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Probably incredibly unreadable modelling thread

by Colman Mon Jun 12th, 2006 at 12:01:53 PM EST

Metatone commented earlier

It strikes me that I've read a lot about the mythic status of "Comparative Advantage" in connection with proof using simple game theory. Indeed, if you inspect the average college economics course you are almost guaranteed to find a very simple simulation set up to demonstrate how Comparative Advantage is real, despite its "counterintuitive nature."

(For myself I sometimes think that great play is made about the "counterintuitive nature" of Comparative Advantage in order to bolster it's mystique, but that is a discussion for another day.)

I seem to recall that you are in the simulation field to some degree at work. Would it possible to set up one of these "simple" demonstrations of Comparative Advantage, but add in movement of capital to that of goods?

Migeru took him up on that ... this thread might be a minority interest.


Stick the discussion in here so we can all see what it is and so that it can float into the debates box later.

Display:
Anyone got a statement of comparative advantage they'd like to use? What are the assumptions made?
by Colman (colman at eurotrib.com) on Mon Jun 12th, 2006 at 12:05:15 PM EST

The Wikipedia definition seems like a good place to start.

As an economic naif this looks to me like one of the many, many ideas in economics that start with 'If all other things are equal...' - assuring a certain disconnection from reality right from the beginning.

So rather than textbook simulations, wouldn't it be more useful to try find examples from the real world?

Any theory that's so fragile it can't survive real world trading conditions doesn't deserve to be taken seriously.  Alternatively if it really does work, being able to point to some reality-based evidence for it would help define the boundary conditions of any simulation.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Jun 12th, 2006 at 12:25:28 PM EST
[ Parent ]
From the wikipedia article:
Assumptions in Example 3
  • ...
  • Full employment - if one or other of the economies has less than full employment of factors of production, then this excess capacity must usually be used up before the comparative advantage reasoning can be applied.
  • ...
  • Perfect mobility of factors of production within countries - this is necessary to allow production to be switched without cost. In real economies this cost will be incurred: capital will be tied up in plant (sewing machines are not sowing machines) and labour will need to be retrained and relocated. This is why it is sometimes argued that 'nascent industries' should be protected from fully liberalised international trade during the period in which a high cost of entry into the market (capital equipment, training) is being paid for.
  • Immobility of factors of production between countries - why are there different rates of productivity? Capital includes production technology and know-how. If it can be moved between countries then the production capabilities of the countries will change. Similarly the movement of labour will change that factor cost and productivity. Perfect transnational mobility of factors of production would invalidate comparative advantage. Imperfect transnational mobility reduces the mutual benefit of trade.
  • Perfect competition - this is a standard assumption that allows perfectly efficient allocation of productive resources in an idealized free market.
Note, specifically: Perfect transnational mobility of factors of production would invalidate comparative advantage. Ergo, globalization invalidates comparative advantage.


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 Jun 12th, 2006 at 12:44:15 PM EST
[ Parent ]
So none of the assumptions hold? Excellent. I'll be relying on that then.
by Colman (colman at eurotrib.com) on Mon Jun 12th, 2006 at 12:58:20 PM EST
[ Parent ]
With hindsight, I think my diary on comparative advantage addressed the effects of "[im]perfect mobility of factors of production within countries".

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 Jun 12th, 2006 at 01:03:52 PM EST
[ Parent ]
by Colman (colman at eurotrib.com) on Mon Jun 12th, 2006 at 01:11:02 PM EST
[ Parent ]
The fun part about the assumptions as they are presented there is that capital plays no part in the set up whatsoever.

This is terribly important as I think it clarifies my main problem with the issue (and which prompted my comment.)

The success of teaching Comparative Advantage rests on a beautifully simple model, a little bit of game theory, nothing more. From that (if you read the mises link I put in my other comment) they are happy to build a whole assertion of "good things."

The problem with free mobility of capital is that it doesn't disrupt the generic assumption that free trade makes for a larger "total sum of wealth" but that it has the potential to massively destabilize the utilisation of that wealth, leaving whole countries effectively unemployed.

This doesn't bother the rich, but it should bother the rest of us.

Seeing the power of a simple model, badly applied in all these economics classes and textbooks, I wondered, what if we can build a simple little model that demonstrates (or not) my fears about what the movement of capital means for the stability of the system. It could be a powerful tool for helping people think carefully about trade.

by Metatone (metatone [a|t] gmail (dot) com) on Mon Jun 12th, 2006 at 01:21:29 PM EST
[ Parent ]
An honest author:
In this way we might raise the well being of all individuals despite differences in relative productivities. In this description, we do not predict that a result will carry over to the complex real world. Instead we carry the logic of comparative advantage to the real world and ask how things would have to look to achieve a certain result (maximum output and benefits). In the end we should not say that the model of comparative advantage tells us anything about what will happen when two countries begin to trade, instead we should say that the theory tells us some things that can happen.

Comparative advantage is important as a rebuttal to naive zero-sum thinking, not as a predictor of performance in a free-trade scenario which does not conform to the assumptions.

by Colman (colman at eurotrib.com) on Mon Jun 12th, 2006 at 01:30:50 PM EST
[ Parent ]
There are still lots of people who think that free-trade is necessarily bad for you. This isn't true, as the theory clearly indicates. It's just not necessarily good either, which is how the theory is generally interpreted.
by Colman (colman at eurotrib.com) on Mon Jun 12th, 2006 at 01:37:33 PM EST
[ Parent ]
Just an engineer here. But FWIW, if the model does not include time as a variable (and from what I've seen it doesn't) it's pretty worthless.  
by tjbuff (timhess@adelphia.net) on Tue Jun 13th, 2006 at 09:35:23 AM EST
[ Parent ]
The assumption is very simple: Different countries are better suited to produce different goods.

China is better suited to make low-cost clothing than America.  America is better suited to grow corn than Saudi Arabia.  Since Saudi Arabia is better suited to the production of oil than America, it only makes sense, in a two-country universe, for America to produce corn while Saudi Arabia pumps oil.

If Saudi Arabia is initially producing corn and oil, and America is doing the same, then free trade should lead to America producing corn, and Saudi Arabia producing oil.  Because this is more efficient, global wealth rises.  Saudi Arabians and Americans can buy what they need with less income.

