How Economic Gobbledygook Divides Us
nytimes.com
nytimes.com
“It’s not free trade, it’s stupid trade,” Donald Trump
has said during his presidential campaign — a slogan
that contradicts every tenet of mainstream economics, as
well as a quarter of a millennium of accumulated
economic data. [...] if you live in a one-industry town
and the main workplace has closed, you are unlikely to
agree with the professional consensus instead of your
own lived reality of loss and decline.
I'm basically going with what the experts seem to say. If I was living in the Soviet Union I'm sure I'd be parroting the views of a different set of experts and saying completely different things with exactly the same conviction.
https://www.youtube.com/watch?v=zk3ruapRQZk
Of course, reality and practicality can change the implementation or feasibility of an idea, but the mere concept of restricted trade being more economically efficient is non-sensical to me.
As an example, if restricting trade were positive, would you say that it would be a good policy to restrict trade between states in the US? And then withing cities? I like one of MF's arguments that restricted trade is what you do to your enemies in war, or to yourself in peace.
What does happen is that the profits of such movement are globalized, so even though at world-level its more efficient, there could be locals that dont profit from it. Free trade increases economic efficiency, but it represents different people, and it doesnt distribute that wealth in a controlled manner. Bear in mind that world-wide poverty has decreased at an unprecedented pace and theres little doubt that it was globalization that catalyzed that.
I also relate this to what Varoufakis speaks about with Greece and Germany: Greece will never have trade surplus because it's not a productive country like Germany, and reducing taxes and salaries don't necesarily fix the problem: but Germany investing in Greece in products and services that serve Germans can compensate the deficit and maintain economic efficiencies.
That is, what I think the failed promise of free trade is that the gains of globalization did not benefit a huge part of the population, but if some of that did then the situation would stabilize.
If everyone is free trade, and nobody tries to cheat, then free trade is better for everyone.
However, when you add in state actors, taxation, arbitrage, high speed trading, and many other real world issues, then non-free trade can be more efficient if it distributes economic output better.
This is really simple if you stop and look at the individual pieces: if you have free trade, but your trading partner uses the money they get from taxation to subsidize weak parts of their economy that you would normally have an advantage in, then you're going to lose that advantage when businesses in that area go bankrupt as they can no longer compete. Your trading partner can then move the subsidy to other businesses and repeat the process until they have destroyed all of your local business.
Free trade doesn't work if others are cheating and you're doing nothing to stop them. There are many other cases besides subsidies where free trade can be easily abused by actors in your own country as well - such as moving their tax debt to other countries while continuing to operate in your country. Free trade is a two way street that has to be managed to prevent selfish actions. Not to say that free trade isn't still the best option, but you have to make sure both partners in the free trade agreement are working to the benefit of both partners.
EDIT: Ah, I'm from South Africa so I forgot it's the USA election and this website is liberal, which means you'll all lose your regular sense and downvote this post because it appears to support Trump or something. Carry on then, I'll be back in a few weeks when you guys have calmed down!
I think it's just that people get caught up in tribal thinking very easily, and while the commentators on this site would usually be interested in discussion on the comparative advantages and disadvantages of free trade, Trump's message on protectionism have driven some people into a corner of having to be anti-protectionism to remain true to their 'tribe'. It's pretty unfortunate how quickly we as humans can fall into a trap like that: "I hate person X, person X believes Y, therefore I don't support Y".
...is precisely the justification the British made for exporting food from Ireland during the potato famine.
Well, they didn't exactly claim it was better for everybody but they claimed that it was a good pretext for letting the Irish starve while Ireland exported food.
Those profits were not used to feed the starving, either. They largely went to rich landowners.
Amazing that even today people defend this.
As you can see, domestic Irish production of all foods, in calories, just about halved. Food production absolutely cratered, due to weather and blight. They eminently were not able to farm "all the rye and corn they needed", and such imports were also in shorter supply than usual, because famine/scarcity conditions were occurring all across Europe (helping to spark the 1848 Revolutions, notably.) But these imports still had to be paid for somehow, and in an era of largely subsistence farming and thus small savings, this had to be paid for in large part by exports - of what? Of highest-value agricultural goods. You see from the graph that Ireland, during the depths of the famine, was a net importer of every grain except oats, where their exports had also fallen from normal levels. And, you see from the chart that, in total calories, Ireland had gone from being a net exporter to a net importer - bringing in over one-quarter of their total food supply in the Famine years, and going from typically exporting around 240,000 tons of grain a year, to importing up to 750,000 tons. Stopping exports from Ireland would have meant more dairy, oats, meat in Ireland, true - and less of the cheap imported grains that people really needed. It's true that the landowners were part of the overall problem, but no export limits would have caused new food supply to spring into existence or be imported.
I think this is one of those fearful arguments that doesnt really represent reality.
In argentina we export a lot to Brasil, and one thing we export is cars. Lets suppose that Brasil takes a protective policy and then uses heavy subsidizing to make car factories and then outcompete argentinian automotors, lets say the subsidy is so large that cars in Brazil cost half in every single aspect, in every niche and ever smaller car element(something impossible to cover in reality).
Yes, the car industry in argentina is toast, but now argentinians can get cars at half the price thanks to the generosity of the brazilian taxpayer. The argentinians have become enormously wealthier by such a measure at large.
Not only that but now argentinians as a whole have half a car extra in money to spend in other services and products, which means that a bunch of other industries will grow! Argentinians would become much richer.
Lets say that Brasil loved that result (i dont know why, because they hemorraged money like hell) and repeat that with every single product argentina builds. IF every single product in argentina ,imported from brasil costed half, and it effectly replaces everything, it really means that Brasil is now giving argentina half the PBI of Argentina in subsidy. That is so unreasonable that it will never happen.
