Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.

Stop the train. I am gonna make an analysis!!!

by kcurie Wed Nov 9th, 2005 at 10:54:08 AM EST

...from the front page ~ whataboutbob

OK OK

I should not be doing that. The diary I am preparing right now is about the wind industry (I even have the title for it).I am also preparing another one about cars.

But I have decided, for the first time, and I hope last, to make and analysis of a dynamical system (get some cover, fast).

This is what I did for getting my Ph.D.  Boring?? You bet. NO I am kidding, it can be fun if you are into it.

And wchurchill in Latin America and free trade recalled me how funny was to use this kind of dynamical analysis where you try to figure out what were the main driving forces of a situation that lead you to some place.

So, I know it will be or may be boring, but this is the only place where a rant-analysis about trade policies can get any attention. I know the analysis is mainly wrong but I think is as good as a caricature as any other I could think of. Or maybe not.


Twenty years ago, open markets were the code word for: you open your market to our products and your financial system to our constant flux of money and we.. well..keep the local elites happy (No I am not gonna go further in the past, I let other people to fill the gap between the Cambrian explosion and 1985)

Countries following this path were basically bribed, not in the standard sense way of bribing (at least not always, some countries in Africa were literally bribed) but pointing out how the local elite would benefit from a policy of open market.

The main goal was to find a market for northern products and the ability to buy the most important national companies (oil among them). The country in question got the chance to receive money from the IMF, finance the debt that came from previous (or present) dictatorship and strength the power of the local economic powerhouses.

It was an important source of soft power.  Of course, poor people just did not benefit (as expected), but it turned out that the middle class did not score better or stayed the same, on the contrary, the policies were very harmful for this sector. Could you believe that Haiti open their rice market where their only industry, in some sense of the word, was the production of rice? All peasants, producers and middle classes bankrupted in just one year of heavily subsidized US imported rice. It will be really funny were not for the situation of Haiti now.

At the same time some countries in Asia just did not give a damn about obtaining foreign credits or improving the national elite, there was hardly a local elite to speak to. They used the trade barriers to develop their own companies and smoothly open them when the need for new technology and information required it. In front of the huge success in the creation of middle class in Asia and the huge revenue obtained by the new elites in the famous Asian Tigers, economic power-houses around the world wondered if they could do even better following other policies.

The fact that Asia opened their financial markets ahead of time leading to the IMF catastrophe in the late 90s lead President Clinton to intervene. Soon open markets were suspicious and for the first time Clinton proposed some measures to guarantee that the middle classes improved their social conditions if the markets were open. The main one being the offer of accepting manufactured agricultural products.

Unfortunately too little too late. Countries had realized that trade barriers are fundamental for the economy of some countries, the correct path was a slow process of open national companies to investment which produced local revenue and income but not to foreign products. This new policy in the last five years has generated enormous successes in Latin America and India. Africa had proceeded to far in their open markets policy which destroyed any spot of national industry, even in agriculture (take South Africa and Magrib as bare exceptions)

SO, right now, open barriers to agriculture products is a win for Argentina and Brasil, but in exchange for what? And this is the key question right now in the free-trade discussion. Latin America has realized that the Bush administration has lost any control on Asia (they laugh at them), and they consider that now is the moment to face US and defend more strongly their positions. The middle classes and the local economic elites have a lot to lose if the free-trade agreement is reached without proper assurances.

And the fact of the matter is that the open trade policies of the US are basically a product of the pressure of American and European service and technological companies. President Bush changed Clinton policy and established in very clear terms that free trade will be a trade-off. Of course all the pundits have to say the same old nonsense about how good wonderfulllll free trade is and invent some new fashion term-gadget (flat Earth comes to mind) or even some new theories to defend the old theories. Truth is that by the time you have read the same article in the Economist for the 189th time you realize that their arguments are rubbish..fortunately they provide the information necessary to reach the conclusion that "free-trade" is not about "free-trade" but about fair or unfair trade.

The trade-off of agriculture for you but services and technologies for us is not necessarily good for India and Latin America. In Latin America , Spain entered the pictured and invested heavily in local companies creating local revenue and technology, why to lose it in front of the American companies with guess what kind of new terms?. And the use of outsourcing and software development have lead the local elite of India to consider that given up now their edge would be as stupid as if the Americans would have decided to close Wall Street after World War II.