That's it.  It doesn't require all of the assumptions that are posted elsewhere in the thread.  It's common sense.  If China has an enormous pool of unskilled labor, China will naturally have an advantage over France in producing goods that only require unskilled labor.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Mon Jun 12th, 2006 at 05:57:41 PM EST
[ Parent ]
Are you really that thick, Drew?
by Metatone (metatone [a|t] gmail (dot) com) on Mon Jun 12th, 2006 at 06:01:06 PM EST
[ Parent ]
that was a serious comment, I think it was uncalled for.

You can't be me, I'm taken
by Sven Triloqvist on Mon Jun 12th, 2006 at 06:24:34 PM EST
[ Parent ]
Ceteris paribus, you are probably right.
by Metatone (metatone [a|t] gmail (dot) com) on Mon Jun 12th, 2006 at 06:36:00 PM EST
[ Parent ]
I'll break my vow and reply. Drew is quoting the standard Ricardo version of trade. The problem with his theory is that it was formulated at a period when money was based upon gold. The flow of capital was thus restricted by the convertibility of currency. He also assumed that labor was relatively immobile.

These two conditions no longer hold.

Another factor (see Herman Daly) is that Ricardo was an economist in an "empty" world, we are now in a "full" one. In an empty world the costs of raw materials and pollution are disregarded. If an area is despoiled one can move. In a full world these costs are passed on to society as a whole. So while firms still operate on comparative advantage, this is no longer a valid model. The costs they are ignoring get borne by others.

A good example is today's article on Chinese Coal:
http://www.eurotrib.com/?op=displaystory;sid=2006/6/12/8448/61749

One of the points that Jerome skipped was that sulfur and soot from Chinese coal burning are showing up in California. In a full world, everything connects.

Oh, to be young again and know all the answers...

Policies not Politics
---- Daily Landscape

by rdf (robert.feinman@gmail.com) on Mon Jun 12th, 2006 at 07:17:30 PM EST
[ Parent ]
I'll break my vow and reply.

I must make quite an impression if you feel the need to vow not to reply to me (and then break it).  Frankly, I'm not sure as too whether I should laugh or send a "Thank You" card.

The problem with his theory is that it was formulated at a period when money was based upon gold.

No.  It was formulated during a period in which Saudi Arabia was an oil-rich desert while America was not.  That's a period that continues today.  My basic point -- the one that apparently makes me "thick" (thank you, Metatone) -- was that comparative advantage is a theory dealing primarily with natural differences between nations/places.

You seem to be under the impression that I'm disputing the notion of costs being borne by others in the case of your example, pollution.  Why you believe this, I don't know.

Oh, to be young again and know all the answers...

Yes.  Now, if I could only demonstrate what a classy fellow I am by tallking down to younger members of the site, life would truly be complete.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Tue Jun 13th, 2006 at 12:16:57 AM EST
[ Parent ]

 Nicely parried.

  I see I have two "dogs" in this fight; so I have to plug for both and hope neither is injured in the process.

 

"In such an environment it is not surprising that the ills of technology should seem curable only through the application of more technology..." John W Aldridge

by proximity1 on Tue Jun 13th, 2006 at 09:46:38 AM EST
[ Parent ]
The only thing you need for comparative advantage to work - the ONLY thing - is that countries have different levels of productivity at producing different things. That's it.

All the talk about labor and capital mobility is really beside the point. Sure, if the global economy were totally frictionless, AND every country had the same technological and organizational capabilities AND the same equally efficient institutions, then everybody would be equally efficient at producing everything and there would be no comparative advantage.

So comparative advantage IS a benefit from open trade that is still relevant to today's world and will continue to be relevant as long as countries are relatively better at producing some things than others. This does not mean that there are not offsetting costs (like downward pressure on the wages of unskilled workers in rich countries, for example) from our current global trade regime (there are) or that many (most?) economists until very recently have tended to ignore or minimize those costs (they have).

The trick is to develop a global trade regime that gives us the benefits of comparative advantage with far less of the costs that the current system generates.

by TGeraghty on Mon Jun 12th, 2006 at 11:37:11 PM EST
[ Parent ]
I know these sorts of comments get many people angry, but I think that the energy that people here put into trying to refute the theory of comparative advantage is misguided and could be put to better use -- again, by making a broader accounting of the total costs and benefits, and their distribution, of our current trade system, and by suggesting ways to reform that system to maximize the net benefits while ensuring a fairer distribution.
by TGeraghty on Mon Jun 12th, 2006 at 11:44:02 PM EST
[ Parent ]
Refute might not be the right word. Understand what is going on and how reliable it is: present a subject as mathematical and we're going to do that.

However, both Drew and you seem to have decided it's better to abandon the mathematics and rely on common sense.

by Colman (colman at eurotrib.com) on Tue Jun 13th, 2006 at 02:33:45 AM EST
[ Parent ]
Thank you.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Tue Jun 13th, 2006 at 12:19:24 AM EST
[ Parent ]
Again, there are no mathematics underpinning it then? Free trade always make everything better?
by Colman (colman at eurotrib.com) on Tue Jun 13th, 2006 at 02:28:33 AM EST
[ Parent ]
Free trade isn't necessarily the best way to handle trade.  It's simply a matter of free trade being better than the other ideas we have so far.  Krugman once pointed out, in one of his books, that even if we were capable of developing a system that would work better, it would be a pointless exercise, because it would be too difficult to build in the real world.  A great deal changes, obviously, when politicians get involved.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Tue Jun 13th, 2006 at 09:34:10 AM EST
[ Parent ]
Also, labour outsourcing is not free trade. Direct foreign investment is not free trade. And free trade doesn't mean unregulated trade.

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 Tue Jun 13th, 2006 at 09:36:01 AM EST
[ Parent ]
Sure, it's easy to theoretically show in a simple two-country model that moving from a world of no trade to one where countries trade, you can potentially make everyone better off. And you can extend that to many countries, tariff cuts, etc, and all you really need is the different productivities for producing different goods and services. There is math underpinning that, but it's all abstract and necessarily leaves out important features of the real world.

Like the "infant industry" story - what if that tariff allows a temporarily inefficient industry to achieve scale economies and efficiency gains that allows it to compete on global markets? If you remove the tariff too soon, you may lose the industry and good-paying jobs. But as long as you have the tariff, consumers pay more for the good in question. The devil is in the details here.

Or like the other stuff people have mentioned here - the global labor arbitrage for example. Again, it's a question of balancing potential gains from specialization against other costs, which I admit economists are not always clear about.