Theres another thought around this topic: that you can destroy an industry, and then increase your profits later on as a sort of monopoly power to recoupe the initial investment. IT would never happen that way: the moment prices rise up, investors would flock again to the argentinian automotive industry and take those profits away.
What is clear is that brasil would be using its tax payers to give products to other countries!
Temporarily they do. Once the Argentinian car industry is gone, however, they can safely jack up prices again knowing that bringing it back will be very, very hard. That money will leak out of the country, driving down the Argentine peso, making Argentines poorer overall.
>Theres another thought around this topic: that you can destroy an industry, and then increase your profits later on as a sort of monopoly power to recoupe the initial investment. IT would never happen that way: the moment prices rise up, investors would flock again to the argentinian automotive industry and take those profits away.
The flagrant gaping hole in your argument is the presumption that you can build a car industry overnight. It takes decades and requires a lot of investment. The Japanese government threw a not insignificant portion of its GDP at its car industry before it even started showing promise.
I dont think you will find a subsidy that ended up being a net monetary gain for the tax payers, let alone a good investment option.
To add as well, the free subsidy is definitely a short term thing. If you look at it as an 'education fee' for the subsidized business, it's not really that unexpected. Eg, a student may be paid nothing while he works as an intern and learns skills, but he does it anyway because once he has done so he can earn far more for the rest of his life. Same with subsides.
Also another way to look at it: the people buying the cars for less could probably already afford the cars. So instead of that money going to new workers in your own country, they're going to those in other countries. So the rich benefit in paying cheaper prices, but the poor who needed that income more than they needed a cheaper car suffer. In properly working free trade, this would be a two way street of comparative advantage, but because of numerous 'cheats' it's no longer a two way street.
It's not just globally more efficient, usually each country benefits (although I wouldn't want to over commit by saying each country always benefits). But the gains from trade are often not distributed evenly within a country, for example manufacturing employees might lose their jobs while the owners have higher profit margins and/or consumers benefit from lower prices. Furthermore, diffuse gains such as lower prices are felt less than acute costs like losing a job.
Time and transition costs are also very important. In some cases transition costs may be very high, e.g. a whole generation of miners might not be able to transition to other types of work such as software development. In the long run the economy as a whole should benefit, but those miners are unlikely to be convinced.
Any idea what MF thought about migration?
The main difference between goods/services and people is that goods don't have rights, but people do. So if people are obligated to pay for the 'positive rights' of people - the "right to food", "right to shelter", and so on, then migration imposes genuine costs. (Of course, this is different from 'negative rights' - the "right to free speech", the "right to freedom of association", and so on.)
The problem is unrestricted trade without a surplus-recycling mechanism. https://yanisvaroufakis.eu/2011/02/09/what-is-a-surplus-recy...
Information theory is where its most important principles come from: competitive advantage, supply and demand, gains of trade, reversion to mean, diminishing returns, etc.
History is the other half of economics: using information theory, psychology, and unreliable data, explain why and how a given scenario unfolded.
If you don't have a strong grasp of either of those but read Atlas Shrugged and call yourself an economist, you might be Paul Ryan.
https://www.youtube.com/watch?v=wwmOkaKh3-s
Free Trade is not always good, and he correctly predicts that the global movement of capital will disrupt the current agreement between capital and labor that served the West so well. Donald Trump is wrong on many issues, but this is not one of them as far as I can tell. There a religiosity to the argument that free trade is "always good", even though high performing Asian economies are somewhat protective.
Economics at its current understanding is almost like a religion of capitalism. It has little to do with actual economic behaviour and has very little predictive power. That's why we keep having crises. Look into the work of anthropologists and behavioural economists to see the reality of how humans actually behave and what that means for "classical economics". Basically, most of it is bunk, all the way down to Adam Smith.
One of the best references I've read on this so far is
"Debt the first 5000 years"
"How Asia Works"
On behavioural economics, there's studies coming out all the time. The evidence is piling up that little of what economists have said makes sense. They've deducted general guidelines that sort of work at the macro scale, but their fundamentals are mostly wrong.
I'm increasingly growing into the opinion that capitalism fails to engineer any new "real" growth after physical needs are met for the majority of the population and this is true of any developed economy. Developed economies by nature stagnate. And when you look into post-physical-needs-are-met growth you mostly see financial services that might not be any net-benefit to society. Again I am still studying the topic so not sure. But it's the impression I get.
If you look at Japanese society it's clearly hit that stage. Physical needs, basic human needs for food and shelter, have been met. Therefore capitalism has for the most part stopped functioning. Most developed economies reach that stage. The issue is we're not satisfied and we keep asking for more and more "growth", even though capitalism might not be able to deliver it.
It might've worked before, but without physical needs capitalism stops functioning effectively, maybe at all. I've written about it here: http://www.rafaelkino.com/essays/capitalismisfailing.html
"The traders negotiated a new trade with OCM. It reached a new plane of creativity. Under the transaction, the offending transaction was canceled at no cost to OCM. In its place was a new swap. The new transaction was for $600 million. Under the swap, for the next three years, OCM would pay a fixed dollar amount. The amount was $4 million a month. In return the dealer would pay OCM an amount calculated according to a complicated formula:
Maximum of [0; NP x {7 x [(LIBOR2 x 1/ LIBOR) – (LIBOR4 x LIBOR-3)]} x days in the month / 360]
Where
NP = $600 million
LIBOR = 6 month Dollar LIBOR rates
The financial engineering was dazzling. There was just one problem. The complex equation, if you did the algebra, always equaled zero. The dealer would never pay OCM anything. OCM would be paying the dealer $4 million each month for three years. This was the intended effect."
http://www.minyanville.com/businessmarkets/articles/traders-...
