Capital and Labor in the Emerging Global Economy

Abstract

The theoretical structure supporting liberalization of international trade is becoming increasingly inappropriate for the study of the emerging global economy. The theory of international trade was formulated as the nation-state emerged as the dominant political structure. The assumptions of mercantilism were discredited by classical economic theory and replaced by theoretical arguments for free trade. The zenith of free trade theory and practice was the nineteenth century. However the assessment of free trade in that period must place trade relations in the institutional context of colonialism and the relatively primitive transportation technology of the time. In this paper, the focus is on the differences between the economic relations of the international system of the eighteenth, nineteenth, and early twentieth centuries and the global system that is now emerging. I ask what effect these differences have for relations between owners of capital and labor. The major point of the article is that public discussion of the emerging global relations provides institutional economists with the opportunity to make an effective argument that institutions do matter. If institutions matter, so does history. We cannot pretend, for instance, that former colonies have the same market culture as do the imperial nations. We must begin to design global economic institutions within the present web of institutions, rather than from a set of axioms. These institutions must account for the evolution of production from dependence on natural resources and physical capital to the increasing role of intellectual capital. The current public debate about global economic policies is being argued from the mental model of trade in finished goods when natural and capital resources cannot be moved across national borders. This mental model confines the debate to free