1.1: Economics- The power of multinational corporations

Critics of globalization often make the following comparison [25] to prove the excessive power of multinational corporations:

In Nigeria, a relatively economically strong country, the GDP [gross domestic product] is $99 billion. The net worth of Exxon is $119 billion. “When multi- nationals have a net worth higher than the GDP of the country in which they operate, what kind of power relationship are we talking about?” asks Laura Morosini.

Before continuing, explore the following question:

Question

What is the most egregious fault in the comparison between Exxon and Nigeria?

The field is competitive, but one fault stands out. It becomes evident after unpacking the meaning of GDP. A GDP of $99 billion is shorthand for a monetary flow of $99 billion per year. A year, which is the time for the earth to travel around the sun, is an astronomical phenomenon that has been arbitrarily chosen for measuring a social phenomenon namely, monetary flow.

Suppose instead that economists had chosen the decade as the unit of time for measuring GDP. Then Nigeria’s GDP (assuming the flow remains steady from year to year) would be roughly $1 trillion per decade and be reported as $1 trillion. Now Nigeria towers over Exxon, whose puny assets are a mere one-tenth of Nigeria’s GDP. To deduce the opposite conclusion, suppose the week were the unit of time for measuring GDP. Nigeria’s GDP becomes $2 billion per week, reported as $2 billion. Now puny Nigeria stands helpless before the mighty Exxon, 50-fold larger than Nigeria.

A valid economic argument cannot reach a conclusion that depends on the astronomical phenomenon chosen to measure time. The mistake lies in comparing incomparable quantities. Net worth is an amount: It has dimensions of money and is typically measured in units of dollars. GDP, however, is a flow or rate: It has dimensions of money per time and typical units of dollars per year. (A dimension is general and independent of the system of measurement, whereas the unit is how that dimension is measured in a particular system.) Comparing net worth to GDP compares a monetary amount to a monetary flow. Because their dimensions differ, the comparison is a category mistake [39] and is therefore guaranteed to generate nonsense.

Problem 1.1 Units or dimensions?

Are meters, kilograms, and seconds units or dimensions? What about energy, charge, power, and force?

A similarly flawed comparison is length per time (speed) versus length: “I walk 1.5 m s−1—much smaller than the Empire State building in New York, which is 300 m high.” It is nonsense. To produce the opposite but still nonsense conclusion, measure time in hours: “I walk 5400m/hr— much larger than the Empire State building, which is 300 m high.”

I often see comparisons of corporate and national power similar to our Nigeria–Exxon example. I once wrote to one author explaining that I sympathized with his conclusion but that his argument contained a fatal dimensional mistake. He replied that I had made an interesting point but that the numerical comparison showing the country’s weakness was stronger as he had written it, so he was leaving it unchanged!

A dimensionally valid comparison would compare like with like: either Nigeria’s GDP with Exxon’s revenues, or Exxon’s net worth with Nige- ria’s net worth. Because net worths of countries are not often tabulated, whereas corporate revenues are widely available, try comparing Exxon’s annual revenues with Nigeria’s GDP. By 2006, Exxon had become Exxon Mobil with annual revenues of roughly $350 billion—almost twice Nige- ria’s 2006 GDP of $200 billion. This valid comparison is stronger than the flawed one, so retaining the flawed comparison was not even expedient!

That compared quantities must have identical dimensions is a necessary condition for making valid comparisons, but it is not sufficient. A costly illustration is the 1999 Mars Climate Orbiter (MCO), which crashed into the surface of Mars rather than slipping into orbit around it. The cause, according to the Mishap Investigation Board (MIB), was a mismatch between English and metric units [26, p. 6]:

The MCO MIB has determined that the root cause for the loss of the MCO spacecraft was the failure to use metric units in the coding of a ground software file, Small Forces, used in trajectory models. Specifically, thruster performance data in English units instead of metric units was used in the software application code titled SM_FORCES (small forces). A file called An- gular Momentum Desaturation (AMD) contained the output data from the SM_FORCES software. The data in the AMD file was required to be in metric units per existing software interface documentation, and the trajectory modelers assumed the data was provided in metric units per the requirements.

Make sure to mind your dimensions and units.

Problem 1.2 Finding bad comparisons

Look for everyday comparisons—for example, on the news, in the newspaper, or on the Internet—that are dimensionally faulty.