Also, one of the problems with economic policy analysis is that distributional considerations are usually ignored. As long as a given policy change (net) results in enough increased output to potentially compensate those who lose from the policy change, economists will usually say that the policy change should happen, even if all the benefits went to Bill Gates and all the costs were imposed on everyone else.

So, no, "free trade" (and of course there is the problem that "free trade" has become such a politically loaded term that it doesn't mean the same thing to different people) in the sense of moving in the general direction of more openness by reducing tariffs and other trade barriers (my definition of "free trade") doesn't always make things better for everyone, but that's different than saying comparative advantage doesn't permit overall increases in output and income (which could and should then be used to compensate those who bear the costs through jobs programs, investments in education and training, and a generous welfare state).

by TGeraghty on Tue Jun 13th, 2006 at 02:15:31 PM EST
[ Parent ]
Also, one of the problems with economic policy analysis is that distributional considerations are usually ignored. As long as a given policy change (net) results in enough increased output to potentially compensate those who lose from the policy change, economists will usually say that the policy change should happen, even if all the benefits went to Bill Gates and all the costs were imposed on everyone else.
And Kaldor-Hicks optimality has been invented for the express purpose of assuaging their conscience about ignoring (re)distribution issues.

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 Jun 14th, 2006 at 07:13:47 AM EST
[ Parent ]
Oh, come on, Miguel.  Hicks invented the IS/LM model, and Kaldor was an advisor to Labour governments.  Both taught at Cambridge, which had an economics department that wasn't exactly known for militant libertarian leanings.  Do you really believe they were enemies of redistribution?

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Wed Jun 14th, 2006 at 12:54:02 PM EST
[ Parent ]
I don't know what they believed. I do know that arguing that "in principle" compensation is as good as "actual" compensation completely obviates the need for a redistribution policy.

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 Jun 14th, 2006 at 01:00:45 PM EST
[ Parent ]
I wonder (because I haven't checked) if you're fallen into the trap set by economic ideologues who misapply the mathematical models to justify their position, in the way that the free-marketeers seem to rely on arguments about market efficiency that really aren't supportable to support their plunder and concentrate policies.

Mathematical models do not have moral content: it's the polemic constructed around the models that does.

by Colman (colman at eurotrib.com) on Wed Jun 14th, 2006 at 01:11:32 PM EST
[ Parent ]
Possibly. I also found this (my emphasis):
Within the same context, a Kaldor-Hicks improvement is defined as a change that is either a Pareto improvement or such that:
  • the "winners" from the change would be able to compensate the "losers" and still be better off (Kaldor criterion); and
  • the "losers" could not afford to bribe the "winners" to prevent the change (Hicks criterion).
Crucially, the compensation or bribe elements of the test for a Kaldor-Hicks improvement is a hypothetical one: the change is considered an improvement if the assessed winners' gain is greater than the assessed losers' loss, regardless of whether the change when implemented would actually involve the payment of any compensation.
It is definitely an improvement on Pareto to consider the possibility of side payments, as long as they actually take place, wwhich is "crucially" not the case in Kaldor-Hicks optimality.

Often Pareto optimality is an impairment to taking any action (see the effects of unanimous decision making in teh EU council, for instance), but then sometimes people just say "but see, it's not Pareto optimal but it is Kaldor-Hicks optimal, so it's ok, we can ignore the losers".

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 Jun 14th, 2006 at 01:17:50 PM EST
[ Parent ]
And, further to the above comment, as you know the IS/LM model was the original Keynesian model that served as the intellectual foundation for programs designed to put money in the hands of those hurt by economic downturns -- otherwise known as a form of redistribution.  That's hardly a point endorsing your above attack.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Wed Jun 14th, 2006 at 12:59:51 PM EST
[ Parent ]
That's not the way I've seen it used, but maybe there was a misrepresentation or misunderstanding involved.

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 Jun 14th, 2006 at 01:02:34 PM EST
[ Parent ]
I note neither of you saw fit to reply to this comment upthread.
by Colman (colman at eurotrib.com) on Tue Jun 13th, 2006 at 02:31:50 AM EST
[ Parent ]
I didn't see that comment, honestly.  My initial look at the thread was only a quick one.  Part of my response will be in a reply to Migeru below, because I think he brought up an important point that requires a much longer discussion.  Perhaps a diary.  Inevitably the real world will be too complex for the basic point I made.

I think the author you quote made a decent overall point.  His last sentence is wrong, in my opinion.  When China opened its doors to trade, for example, the result was reasonably predictable.  Jobs that didn't require a highly-skilled worker went to a country with a large pool of unskilled labor -- that large pool translating to lower costs.  Ricardo was simply taking Smith's division of labor a step forward to build a trade theory at a time when economists were at war against mercantilism.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Tue Jun 13th, 2006 at 09:25:53 AM EST
[ Parent ]
I am generally in agreement with what he said.

The point about "full employment of resources" is also key. In a world of global industrial overcapacity, industry location can have huge impacts on employment and wage structures, as people living in the US "rustbelt" well know.

by TGeraghty on Tue Jun 13th, 2006 at 02:18:04 PM EST
[ Parent ]
So it's not a mathematical model as the other economists say, it's just common sense? No rigorous underpinnings? No demonstration of increases in welfare?
by Colman (colman at eurotrib.com) on Tue Jun 13th, 2006 at 02:26:16 AM EST
[ Parent ]
All of those things can be done.  I just don't have the energy to do them at the moment.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Tue Jun 13th, 2006 at 08:51:23 AM EST
[ Parent ]
Without relying on the assumptions above?
by Colman (colman at eurotrib.com) on Tue Jun 13th, 2006 at 05:26:05 PM EST
[ Parent ]
To be, economics should always be qualitative, not quantitative (i.e. increasing the supply of money usually leads to inflation vs M3 increasing by 10% causes inflation to increase by 1%: one id mostly true, the other is silly even if it can be true occasonally).

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Tue Jun 13th, 2006 at 03:05:39 PM EST
[ Parent ]
That's fine so long as that's how it is presented. "Comparative advantage and thus free trade makes everyone better off" is presented as a law of nature, not as a rule of thumb.
by Colman (colman at eurotrib.com) on Tue Jun 13th, 2006 at 05:27:29 PM EST
[ Parent ]
That's actually a pretty good description of what economics should be about: rules of thumb rather than laws of nature

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed Jun 14th, 2006 at 06:16:36 AM EST
[ Parent ]
The underlying assumption here is that "mathematical" implies "quantitative" and excludes "qualitative". The same mistake was made by 19th century mathematicians who felt that only arithmetic was rigorous enough for calculus (the arithmetization of analysis) and geometry (algebraic geometry). This mistake hasn't been corrected yet, even though it's been over 100 years since Poincare invented topology, which is all qualitative. The quantitative determinism of 19th century mechanics also has given way to qualitative dynamical systems theory [again pioneered by Poincare and forgotten for 70 years... a real tragedy].