But even if that wasn´t the case, a lot of finance is essentially "robbery by math", by people who can do complicated calculations and figure out ways to route things around the financial system with weird financial instruments, from people who can´t, and who also have the Donald Duck $ sign in front of their eyes blinding them.
Maybe the problem is that such an agent doesn't exist. But if such deals are really commonplace it's a pretty sweet opportunity for there to be no one taking advantage of it.
fwiw - the ability to think through that kind of structure appears to be a lot commoner in computer scientists and similarly trained engineers, than it does in economist/finance types - but even there, it´s not exactly common. You have to be able to juggle inverse foreign exchange relationships against some knowledge of trading and banking relationships within and between countries, and project over time. It´s a distributed systems problem if you think it through - and we all know how easy those are to troubleshoot.
I admit I'm not up to date with the latest graduate-level economic models. But I have read about Ricardian comparative advantage. When I looked into the assumptions behind that model, I realised they were utter nonsense. In turn, that made me reluctant to believe anything else that economists wrote on the subject.
The same thing happened with banking. The standard macro model where banks lend out central bank reserves with the overall constraint on credit creation being 1/(reserve requirement) is kinda-sorta what happens, but the details are all wrong. As far as I can tell, economists don't want to change the details of this story because then they have to re-write another part of their theory (IS/LM), and that forms the keystone of a lot of standard theory.
To summarise, I haven't seen much from academic economics that inspires confidence. So why should I trust them?
Could you be more specific? It's a simplistic model sure, but just about every field of study or industry uses simplified models. As a first-order approximation it seems reasonable.
It falls to pieces once you consider that comparative advantage is dynamic. While gold deposits are either there or not, an industrial base can be built using judicious application of tariffs and subsidies.
As with most assumptions in economics (e.g. perfect information), it serves a purpose, although that purpose isn't to simplify the models - but to aid in the creation of politically useful models.
I think people in general people have learnt to be skeptical about economic forecasts, and that is only a good thing in my view.
"About these matters there is no scientific basis on which to form any calculable probability whatever. We simply do not know. Nevertheless, the necessity for action and for decision compels us as practical men to do our best to overlook this awkward fact.." -- Maynard Keynes
1/ What is the nature of comparative advantage? Where does it come from? The standard explanations point to things like weather, but surely location-dependent industries are only a tiny fraction of modern economic output.
2/ Is comparative advantage fixed? To the best of my limited knowledge, heavy industry in the US civil war era was only able to grow because of trade barriers. If comparative advantage can vary over time, surely that implies a very different course of action to "specialise in what you're best at right now".
3/ How does a country automatically know what it is best at producing?
4/ What about cross-pollination of ideas between industries?
5/ What about diversification? Surely putting all your eggs in one industrial basket is a bad idea? Holland (and now Saudi Arabia, Nigeria, and others) specialised in oil production, which ultimately had nasty side effects on its economy. This is known as the Dutch disease.
6/ The usual claim is that "in the long run", everyone benefits. How long is the long run? How much suffering takes place in the short run? I mean, look what happened to Detroit.
To address your "simple model" point: yes, many people do argue that "all models are wrong, but some are useful". If you're going to make that argument, you need a mechanisim for differentiating between bad and good models. I don't know of any such mechanism in economics.
I'd be a whole lot happier with a series of detailed ethnographies than with a mathematical model. Some things are just too complicated for mathematics to handle.
I know the standard answer to this one: they don't, but they allow the free market to handle it. Industries which have an advantage in that country will flourish, those that don't will go bankrupt.
Other countries that started off from a similar starting point (e.g Thailand) and "let the market handle it" ended up way behind.
And of course you'd expect them to develop a few large and particularly successful industries - but they developed on all fronts simultaneously, in some areas slightly faster than others.
And I mean, the most successful "Asian tigers" were Hong Kong and Singapore - with the most open, least "state chosen" economies.
Hong Kong and Singapore very much followed stated directed investment. Singapore went out of its way to court large multinationals (Philips and Shell were among the first lured over), for instance, built 90% of the housing stock in the country and even today gives out a multitude of grants to new businesses in 'key' industries.
I'm not saying that any tariffs and subsidies will halt growth, or that industrial policy will always fail. What I am asserting as the general trend is that moving towards a freer economy pretty typically helps - and moving towards a dirigiste economy usually doesn't do much good. If anything Asia should be a demonstration of this - China before and after the 1978 reform process, Vietnam before and after the 1986 Doi Moi reforms, India's 1991 Rao-Singh reforms, among others. These didn't mark an increase in state intervention/ownership, tariffs and subsidies, but rather a decrease.
Which countries are you talking about specifically?
>I'll note also that throughout most of their boom periods, both Singapore and Hong Kong had very small or no tariffs on almost all goods
They tended to suppress the value of their currency by buying treasuries, rendering their exports more competitive. This acted as an implicit subsidy on all exports.
Also, while they tended not to put tariffs in place, they did directly subsidize - the flip side of the same coin.
"Free" that was not.
>Also, that housing, the most government-controlled sector in both countries, is notably very expensive - not a particular success story.
That's a global phenomenon. After the US plunged interest rates to zero everybody else had to follow suit or watch their exports drop off a cliff.
It used to be much cheaper before that happened.
>not a particular success story.
Whether you call it a success or not it is the direct opposite of what you claimed: it is interventionist.
