Notes

The dangerous myth of inevitable progress

The conversation begins with a sobering challenge to one of modern society's most basic assumptions. While most people grow up believing in inevitable progress—expecting technology, GDP, and society to continuously improve—this faith may be dangerously misplaced.

Ajay argues for a more nuanced view:

"I feel it is better to tell children a fairy tale where their technology will get better, but it could well be that their state gets worse. So the progress of a society is something far more complex and should not be taken for granted. So it's a very iffy thing. It's something to aspire for, we should dream of it, but we should not count on it."

This perspective connects to broader patterns of human moral development. The concept of the expanding circle, introduced by W.E.H. Lecky in 1897, describes how moral consideration historically expands from family to tribe to nation and potentially beyond. Yet this expansion isn't guaranteed—circles can contract during periods of nationalism and identity-driven conflict.

Even in ancient times, this expansion could take remarkable forms. The emergence of Jainism in primitive Indian society, with its advanced concepts of non-violence despite protein scarcity, demonstrates extraordinary intellectual and philosophical capabilities that transcended immediate material constraints.

Understanding globalization through five freedoms

Globalization, stripped of airport-book oversimplification, represents a specific condition: the extent to which human beings can engage deeply with people across national borders without state interference. This engagement occurs across five crucial dimensions.

The movement of ideas should flow freely across countries, unrestricted by sectarian conceptions of "foreign" versus "domestic" knowledge. People should be able to move freely, with states not controlling their citizens through passport systems and border checkpoints. Goods should move based on voluntary transactions—like purchasing ball bearings from Mozambique—without customs duties or arbitrary restrictions. Services should cross borders freely, whether through remote work or professionals practicing in different countries. Finally, capital should flow where returns are highest, unconstrained by government controls.

Two fundamental forces shape these freedoms: government interference and technological capability. States, defined as communities maintaining a monopoly of physical violence in given territories, naturally tend to control these flows for their own purposes. Meanwhile, technological advances—from steamships to container shipping to telecommunications—determine what's practically possible regardless of political restrictions.

This framework reveals globalization not as a vague concept but as a measurable phenomenon: the degree to which voluntary transactions can occur across borders without state interference.

The paradise of the first globalization

The period before World War I represents something approaching an ideal state of human freedom. In this first globalization, nation-states were largely absent from economic life, creating conditions of extreme freedom for individuals and businesses.

People traveled without passports or visas—these restrictions only emerged during World War I. Capital moved freely to where returns were highest, creating the economically optimal pattern of "capital flowing downhill." The richest place in the world, London, had abundant capital earning low returns, while poor countries like the United States, Argentina, and India offered high returns on investment. Projects worldwide naturally went to London for financing, then deployed that capital productively in developing economies.

John Maynard Keynes captured this remarkable period in his famous 1912 description of someone living in a city, able to receive goods from anywhere in the world at their doorstep while participating freely in global activities without restriction.

Ajay shares an example of how this system worked in practice:

"Polson was a British company that was built in India, that grew up and became very successful in India because at the time of the First World War, the British army wanted to buy vast amounts of butter. And Polson built the first milk supply chain from Gujarat to make butter and send it by train to Bombay and from where it was sent up to the UK."

This represents the first globalization at its finest: a company identifying opportunity across continents, building supply chains spanning vast distances, and serving global demand through voluntary transactions.

The long dark period of nationalism

World War I and the Russian Revolution shattered this paradise completely. The rise of nationalism brought passports, naval blockades, and restrictions on trade. These weren't temporary wartime measures—they fundamentally restructured how states related to their citizens and the world economy.

The scale of destruction was remarkable. Many metrics of globalization, including the crucial trade-to-GDP ratio, only returned to 1913 levels in 1982—nearly seventy years later. This wasn't just economic regression but a loss of basic human freedoms that had been taken for granted.

The period also saw the emergence of the first capital controls in world history. When Hitler wanted to target Jews, he implemented restrictions on moving money across borders—something that had never before existed. This established the template for states controlling their citizens' economic lives in fundamental ways.

Even the post-World War II recovery was constrained. John Maynard Keynes and Harry Dexter White designed the Bretton Woods system around a specific trade-off: fixed exchange rates to promote trade stability, but capital controls to maintain government policy autonomy. Keynes intuitively understood what would later become Nobel Prize-winning economics: you cannot simultaneously manage exchange rates and allow free capital movement.

This meant that even by 1982, when trade volumes recovered, globalization remained a pale shadow of 1913. Capital mobility was restricted, and the movement of people remained far more constrained than in the pre-war period.