Topology blows my mind away. Algebraic geometry (especially the kind where you just write down equations and churn) bores me to tears. Most of what passes for advanced mathematical economics is hardly advanced or beautiful math, and certainly not qualitative.

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 Jun 14th, 2006 at 11:35:24 AM EST
[ Parent ]
Drew, if American capitalists can move all jobs except selling food, clothes, and gadgets, cleaning toilets, and building houses, to China and India [and there are enough educated chinese and indians to take over all US white collar jobs] then what jobs are left for americans, and what income will Americans use to buy the clothes and gadgets made in China?

Comparative advantage (and division of labour) reduce to the simple mathematical fact that if you look for the optimum among a larger set of possibilities, you get a better optimum. You can also get the convexity of the production possibility frontier out of the general properties of functions defined by optimizing a parametric family.

There is one basic flaw in making the jump from division of labour to comparative advantage. It is reasonable to consider a person as a single, indivisible economic agent. It is not so reasonable to consider countries as single economic agents. Maybe it was so in Ricardo's era, but it is not today.

Cui bono? It appears to me that the downplaying of capital as a factor of production in discussions of comparative advantage, ignoring transnational agents, ingoring the different agents within national economies, and using "comparative advantage" as the answer to "why free trade?" just points to the fact that it is the transnational capitalist class that benefits to the detriment of everyone else.

There is a point in quantitative social science where mathematical modellling stops and political choices begin. Too many people look to mathematical economic as the magical too that will give the one true policy solution to any given problem. They don't understand policy, modelling, or mathematics.

I suppose that's what Metatone meant with "are you really that thick?".

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 Tue Jun 13th, 2006 at 06:54:05 AM EST
[ Parent ]
Ah, but in the long run ...
by Colman (colman at eurotrib.com) on Tue Jun 13th, 2006 at 06:57:30 AM EST
[ Parent ]
In the long run the last capitalist is strangled with the guts of the last economist. </snark>

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 Tue Jun 13th, 2006 at 06:59:36 AM EST
[ Parent ]
you get a better optimum

You may get  a better optimum, surely?

by Colman (colman at eurotrib.com) on Tue Jun 13th, 2006 at 07:01:01 AM EST
[ Parent ]
Well, you dont get a worse optimum.

The collection of problems for which the optimum combined solution is the juxtaposition of the optima for the parts is nowhere dense, of measure zero, a variety of lower dimension, or any of a number of colourful phrases depending on which favourite branch of math you use to pose the question.

And I'm a physicist at heart. To me > and ≥ are the same, within experimental accuracy.

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 Tue Jun 13th, 2006 at 07:05:19 AM EST
[ Parent ]
And I'm a physicist at heart. To me > and ? are the same, within experimental accuracy.

While mathematicians worry about the difference. Don't get a worse optimum I can live with! You were worrying me with the other.

by Colman (colman at eurotrib.com) on Tue Jun 13th, 2006 at 07:08:37 AM EST
[ Parent ]
I almost wrote "don't get a worse optimum" and then I thought "bah, only mathematicians would care about that, and the reast will have to do a double take and may even ask about the double negative".

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 Tue Jun 13th, 2006 at 07:10:15 AM EST
[ Parent ]
Bloody mathematicians.
by Colman (colman at eurotrib.com) on Tue Jun 13th, 2006 at 07:12:10 AM EST
[ Parent ]
My hands are of your colour, but I shame to wear a heart so white.

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 Tue Jun 13th, 2006 at 07:12:59 AM EST
[ Parent ]
If you're a constructivist or intuitionist mathematician, ≥ may not exist.

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 Tue Jun 13th, 2006 at 07:11:34 AM EST
[ Parent ]
I think it's time for our resident applied epistemologist to chime in.

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 Tue Jun 13th, 2006 at 07:12:28 AM EST
[ Parent ]
(I'm still working on my first cup of coffee so I request permission to Revise and Extend my remarks.)

We're talking Reals, right?

≥ means there exists a number such that the statement to the left stops/halts at a singular and particular quantity.  As in:

x + y ≥ 5 (E1)

Compare with:

x + y > 5    (E2)

in E1 5 is a member of the solution set while in E2 5 is a set descriptor, one may say, a property of the set, and is not a member of the set -- to avoid Russell's Paradox.

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

by ATinNM on Tue Jun 13th, 2006 at 09:53:27 AM EST
[ Parent ]
I call on your epistemological powers of discernment and you swallow "Reals" whole?

Enough of that American coloured water you call coffee: have an espresso, no, due espressi.

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 Tue Jun 13th, 2006 at 10:01:53 AM EST
[ Parent ]
We could start with the Counting Numbers and work out from there but it's too damn early in (my) morning for that.  

I am drinking fresh ground Guatemala Antigua (Fair Trade) beans, French roasted, made in a French Press pot with water that has come to a full boil and then rested for 10 seconds before being added to the pot.  The brew then steeps to bring out the oils and develope the caramel flavours.  

Unfortunately, our Expresso Machine died.  :-(  So the occasional early AM double-shot is no longer available.  

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

by ATinNM on Tue Jun 13th, 2006 at 10:23:30 AM EST
[ Parent ]
On the reals (and possibly other infinite structures) anyway. I don't think they'd deny it on finite structures for instance.
by Colman (colman at eurotrib.com) on Tue Jun 13th, 2006 at 07:13:35 AM EST
[ Parent ]
Q: How much can you get away with in finitistic math?

A: A heck of a lot, but nonconstructively.

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 Tue Jun 13th, 2006 at 07:16:52 AM EST
[ Parent ]
Drew, if American capitalists can move all jobs except selling food, clothes, and gadgets, cleaning toilets, and building houses, to China and India [and there are enough educated chinese and indians to take over all US white collar jobs] then what jobs are left for americans, and what income will Americans use to buy the clothes and gadgets made in China?

There would, in that case, be very little income left for Americans to buy anything.  There would also be little by way of a market for China and India to sell their goods in America.  In the end, you can only sell what your customers can buy.  However, today, China needs to sell a couple million t-shirts in order to buy an American airplane.

