Short answer is no. The long answer is that it can’t do it by itself. In order for an economy to grow, global or local, it has to have more people making more goods and services. In order for that to happen, you have to have demand for those goods and services.

Questionable math

There are, as with too many issues in economics, at least two ways to look at this. One way is to add up all the Gross Domestic Product (GDP) amounts for all the countries in the world. The GDP is generally our government's reference as to how well our economy is doing. The other way to look at it is something called Purchasing Power Parity (PPP), an adjustment to the GDP of a country. PPP attempts to take into consideration the differences in price for various things in an economy, and therefore is supposed to be a better measure of prosperity in a given country relative to the world. For instance a bag of rice costs less in Thailand than it does in Germany so the PPP adjusts the GDP of Thailand upward under the reasoning that the Thais have more purchasing power in their local economy, even though they have less money. So, according to this reasoning, Thailand's economy is better because it is worse.

Add up all the GDPs of all the countries and developing countries seem to produce less than a quarter of the total. Their share of the total has actually fallen in the last twenty years. If you use the PPP to compare economies, their share of the total is not only higher, nearly half of the global total of GDPs, but has risen over the same period. The GDP figures suggest that the global econmoy is shrinking but the PPP adjustment says the global economy is growing.

So which one is right? The GDP total, unadjusted, is right. A businessman does not use the PPP adjustment when calculating what goods can be sold into a market in a developing country. Why? Because his profit is based on domestic costs and exchange rates of currency which the GDP figures account for for every country. This same businessman will turn around and claim that globalization is improving things in Thailand as shown by the PPP adjustment.

In summary, even though people in developing countries are making less money, the PPP adjustment claims they are better off because making less money has depressed local demand enough to crush pricing power for products. Huh?

A matter of demand

Demand is a tricky concept. It is the combination of need and money. Money without need is not demand and need without money is not demand. If you add more people to your economy and they have no money, this will not increase demand. Likewise if you add more money to your economy and the recipients have no needs, it will not increase demand. Money does have the property of transforming desires into needs. So adding money can create demand in a sense. There is an upper limit to how much an economy can grow due to adding money. When that upper limit is reached it creates a condition called wealth, where excess money ends up in a mattress, no longer creating demand.

So at any given moment, there is a total amount of demand in the world equal to the sum of all the people’s needs/desires and the money they have to spend, less savings and equity. If you envision a single person as a unit of demand, the demand he can create is equal to his needs and means. Each person is a potential demand unit as a person is a natural wellspring of needs, food, clothing, shelter, etc. In order for a person to become a demand unit, that person must have money. A person gets money with a job.

People have more or less the same needs and desires. So every demand unit can theoretically create the same demand given the same amount of money. This is the problem with globalization. It is a problem of money.

How much demand?

When a U.A.W. worker loses his job at Ford, where he made $45 per hour, and is replaced with a Korean who makes $8 and hour, we lose net global demand. The U.A.W. worker starts his own window washing business and is now making $15 an hour. So instead of one demand unit making $45 and hour, we now have two who together make $23 and hour. The global demand for our goods has been shrunk by $22 per hour. Where did the $22 go? It went into someone’s mattress.

The amount of global demand is the sum of demand from all the demand units in the world. The theoretical point at which you would have no demand at all, and no economy at all, is if none of the demand units could produce disposable income. It is the towering irony of the industrial age that a capitalist’s fantasy goal is a product that costs nothing to produce and will sell for an infinite amount of money. This is completely the antithesis of an economy. Even though it is a certainty that reducing wages will reduce demand, capitalists main focus is cutting costs, and since labor is factored into everything, even raw materials, the capitalist focus is cutting the cost of labor, thus destroying the market for his products.

Globalization offers U.S. business and consumers some benefit in reduced prices due to cheaper labor, somewhat offsetting the loss of aggregate demand in our domestic economy. But you have to look at the other side of the equation. The loss of demand in our economy is a loss of demand for the global economy resulting in softer prices and lower wages, i.e. global deflation. Global deflation means that everyone ends up making less money, even those of us that thought globalization was a good idea.

Are we really investing in a global economy?

It’s true that from time to time, people will take some money out of their mattress to build a factory or something. That is how economies grow in a closed system. And in theory, the global economy is a closed system, or will become a closed system. However as demand decreases, the combination of need and money, due to lower wages of the demand units, the incentive to build a factory decreases, retarding further growth.

One of the stated objectives of globalization is to spread prosperity to developing countries. It does that. Developing countries are delighted to get $8 and hour for their population. Their demand units are producing more demand and ours are producing less. So in the short term, the aggregate demand for goods and service in the world is declining, and will continue to decline if the global socioeconomic policy remains a policy of exploitation of cheap labor in developing countries.

James W. Paulsen of Wells Capital Management, points out that recent economic growth in the U.S. has not been achieved by increasing revenues. I has been achieved by cutting costs. In other words, the growth currently showing up in the GDP figures for this country is not growth at all, but actually reflects retrenchment in the face of declining demand. Globalization is, from an American businessman's perspective, more of the same. Globalization, particularly outsourcing, has allowed massive cost cutting which shows up on the corporate bottom line. It works for the corporations and is frankly much easier than having to increase revenues through more traditional methods, like hard work. For our society, and for the world economy, it is essentially suicidal and deflationary to bleed more and more demand, in the form of paid wages, from economies, domestic and global.