concerns of those who believe some countries are abusing their environments and workers to be able to produce goods and services less than we can do domestically. I think it is important that their safety laws and human rights are held to the same high standards that we expect of our American corporations operating plants here.

I also believe in the necessity of having level playing fields in which foreign governments do not intentionally subsidize their industries to the detriment of our American firms. Just remember though that for all of the talk of subsidized foreign steel, rubber, and textiles causing the rust belts in Michigan, Ohio, Pennsylvania, and the Carolinas, our government subsidizes plenty of industries itself including energy and agriculture.

But I draw the line when it comes to national security. I find it completely inexcusable that any of our military armament, spy satellites, or boats and planes are built by foreign firms or with foreign components. Our government and taxpayers must pay the price to guarantee that such goods are produced under the total control of American providers and suppliers without giving blank checks to those providers to rip off the American taxpayer because of protection from foreign competition.

In an ideal world, American workers would earn high wages while producing goods and services which meet the price and quality expectations of American consumers without fear of international sources. But that is no longer a reality in this 24 hour high tech world with instant internet communications which quickly help American distributors and retailers find the least expensive sources for their goods anywhere in the world.

If American workers and corporations are to succeed in the decades to come, our children must be immersed in learning engineering, scientific research, finance, and communication technologies so that our country can continue to create and design goods and services for the world which are likely to be manufactured in foreign lands thanks to comparative advantages, economic order quantities, and multipliers.