Thursday, February 05, 2009

On Economics

The Eli Economics Institute is not quite as down on economists as Michael Tobis, but the bunny has always advocated trusting everyone, but cutting the cards. As with much else the issue is almost always the assumptions, not the details. Thus it was interesting to read "Trade Liberalization and Economic Development by Jomo Sundaram and Rudiger von Arnim which appeared last month in Science.

In the eco biz, the chalk line is that free trade benefits all nations on balance. Sundaram and v. Arnim point out that this depends on several assumptions. Originally

The case for free trade rests on Ricardo's theory of comparative advantage. . . . However, his argument assumed a world of flexible exchange rates responsive to changes in the market for goods, continuous full employment, and costless factor mobility, meaning that no barriers exist to seeking and finding employment anywhere in the world. Especially in developing countries with chronic underemployment and volatile, cyclical capital flows, the last two assumptions are generally not satisfied.
Idealized free trade assumes that acountries exports are concentrated in areas where it is most productive and imports in areas that are least productive. The authors point out that this is a non-runner, given that most trade occurs between countries that are quite similar (US/Canada, the EU, etc.).

Large-scale policy models have focused on configurations that emphasize gains from trade--despite a large and growing chorus of prominent economists [including Nobelists Paul Samuelson and Joseph Stiglitz] arguing that across-the-board liberalization can be harmful.

The fundamental difference between economies of the developed and developing world is another crucial dimension of trade theory. Suppose that countries specialize in sectors for which the production factors are relatively abundant, as is recommended by traditional models. Exports of developing countries tend to be concentrated in primary products, which offer little added value. However, over time the prices of primary products will tend to decrease relative to manufactured goods. The role manufacturing plays for development has been recognized. Gains from trade then do not derive from Ricardian specialization but from expansion of dynamic sectors. From this perspective, the potential gains from trade liberalization are large, but they will materialize only if complemented by policies promoting development of industry.

Within the present context, further trade liberalization will benefit a few richer countries and stick it to the poor, especially the rural poor, unless they are specically compensated. Liberalization of trade rules for agriculture will be an even worse bargin for the under-developed countries.



John Mashey said...

For more detail, I recommend Leclerc& Hall, "Making World Development Work",, (I have a long review).
Maybe your library has it.

See especially Chapter 37, "The Elephants in the Living Room", which includes:

"We have seen much of the less-developed world become economically poorer..."

Some successes, a lot of failures, even with the best of wishes by well-meaning people.

Magnus said...

Not so sure about this one... for e.g. the import tulls on the third world is not helping...

not all good but also see

Anonymous said...

I don't have an economic theory ready, but I've got the impression that older theories are obsolete. In the a country such as the US, millions survive without adequate health care, live in trailer parks and off food stamps, while in many African countries obesity is as much a problem as in Europe or the US - for a small part of the population.
So the divide is no longer between 'rich' countries and 'poor' countries, but between have's and have-nots.


Anonymous said...

Idealized free trade? My dear Ms. Rabett, there's only one kind of free trade. And if it's not free, it's coerced. That is a fact. Here's another: so-called "policies promoting development of industry" are not free trade; they are coercive.

In the absence of protectionism and all other forms of government intervention, unemployment is always voluntary. Governments create unemployment; the free market does not. "Unemployment in the unhampered market is always voluntary" (Mises [1949] 1966: 599).

It is another economic axiom that the need and desire for goods and services is, for all intents and purposes, unlimited. Yet the ability to produce those goods and services is always limited. For precisely this reason, then, there's a need for all productive ability that exists. The law of comparative advantage, which you evidently don't understand for want of concentrating on assumptions rather than details, perhaps, was actually what von Mises called The Law of Association. This law holds that human cooperation in a division of labor is mutually advantageous even when one party is productively superior to the other in every way, because it allows the superior party to concentrate on those areas of his superiority which are greater and more important -- i.e. on his areas of comparative advantage. At the same time, the inferior party concentrates on those areas in which his or her inferiority is less or less important, which represents his comparative advantage (Ludwig von Mises, Human Action, p. 159-161).

David Ricardo (1772-1823) systematized this law in order to demonstrate the ways in which the division of labor benefits all, even in the event that a single state were capable of generating every single good without exception with less labor than its trading partners. But in fact, as neither you nor Sundaram nor von Arnim realize, the Law of Association -- or comparative advantage, if you prefer -- is all-pervasive, which is exactly why von Mises termed it the Law of Association.

[The Law of Association] is found not only in the case of the boss and his secretary or the boss and his janitor, but also in such everyday cases as the physician and his X-ray technician, the architect and his draftsman, the engineer and the mechanic, and so on. These are all cases in which one party could almost certainly do the work of the other in less time than the other does it, but in which it does not pay him to do it, because it would mean time away from his own work, in which his superiority is greater. In light of this principle, it is clear that even a genius like Thomas Edison can benefit from being free to employ the humblest cleaning lady, despite the fact that he could almost certainly clean his office in the barest fraction of time it takes her to clean it. Employing the cleaning lady enables him to devote whatever time he would otherwise have devoted to cleaning, to inventing, where his productive superiority over the cleaning lady is incalculably greater than it is in the cleaning, however great it is there (Dr. George Reisman, Capitalism).

Note the fact that both parties benefit.

