Countries Still Rule

[This post originally appeared on another blog written by Jonathan Dingel. It has been imported into Trade Diversion. I apologize for the hyperbolic rhetoric of my former years.]

Tyler Cowen at Marginal Revolution recently unknowingly resurrected an old fallacy. He writes that, of the world’s one hundred largest economic entities, “[f]ifty-one are corporations, and General Motors comes in at number twenty-three, just ahead of Denmark (the data are from 2000, Wal-Mart should be higher than listed, among other changes).” The caveat Cowen offers (“To be sure, these comparisons are problematic. Yearly sales are not strictly comparable to gross domestic product”) is woefully insufficient.

Jagdish Bhagwati tackles this fallacy in his new book, In Defense of Globalization.

This dramatic statistic is misleading, however, as the two sets of data are not comparable… So when we compares sales volumes, which are gross values, with GDP, which is value added, we are comparing oranges with apples. The comparison, while conceptually flawed, also exaggerates the role of corporations because sales figures across the entire economy will add up to numbers that will vastly exceed the GDPs of the countries where these sales occur. [p.166]

This idea of corporations ruling the world was manufactured by left-wing critics of globalization in order to instill fear. Corporations, despite all their incentives to please populaces and customers, are not democratic, so people prefer to see democratic governments remain powerful enough to control corporations when necessary. “Wal-Mart and GM are stronger than most governments!” is a great catch-phrase to scare people undecided about the desirability of globalization.

Martin Wolf took this Institute for Policy Studies “paranoid delusion” to task over two years ago; it’s too bad that Professor Cowen blogged without catching this criticism of the data. Here’s how Wolf reads the data in his February 6, 2002 Financial Times column:

In fact, only two of the top 50 economies, measured by value added, and 37 of the top 100 were corporations. For the critics, GM is bigger than Denmark and Wal-Mart is bigger than Poland. Properly measured, Denmark’s economy is more than three times bigger than GM. Even impoverished Bangladesh has a bigger economy than that of GM.

But the flaw in such claims is not just factual but also conceptual, since countries and companies are radically different. A country has coercive control over its people and its territory. Even the weakest state can force millions of people to do things most of them would far rather not do: pay taxes, for example, or do military service. Companies are quite another matter. They are civilian organisations that must win the resources they need in free markets. They rely not on coercion but on competitiveness. []

In short, leftists trying to critique corporate power have bastardized the data until it produced an interesting statistic. Hopefully the Marginal Revolution will revise its take on the matter to include a stronger disclaimer than its mere “these comparisons are problematic.” Something along the lines of “these comparisons are ridiculous and misleading” would be more appropriate.