Ricardo and Morality | 24 comments (24 topical, editorial, 0 hidden)

Good Bye, Invisible Hand (4.00 / 2)

By coincidence I am slowly reading Gomory and Baumol's Global trade and conflicting national interests (Cambridge, Mass. c2000), and at least cursorily Chang's Bad Samaritans ([London, 2007] New York, 2008). Both are pertinent and make worthwhile reading. Chang makes the point that current trade and developmental policies are fundamentally flawed, and that this is, in principle, well known. He writes convincingly and engagingly, drawing on his personal experiences as a Korean whose life parallels the rise of the Korean economy, as well as on a wealth of historical sources, sometimes quite funny ones. He makes it quite clear, nevertheless, that we, the rich countries, are not acting in good faith towards the developing world, a fact that needs to be more widely propagated. – Highly recommended.

Gomory/Baumol show that Ricardo's argument is predicated on conditions of decreasing marginal productivity and a small capital base that prevailed in agrarian societies and thus fails for modern economies. In lieu of one global equilibrium, that cannot be improved, there are as many equilibria as there are (historically contingent) distributions of industries among countries. Thus the Invisible Hand lost its bearing. QED

In addition they show that international trade may leave a country worse off than no trade at all (!), and that while a degree of development is clearly beneficial to all, there is a rivalry between the more developed countries, a zone of conflict, where the maximum total output (income) requires mutual consideration and restraint.
[But beware, I'm only at p.40.]

Now, with Ricardo debunked, perhaps one could reframe the Free Trade issue?

Is the whole universe necessarily the optimal size of an economic area?

Is the current incongruence between political and economic organisation a good idea?

Is there a limit to the inhomogeneity that the politico-economic order can accommodate?

by Humbug (mailklammeraffeschultedivisstrackepunktde) on Thu Jul 24th, 2008 at 12:27:58 PM EST

Re: Good Bye, Invisible Hand (none / 1)

Wasn't Ricardo showing that trade could benefit both parties, not that is necessarily would?

by Colman (colman at eurotrib.com) on Thu Jul 24th, 2008 at 12:33:53 PM EST
[ Parent ]

Re: Good Bye, Invisible Hand (4.00 / 2)

He showed that the equilibrium is a global optimum (and will be attained by the Invisible Hand).

Trade is beneficial to both parties under very general conditions (or else it would not happen). This is very often used as an argument in favour of trade liberalisation etc.

However – and because of this fault this is not really an economical argument – this does not take into account the opportunity costs. Say, if a school boy works as a shoe shine he is better off than if he does not work; but only insofar as this does not interfere (negatively) with his schooling, playing piano or football etc.

by Humbug (mailklammeraffeschultedivisstrackepunktde) on Thu Jul 24th, 2008 at 01:29:10 PM EST
[ Parent ]

Re: Good Bye, Invisible Hand (4.00 / 2)

He showed that the equilibrium is an optimum if you use incredibly simple minded examples which are a large number of galaxy-widths away from any kind of political or economic reality.

The Invisible Handers took his argument and turned it into a crusade against the heathen savages who were - and are - badly in need of education, uplift and taming.

I'm not sure Ricardo was ever really about trade - possibly upon a time, perhaps, but certainly not for a long while.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Jul 24th, 2008 at 02:52:16 PM EST
[ Parent ]

Re: Good Bye, Invisible Hand (4.00 / 3)

I've been wanting to write a diary for a while about some of the different ideas that are used to support why trade is a good thing. So I'll take a swing at it here.

First, modern economics assumes that utility is independent. This means that the value to me of a given quantity of utility is the same regardless of how much other people have. So anything that makes everyone better off in terms of absolute utility is beneficial for all. This is Pareto optimality.

Suppose that you and I both wish to purchase a pizza. If we purchase them separately we will both spend 10 euros on a pizza. Now suppose that there's a buy one get one free deal. So if we cooperate and buy together, we get two pizzas for 10 euros , so that each pizza costs 5 euros. Now to most people, it only seems fair that in this case the gains generated by cooperation by distributed equally, so that each person pays 5 euros.

But if the the measure of fairness that we adopt is that cooperation is economically beneficial so long as each party makes an absolute gain, then I can put in 2 euros for my pizza, and you 8 euros, and we are both still better off than we would have been had we purchased separately. Because you still saved 2 euros by cooperation. But does that make sense? If you go out into the real world do people really agree that economic transactions where both parties benefit in absolute terms, but the relative distribution of gain is unequal that a fair deal has taken place?

And far from being an academic discussion, this is the way that societies like the US and the UK have developed such gross income inequality. It isn't that the wealthy took some existing quantity of wages from the poor. It's that the cumulative effect of economic growth where the relative distribution of gains was unequal was to redistribute income in a society to increase the share of income going to the wealthy.

And if that wasn't bad enough, neo-liberal economists point to deadweight losses as a way in which to justify changes in the absolute distribution of wealth so as to benefit the wealthy. And if you dare to disagree, you're being anti-social. But I'm not going to get into that now.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Fri Jul 25th, 2008 at 01:06:44 AM EST
[ Parent ]

Well, no, he did not ... (none / 1)

... what advocates claim for an argument and what an argument accomplishes are often two distinct things.

It took the neoclassicals and an egregiously flawed model of human behavior to arrive at a model where there is a global optimum arrived at by the Invisible Hand. Now, of course the true believers in traditional marginalist economics do not have a vocabulary or syntax in which to discuss the egregious flaws of the utility maximizing model of human behavior, and from the basis of their trained incapacities, the HO model appears to just be an "extension" of Ricardo's model.

However, what Ricardo's model established is that it is possible for nations to trade for mutual benefit. And it does not require conditions of pure competition, perfect information, or people in fact valuing all combinations of goods and bads with continuous indifference fields in order to arrive at that conclusion.

The assumptions of the argument arriving at mutual advantage then establishes the scope for types of trade relationships where we know that is possible. For the neoclassical HO theory, that scope is some alternate reality populated by some intelligent life other than human beings. For Ricardo's theory, the scope is more interesting, since it is possible, although far from automatic, to see trade relations that lie within the scope of his argument.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Fri Jul 25th, 2008 at 12:23:27 PM EST
[ Parent ]

Ricardo and Morality | 24 comments (24 topical, 0 editorial, 0 hidden)

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