And this is why Bush receives all these attacks. For the first time, they are bargaining!!! And this have some people scared. Nobody must/can/should explain the real situation, nobody can/must/should attack anybody for the real reason. They all play a poker game. Fortunately for Latin America and India, oil, Iraq and the lost of Asia have let the US without a very powerful weapon: the ability to threat with military intervention or spy-style destabilization in the big countries. In this situation, Latin American countries are asking for more, they are even taking some strong positions, from patents rights to protection in certain sectors.

A lot of details do not appear in this rant-analysis. I know. I know. From the influence of small countries in Latin America, or the situation of the East Africa Coast. Prices of chocolate and coffee were also fundamental to understand how strongly some countries pushed for manufacturing agricultural products (not just selling cocoa) and let others completely out. There are much more things left, specially the evolution of the free-trade paradigm during the early 90s back when the IMF was fundamentally a branch of the "International Mother Fuc--rs and CO".

So I hope that the comments will fill the gaps, there must be a lot of variables that that were important but now I forget. In any case, I am quite sure of something. The poker game will go on but if developing countries are not convinced they will not sign anything. Economic elites are very happy in Brasil, Argentina and India right now. Why change? Maybe the wonderful Bush administration projection  of global charming could do the trick? HE HE HE HE I am joking.

Display:
Dynamical analysis is indeed the right place to stand (or at least a sound place to stand) in criticizing free trade policies. Unfortunately, the level of economic confusion in discussions of trade policy is so high that it can be hard to recognize a sound argument in the sea of unsound ones.

Discussions tend to derail unless the participants understand Ricardo's principle of "comparative advantage", which is the foundation of the classical economic understanding of why people trade.

In particular, the principle explains why the least efficient producer (of, say, rice) may have a comparative advantage in making that product, and hence export it. If this seems wrong to anyone here, please review Wikipedia: Comparative advantage.

This in no way argues that free trade is the right policy at all times for all people. Understanding comparative advantage, however, is necessary in order to make reality-based arguments leading to support for genuinely beneficial policies.

"That it is logically true need not be argued before a mathematician; that it is not trivial is attested by the thousands of important and intelligent men who have never been able to grasp the doctrine for themselves or to believe it after it was explained to them."

-- Paul Samuelson on comparitive advange, in response to Stanislaw Ulam's challenge to to name one theory in all of the social sciences which is both true and nontrivial


</ didacticism>

Words and ideas I offer here may be used freely and without attribution.
by technopolitical on Sun Nov 6th, 2005 at 11:20:21 PM EST
Okay, besides the fact that Ricardo et al sound like pompous asses, let's just accept for the sake of argument that Ricardo is correct.  In fact, it does seem to me that the theory is sound (she says pompously).  

HOWEVER (all caps to denote that it's a big "however" and not to be construed as yelling and/or anger)... however, even in this absolutely true theory, if there are not enough resources -- or the perception exists of not enough resources -- the end result is war.

Now, we can stand on theory and accept as fact that all of this is true, but we would be ignoring both human nature and the fact that either we do not have enough resources for this to work, or we have leaders who are not actively countering the perception that we do not have enough resources.  

Therefore, pursuing this agenda without countering the perception that we are competing for limited resources will result in war.   It's right there in the theory.  I'll end with another truth -- something's gotta give.

Maybe we can eventually make language a complete impediment to understanding. -Hobbes

by Izzy (izzy at eurotrib dot com) on Sun Nov 6th, 2005 at 11:57:01 PM EST
[ Parent ]
The Theory of Comparative Advantage - Overview (my emphasis)
The modern version of the Ricardian model and its results are typically presented by constructing and analyzing an economic model of an international economy. In its most simple form the model assumes two countries producing two goods using labor as the only factor of production. Goods are assumed homogeneous (identical) across firms and countries. Labor is homogeneous within a country but heterogeneous (non-identical) across countries. Goods can be transported costlessly between countries. Labor can be reallocated costlessly between industries within a country but cannot move between countries. Labor is always fully employed. Production technology differences across industries and across countries and are reflected in labor productivity parameters. The labor and goods markets are assumed to be perfectly competitive in both countries. Firms are assumed to maximize profit while consumers (workers) are assumed to maximize utility. (See page 40-2 for a more complete description)
This is what "all other things being equal" means in this context. Too many assumptions.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Mon Nov 7th, 2005 at 06:49:48 AM EST
[ Parent ]
.. how much milk can a cow generate.

Imagine first that the cow is a homogeneous sphere....

It is an old and stupid physicist joke but it reflects that results from rough assumptions can not be taken seriously...they only serve to make a better second approximation.