The housing is all excellent quality and it forced the private sector housing to be even higher quality still in order to be able to compete. I'd say it was a policy that we should probably copy.
>China before and after the 1978 reform process
China didn't fully open up after the 1978 reforms and still hasn't. The investment in the country is largely state directed even today. It's a counterpoint to your argument, not proof of it.
They also loaded up on treasuries and put in place covert and not so covert subsidies/tariffs.
>Vietnam before and after the 1986 Doi Moi reforms, India's 1991 Rao-Singh reforms, among others
Hardly great success stories. Considering that Taiwan and South Korea, for instance, started off from pretty much the same place and reached first world status.
I'm talking about countries across the world in Africa and South America, as well as in Asia such as Indonesia, and the countries I mentioned before their reforms - India and China. These policies (acquire key heavy industry, support exports, replace imports with domestic production, have government plan the economy) were extremely common - almost ubiquitous - all over the postwar world, especially before the 1990s, yet didn't deliver high rates of growth to most of the countries where they were tried. So what was the spark of growth?
> They tended to suppress the value of their currency by buying treasuries, rendering their exports more competitive. This acted as an implicit subsidy on all exports. Also, while they tended not to put tariffs in place, they did directly subsidize - the flip side of the same coin.
Sure, you can suppress the value of your currency - that just makes imports more expensive and suppresses domestic consumption. Which has a negative impact on real domestic incomes. It's a costly "trick".
And export subsidies are different from tariffs - they do not directly make domestic production, for domestic consumption, more competitive against imports. So if I had to pick a "least-bad" option between a tariff and an equivalent export subsidy, I'd pick the latter, since it at least exposes domestic producers to foreign competition, and therefore doesn't drive up domestic prices. (Though it does subsidize foreigners. Ah well.)
Again, I'll note that the countries which did this the least did as well, and usually better, than the countries which did it more. It's about magnitudes.
> Whether you call it a success or not it is the direct opposite of what you claimed: it is interventionist.
Sure, it's highly interventionist. So going by your rubric, you'd expect it to outperform the rest of the economy in price or quality. But it generally doesn't - and housing in more liberalized housing markets, like in Japan and South Korea (even in the megacities!) is more affordable compared to incomes, taking quality into account.
> China didn't fully open up after the 1978 reforms and still hasn't. The investment in the country is largely state directed even today. It's a counterpoint to your argument, not proof of it.
China didn't fully open up, that's true. But it did open up massively compared to before, and this succeeded in boosting growth considerably. I don't see how a country going from, say, 90% state directed investment to, let's say, 50% state directed investment, and succeeding, is an argument in favour of interventionism. Did they engage in tariff/subsidy measures? Sure, but those barriers to trade were even stronger during the pre-reform Maoist era.
> Hardly great success stories. Considering that Taiwan and South Korea, for instance, started off from pretty much the same place and reached first world status.
Well, note the chronology. Taiwan and South Korea had completed most of the same reforms (considerable liberalization of trade, ownership, investment) in the 1950s and 1960s! So they had a 25-35 year "head start". Also, in the era immediately after these reforms, growth in India and Vietnam roughly doubled compared to their pre-reform eras. And they've kept or expanded these reform policies and continued to see strong growth.
As far as I can tell from your examples, you're arguing for roughly a Ha-Joon Chang-ist position - that whatever intervention exists in a country, no matter how much reduced from its previous level, is to credit for its growth - and no matter how much liberalization has occurred, even when a sudden liberalization coincided with a sharp takeoff in growth, liberalization can apparently not be credited with that growth. And I do not think you are so absolutist - but neither am I.
I'm not arguing that intervention leads to increased growth 0% of the time, just as I'm not arguing that liberalization leads to increased growth 100% of the time. I'm only saying that, in most places, especially pre-1990, there was/is too much intervention and not enough liberalization. And I think that people arguing for some sort of neo-mercantilist Trumponomics have at least as high a burden of proof to explain why, when moves towards liberalization usually coincide with increased growth and moves away usually coincide with low or reduced growth, that somehow this is an argument for moar government economic planning. It's like arguing that because I can still drive fine with one beer in me, then three or four more won't hurt. Anyways. I think I've made my point as long-windedly as I need to here - I'm not taking an absolutist position, just an "it tends to be this way, generally" one - which is only sensible in a fuzzy realm like macroeconomics.
Outside of a regulatory framework, in modern economics, comparative advantage won't work. It will be those with the most power (derived from success or money or something else) will win. Those with the most resources wins. And yes those who can game the system will win. Otherwise you'd take the 'capital' out of capitalism. After all, who wouldn't capitalize over the stupidity of another country that let you take advantage of it?
Outside of natural resources, can you please tell me how an area on this earth can have an advantage over another area. I am befuddled by this argument for free trade, in regards to countries.
An advantage can come out of any number of things - climate, location relative to a trade route, particular local demands or preferences, or just happenstance. As you note, comparative advantage is not just about whole countries, but also about regions, companies, and individuals - so that it's not just about an "area of earth" but about the variety of things that happen in each place. Comparative advantage is an argument that trade makes people (regions, cities, etc.) better off even if they have nothing they are the best at.
And if you say "but the perfect market wouldn't have any subsidies or aids" then you are living in a fantasy world made up by economists! They don't even have to subsidise, all they need to do is make it slightly easier for house painters to do their work there than anywhere else in the World, by easing legislation and lowering taxes. They will outcompete you just by following less laws and regulations and paying less tax. Because everyone ever has agreed that laws and tax should exist, you need to explain how "perfect" markets will ever exist. Again, look into China and it's the exact same thing. They don't need subsidies, they create Special Economic Zones.
