The Fool, the Bad and the Lazy – Globalization Mathematics

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If everything is so great, how come we have so much to complain about?

There are many articles discussing globalization but in my opinion the theory behind the phenomenon is lacking. I think that many people present globalization as if it is a clear-cut, good or bad issue. Doing so derails our ability to understand it. Globalization is good for some people and bad for others. To support one side of the debate and dismiss another is to turn your ears from the genuine distress of those beside you.

For anyone that creates and plays around with models describing spatial economies, it is clear that the phenomenon of globalization is an interesting case to take on. In my opinion, this phenomenon does not require a unique special model since it is a mere extension of the basic gravitation model that I’ve presented. The model can easily explain the macro behavior in the markets. The changes from the city level, which I usually deal with, to the state level and beyond are fascinating and I will relate to some of them here.

The Gravity Model

In the previous chapters, I’ve presented the model in detail. In a nutshell, the predictions of the model are:

  • Agglomeration is the only stable state of the market – suppliers of a product or service will prefer to crowd to one place or unite to a single company, economical Gravity Core.
  • The Gravity Core creates economic repression, a Suppression Zone in the surrounding area.
  • The Suppression Zone area created by the Core depends on the Hassle-distance that customers are willing to “pay” to consume the product.

You are of course welcome to delve into a more in-depth explanation here:
Suppression Zone and Hassle Distance

Globalization

In a globalized world, it is still more theoretically beneficial to focus on cities rather than countries. The reason is clear, London is very different from Cardiff, Tel Aviv is different from Be’er Sheva, and New Haven is different from New York. The impact of globalization originates from cities and mostly affects cities, rather than entire states as a whole.

However, a country’s borders change the way the economic model works.

Asymmetric Hassle Distance

In the basic model I have shown how the Suppression Zone of the big city that spreads over small towns is related to the distance between them and the specific services offered. But what happens between cities like London and Paris, Rome and Berlin, or New York and Hong Kong? What happens when we need to travel between countries and not just between cities?

In principle, on a single specific product, so long as transportation is slow and expensive, cities can not compete. The Hassle-distance is too high, the Suppression Zone is restricted and the graph will look like this.

With the “shortening of the distance” of globalization, the Hassle distance is reduced and the Suppression Zones grow. Cities will enter the Suppression Zones of each other. In principle, we were supposed to see this graph.

However, at the border between the countries there are a few changes. First, there is the cost and hassle of the crossing itself. In addition, there are cultural and language differences, lack of trust among foreigners, etc. All this will make the graph look like this:

Now here is the interesting part, There can be differences that will offset the presented symmetrical state. Differences arising from contracts between countries, such as customs, trade agreements, postage agreements, etc. It is also possible that one language has priority over another. For example, one side may use English and the other Hebrew. It would be much easier to sell a product in English (for example, a film) in a Hebrew-speaking country than the other way around. The graph can therefore be asymmetrical:

In this situation one of the cities has a definite advantage and even if they started with the same economic power, the border crossing created an advantage in which one city can easily compete with the other but not vice versa. The Suppression Zones of the cities in space, once equal circles, will now be seen as such:

A good example of this is the ease in which products manufactured in China are sold in the US. For example, production cost for a fishing hook in a remote city in China can be quite similar to the production cost in a remote city in the US. However with the famous postal agreements where shipments from China are subsidized by the US mail, it is cheaper to ship the product from China to the United States than from the US To the US. The Chinese products  clearly overtake the market without any production cost advantage or superior quality.

Custom taxes can also be easily illustrated by graphs, as well as currency conversion fees and additional hassle caused by the border. The graph can also explains what will happen if you remove all these barriers, for example if all of Europe were to be united under one currency

That’s right, the big cities will suppress the economy of the smaller ones.

Personally, I can’t understand how the leaders of smaller nations in Europe have signed to join the European Union without significant compensation from Berlin and London. They had just witnessed the reunification of Germany, where in spite of the huge payments to the East, all economic activity in the cities there was crashing by the economic power of the cities of West Germany. To give away the economic tools (currency rate, customs etc.) defending Rome, Athens or Lisbon in the age of globalization, where distances are so short, to join a union without any defense against competition from Berlin … it’s an economic suicide.

Accountants and the big city

I’ll give you an example from my country, from Israel. Let’s examine the competition between Tel Aviv and the city of New York. For certain products the distance between the cities was almost completely wiped out. On those New York just ran over Tel Aviv. An example of such a product is accounting for high-tech companies.

Ostensibly accounting seems to be a very local business. You would assume it depends on the local tax laws, local conventions, culture and language. On the face of it, there is no chance that in this area New York accounting firms will dominate the Israeli market. They have no advantage … or do they?

In fact they have a huge advantage. In the global era, for high-tech companies, the critical phase is going public and joining the stock exchange. For such a product (going public), so unique, so precious, so important to the life of the company, the whole world has become flat and close. The Tel Aviv stock exchange once had a certain justification, these days it is not even an option for a growing Israeli hi-tech company. And if you are going to issue stocks in New York anyway, you have to work with an American accounting firm and preferably from the day you set up the company.