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Mon Nov 7th, 2005 at 07:49:13 AM EST
[ Parent ]
The stupid physicists' joke reflects the fact that many theories are formulated not with the mathematics they should but with the mathematics we can handle. Too much of economics is formulated using linear equations and no attention is paid to the size of the approximations being made (which would give a rough indication of when the models cease to be applicable). To apply linear reasoning (more of this implies more of that) you don't need mathematical economics.

For instance, for Ricardian analysis to apply we are supposed to assume labor is fully employed. Is this a good approximation when unemployment is 3% (Beveridge)? When it is between 5% and 10% (USA)? When it is between 9% and 15% (France)? When it is 21% (Spain in the 1980's)? How large must unemployment get before it is justified to impose protectionistic trade barriers? Free-market advocates remain silent like whores (to use a much-loved expression from the Spanish castizo vernacular) on this issue, but then again they are prostituting themselves to big business.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Mon Nov 7th, 2005 at 07:59:38 AM EST
[ Parent ]
.. amen

Loved also the silent like whores. I am gonna use it often around here.

A pleasure


I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Mon Nov 7th, 2005 at 08:06:25 AM EST
[ Parent ]
Please see my comment below regarding comparative advantage vs. "the modern version" of it. As you suggest, the spherical cows were added as mathematical decorations. However, they have nothing to do with the underlying principle.

Words and ideas I offer here may be used freely and without attribution.
by technopolitical on Mon Nov 7th, 2005 at 03:59:57 PM EST
[ Parent ]
Migeru

On this I will disagree resolutely with you. the Theory of comparative advantage does not need all these hypotheses to work, and as Samuelson noted, it is both true and non trivial.

I have already promised to do a diary on this, and so I will, and I now put it close to the top of my list of things to do. I will also argue why I am in favor of free trade, using what I think will be an unexpected argument for most.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Mon Nov 7th, 2005 at 03:25:52 PM EST
[ Parent ]
 is mainly arguing about the universality of any economical law.

And I would certainly agree with him. This does not mean that a certain approach is not useful or insightful, but it can not be generalized to all cases. As a matter of fact, the truth about this  or that particular economical statement, specially if it comes under the general myth of law, is actually based in how it adapts to our particular vision of the world. If it fits we accept it, otherwise we don´t. This is because there is no way you can deal with such a complex system with so basic approximations.

The most you can accept (because you think so but not based on any solid ground) is that the law or explanation gives the proper "flavour" to the economic situation.

But I think I am speaking for someone else.

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Mon Nov 7th, 2005 at 03:47:34 PM EST
[ Parent ]
What I am arguing about is arguing comparative advantage on the basis of simplistic graphs like this one.

The first quibble I have is that, in the presence of substantial unemployment, it is possible for the trading partner with absolute advantage to shift their unemployment to the less efficient trading partner. Also, at least two products are required. Many poor countries have essentially monoculture agricultural sectors, like the cited example of Haiti which really only produced rice. The Ricardian rationale for opening Haiti to free trade so its only domestic industry can be destroyed by dumping from the US escapes me.

Comparative advantage is true an nontrivial, but it is also abused in propaganda.

The point is this: many economic laws are akin to the laws of perfect gases. The first thing they teach you when you study Thermodynamics in earnest is how real gases depart from the "ideal" law.

Another analogue of economics law is Hooke's law of elasticity. The most interesting thing about elastic systems is histeresis, that is, deviations from lienarity and "memory effects".

I don't see a lot of economics discussions of the approximations involved in arguing (deriving would be an exaggeration) economic laws, or of the "domain of applicability" of the same. I don't see a lot of discussions of nonlinearities, cusps, or the speed at which things happen (workers are supposed to instantly migrate to new professions when the conditions change, as consumers are supposed to instantly migrate to cheaper products and capital to more profitable ventures).

I was getting ready to write my own diary on Ricardo just to spur you into picking it apart. I'll just wait for yours.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Mon Nov 7th, 2005 at 04:21:28 PM EST
[ Parent ]
Go ahead then, I am not sure I can commit to any deadline...

In recent days, I've had quite a bit of time over here, but that's just because I am waiting for a big client to give the green light on a big project. Once this happens (and it's a question of days), I'll be much less available.

Yo make excellent points about histeresis and the non-instananeity of a number of transitions.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Mon Nov 7th, 2005 at 04:37:40 PM EST
[ Parent ]

With a Hey-nonny-nonny and a ho-ho-pffft we assume the problems away.

'Let' Labour be homogenous across national borders.  Oh yeah?  What Universe are we speaking of, exactly?  Not this one.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Wed Nov 9th, 2005 at 02:38:36 PM EST
[ Parent ]
Homogeneous within but heterogeneous across. But still, you've got to laugh.