Anyway the idea that markets exist separate from governments is a fiction made up by economists. See "Debt the first 5000 years" on a description of how anthropologists have found that actually, the most common origin of a market is government intervention.
I don't think most economists have ever argued that markets exist outside frameworks of property rights and rules of trade. And while these things have often been laid out by governments, it does not necessarily mean that they always are, or always must be (where we take "government" to signify a usually-geographically-bounded entity with the monopoly of force.) Just the same, money has often been issued by governments, but does not necessarily mean that only governments can issue or create money. Markets exist wherever trade exists, and are shaped by governments - sometimes well, sometimes badly, and always within certain constraints of reality.
As pertains to the supposed advantage of government support of industry - take a closer look at China. The most dynamic sectors of the economy there - in assembly and manufacturing - have been the least directly subsidized and encouraged. The big State Owned Enterprises, in steel, concrete, and other heavy industry insulated from competition, are the most saddled with debt and are not innovative and dynamic. The main effect of their subsidy to these industries is philanthropize everybody's consumption of their products. Sucks for the Chinese taxpayer, but everyone else gets cut-price goods. And you'll note that, even after getting "pseudo-monopolies" on various economic sectors, prices in those sectors have kept falling. The "drive-out-competitors-then-raise-prices" drama never seems to appear - and it's no surprise, because these companies are competing with each other.
But that's not the main point that most economists are making (except the rather unusual anarcho-capitalists like Rothbard and the like.) The point is that there are property rights that are more or less in accordance with certain aspects of reality, and attempts by governments (or indeed private actors) to enforce property rights at odds with physical and informational reality is going to cause serious problems. For example, if a system of property rights says that nobody can own title to exclusive use of land or water, then I've set up a system where the inevitability of needing to physically occupy some land or water conflicts with the impossibility of acquiring stable property in it. Conversely, if a system of property rights says that the first person to speak and claim a phrase owns all rights to it forever (like some super-copyright), then it's just made normal language extremely cumbersome. The primary point of economists in the whole Menger-Hayek-Mises-Hazlitt meta-tradition is that while a government of some kind is probably inevitable, it should recognize that appropriate property rights depend on certain properties of the things themselves, and not arbitrarily defined by the government. (This is a sort of compact way of saying "property rights need to be defined differently between private goods, public goods, club goods and pool goods, due to their actual physical differences.)
Also these people are only respecting the rules they have already interiorised from living in developed economies. If you look at history, individual private property does not show up as something innate. Tribes owned areas and fought for them, but they didn't have much individual property within themselves (neither did they have barter economies).
It's true that people interiorize rules to a certain degree. And to be sure, no set of property rights should be beyond question. However, once you get up beyond a certain small society size (a few hundred people, really) you need some kind of property right to distinguish whose stuff is whose - since you'll soon start making trades between strangers and middlemen who are not bound by familial/kin ties, or reciprocal gifting arrangements, or honor systems.
The point is that you need appropriate systems of property for various things. Apologies if this is just repeating what you already know, but consider, say, clothes. They're rivalrous (only one of us can wear them at the same time) and excludable (I can easily stop you from also wearing them, and can tell when you're trying to do so.) So, it's a "private good". On the other hand, a broadcast radio station is not rivalrous (you tuning in does not prevent me from doing so) and not excludable (I can't really tell if you're tuning in, and can't stop you specifically from doing so.) Therefore it's a "public good". These are material realities that imply certain (different) property rights - and attempting to ignore that fact is likely to lead to all kinds of problems. The point of theories of private property is to try to come to grips with these realities, and to acknowledge them in the creation of property rights systems - whether mono-centrically with a government, or poly-centrically with various contracts and arbitrations. The mistake I think Graeber and others make is to sort-of assume that any arrangement of property rights that we can imagine, can be successfully imposed on material/informational reality.
I haven't read the he believes any system imaginable can be applied.
Its true many of the examples he gives were for small populations, but the principle of sharing in small tribes was reciprocity. You give something you get something back. The issue with reproducing that in bigger groups is that you can't hold people accountable anymore. But of course, maybe with modern information technology there is a way.
Anyway as I've said on my other comment (and getting back to the topic of discussion) it seems like we both know the data but arrived at different conclusions. I'm not sure how to convince you of anything other than ask you to reconsider. If current trends continue, the cost of global capitalism might end up being democracy itself.
Reciprocity is a perfectly good way to run a small economy. But note - you're still trading, in a significant sense. Accounts of who does what are kept, the relative value of items and acts are considered, and social honor and reputation are valuable goods in themselves (in a "capitalist" system as well.) One does not escape from "markets" or "property" just because some goods are social or symbolic.
I agree we've sort of ended up at different destinations. I'm aware that "global capitalism" is a strange beast - but not really any stranger than anything that's come before. It's sometimes hard, but works okay, and is probably worth keeping around on its own merits.
This was very very good and I appreciate you taking the time to write all that.
Thanks
But the idea that free trade is "awesomely good for everyone" which is pushed or that markets can exist without governments or that a "perfect market" would have no government intervention seems to have no basis in reality, as far as I've read. Markets and governments exist in a symbiosis that can have good or bad effects, and there's increasing knowledge on how to manage the relationship so that most people in most places benefit. The arguments towards Total Free Trade with No Protectionism and Free Movement of Capital (capitalized because those are the ideas that I have qualms about) seems to ignore, in my opinion, the following things:
On No Protectionism: Masses of workers might lose their jobs and be unable to retrain, creating a huge structural unemployment problem.