In the United States, New York won over all other cities in the field for the same reason, the proximity to the stock exchange. The accounting firms consolidated to the “big four” that dominate almost the entire market. These offices now control this activity in Israel. The Big four are the major offices here too. The economic advantage is preventing any other accounting firms in Tel Aviv from competing in this domain and they will never be the handling accounts of hi-tech companies even if most of the activity is local.

The accounting services for Israeli high-tech companies is dominated by companies in New York and Tel Aviv. Each time there is a huge deal or issuance of an Israeli company, New York get its cut, Tel Aviv get its cut and the city in which the company is located, for example Haifa, doesn’t see a dime.

Globalization always empowers the strong cities on the expense of the smaller ones. Globalization simply removed barriers of culture and distance that existed between cities, enabling cities to expand their Suppression Zone and spread them all over the world, thus created the world-cities that drained all economic activity in certain areas.

New York accountants did not create the Israeli hi-tech company in Tel Aviv. Nor have they contributed to its creativity or its management. New York does not create this economic activity in Israel but in so many cases it will attract the activity to it. The company will be registered as an American company and will pay most of its taxes there. But pay attention, it will be New York that will earn from it in it’s GDP, not any other city in the United States.

Lawyers and the big city

There will be some that may not agree with the claim I just made. They would say New York accountants had made a contribution to Israeli Hi-Tech companies. So I will give the same example, narrowing it down to a lower scale – instead of companies, let’s talk about people. Instead of issuing stocks and accountants – divorce lawyers.

Divorcing spouses is also an economic issue. In this case, a lawyer will take his part and it will be recorded as income and part of the GDP of the city in which he lives. Has the lawyer created the deal? Has he contributed somewhat to the fact that these people were married or divorced? No. He did not contribute anything.  If that is the case, (and keeping in mind the fact that people get married and divorced regardless of which city they live in) the dispersion of lawyers should be identical to the population’s distribution… But that’s not what happens.

Let’s assume for a moment that a very rich couple from Cardiff is getting divorced. What are the chances that at least one of them will hire a lawyer from London? Let’s  say 10%. In contrast, in London there is a similar couple who divorces, what are the chances that one of them will hire a lawyer from Cardiff? Probably zero.
As a result there are more lawyers in London to deal with divorces than expected from the size of the population. In smaller cities, there will be far fewer such lawyers and they will charge far less.

In London there will be more lawyers to deal with the larger cases, earn more and register higher GDP.
Did they change the divorce rate in Britain? No.
Does the London law firm have economies of scale here? No.
The economic activity itself would exist with or without London lawyers. London simply attracts the economic activity that once occurred in other cities. The reason it is now concentrating in London is that the distance between Cardiff and London has been reduced. The hassle of getting to London or communicating with a lawyer from London is not as high as it was only 30 years ago.

London earned, Cardiff lost. No real economic activity has been added to the market, it has only shifted to the stronger city.

All over the world we see the phenomenon in which the capital cities and especially the world-cities are pushing hard towards globalization. The reason is obvious, any removal of economic barriers contributes to the city’s Suppression Zone and extends it over weaker cities.

This is what many economists miss when they discuss globalization. Globalization should not be measured at the level of countries but at the level of cities.

Globalization and the big city

How can it be that people in Britain oppose staying in the EU and are supporting Brexit ?
How can people support Trump’s trade war with China?

But who truly supports it and who really objects?
Could it be that the Londoners are in favor of remaining in the EU while the periphery is against it? Is that what is happening in the US?

I want to clarify, I’m not in favor of the Brexit or Trump, nor am I against them. I’m just dealing with spatial economics and presenting its implications.

However, I am very annoyed by the claims that there is a side to the argument that is stupid (Trump supporters), does not understand economics (Brexit supporters) or lazy (Greek residents). The global economy is beating them up.

People in the economic periphery know very well what their conditions were 20 or 30 years ago and what they are today. They were told that the economy is flourishing but they are experiencing exactly the opposite. Their assumption therefore is that those who tell them these stories are stupid, evil, or both.

On the other side, members of the great cities definitely experienced an economic uplift in the last 20 years. Globalization works in their favor, they live in greater prosperity, they see successful people breaking wage ceilings again and again. They see those people from the periphery and don’t understand how they could vote for Trump or the Brexit, and assuming that everyone who does so is lazy, stupid, or both.

The economic model I’m presenting is not complicated: when all players seeks only their personal gain, we are bound to get many losers and very few winners. That’s how the economy is built.

You don’t believe me? Play a game of Monopoly and you’ll find that at the end of the game all the money will be in the hands of only one player. Even if we will have 4 computers playing exactly the same strategy, and though the dice does not prefer any player, the money will pile up in the hands of one player. A tiny initial advantage will turn into a huge advantage and augmentation. Years ago we had a lot of game boards, a board in every city, the cities were remote and each had a local winner. Globalization has connected all the tablets to one giant board. Those with the initial advantage simply trample all the others. Capital accumulates in the hands of fewer people while all others have to work harder and earn less.

Want to dig deeper? Go to this link. The model is so simple that it annoys to ignore it.

Unfortunately, I have no solution. I am presenting a built-in problem in the global market to increase understanding among the different parts of society. No one is stupid, no one is evil. We need to understand that the laws of economics, the “invisible hand” of the market does not aspire to create social balance but rather pushes for augmentation.

Only by understanding this principle we may find a solution together.


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