It is true that comparative advantage is more robust than that, the hypotheses I quote are the ones that are necessary to have a linear model. Now, since linear equations are the ones we can fully solve, they are the ones that we formulate all our theories (economic or otherwise) in terms of.

I'm working on a diary where I hash out all these details, but it will take a few days.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Wed Nov 9th, 2005 at 02:48:23 PM EST
[ Parent ]
Thank you for the correction.

As I'm sure you know, we can solve (some) linear equations but it is also true Strange Attractor/Repulsor formulae are the norm rather than the exception in non-trival analysis.  And they are really hard just to understand the  term relationships.  To solve?  Some can be, most can't.  Even computing the Lyapunov and Kolmogorov Exponents from a manifold gets ... interesting (Read: aiiYEEE!.)

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Wed Nov 9th, 2005 at 03:23:36 PM EST
[ Parent ]
Most basic economics applies to static (or, more properly, stationary since economics is all about flows and rates) situations. Of course, the real meat is in the dynamics, and there you would quickly get all that nice turbulence and attractors.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed Nov 9th, 2005 at 04:05:50 PM EST
[ Parent ]
... I was going to call you names.. but it´s OK.. it is open science after all (he he).

I think we should make a workshop: "Non-linear equations for economists: It is not really that scary" Do you think anybody would attend? (I had to.. a cheap shot, I know, I am deeply sorry).

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Wed Nov 9th, 2005 at 04:20:02 PM EST
[ Parent ]
Will you be in Spain this Christmas so we can exchange notes?

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed Nov 9th, 2005 at 06:31:32 PM EST
[ Parent ]
Even computing the Lyapunov and Kolmogorov Exponents from a manifold gets ... interesting (Read: aiiYEEE!.)
Nah, for that you just need the Jacobi field. The exponents are the principal curvatures.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed Nov 9th, 2005 at 06:38:48 PM EST
[ Parent ]
Your link to the online textbook at internationalecon.com describes these as the assumptions of "The modern version of the Ricardian model". Modern academic economics is far gone in mathematical analysis, using procrustean assumptions to make the models tractable. The textbook goes on to give a "A Ricardian Numerical Example" which somehow generates graphs with straight lines. This requires both stretching the facts and cutting off their feet.

Comparative advantage is a simple and (once understood) self-evident concept. It is robust, rather than dependent on a host of idealizations. It must be understood if one wishes to be in a position to examine its limitations as a basis for policy.

Words and ideas I offer here may be used freely and without attribution.

by technopolitical on Mon Nov 7th, 2005 at 03:53:36 PM EST
[ Parent ]
Ooops. The above was intended to be a reply to Migeru.

Words and ideas I offer here may be used freely and without attribution.
by technopolitical on Mon Nov 7th, 2005 at 03:55:12 PM EST
[ Parent ]
The general concept behind is indeed easy. The main problem is to find a situation in real life where the real world constraints would not affect other parameters and other structures in a very fundamental way.

I think the example of Haiti would be a good one. If they would have had two industries. Would have been good for them to trade and destroy one of their two main national structures holding the social complex compact?

Once one of the industries would have been left, are you sure the result would have been the improvement proposed in focusing in another industry... or maybe just a civil war during the meantime?

It is not easy at all.

The perfect mythical counter-example to the analysis is to use the "two men in island" example in your same link. What if the old lad would die because instead of having different distribution of work just concentrates on one which turns out harmful? or what if he gets crazy doing just one work? or what if...

I guess you get my point, in real life these theories are  "something else that we may take into account" or maybe not.

At least this my take.

 A pleasure.

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Mon Nov 7th, 2005 at 04:05:17 PM EST
[ Parent ]
free trade should not be done across the board, clearly.  It needs to be carefully negotiated, by both sides.  It's particularly difficult when one country is subsidizing an industry.  that country IMHO should be pressured over time to reduce such subsidies (US and Europe are guilty in agriculture here).

I think your point on a country accepting investment, to finance their growth, while not initially accepting free trade, so they can build their infrastructures and societies is clearly the right approach.  I would hope as they build strength economically, that they open to free trade, gradually over time.  The economics of competitive advantage really do make it clear that is the best for the world.  but I think those discussions some time lose sight of the real meaning and impact of the  word "dislocations"--if  not handled correctly it can be horrific.

"have let the US without a very powerful weapon: the ability to threat with military intervention or spy-style destabilization in the big countries."  I don't think the US will be using these tactics in Latin America--mistakes of the past have been seen, and I think corrected.  Drug trafficing issues is the one area that could loom as a problem.