On Free Capital: Quoting Jonathan Goldsmith talks about in his segment on Charlie Rose, if you allow for capital to move freely, you brake the contract between labor and capital that's been made through tremendous conflict and compromise in the West. Capital can manufacture goods outside of the country and reimport it, breaking the fundamental agreement of sharing of profits that allowed the West to become so good to live in during the 20th century.
And that is the recipe for tremendous income inequality and the destruction of local manufacturing.
On the Loss of Manufacturing: Vaclav Smil has said that "without manufacturing you have no middle-class"
Basically Free Trade with No Protectionism seems to mean the destruction the local population's wellbeing in exchange for "economic growth" that benefits very few people at the top. The pieces are there if you want to connect them.
But the primary counterargument is that attempts to restrain free trade generally a) reduce overall output and productivity b) give domestic producers a captive market and no incentive to improve c) incentivize smuggling and corruption in getting around barriers and d) cause local industry to fall behind and inevitably be overtaken in global markets even with domestic supports.
On the free movement of capital, one notes that the US, for example, has a large "trade deficit". But what does this mean? Essentially, that US consumers are net exporters of dollars in trade for foreign goods. But where do these dollars go? Well, they come to the US as part of "capital account surplus" - that is, the movement of capital investment into the US. While the immediate impression is of "industry moving overseas", the US is in fact an enormous net destination of capital investment. ( http://3.bp.blogspot.com/_otfwl2zc6Qc/TMybFmTdp1I/AAAAAAAAOm...) If they restricted the movement of capital, it would mean shutting out incoming capital investment, not keeping it from leaving.
So what happened to manufacturing? In a word: automation. The US manufacturing sector is at an all-time high in terms of value produced, but it's quite true that it employs fewer people than it did during its heyday. Manufacturing didn't decline, it's just that people don't work there like they used to. ( https://www.aei.org/wp-content/uploads/2015/10/mfg1.jpg ) This is what's felt as being "without manufacturing", but really it's just the automation of manufacturing, just like the automation of farming. This is overall a positive process, increasing productivity, but in the short-to-medium term it can be painful.
I also think the automation argument has another flaw and a very simple one. By tracking jobs that have been outsourced you are tracking old jobs in some factory that put people out of work. But what about the factories that don't get built, or the labour Forces that don't get trained to make new goods ?
By removing trade barriers and allowing capital to reimport manufactured goods you have removed the incentives to invest and maintain a workforce.
If trade barriers were still up, my guess is there would be huge training programs for people to go into certain professions that would be needed to manufacture goods locally. I.e. The IPhone is produced in China, and Steve Jobs once told Obama the reason was he couldn't find the 5 millions engineers or so he needed in America to build it.
If the trade barriers were still up that would make manufacturing in China uneconomical, then Apple would start a massive training program to train those engineers in America. Apple didn't do that program because it didn't need to, it could find them in China at a cost of 20-to-1. Compare that to Intel, a company that keeps their production in the US, which has invested in programs to train engineers in America.
If capital can move freely it will choose the cheapest available workforce, and it can't find that workforce it will train it in the cheapest possible location. It will then reimport goods manufactured with the lowest-investment workforce into the highest-profitable markets to sell it. Because free trade.
So even though automation is part of the story the destruction of trade barriers also has another effect, which is the removal of incentives for capital to invest in labour training. And that's the origin of the barista economy that people keep complaining about - businesses have no reason to invest in America anymore to manufacture their goods. They absorb the highly educated workforce paid for with a lot of public money, and they benefits from it, while reinvesting as little as possible in the economy and dodging as many taxes as they can.
Personally I think Steve Jobs was talking guff, if that's what he said. Most of the actual engineers and designers are in high-income countries - it's just the assembly and components that come from low-income places. Which is what you'd expect - the more labour-intensive a component or task is, the more you strive to minimize labour cost. And most of the cost of the iPhone is in components, research/overhead, and profit (things which mostly do not go to Chinese wage-earners!). The actual assembly is generally estimated at between 5% - 8% of the final cost, and done largely by 'semi-skilled' rote-task workers. Not the kind of jobs that pay high wages even in the US.
The idea of moving goods from the place where it's cheapest to make them (including extra investment), and moving it to the markets where it's most profitable to sell them, is indeed most of the point. It is sort of the idea of the best supply meeting the highest demand - the idea that we grow corn in a sunny field, not an arctic greenhouse, and ship it to the mill quoting the highest price. To require this to not occur is to require that the cost of making it is increased, or the demand for it is decreased.
I would argue generally that the 'barista economy' is not a case of a lack of investment in labour training, but rather a mis-investment. There are huge incentives - especially through federal and state grant and loan programs, and supports for state schools - for students to go into four-year universities and take some degree, any degree, regardless of how useful it actually is. So this results in a large amount of money being spent on a lot of "training" which never actually gets used. This takes up the time that would be spent on other, more relevant training, and causes dissatisfaction among "over-educated" people who feel that their expense of time and money was pointless. That's one of the big problems with a system that promises people lots of money for taking a degree, no matter what it is - it detaches people from the need to look at what jobs are actually available, and it suppresses other training that could have been more usefully done. It also does subsidize those companies which do use the training that has occurred, at the expense of everyone who's paid taxes and doesn't need the training that's offered. Arguably, the fact that tax money is taken off everybody and spent on bachelors of arts degrees is a disincentive to manufacturing and other industrial sectors.
Is there really that much tax money being spent on Bachelors of Arts ? That seems like a myth to me, the cost of Bachelors of Arts in America must be tiny at this point.
I'm not sure how to carry on with this, as much as it is enjoyable to talk to someone about these issues, It seems like you have all the knowledge and have decided the human costs of this calculus are acceptable. I don't agree it is, particularly not if, as we are now seeing with Trump, Le Pen and AfD in Germany, the cost of globalised capitalism includes the unraveling of democracy.
