Ricardo's Mistake | 51 comments (51 topical, editorial, 0 hidden)

Re: Ricardo's Mistake (none / 1)

I very much like your piece, but it should be pointed out that modern trade economics doesn't rely on Ricardo for anything other than providing a simple heuristic on how trade might work. The state of the field has advanced far beyond Ricardo by now. The most recent major theoretical addition was by Krugman, using your same hypothetical world of two countries with the same shaped PPFs. Trade also can occur due to increasing returns to scale and as such result in positive economic outcomes for all actors. By combining the PPFs of two countries, a single larger economy allows for those firms with increasing returns to scale to increase in size, resulting in increasing intra-firm transfers between the two countries. The automobile industry is one good example. Because the benefits of such forms of trade are not based upon transferring wealth from owners of factors -- labor or capital -- to each other they may result in higher wealth for all workers and capitalists in both countries, alike.

by santiago on Tue Dec 8th, 2009 at 10:30:23 AM EST

Re: Ricardo's Mistake (4.00 / 2)

Nevertheless, precisely the logic discussed under the "Theory" section remains in the textbooks used at the undergraduate level in fresh- and brownwater schools of economics. Discussions of the underlying assumptions and limitations are normally omitted.

- Jake

If you only spend 20 minutes of the rest of your life on economics, go spend them here.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Dec 8th, 2009 at 02:51:44 PM EST
[ Parent ]

Re: Ricardo's Mistake (none / 1)

Yes, it is, because at the introductory, undergraduate level the heuristic of trade is an important concept to grasp in order to begin to understand how to use and criticize the tool sets that economists employ. By the undergraduate intermediate (3rd and 4th year undergrads) level, the up-to-date works that either advance beyond or refute Ricardo and other classical economists such as Marx and Smith are central parts of the standard curricula. The fact that such courses are more difficult and advanced, mathematically and otherwise, leaves too many people -- non -economists who just took the intro courses -- with just the misleading, intro 101 concepts -- and I agree that this is an important pedagogical problem in the field.

by santiago on Fri Dec 11th, 2009 at 09:53:16 AM EST
[ Parent ]

Re: Ricardo's Mistake (none / 1)

You give econ majors far too much credit.

Whenever you construct toy models, you reach back to the first- and second-year textbooks. Because that's where you learned to build toy models. So if you teach people nonsensical toy models in the first- and second-year textbooks, they will come away with a nonsensical conventional wisdom.

You can teach more sophisticated models later to your heart's content, but the qualitative, intuitive understanding - their bullshit detector, if you will - will still be based on their conventional wisdom.

- Jake

If you only spend 20 minutes of the rest of your life on economics, go spend them here.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Dec 11th, 2009 at 08:39:43 PM EST
[ Parent ]

And quite apart from that... (4.00 / 2)

... teaching a model - any model - without even mentioning the most constraining assumptions is simply inexcusable. Particularly when you provide a number of non-essential assumptions that mislead people into believing that the assumptions underlying the model have been stated.

- Jake

If you only spend 20 minutes of the rest of your life on economics, go spend them here.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Dec 11th, 2009 at 08:43:14 PM EST
[ Parent ]

Re: And quite apart from that... (none / 0)

Looking at it from the outside, I would say that teaching one set of models the first years and then showing the more advanced ones that show the faults of the first year's models serves multiple purposes.

You can indoctrinate a large number to serve as loyal footsoldiers - bureacrats in companies in the case of economics - while
educating those that show talent for the subject further to keep some a second line of intellectual defense.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Tue Dec 15th, 2009 at 06:27:30 PM EST
[ Parent ]

Re: And quite apart from that... (4.00 / 2)

It doesn't have to be that Machiavellian. Physics envy is plenty sufficient.

Those advanced models "replace" the simple first-year models, "in the same sense that quantum theory replaced classical mechanics." And since the undergraduate-level stuff has been supplanted, it doesn't need to be revisited. After all, you don't revisit the classical physics textbooks much either.

The difference that this physics envy conceals is that the relative importance of the simplifications that go into physics models does not change over time. The three assumptions that were most constraining on a model of the motion of the gyroscope two hundred years ago (air resistance, contact point friction and rigidity) are still the three assumptions that are most constraining today.

The same cannot, alas, be said for economic models. So you have a toy model that stipulates liquid, competitive markets as the three most important assumptions, and doesn't even bother to mention capital immobility. Which was not a bad way to prioritise the assumptions two hundred years ago. Unfortunately, today competitive markets is an afterthought compared to the enormity of assuming that capital is immobile. But toy-model trade theory is Settled Science, so there's no need to revisit those models. Right?

- Jake

If you only spend 20 minutes of the rest of your life on economics, go spend them here.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Dec 15th, 2009 at 07:49:21 PM EST
[ Parent ]

Re: Ricardo's Mistake (none / 1)

santiago:

Because the benefits of such forms of trade are not based upon transferring wealth from owners of factors -- labor or capital -- to each other they may result in higher wealth for all workers and capitalists in both countries, alike.

There is no doubt that the rise of global corporations - with hugely expanded access to global markets, levels of capital, and scope for applying technological innovation has hugely expanded their total wealth, productivity, value added etc. But what evidence do we have that this incremental wealth is spread to all workers and capitalists in all countries ALIKE?

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot dotty communists) on Wed Dec 9th, 2009 at 07:26:28 AM EST
[ Parent ]

Re: Ricardo's Mistake (none / 1)

Read Krugman's numerous works on the topic and for which he was awarded the Nobel prize last year. What he found was that most trade occurs NOT between countries with comparative advantages between each other, but between countries with almost identical factor costs in labor, capital, regulation, unionization, etc. Most trade occurs between countries that are almost entirely alike. US-Canada. EU-EU. Japan - US. Etc. Krugman asked how this could be true if the neo-classical trade theories of Storper-Samuelson (which models trade as returns to labor and capital in different countries) or Heckscher-Ohlin (a more advanced version of the classic Ricardo model of abundant and scarce factors) were also true, and he finds that they can't -- that another explanation of trade was required to explain the most common type of trade in the late 20th century-- intra-firm transfers.

by santiago on Fri Dec 11th, 2009 at 10:03:28 AM EST
[ Parent ]

Re: Ricardo's Mistake (none / 1)

That would be trade measured in money right?

So if 5 tons of raw materials are shipped from country A to country B that keeps 4 tons within their borders and sell 1 ton (with labor added) to country C for more then 5 times the value/ton of the original raw materials most of the trade will be between B and C?

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Tue Dec 15th, 2009 at 06:25:39 PM EST
[ Parent ]

Re: Ricardo's Mistake (4.00 / 2)

Because the benefits of such forms of trade are not based upon transferring wealth from owners of factors -- labor or capital -- to each other they may result in higher wealth for all workers and capitalists in both countries, alike. (My bold)

At times benefits have accrued to workers as well as capitalists, but not particularly in the USA in the last 30 years. As J.S. Mill noted, there is no reason that the distribution of wealth has to follow the same pattern as the generation of wealth. In fact there are substantial reasons why the distribution of wealth should be significantly more equal than the generation. After all, those who became rich through their industry in fact did not do so in isolation from the rest of society, but rather by relying on the laws, human resources and social structures provided by that society and by being able to harness those factors to his benefit.

Unfortunately, social science is so badly taught in the USA that a majority of those who would benefit personally from such a more equitable distribution of wealth think that this would be wrong. I do not believe this is an accident.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Dec 10th, 2009 at 08:08:23 PM EST
[ Parent ]

Ricardo's Mistake | 51 comments (51 topical, 0 editorial, 0 hidden)

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