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  • Print publication year: 2015
  • Online publication date: May 2018

12 - Globalization and its challenge to Europe


Globalization and the law of one price

The hype around globalization in early-twenty-first-century political and economic debates may convey an impression that we now are in an entirely new phase of economic development. This chapter will show that the presumption is wrong. A dose of elementary economic history is often helpful when the popular media forget about the past.

Globalization is market integration on a world scale. Market integration means that domestic markets are increasingly dependent on international markets. Prices and hence factor rewards will reflect global rather than local demand and supply conditions. Globalization is the product of intensified trade, capital mobility and migration. In that process prices, interest rates and – with a time lag – wages tend to converge and react faster to international shocks. The first wave of globalization started in the middle of the nineteenth century when barriers to trade, migration and capital mobility were abolished or weakened at the same time as the speed of information transmission increased. In most respects markets were as globalized around 1900 as they were at the beginning of the present century. In fact labour mobility across borders was less restricted before 1914 than it is now. However, there was an anti-globalization backlash early in the twentieth century with two World Wars and the Great Depression. That policy reversal affected commodity, labour and capital markets to the extent that the late-nineteenth-century globalization level was not regained until the 1970s or 1980s, when the second globalization period gained momentum.

Market integration operates through trade and arbitrage and the ultimate manifestation of a fully integrated market is the law of one price. The law of one price proposes that the price of identical goods that are traded is the same in all geographical locations. This is strictly true, of course, only if transport and transaction costs are zero, which they are not.

Much of the recent research in the economic history of globalization has been inspired by Harvard and Wisconsin-based J. G., Williamson and younger colleagues. Major themes in this research effort are explored in K. H., O'Rourke and J. G., Williamson, Globalization and History: The Evolution of a Nineteenth Century Atlantic Economy (Cambridge, Mass.: MIT Press, 1999).
M. D., Bordo, A. M., Taylor and J. G., Williamson, Globalization in Historical Perspective (University of Chicago Press, 2003) contains a large number of chapters on practically all aspects of globalization.
The role of transport cost reductions, as opposed to trade policy, in globalization is played down in G., Federico and K. G., Persson, ‘Market integration and convergence in the world wheat market 1800–2000’, in T. J., Hatton, K. H., O'Rourke and A. M., Taylor (eds.), The New Comparative Economic History: Essays in Honour of Jeffrey G. Williamson (Cambridge, Mass.: MIT Press, 2007), p. 99.
M., Obstfeld and A., Taylor, Global Capital Markets: Integration, Crisis and Growth (Cambridge University Press, 2004) is a careful analysis of the ups and downs of capital market integration over the last 150 years.
M., Ejrnæs, K. G., Persson and S., Rich, ‘Feeding the British: Convergence and market efficiency in nineteenth century grain trade’, Economic History Review 61(1) (2008), 140–71, points out that increased market efficiency contributed significantly to price convergence in the nineteenth century.
J. G., Williamson, ‘Globalization, labor markets and policy backlash in the past’, Journal of Economic Perspectives 12(4) (1998), 51–72, suggests that globalization has winners and losers, which explains policy backlashes.
D., Rodrik, Has Globalization Gone too Far? (Washington: Institute for International Economics, 1997) warns us not to overstate the advantages and gains from globalization.
Two recent monographs are investigating the link between globalization and economic divergence: Robert C., Allen, Global Economic History, A Very Short Introduction (Oxford University Press, 2011); Jeffrey G., Williamson, Trade and Poverty, When the Third World Fell Behind (Cambridge, Mass.: MIT Press, 2011).
Tirthankar, Roy has written an excellent economic history of India focusing on India's relation to the global economy in India and the World Economy, From Antiquity to the Present (Cambridge University Press, 2012).