I suggest that this is true of much of the US educational/training system. The government keeps pumping more and more money into the educational system, especially via loans. But the number and size of universities are still limited by accreditation and other restrictions (especially in qualifying for those loans) so competition can't drive the price down. Indeed, the price climbs precipitously because students have ever-more amounts of money to spend (often as debt) on a limited number of spots. But you have to pursue a degree to get the money, so rather than pursue what seems best in the job market, pursue what's easier to get into and succeed in. Hence, the phenomenon of a big mis-allocation - a huge number of expensively-educated people carrying lots of debt who can't find commensurate jobs.
I think a lot of the problem is just the suddenness and visibility of a lot of it now. US unemployment is now getting quite low, but a lot of it consists of the chronically unemployed who were accustomed to a solid, long-term job. (I would disagree that purchasing power is falling for a majority - though it did during the recession.) Hence it is more visible. But can the US close itself to large sectors of trade indefinitely to maintain this workforce, especially as automation advances anyways?
It's not so much that I have "accepted the human costs" or "have all the knowledge" - but rather that I don't, and don't really imagine that somehow a system can be designed that provides all the benefits of free trade without actually instituting it. To balance and tweak tariffs and quotas and supports seems to be just as high, or higher, a claim to having all the knowledge. The trouble of Trumpian or Le Pen populists is a real one - but do we just say: whoever has the loudest, weirdest political base gets to set the economic agenda, because we're scared if they get angry? I dunno. If so, we should be honest about that - that we're avoiding free trade not because it's bad economically, but because we're worried about fierce populist backlash.
economists and experts keep telling them that they're "wrong" to blame free trade or immigration (just like the linked article). Even though most competent economists would actually say, like you said, that free trade is not beneficial to everyone everywhere.
To answer your question directly yes I think the economics of the system must include the "externality" of the discontent it generates in populations.
It seems like you're saying that although some people might lose their jobs and see their earning potential collapse, free trade is "more efficient" for some majority (+50%) of the population therefore it is good. I would say whatever benefits that come to the majority doesnt really balance out with the suffering of those left with their wellbeing destroyed. Their backlash against the system that destroyed their livelihoods is only natural.
markets are supposed to serve us, and our societal wellbeing. If they fail do that, in my view, they are a failure.
So yes people are losing purchasing power in developed economies, and from my understanding it's been that way since the 70s.
As to losing purchasing power, I would more prudently say "relative stagnation". Here's before-tax incomes, adjusted for inflation, for the top 1% and bottom 20%: (http://inequality.org/wp-content/uploads/2014/10/Figure-8-e1...) It's not that the majority have seen real declines in purchasing power in most areas, it's just that they have seen relatively less growth than the richest - but this is unsurprising in a rapidly growing, globalizing world. Inequality certainly chafes a lot of people - but it's not quite the same as declining real incomes. (You can also see how tied to asset valuations the top 1%'s incomes are - the dot-com bust and the 2008-2010 recession are quite visible.)
Edit: Here's the same sort of graph for the whole income spread: http://inequality.org/wp-content/uploads/2014/10/Figure-9-e1...
On top of that, it's making people angry, for very good reason, because if you look into behavioural economics and psychology, we have an innate sense of fairness that's being violated. And the social contract that maintains democracy includes the idea of fair work, fair rewards.
It seems like you regard this sort of outcome, of massive income inequality and stagnating wages, as inevitable, or neutral. I don't and many other people don't. They're angry about it and they're voting for Trump, or fighting for higher minimun wages, or unionizing. And historically those things (political change, collective bargaining) have in fact ended up giving higher percentage of the profits to the workers and citizens involved in the manufacturing of the products that are making so much money for capital. This is exactly what global trade is destroying, and people are getting increasingly angry.
Look, I just think you need to reconsider, globally, the psychological effect this sort of thing has on the population. Since 1973 the median wage has grown at a 0.2 percent annual rate. 0.2 percent! And the return is slowing down since 2000.
Source: https://thinkprogress.org/wages-have-been-stagnant-for-40-ye...
Yes, I understand why people are angry. People get angry about all number of thigs, more or less justifiably.
The problem is that most of the cures being proffered for this percieved unfairness will not solve the problem. To reduce the disparity between the wealthiest and the rest, are people talking about, you know, ending mortgage and property tax deductions, liberalizing the education sector, permitting more housebuilding, ending moral-hazard-generating bailouts of companies and banks? A little, but hardly. What you hear is that the "people" want tariffs (impacting the poorest, who disproportionately consume cheap imports), higher minimum wages (which slightly raise the incomes of some workers, at the expense of making youth, people with minimal educations, ex-prisoners and the disabled unemployable), and trade unionization (which benefit those in the union, but those shut out of the union scarcely at all.)
I'll also note that this era of stagnation for the developed-world middle class has also coincided with a huge growth in the incomes of most of the rest of the world - these are not totally unconnected. Sure, we can be nationalists about it, but there are big benefits to the rest of the world from globalization.
I think there are sensible ways to diminish these income disparities. But I don't really that many people advocating for them - mostly I hear the old protectionist mantras, and I just do not agree with that.
Consider an "individuals" example: I am a better cook than the average fast food worker, and I am also better than them at building databases. So why don't I split my time between my office and the fry vat? And why does the fast food worker have a job? Because if I do one thing, I can't do another - I have limited hours. And my advantage at building databases is much greater (let's say 10 times as good as them) than my advantage in making fast food (let's say 1.5 times as good.) So, we focus on what we have the greatest comparative advantage in, and trade the results.