And this is not an accurate picture.  If it were the case that businesses simply shipped the great jobs to China and India, American output would plummet.  As you know, despite all of the issues we can rightly dig into with regard to what is wrong with the current American expansion, output is still rising at similar rates to what we saw in the 1990s.

You're tripping, I think, over the myth of service-sector jobs being inherently lower in pay.  Everyone thinks of the McDonald's employee, who earns the minimum wage and is usually a teenager, and fails to remember the programmer at the telephone answering service company (such as a friend of mine), who earns a much higher income and is, at least, in his/her twenties.  The service-sector jobs created in the 1990s were largely of the latter sort.  (I have a statistic on this in one of my books.  I'll try to dig it up later, but I seem to remember the statistics showing that roughly 2/3s of Dot-Com-Boom Era jobs were higher-income, as defined -- again, if I remember correctly -- as carrying salaries of $50,000 or more.)

More options will, obviously, leave an investor or businessman no worse off.  But comparative advantage is really getting at the fact that different parts of the world will be have different characteristics, and thus lend themselves to different portions of the economy, which is why I brought up the comparison between America and Saudi Arabia on corn and oil, since it connects with differences in the environment.

It is not so reasonable to consider countries as single economic agents.

I partly agree.  But keep in mind that countries also, to some extent, turn themselves into economic agents through their legal arrangements.

It appears to me that the downplaying of capital as a factor of production in discussions of comparative advantage, ignoring transnational agents, ingoring the different agents within national economies, and using "comparative advantage" as the answer to "why free trade?" just points to the fact that it is the transnational capitalist class that benefits to the detriment of everyone else.

I wasn't aware that I ignored these.  Perhaps you might get into some specifics.

Is trade to the detriment of people in China?  Or the emerging market in Vietnam?  Again, everyone looks to the unemployed manufacturing worker whose job has been shipped to Asia while completely ignoring the fact that the worker in Asia now has a job.  Are American workers entitled to those jobs?  They're going to lose them, anyway, if another company moves into that market and undercuts the manufacturing worker's employer.  Is the business owner now going to make more money?  That depends on a number of factors, but the odds seem to strongly suggest that he will, in the short run.  But what happens when his competitors move in, or when new competitors spring up in China?  It's not a one-move game in which the outcome lasts forever.

Look, we're talking about the aggregate.  In the aggregate, comparative advantage suggests that free trade will leave us in better shape, economically.  Does it mean that every individual will be better off?  Of course not.  If anyone is able to find a policy that leaves every person wealthier, let me know.  I'll notify the Bank of Sweden.

Again, I don't think I was denying the presence of political choices, nor did I come anywhere near making a claim that mathematical economics would provide a magic tool.  If what I've said makes me thick, then I suppose I'll live with being thick.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Tue Jun 13th, 2006 at 10:47:36 AM EST
[ Parent ]
There would, in that case, be very little income left for Americans to buy anything.  There would also be little by way of a market for China and India to sell their goods in America.  In the end, you can only sell what your customers can buy.  However, today, China needs to sell a couple million t-shirts in order to buy an American airplane.
Well, at the moment Americans are buying these gadgets on borrowed money, not on their incomes, and have been for the past 5 years.

Can you find the labour statistics by sector during Bush's presidency? It seems the jobs created during the dot-com bubble are being outsourced. US computer manufacturers are even outsourcing their R&D so that all they add to what their Taiwanese provides produce is a brand name. How's that for value added? Why should I buy a Dell when I can buy an ASUS or an Acer?

It is not so reasonable to consider countries as single economic agents.
I partly agree.  But keep in mind that countries also, to some extent, turn themselves into economic agents through their legal arrangements.
Except that, for the past, say, 25 years (to use Jerome's convention which ties it to the start of the Reagan/Thatcher era) countries have been eliminating the lagal arrangements that made them single economic agents.

From this

I wasn't aware that I ignored these.  Perhaps you might get into some specifics.
on, you are replying not to objections to you specifically, but to a criticism of the general discourse: Cui bono, who benefits from the flaws in the discourse that some of us perceive?

In the aggregate, comparative advantage suggests that free trade will leave us in better shape, economically
That seems less compelling than the "free trade is the be-all and end-all and the panacea for all our economic problems" which seems to be the order of the day in economic policy making around the world. And, like I said before, free trade is not the same thing as free movement of capital or free movement of labour. It is very different to have several distinct economies which trade among them, than to have what amounts to one big economy.

The original comparative advantage example was assuming that Portugal had an absolute advantage over England in wine and wheat, but to have comparative advantage in wine, and England in wheat. Then it made sense for the UK capital to be dedicated to producing wheat and buying portuguese wine with the wheat, because capital (and labour) had nowhere else to go. In the European Union, it makes more sense for the English capital to be invested in Portugal instead: the English economy gets decapitalized and the English capitalists move to Portuguese villas.

Within single economic units you have sometimes massive rearrangements of capital and labour and extreme hardship results for many, and that's why there are wealth redistribution schemes on a national level. If you're going to have a single integrated world economy (which, I repeat, is not the same thing as several economies with trade) you're going to have to have global wealth redistribution. Otherwise you'll have massive rearrangements of capital and labour and it will hurt.

If you do nothing it will happen all the same. Sure, but then do something. Recognize what is at play and what will happen and steer it.

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 Tue Jun 13th, 2006 at 11:13:25 AM EST
[ Parent ]
Well, at the moment Americans are buying these gadgets on borrowed money, not on their incomes, and have been for the past 5 years.

They're certainly buying a lot of stuff on credit.  I agree.

Can you find the labour statistics by sector during Bush's presidency? It seems the jobs created during the dot-com bubble are being outsourced. US computer manufacturers are even outsourcing their R&D so that all they add to what their Taiwanese provides produce is a brand name. How's that for value added? Why should I buy a Dell when I can buy an ASUS or an Acer?

The BLS should have statistics, but I'm not sure how specific they'll be.  Usually, I believe the Labor Department records job creation/loss in manufacturing, government, health, education, service, etc.  Obviously those are quite broad categories.  As of May 2005, there were roughly 26,000 researchers in the "computer and information sciences" (with average pay of a bit over $94,000).  I'm not sure how this compares with the beginning of the Bush presidency, since the BLS site's link only yields one report.

Except that, for the past, say, 25 years (to use Jerome's convention which ties it to the start of the Reagan/Thatcher era) countries have been eliminating the lagal arrangements that made them single economic agents.

