Bruno G. Rüttimann - Modeling Economic Globalization


As Confucius once said: The decomposition of order begins with the confusion of terms. That is also applicable to globalization. And decomposition, because everybody is talking about globalization without knowing exactly what they are talking about, thus creating confusion. The need for composition emerges in order to structure the phenomenon, so as to gain insights and eliminate confusion. The reason behind this being that globalization is perceivable and concerns all of us – but is hardly tangible.

Many books have been written on globalization but no individual one presents an integrated theory of it. The questions I asked myself were: “What is globalization of economy? How is globalization driven and by what means? Is it possible to put globalization into a structured model in order to better understand this phenomenon? How can the intrinsic nature of globalization be modeled?” Let us lend a structure to the determinants of globalization in order to gain more insight and we will see that there are not only different types of globalization in existence but also an intrinsic or built-in law of evolution.

Globalization is often seen as an obscure process that apparently yields more profit for the companies on the one hand while increasing unemployment for the working classes on the other hand. This book does not discuss the social aspects of globalization – although of essential importance –, but instead goes into the causes and effects of it. Globalization is hardly controllable, since it is not only a process but rather the phenotypical manifestation within the causal systemic world of economy and politico-social behavior. It is a system with a multitude of actors interconnected in the form of a neuronal network, without a predominant “ganglion”, with each “neuron” governed by its rationale, and evolving according to a non-controllable, but partly predictable chaotic system.

This book is an essay analyzing the complex aspects of globalization and an attempt to develop a normative model of globalization culminating in a comprehensive theoretical view. The two events having lead to this opus were my opening speech at ALUMINIUM TWO THOUSAND, the 5th World Aluminium Congress in Rome, from May 18 to 22, 2003, with the title “Globalisation and the Effects of the Opening of the East on the Western European Aluminium Semis Industry”, and the Best Paper Award at ET04, the 8th International Aluminum Extrusion Technology Conference in Orlando in Florida, from May 18 to 21, 2004, bearing the title “The Effects of Globalization on the Aluminum Extrusion Industry”. Many people encouraged me to go further by writing a book on globalization, and the success of these two speeches gave me the strength to do so. This book is the result, and a first attempt to explain economic globalization by means of an underlying new thesis.

Our intention is not to look into the aspects of the classic foreign trade theory based mainly on comparative cost advantages and associated opportunity costs, as well as factor allocation and associated Pareto optimality – there are already enough books on the market dealing with this subject. Instead, we will present a new, complementary and formalized view of trade, drawing more from realistic experience in business and physics as orientation. This can be seen on the one hand as an inductive approach, analyzing the rationality of a single actor, and on the other hand, as a thermodynamic deductive approach, defining an entropy-based concept interpreted as the risk of an economic system. Indeed, today’s neoclassic theory is based mainly on Pareto optimality of scarce resource allocation and efficiency aspects of the market. In thermodynamics, this corresponds to the 1st Principle of Thermodynamics dealing with the conservation of energy and the degree of efficiency. The 2nd Principle of Thermodynamics considers the question of whether or not a transformation takes place, aiming finally to maximize entropy. It is exactly this question that we will investigate over the next chapters, referring less to equilibrium and more to the conditions that make transactions happen, thus leading to evolution of the market. The result is a comprehensive model of economic globalization going far beyond physical foreign trade flows, including reflection on business strategy, and entering into the intrinsic nature of economic globalization.

Chapter 1 explains the phenomenon of economic globalization with its causes, symptoms and effects. It shows that the actions of the numerous different actors result in an uncontrollable process.

Chapter 2 analyzes business and structural drivers in order to classify the different businesses as typologies. It transpires that different types of businesses co-exist within the same industrial sector along the integrated value chain.

Chapter 3 structures the amorphous term globalization by defining different types of globalization, on the basis of business typology. This chapter is the sparking momentum of a new thesis on economic globalization.

Chapter 4 overcomes the aggregated equilibrium modeling of the neoclassic theory of economy, applying a post-neoclassic view based on a more transaction-oriented and inductive market logic approach. The limitistic approach of comparative cost advantage is replaced by the comparative competitive advantage for similar yet differentiated products. The driving rationale for each globalization type is then developed.

Chapter 5 introduces a thesis derived from thermodynamics to explain the evolution of economic systems leading ultimately to globalization. With an entropy-based risk concept founded on the inequality of a system, the globalization of the economic system can be modeled and measured by a genotypic risk metric, leading to the Central Theorem of Globalization. This new metric allows a comparative analysis of trade flows to be conducted, as well as of the product composition of a political economy.

Chapter 6 integrates the profit maximizing logic with the minimizing risk behavior of an economic actor using the paradigmatic approach from thermodynamic enthalpy. The result is the governing rationale of maximizing the value net of risk.

Chapter 7 summarizes the concepts of a new post-neoclassic thesis on economic globalization as presented in the former chapters with five postulates.

In this context, chapters one, two and three lay down the foundations for a new and comprehensive globalization thesis. Likewise, we see that chapters four, five and six are intrinsically linked, with chapter four explaining the rationale of an inductive cost-benefit based transaction logic, chapter five describing on a higher aggregation level an additional deductive rationale of risk-minimizing portfolio logic, and chapter six uniting the previous two, aiming to maximize profit and minimize risk, thus becoming the underlying latent mantra of globalization. Chapter seven synthesizes the whole as five postulates.

This opus is the result of empirical observations drawn from business management experience, micro-economic market theory, and thermodynamic analogies. The concepts presented in this book could provide various clues that leave room for additional interpretations and further development. It could therefore be the starting point for a new cycle of economics analysis and discussions regarding globalization.

September 2006

Bruno G. Rüttimann

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© Bruno G. Rüttimann, 2009