Why the World is Not Flat

Toyota’s sudden collapse, with recalls multiplying and engulfing its best cars, has implications for Tom Friedman’s 2005 thesis that The World is Flat. It is yet another example of why Friedman is wrong.

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Friedman had essentially argued that comparative advantage—or what might simply be called competitive advantage—has disappeared and that one could produce anything at the same cost around the world: in India and China, as in the United States. Friedman is a pro-globalization intellectual who probably meant this as a wake-up call for the United States to shape up. But it ironically served to alarm several of his readers into thinking that the United States was doomed by open competition from abroad, that the Chinese and the Indians would now, like Russell Crowe’s Roman legions, march in lockstep across this flat world and vanquish us.

Writing almost 10 years before Tom did, I had in fact noted in The New Republic (“Fear Not: Why the Global Economy Shouldn’t Scare Americans”) that we were in a “new epoch,” in which several factors had led to the erosion of “thick” margins of comparative advantage and many producers faced intense competition. In economic terms, I was arguing that we now had “kaleidoscopic” comparative advantage—what we call in economic jargon, "knife-edge" specialization—so that specialization would shift among countries with small changes in cost conditions.

The factors that had produced this situation were several, e.g. interest rates were less unequal across countries with integrated capital markets; technology used by multinationals located in different countries became more available across nations; the spread of technical education also meant that many in India and China read the same textbooks as Americans and Europeans; and so on. So, with kaleidoscopic (or "thin" or "knife-edge") comparative advantage in many activities, we were now confronted with volatility in, not the end of, comparative advantage.

Where Tom went wrong was to argue instead that we are now at the end of having comparative advantage. In fact, it is easy to find reasons why countries still have differences, often due to politics and due to culture, that make the world not flat. Thus, China’s authoritarian politics has undermined the development of software: The PC (personal computer) and the CP (the Communist Party) do not go together! But India has a noisy democracy where software has thrived; and, until recently, it has had bad autarkic policies that have undermined hardware production (which has thrived in China).

As for cultural sources of non-flatness, the Japanese tradition of artisanship, with its careful and measured meticulousness, gave Japanese industry comparative advantage vis-à-vis the U.S. in product design and innovation; but they lagged behind for decades on finance, where quickness of response was the key requirement. Toyota’s misfortunes underline the perils of expecting modern information technology to perform multiple tasks in cars without flaws. But more than that, Toyota’s misfortunes also reflect how the company’s slow attempts to fix its safety problems were simply out of touch with the speed of the modern world’s demands. So, the meticulous and measured artisanship that conferred comparative advantage on Japanese industry may reverse itself unless the Japanese industrial culture adapts in the same way as the Japanese financial culture has finally begun to do.