Sure, if you only think of legal arrangements as tariffs and subsidies.  Tax policy, the quantity and qualities of regulation, and many other factors can affect the relationship, as well.

Cui bono, who benefits from the flaws in the discourse that some of us perceive?

Are you suggesting that Ricardo invented comparative advantage to cover George W. Bush's ass when Bush sought to ensure Michael Dell's ability to outsource?  We could call it The Ricardo Code.

Look, I'm not denying that businessmen and investors benefit.  I'm simply saying that they're not the only ones who benefit -- that other workers benefit, too, along with consumers as a group; that it's not some sort of Grand Conspiracy of the Evil CapitalistsTM.

That seems less compelling than the "free trade is the be-all and end-all and the panacea for all our economic problems" which seems to be the order of the day in economic policy making around the world. And, like I said before, free trade is not the same thing as free movement of capital or free movement of labour. It is very different to have several distinct economies which trade among them, than to have what amounts to one big economy.

That's because politicians and policy entrepreneurs need to make ideas compelling if they want to be elected -- or, in the latter case, have their favorite candidates elected -- with the ability to push those ideas in legislation.

How would you define free trade if not the free movement of capital and labor?

In the European Union, it makes more sense for the English capital to be invested in Portugal instead: the English economy gets decapitalized and the English capitalists move to Portuguese villas.

If that were the case, wouldn't England look quite different today?  What does the English worker possess that the Portuguese worker lacks?

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Tue Jun 13th, 2006 at 12:32:27 PM EST
[ Parent ]
How would you define free trade if not the free movement of capital and labor?
The free movement of goods, of course. Moving the products, not the factors of production.

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 Tue Jun 13th, 2006 at 01:58:00 PM EST
[ Parent ]
Is the equipment (capital) that is necessary for manufacturing not also a good?  Once the knowledge was imported, and the business operations financed, it was inevitable that countries like China would take these sorts of jobs.  The fact that manufacturing was profitable when the factories were centered in Detroit and Frankfurt is, as you well know, irrelevant if the opportunity to produce at lower costs presents itself.  If that opportunity is not taken, the business will fail, because its competitors will certainly take those lower costs and crush it.  The jobs are, therefore, lost, anyway.  At least under a system with freedom of movement for the factors, there will be jobs for someone, and there will be competition to drive down prices, raise the aggregate welfare, and afford us the means to help workers who were slammed by outsourcing.

Capital can be seen as a good, as well.  That's why lenders are paid interest and shareholders are made partial owners.

There are always winners and losers on an issue like this.  I'm not going to deny that, nor should anyone else.  A world of free trade may hurt manufacturing workers in America and Europe, but a world without free trade will hurt workers and consumers elsewhere.  You've got to recognize both sides.  Simply taking the photo of the unemployed pillow maker and running with it might be great as a means to raising political capital and winning the Iowa primary for the Green Party, but it is, to put it mildly, misleading to take that photo and present it as though it accurately depicted the outcome for the world as a whole.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Tue Jun 13th, 2006 at 05:09:19 PM EST
[ Parent ]
 A world of free trade may hurt manufacturing workers in America and Europe, but a world without free trade will hurt workers and consumers elsewhere.

May. Probably will, but not certainly.

There are always winners and losers on an issue like this.  I'm not going to deny that, nor should anyone else.

But they do. Repeatedly. Which is rather the point.
by Colman (colman at eurotrib.com) on Tue Jun 13th, 2006 at 05:24:58 PM EST
[ Parent ]
May. Probably will, but not certainly.

You're right.  Sorry.  And the same should be said for the world with free trade.  The loss of a given job to outsourcing is not a certainty either.

But they do. Repeatedly. Which is rather the point.

Who are "they"?  The Bushies won't even deny that.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Tue Jun 13th, 2006 at 05:30:01 PM EST
[ Parent ]
You're right.  Sorry.  And the same should be said for the world with free trade.  The loss of a given job to outsourcing is not a certainty either.

Absolutely.

Who are "they"?

It's always presented as short-term dislocation rather than long-term loss. Maybe not in detail, but in broad-brush stroke.
by Colman (colman at eurotrib.com) on Tue Jun 13th, 2006 at 05:32:40 PM EST
[ Parent ]
It's always presented as short-term dislocation rather than long-term loss. Maybe not in detail, but in broad-brush stroke.

Oh, okay.  That's certainly true.  Some of that, I suspect, probably depends on where the worker is located.  If he's in Flint, Michigan, a new job with comparable pay might not be coming to the area.  If he lives in New York, he probably has a better shot of getting back on his feet quickly.  New York is also, obviously, much wealthier than Michigan, and can better afford to help people.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Tue Jun 13th, 2006 at 05:44:30 PM EST
[ Parent ]
There is capital and there is capital goods. Don't get smart on me, you know the difference between factors of production and products.

Also, just because labour and capital have a price doesn't mean they are goods... Unless you're going to commoditize everything conceptually. Maybe money is a commodity, but labour is not.

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 Jun 14th, 2006 at 06:11:12 AM EST
[ Parent ]
Labour is a service provided by workers.  It's not a good.  When we talk about a labour surplus, we're really talking about a surplus of people who can provide a given service.  However, I disagree with you on capital.  You can draw a distinction between capital and capital goods, but I don't see the point.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Wed Jun 14th, 2006 at 09:58:23 AM EST
[ Parent ]
In the European Union, it makes more sense for the English capital to be invested in Portugal instead: the English economy gets decapitalized and the English capitalists move to Portuguese villas.

If that were the case, wouldn't England look quite different today?  What does the English worker possess that the Portuguese worker lacks?

Hey, I'm referring to Ricardo's example of wheat and wine 200 years ago, not to today's economy.

But right now, everyone is moving their factories from Western Europe to the new member states, not because they are not profitable or competitive where they are, but because they can lower labour costs by moving. So the west gets decapitalized in the process and lots of people become unemployed, and the state is supposed to pick the tab of retraining them.

Not quite the same thing ascomparative advantage from the trade of goods with Eastern Europe forcing the capital of the West to be reinvested in some other sector but in the same country where it is now invested.

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 Tue Jun 13th, 2006 at 02:03:59 PM EST
[ Parent ]
The basic question here is - are these movements a zero sum game?

The theory of comparative advantage suggests they're not.  Drew seems to be saying that as long as the new business owners and the workers are richer, their extra wealth cancels out the losses in the areas that are being decapitalised.