2/ Precisely what the comparative advantages are is not fixed, it changes as much as industries and the world economy changes. But the principle remains the same. Heavy industry in the US did grow a lot behind substantial trade barriers, but the US had a very large internal free trade zone. Other countries, such as the UK and Sweden, had much freer trade and also saw large growth.
3/ They don't know what they're best at producing, you have to find this out by testing it against world markets. Which is better than just saying "we'll just make everything we need within our own borders."
4/ Well, what about it? Ideas can cross-pollinate across borders perfectly well, and probably better if you have free trade.
5/ Comparative advantage doesn't mean that each country must specialize in single things - it just means that even countries (rather, people in countries) with low productivity can still trade successfully. Countries can have a range of competitive sectors by specializing. And most of the consequences of "Dutch disease" are due to governments becoming over-dependent on revenues from the one big sector.
6/ Well, most people who are arguing for comparative advantage as an essential policy consideration would point to Detroit and say "actually, that happened because of massive urban demolition policies/continous bailouts for failing companies/unions with special privileges/very bad policing/overall, an attempt to ensure that a momentary 1950s economy was frozen in time".
The problem with attempting to do detailed ethnographies is that it tends to capture more peoples' reactions to economic phenomena, than to those phenomena's actual causes. It's like doing a study of how people react to malaria (which could be useful!) without mentioning that it's spread by mosquitoes (which is essential to grasping the mechanics of the problem.) A lot of economics has to do with hard physical/informational realities. These have to be understood, at least on a basic level, with models.
In any case do you at least acknowledge that this stuff isn't clear cut? Or at least far less clear cut than the naive theory presents it?
Do you think there's a scarcity assumption built into the theory, then? Because it seems to me that if you could perfectly automate fast food cooking, you could flood the market and still spend a full working day doing database creation - thus stopping my comparative advantage working.
Now, if you had robots that could replicate themselves indefinitely, with effectively unlimited resources, then yes, comparative advantage would cease to apply in the sense I'm talking about. But then we'd have a Star Trek replicator economy, and we wouldn't have to worry about not having an "income" from work.
A model is a positive construct, not normative. From the model:
1 - That is not answered by the model. You'll almost certainly need to answer it case by case, as the origin of some advantages are that somebody just happened to be born in a place instead of another. Other are clearly more systematic.
2 - Does not seem to be. This is also not on the model.
3 - The country does not get to "know" what it is best at. In a competitive market¹ the less competitive industries fail while the more competitive ones thrive.
4 - That's also not on the model. It will probably change the comparative advantages in the future.
5 - This one is completely normative.
6 - A much more likely claim you'll hear from economists is that overall the population benefits from international trade. There's no "long run" there, and not "everyone" either. This one model does not explain how a population can spread that benefit so it goes to everyone and is sustainable on the long run, you'll have so look at many of them to get a good answer to that.
As the GP said (and I on another comment), it's too simple. But you didn't point to flaws.
1 - Notice I didn't say "free market" here.
I don't think I've ever seen anybody criticize Ricardian comparative advantage before. What assumptions did you find to be nonsense?
Personally, I've always thought the model to be too simplistic (in the real world, there are often unrelated issues that have greater effects), but never could find a systematic flaw on the model itself.
Introductory macro, like any other introductory course, is always at least twenty years lagging behind standard theory, as used by large economic organizations (e.g. central banks, international agencies), and at least some twenty five to thirty behind the cutting-edge stuff. At least, that's the rule of thumb that I was taught. It's unfortunate for undergraduate students, who really don't get a taste of the hardcore econ. But I guess that's just how it is.
But about Ricardian comparative advantage: it's a bad model. It's a gem of economic thinking, just like Ricardo's differential theory of rent. But as model, it just ignores so many things (pretty much all that you've pointed out) that it really isn't useful beyond a "first-order approximation" (much like IS/LM models).
Ironically, it's a fine short-run model. You've asked about what the long-run is. Well, the long-run is when all inputs can be changed by the firms, whereas the short-run is when they can only change some of the inputs (e.g. labor and raw materials, as opposed to machinery). It doesn't really have a direct relationship with time, but the idea behind is that the varible inputs can be changed in a shorter time scale than the fixed inputs. But when everything but labor is fixed, that's just when comparative advantages kick in.
On the other hand, comparative advantage simply can't handle stuff like technological advance, resource exhaustion, or pretty much anything which might change the productivity in any of the countries we're looking at. It wasn't conceived to deal with any of that, either. It was pretty much Ricardo's counter-example to the issue of whether trade would be profitable in the presence of absolute advantage, and one of his pet arguments against the Corn Laws.
There are 2 candidates this election.
Comprehensive economics 101 in simple language, probably middle-school level.
It's adult-level economics (although I'm not sure what that even means).
In the computer industry, deflation is one of the facts of life for many decades -- just about anything, e.g. gigahertz, gigabytes, cores, etc. will cost less tomorrow, and people realize it today. So the economic theory says that due to having been in the grips of deflation for many decades, the computer industry should be a barren wasteland with almost no investment, employment, or opportunity because no sane investor would ever spend any money on anything because their money would be able to get more of what they would have spent it on if they're just patient.
This is one thing that makes me very skeptical of the experts. Of course the following passage also succinctly describes my experiences having grown up in the Rust Belt:
> if you live in a one-industry town and the main workplace has closed, you are unlikely to agree with the professional consensus instead of your own lived reality of loss and decline.
Things like that in a recession it is sensible for individuals to cut spending but it can make sense for the government to borrow and run deficits just go past most people. I'm not quite sure what the answer is.