The great restoration of the second globalization

The second globalization, spanning roughly 1982 to 2016, represented a remarkable restoration of human freedom enhanced by technological revolution. Container ships and wide-body aircraft dramatically reduced transportation costs. Computers and telecommunications enabled entirely new forms of service trade, allowing knowledge work to span continents.

Most importantly, the Keynesian system began breaking down in economically beneficial ways. Countries abandoned fixed exchange rates for market-determined floating rates, enabling them to simultaneously remove capital controls and restore financial freedom. Within Europe, the European Union restored pre-World War I freedoms of movement, allowing people to travel visa-free across national borders.

This period was characterized by unconditional welcome—countries like China and Russia were invited to participate fully in global integration regardless of their domestic political systems. The underlying assumption was optimistic: economic prosperity would naturally lead to political liberalization and better behavior.

The economic benefits were enormous. Using David Ricardo's theory of comparative advantage, cross-border trade increased welfare even when one country was more efficient at everything—what mattered was the ratio of relative efficiency between different activities. From a public economics perspective, voluntary transactions across borders typically involve no market failures, making government interference economically harmful.

Amit illustrates this with the concept of trade deficits:

"It's not India buying from China. It is Indians, individuals, buying from Chinese individuals or companies to the mutual benefit of both of them. Every trade leaves both of them better off and therefore by extension, it leaves India better off, it leaves China better off."

The conditional integration of the third globalization

Recent years have witnessed the emergence of what Ajay terms the third globalization—not the death of global integration, but its evolution into a more sophisticated, conditional system. This change reflects hard-learned lessons about the relationship between economic integration and political behavior.

The advanced economies, representing about 65-70% of world GDP, have developed unprecedented tools of economic statecraft. These include blocking acquisitions on national security grounds, restricting sales of advanced semiconductors based on precise technical specifications, and compelling allied companies to refuse business with targeted countries.

The restrictions can be remarkably specific. Current U.S. export controls prevent the sale of GPUs capable of transferring more than 600 megabits per second to China—allowing gaming and basic computing while blocking the most advanced AI development capabilities.

Perhaps most dramatically, the system has been weaponized through secondary sanctions and payment restrictions. The Russian invasion of Ukraine prompted the seizure of $600 billion in Russian Central Bank reserves and the exclusion of Russian entities from the Swift payment system.

Ajay explains the underlying logic:

"The logic on the part of the advanced economies was that it is morally superior to do economic restrictions rather than spill blood. Their logic is we want to do everything we can to make sure that Russia will lose in Ukraine. There are two ways to do it. One way is to use guns and soldiers to fight in Ukraine, which means fundamentally that more people die, or choke Russia using economic statecraft, and you get the same objective done while fewer people die."

The economics and ethics of conditional globalization

This new system raises profound questions about both effectiveness and morality. The restrictions primarily target about 15% of world GDP, while the remaining 85% continues deepening integration. For countries like India that maintain basic international norms, globalization continues strengthening—indeed, the post-COVID expansion of remote work has accelerated certain forms of global integration.

The economic logic remains sound: voluntary transactions create mutual benefit, and preventing them typically reduces global welfare. However, the third globalization introduces a new consideration—the belief that unconditional economic engagement can subsidize and strengthen actors who threaten international stability.

This creates genuine moral complexity. An AI researcher in China faces career limitations through no fault of their own, while Chinese civilians suffer various restrictions due to their government's behavior. The proponents of economic statecraft argue this represents a lesser evil compared to military conflict, but the trade-offs remain troubling.

Ajay concludes with a pragmatic perspective for countries like India:

"For 100 years, our journey is to become an advanced economy and a democracy. Then one can rethink the world at that future date. I expect 100 years from now, India will be a great country, like Japan, like Taiwan, like South Korea. We will have full amity and collaboration with the advanced economies of the world because we will be an advanced economy ourselves."

The third globalization thus represents not the end of global integration, but its evolution into a more discerning system—one that maintains the economic benefits of free exchange while attempting to address the political and security challenges that unconditional engagement has revealed.

Supplementary Resources

• Dawn of the third globalisation? by Ajay Shah (Article, Business Standard)
• An Indian view on dollar domination by Ajay Shah (Article, Business Standard)
• When world leaders thought you shouldn't need passports or visas by Speranta Dumitru (Article, The Conversation)
• Resilience to Trump tariffs by Ajay Shah (Article, Business Standard)
• Indian virtue in the US-China trade war by Ajay Shah (Article, Business Standard)
• The Three Globalizations by Ajay Shah and Amit Varma (Podcast, Episode 17 of Everything is Everything)
• Implications of US tariffs by Ajay Shah (Article, Business Standard)
• The Economic Consequences of the Peace by John Maynard Keynes (Book, Chapter II: Europe Before the War)

The complete transcript file is available to download below.