What evidence is there that this is really true? Quoting US growth figures seems suspect when that growth has apparently been fuelled by credit and a housing bubble.

We've already gone from 'Everyone is better off!' to and admission that 'Everyone is better off on aggregate, but there will be some losers.'

How can you assess whether or not it's a zero sum game without being able to quantify the changes?

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Jun 13th, 2006 at 05:13:55 PM EST
[ Parent ]
The basic question here is - are these movements a zero sum game?

The theory of comparative advantage suggests they're not.  Drew seems to be saying that as long as the new business owners and the workers are richer, their extra wealth cancels out the losses in the areas that are being decapitalised.

Drew is basically using an apparently very popular sleight-of-hand called Kaldor-Hicks optimality" which is used by economists to escape 1) the fact that multiple competing criteria of goodness prevent you from totally ranking all possible outcomes; 2) the need to worry about the (re)distribution of wealth. From Wikipedia:
Given a set of alternative allocations and a set of individuals, a movement from one allocation to another that can make at least one individual better off, without making any other individual worse off, is called a Pareto improvement or Pareto optimization. An allocation of resources is Pareto efficient or Pareto optimal when no further Pareto improvements can be made.
Under Pareto efficiency, an outcome is more efficient if at least one person is made better off and nobody is made worse off. This seems a reasonable way to determine whether an outcome is efficient or not. However, in practice it is almost impossible to make any change without making at least one person worse off.

Using Kaldor-Hicks efficiency, an outcome is more efficient if those that are made better off could in theory compensate those that are made worse off and lead to a Pareto optimal outcome. Thus, a more efficient outcome can in fact leave some people worse off.

You see, as long as the King could in principle spread out some of his wealth to the people, it is ok for him to tax them dry. This is what modern economics has come to.

Just on decision-theoretic considerations, Kaldor-Hicks efficiency makes my blood boil.

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 Jun 14th, 2006 at 06:05:48 AM EST
[ Parent ]
Aha. Good clarification.

One challenge seems to be persuading everyone to start thinking economic implications through in these deeper terms, so that it's no longer possible to play the shell game successfully.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Jun 14th, 2006 at 10:54:25 AM EST
[ Parent ]
Pareto succeeded 150 years ago. Then people decided holding two criteria of goodness in your head at the same time (say, guns and butter) was too much effort, and lent itself to uncomfortable questions, and "progressed" backwards to Kaldor-Hicks.

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 Jun 14th, 2006 at 10:59:16 AM EST
[ Parent ]
Drew is basically using an apparently very popular sleight-of-hand called Kaldor-Hicks optimality" which is used by economists to escape 1) the fact that multiple competing criteria of goodness prevent you from totally ranking all possible outcomes; 2) the need to worry about the (re)distribution of wealth.

First of all, (2), which I agree with depending on what form redistribution takes, is irrelevant to the current discussion.  That's politics, and the questions surrounding it cannot be answered until we come to a conclusion on comparative advantage and free trade.

Calling it a sleight-of-hand implies that I'm hiding something in my argument, which I am, to my knowledge, not.

I only know of Kaldor-Hicks through my own reading.  It is not taught at the undergraduate level, as far as I know.  So I can't tell you how popular it is, having never come across it in classes or journals,.  I'm also not exactly a know-it-all on Kaldor-Hicks, having read about it roughly a year ago and forgotten much of it.  But, from what I understand, the sleight-of-hand you're angry about is the decision to look away from the individual case so that the aggregate can become the primary focus.  I don't see the problem with that.

Your example of the King under Kaldor-Hicks is not fair.  The King is able to do whatever he wants, much like the politician.  (I'm sure we could think of examples involving Dubya.)  Economics will tell you that the King, in your example, is going to bring economic activity to a halt, because the people will have no incentive to produce if the King is simply going to take it all away.  (Technically, I think models would show people producing very little, but that's the consequence of using those models.)  The King, in stage two of the game, ends his move with nothing taxed.

That's what modern economics has come to.

ThatBritGuy actually states my point quite well, although there is much more to it:

Drew seems to be saying that as long as the new business owners and the workers are richer, their extra wealth cancels out the losses in the areas that are being decapitalised.

I would actually say that the new gains produced via trade will exceed the loss (decapitalisation, jobs, etc.) suffered in the company's initial location.  In other words, the end result is a net gain in wealth.  I think that this is what he was getting at, though.

Now, if you want to talk about Pareto optimality, let's also talk about the violation that occurs when tariffs and subsidies are produced by the government.  Again, you're making an argument about one group of workers being hurt -- an argument I don't dispute -- but not acknowledging the other group of workers who are hurt by the status quo.  There are always winners and losers.

Should I have to pay a great deal more for my sugar simply because Florida's sugar growers don't want to compete with their Brazilian counterparts?  If we allow free trade in that area, I'll certainly see a benefit.  Florida Crystals might go down the tubes, but is that company somehow worth more than the Brazilian one?  If we dropped the subsidies and import restrictions, Florida Crystals would most likely be made worse off, but sugar users would be better off.

Pareto optimality is, obviously, an important understanding, but it is not the be-all, end-all ("end-all, be-all"?) of optimization.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Wed Jun 14th, 2006 at 10:56:53 AM EST
[ Parent ]
Drew - are you a macroeconomist?  


She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Wed Jun 14th, 2006 at 11:01:21 AM EST
[ Parent ]
I'm not really anything specific, although macro is what I enjoy.  There were no macro/micro concentrations.  My concentrations were in economic theory, applied econ, and comparative systems.  The econ theory one involved a basic game theory class and a slightly-watered-down PhD micro class under the name "mathematical economics," intended for students who planned to go to grad school.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Wed Jun 14th, 2006 at 12:07:08 PM EST
[ Parent ]
Thanks.


She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Wed Jun 14th, 2006 at 07:27:11 PM EST
[ Parent ]
No problem.  For the record, all macroeconomists are necessarily microeconomists these days, as well, because of the idea of microfoundations.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Wed Jun 14th, 2006 at 09:07:03 PM EST
[ Parent ]
I would actually say that the new gains produced via trade will exceed the loss (decapitalisation, jobs, etc.) suffered in the company's initial location.  In other words, the end result is a net gain in wealth.  I think that this is what he was getting at, though.
You don't say this explicitly, no, but clearly it's part of mainstream economic thought right now that, as long as the people who gain could in principle compensate the losers and still come ahead, it's an improvement.