But I still think if I were Bush, I would drop free trade with Latin America as an agenda item.  If individual countries in LA want to negotiate more open trading agreements, I would respond and see if something could be done that is good for both parties.  But why take the grief--grief from the countries, and grief in the US from people who don't want the free trade.  

by wchurchill on Mon Nov 7th, 2005 at 01:22:01 AM EST
My answer has always been that the technology and service industry have a lot to win. Basically it would fix their position as world leaders for decades to come.I think this is the origin of the Bush pressure on foreign countries.

The problem is that Argentina or Brazil is not gonna sign a piece of paper where they open borders to their products and then wait how Bush has to face the to her side of the equation; the red state agricultural powerhouses.
So the situation is perfect as it is now. Bush keeps both sectors happy but actually nothing is signed. In this way, the developed world is also happy and the agricultural industry remains in the red corner.

I bet the service industry is going to put a lot of pressure, but we will see how it goes from here.

A pleasure.

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Mon Nov 7th, 2005 at 02:40:06 AM EST
[ Parent ]
..but, you quickly sketched in a visible system, and made connected arguments I hadn't thought about before.

Good Diary! More please....

You can't be me, I'm taken

by Sven Triloqvist on Mon Nov 7th, 2005 at 05:37:34 PM EST
examples of our free trade discussion. ( It's certainly nice to see some actual reporting on an issue or two.  I could give a ___ what Maradona thinks of the US Free Trade policy, which is all I've really read about so far.)

Some Highlights:

In renewing his plea for free trade, Bush said he would bow to da Silva's wishes that World Trade Organization talks at the so-called Doha Round in December come first. Those negotiations are expected to create a framework to govern regional accords such as the Free Trade Area of the Americas, the stalled pact.
"Look, let's work together on Doha and see how that goes, and we will continue working on the Free Trade Agreement of the Americas," Bush quoted da Silva as telling him.
The president said he was "impressed" by da Silva's economic reforms.
Some use of the WTO to eliminate subsidies:
But da Silva also has been aggressive in aligning with other developing countries, at times against U.S. interests.
Brazil, a growing agricultural superpower, helped lead a successful challenge to U.S. cotton subsidies at the World Trade Organization. Da Silva's government is contemplating mounting a similar challenge to U.S. soy subsidies.
Some recognition that subsidies and tariffs are best changed gradually, to minimize dislocations:
In their meeting at the Brazilian leader's weekend retreat outside the capital, da Silva brought up the issue of U.S. agricultural subsidies. Bush said the United States is embarked on a plan that would eliminate them over 15 years--"so long as we get the same treatment from trading partners such as Europe."
I imagine the 15 years and comments on Europe will be bargaining issues needing resolution.

So it's continued bargaining.  These free trade agreements just take a long time.  But I still would recommend to Bush if I were an advisor, that he should just put this one the backburner.  The Latin American agreement is just not that important to the US, IMO, and is problematic if, as a number of you have said, the trade positions of the various countries are up in the air.  And perhaps most of the benefits could be achieved by just bargaining with countries that are mutually interested, which may be the large potential trading partners anyway.

by wchurchill on Mon Nov 7th, 2005 at 06:46:00 PM EST
..not easy for Bush.

I agree that this is probably the best for him, but I doubt he can do anything else. I can not imagine how many big cats will be knocking on the door if he says directly so or even putting in the backburner.

The  deals they need is Latin America and India, the rest of the bunch are just too small countries and with no geopolitic importance right now.

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Tue Nov 8th, 2005 at 03:46:00 AM EST
[ Parent ]
thanks for your comment Kcurie.  I wonder what you think of Bush's comment on agreeing to agricultural changes on subsidies, as long as Europe does the same thing.  In earlier posts, you seemed to think this was an important thing--I think you were referring to Brazil specifically.  Jerome seems to be defending the French position, and I guess other European countries, which seems a very hard line position on this.  I imagine both the US and Europe are reluctant to address this--just as you correctly point out, the impact is heaviest on the red states, Bush's base--and I imagine there are similar social and political implications in Europe.
I would think opening a diary on the removal of agricultural subsidies, but phased in to lessen the impact of dislocatiolns, would be very interesting--allowing you to express your positions and Jerome and others to respond.
To me, though it seems painful, I don't see how free trade can really give all of its benefits if the richer countries subsidize the important products that the poorer countries might trade.
by wchurchill on Tue Nov 8th, 2005 at 11:27:39 AM EST
[ Parent ]


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