How Globalization Went Pop and What It Means for Workers

How do you measure how fast the world economy has "globalized"? Borrow a concept from physics. Call it global economic entropy.
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Reuters

Global trade is old -- really, really old. But something new is happening to the world economy as software and container trade shrink the globe -- the rate of "globalization" is increasing, allowing developing countries to hitch a ride on the capital of advanced economies and race forward.

But how do you measure how fast the world economy has "globalized" in one figure? Perhaps, by borrowing a concept originally developed by physicists known as entropy.

Many people are familiar with the concept of entropy, a measure of disorder, from physics. But there is another, more generalized concept of entropy developed by American mathematician Claude Shannon known as information entropy. Information entropy is an abstract measure of diffusion. It tells you how spread out any distribution is, whether it's a distribution of people's heights or particles in a room.

The World Is a Balloon
Imagine a helium balloon tied to the floor of a room. If we took a snapshot of the distribution of helium in the room, we'd see trace amounts of helium floating around, but the overwhelming majority of helium would be concentrated in the balloon. If you pop the balloon, the helium particles would burst out, spreading over an increasingly large area over time as they diffuse through the room. The information entropy lets us measure just how spread out the particles are, and track their diffusion over time.

Similarly, we can take a snapshot of the distribution of global GDP among nations. For example, in 1991 total global GDP was about $22 trillion (in current U.S. dollars) and the United Kingdom generated about $1.013 trillion of that total, or 4.7%. Calculating this percentage for every nation lets us build a distribution of each nation's share of total global GDP in a given year. We can then measure the information entropy of this distribution for each year over time. In doing so, we see that the distribution of global GDP among nations became more spread out over the last several decades.

In short, globalization popped the global GDP balloon, letting GDP escape to developing nations and spread out more uniformly across the world.

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Computed for 165 nations using data assembled by The World Bank.

Though there is no "GDP balloon," there are national boundaries and geographic distances that have historically restricted the movement of capital and goods. The infrastructure of globalization marginalized the importance of these national boundaries and collapsed distances, liberating capital by facilitating global investment, and unleashing truly globalized trade in goods and services. As expected, these changes in trading and investment patters affected how economic activity is distributed among nations. In short, global trade is randomizing the location of economic activity - sending capital and resources flying around the world with an increasing indifference toward national boundaries and geography -- and allowing more nations to participate meaningfully in the global economy.

Information entropy is a measure of information, and its units are given in bits -- the same bits that encode this article on the Atlantic's servers. Shannon discovered the deep connections between diffusion and information while doing research on how to create codes that use the least amount of information (bits) as possible. His fundamental observation is straightforward: widely distributed data points require more information to communicate, and have higher entropy. More concentrated data points require less information, and have lower entropy.

The diffusion of economic power unleashed by globalized supply chains and modern communication is already having profound and unexpected effects on the global economy. As I wrote last month for The Atlantic, income disparities are growing in developed nations as the premiums for high-skill labor grow, while accessible low-skill labor becomes more plentiful and less valuable. The returns on capital are growing to dominate the returns on labor in developed nations as industries increase their use of technology and automation. Only time will tell whether the trend of increasing economic diffusion persists, but the enormous volumes of time, money, and labor invested in the infrastructure of global trade suggest that many people are convinced that globalization is here to stay, likely causing economic activity to become more diffuse over time.

The increasing entropy of economic activity gives us a precise metric for something we all know to be true -- it takes more information to tell the story of the world economy than it did only ten years ago. The world has become a measurably more complex place.

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Charles Davi is a capital and derivatives markets lawyer in New York City. He received his J.D. from New York University School of Law and B.A. in Computer Science from Hunter College.

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