In modern economics, there are currently two bodies of theory that argue in favor of a supply-side reinforcement of investment spending as opposed to mass consumption and thus in favor of adjustment to globalization by cutting wages and government spending: endogenous growth theory (EGT) (Romer 1986, 1987, 1990, 1994; Segerstrom 1991; Caballé and Santos 1993; Grossman and Helpman 1994) and strategic trade theory (STT) (Krugman 1991, 1993). EGT deals with the empirical fact that the decline of capital productivity assumed by standard neoclassical growth theory, has never and probably will never occur. Drawing on previous work (Crafts 1996), it searches for an additional factor of production which is assumed to create further increases in productivity, identifying here the role of human capital and technology. In order to maintain competitiveness, capitalist enterprises and all territorial (national) economies have to maximize the productivity of investment by optimizing the mix of investment in physical capital (plant and equipment) and human capital (training and education). The post-Keynesian observation of stable capital-output ratios (Domar 1961; Bicanic 1962; Mayor 1968; Helmstädter 1969:48-60) was the basis for the argument about rising real wages as a condition for capitalist growth. The same observation is used in EGT to justify austerity in the name of efficiency. This appropriates Keynes to maintain that the rise in household incomes is based on human capital that households must reproduce by spending on education and training. STT is closely linked to EGT. It maintains that the welfare of a nation depends on its capacity to operate at the technical frontier, which yields Schumpeterian innovation rents. Just as in EGT, in order for a country to maintain a competitive position on the technical frontier, consumption has to be curtailed in favor of investment in physical and human capital.
In opposition to these theoretical approaches, I argue that disappointment and maldistributed welfare gains from contemporary globalization are due not to its extent but rather to perverse policies and certain characteristics. The result is a race to the bottom that cannot be addressed by wage cuts. The essential instrument driving the cost competitiveness of catching-up economies is devaluation. This option is only open to lagging economies, and not to those with a surplus in their balance of trade or even in their balance of payments.