Anent international trade, imagine with me a moment that modern technology in a developed country like ours is able to grow more hothouse tomatoes with less labor than, for example, Mexico can grow them outdoors, where their fields must be manually farmed. (This total labor includes all the labor involved in building and maintaining the hothouses.) In this hypothetical example, let us say that the labor necessary to produce X amount of tomatoes in our country is 1000 man-days, while in Mexico it is 2000 man-days. Imagine furthermore that in this country it is possible to manufacture Y vehicles with 500 man-days of labor and that to produce this same amount of vehicles would require 1000 man-days of labor in Mexico.

Now ask yourself: will we produce our own hothouse tomatoes and undersell Mexico on tomatoes merely because we can do it with less labor?

Answer: No.

Why? Because it pays both countries to concentrate on their comparative advantage and then to freely trade. Rather than put in 1000 man-days to grow and cultivate hothouse
tomatoes, this country will put 500 man-days to manufacturing vehicles (or whatever), our area of comparative advantage, in other words, and then exchange for the amount of tomatoes it would have cost us in man-days here. Do you begin to grasp? Mexico benefits in the same way, since -- but this is academic. Let us simply note that the introduction of money only reinforces the ineluctable conclusion: it's economically advantageous for each country to concentrate on its own area of comparative advantage. Which presupposes, of course, that these countries are operating with real (as opposed to fiat) money, and that government isn't plundering one sector of the population to redistribute it to another.

In your protracted and misbegotten campaign for authoritarianism, you should also consider the fact that governments, by definition, are agencies of force. "The legal use of force" is how Jared Diamond defines governments, in a relatively rare display of accuracy. Government is not an agency that produces or creates, but expropriates and confiscates.

If you have any doubt about this, please observe the fact that government cannot spend a single cent unless it first taxes, borrows, or prints. And there has never been a government in the history of the world that has proven itself capable of running complex economies, the reason for which is simple: it's impossible for any bureau, even of super-geniuses, to do so. Here's a quick illustration of why. Nor has any government ever proved itself capable of running the lives of the individual. Nor in the entire history of the world has fiat money, which is what you call for when you call for greater government intervention, ever once succeeded. Not one time. On the contrary, fiat money has always ended in unmitigated disaster, as it will in this country today. Why? Because the root of real money is production, and that means, among many other things, that the money must ultimately come from somewhere, and that somewhere is in production. But when you hamper or kill the incentive to produce (through such things as greater taxation and expropriation and redistribution), the production will simply go away. It then becomes necessary to coerce production, which is an act of force.

It seems worth mentioning also here, simply for posterity sake, that for many decades now we've hardly lived in anything remotely approaching a free market. In actual point of fact, the world has never seen a complete laissez-faire system, though early American and late-twentieth-century Hong Kong came close. (Just incidentally, that same Hong Kong obliterates Sundaram and von Arnim's non-argument singlehandedly.)

Fact: over 51,000 new economic regulations in this country were added over the last twelve years alone. Yet according to Alan Greenspan, Barack Obama, George Bush, and others like you, it is "free markets" that have failed us.

What free markets?

Banking, housing, and insurance are the most regulated areas of the economy. They are strangled by regulations, and have been for decades. This is a failure of the regulatory state.

To say that neither the Federal Reserve, nor the artificial adjustment of interest rates, nor corporate welfare, nor the bankrupt social security system, nor income tax, nor rule by lobby groups, nor the carte-blanche printing of fiat money -- to say that none of these are primarily responsible for our current economic crisis but that the free market is is worse than incorrect: it's a kind of lunacy. To call, as you do, for more of that same bureaucracy while simultaneously calling for less of the free market is even worse.

That fact of the matter is that there is nothing in nature, neither human nature nor nature apart from humans, that gives governmental bureaucrats legitimate authority over the property and person of any human.

As usual, Ms. Rabbett, your post is rich in rodomontade but piss-poor in content -- in large part, I believe, because you don't have any idea of what you're talking about, economically speaking. This becomes increasingly clear the more you enlist folks like my old friend Bill McKibben, whose economics are embarrassing, a fact of which he himself is well aware, I promise you. Of course, none of this says anything at all about the fact that coercive governmental institutions are prohibited by something called the Declaration of Independence and the United States Constitution, which in their explicit use of the term unalienable rights systematically bars the initiation of direct (e.g. military conscription) or indirect force (e.g. expropriation) against any other individual. In recognizing that we each possess the unalienable right to our own life, liberty, and property -- and only our own life, liberty, and property -- the framers of the Constitution thereby strictly prohibited the instigation of governmental force, as well as private force.

Any State interference in private affairs, where there is no reference to violence done to individual rights, should be absolutely condemned. To provide for the security of its citizens, the state must prohibit or restrict such actions, relating directly to the agents only, as imply in their consequences the infringement of others' rights, or encroach on their freedom of property without their consent or against their will. Beyond this, every limitation of personal freedom lies outside the limits of state action (Wilhelm von Humboldt, The Limits of State Action, 1791).

Money is property.

In the United States anyone and everyone possesses the unalienable right to grow as filthy rich as the market will bear, provided that he or she does not infringe upon the identical rights of others. That's it. Your rights, my rights, everyone's rights stop where another's begin. If you follow that very simple tenet, and if you cease ignoring the fact that money is property and that property is an extension of person, you'll no longer confuse the issue again and again and again.

EliRabett said...

Property is theft