So, let's do this. We'll put all kinds of taxes and tariffs on trade, and that will be just as good as free trade because we could in principle reimburse those tariffs.

That an economic outcome is good because of what in principle could be done but isn't boggles my mind.

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 Jun 14th, 2006 at 11:10:54 AM EST
[ Parent ]
What are you referring to when you mention "what in principle could be done but isn't"?

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Wed Jun 14th, 2006 at 11:55:41 AM EST
[ Parent ]
The compensation that in principle could be given but actually isn't.

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 Jun 14th, 2006 at 01:20:08 PM EST
[ Parent ]
But turn that around, and ask, "Should we compensate other people whose standard of living is lowered by the presence of trade barriers?"  ("Barriers" is probably not the correct word, but I'm lumping anything that stops free trade under that label, for the sake of simplicity.)  Again, there are people losing right now in the name of "protecting" others.  Is the well-being of those who are made better-off by trade barriers more important than that of those who would be better-off under conditions of free trade?

These questions need to be answered: Why should I have to pay a great deal more money for a Honda simply because GM and Ford make shitty cars?  Is it fair to place restrictions on imported food simply because agricultural corporations here cannot compete?  The point is, again, that other people are hurt when trade is not free.  Are those who benefit from a lack of free trade somehow worth more?

An advantage was granted to some people under the tariff and subsidy regime that should not have been granted.  Others -- wealthy, poor and middle-class -- were handed the cost in the form of higher prices and decreased living standards.  It's all well and good to discuss Pareto optimality, but Pareto optimality was flushed down the toilet the moment governments decided that certain businesses and industries deserved shelter from competition.  If you want to live in a world of original Pareto optimality, we're going to have to ban most, if not all, government functions.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Wed Jun 14th, 2006 at 02:39:03 PM EST
[ Parent ]
Again, there are people losing right now in the name of "protecting" others.

Might be losing, in theory.

If you want to live in a world of original Pareto optimality, we're going to have to ban most, if not all, government functions.

Absolutely. Attempting to apply theoretical economics with its silly assumptions that don't match anything in the real world isn't a good idea.

I'm coming to the view that the best that theoretical economics can do at the moment is give us an idea of what might be possible, not what is. That's true of most system sciences really.

by Colman (colman at eurotrib.com) on Wed Jun 14th, 2006 at 03:07:27 PM EST
[ Parent ]
The world described by Walrasian economics and which is used by free marketeers to justify their policies is a fantasy world. It does not exist nor will it ever exist. It says that under a condition of perfect, complete information where markets exist for all possible types of good and services, where all contracts are sure to be enforced, and where there are no externalities or perfect mechanisms are in place to conteract them, markets will serve to increase overall efficiency given any initial allocation of resource. Even here, however, note that is says nothing about the distribution of those gains. All outcomes are in theory equivalent, even one where you gain almost everything and I gain next to nothing -- an outcome that has been consistently proven to be deemed unjust in ultimatum game experiments in behavioral economics.  

Perhaps these conditions exist in a parallel world described by theoretical physics inhabited by sentient, sociopathic supercomputers. It is not, however, the world you or I live in.

No raindrop believes itself responsible for the flood that follows.

by Benito (haplo1998 at yahoo) on Mon Jun 19th, 2006 at 10:33:20 PM EST
[ Parent ]
Look, you haven't read my comment upthread that "allowing side payments is an improvement on Pareto as long as the side payments actually take place".

A cost-benefit analysis along the lines of "I will benefit more than you will be hurt therefore let's do it", justified on "I could compensate you for your loss and still come ahead, but I don't have to", seems wrong-headed.

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 Thu Jun 15th, 2006 at 08:07:57 AM EST
[ Parent ]
I didn't read the comment, because I already understand the point.

I'm not disagreeing with that.  But you still have not answered my charge about people who are hurt by the lack of free trade -- the people who lose a chunk of their living standards because of the government providing an unfair advantage to others.  Set Pareto, Kaldor and Hicks aside for a moment.  The real question here is of whether or not it is far to give some workers an artificial advantage over others.

By placing tariffs on imports, or giving subsidies to exporters, governments redistribute wealth -- yes, eliminating Pareto optimality -- from those who would be better off under free trade to those who would not.  Why should those people be valued more by the government than other citizens?

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Thu Jun 15th, 2006 at 10:34:40 AM EST
[ Parent ]
"Might be better off under free-trade". <stamps feet>

What if one rich guy would be better off and everyone else would be reduced to penury. Would redistributive tariffs be ok then?

by Colman (colman at eurotrib.com) on Thu Jun 15th, 2006 at 10:39:15 AM EST
[ Parent ]
<stamps feet>

You almost made me spit my coffee out with that.  From this point, onward, assume that I'm using "mights" and "maybes" where needed.

To answer your question, I would obviously support redistribution in large quantities under that example.  But, needless to say, this is not what seems likely to happen, unless we look only at a few pieces of the picture -- namely, the businessman who outsourced and the workers who lost their jobs.  (In fact, on this one occasion, I'll guarantee that this would not happen.)  But, again, that ignores the Chinese who, at this point in time, seem likely to gain those jobs, as well as ignoring the other (Americans, Europeans, Guatemalans, Japanese, Aussies, whatever) who will likely see the cost of food, cars, clothing, computers, etc., fall, thereby raising their living standards.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Thu Jun 15th, 2006 at 10:51:03 AM EST
[ Parent ]
my coffee

Excuse me.  That should read "my colored water that Americans call coffee," according to Migeru.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Thu Jun 15th, 2006 at 10:53:50 AM EST
[ Parent ]
That's the only rational explanation for the fact that Americans can drink a dozen cups of coffee a day.

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 Thu Jun 15th, 2006 at 10:56:23 AM EST
[ Parent ]
I usually have four or five per day, but I use espresso (ha!), milk and sugar.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Thu Jun 15th, 2006 at 11:00:42 AM EST
[ Parent ]
That, and our sleeping habits dictate that several cups are necessary in the morning.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Thu Jun 15th, 2006 at 11:02:29 AM EST
[ Parent ]
Several cups of Italian coffee in the morning would kill you.

But you only have 4 or 5 espressos a day, which I suppose is ok. One in your capuccino for breakfast, a mid-morning coffee, one after lunch, one after your (early) dinner. Matches the Spanish pattern (the last one happens at tea-time way before our (late) dinner.

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 Thu Jun 15th, 2006 at 11:06:22 AM EST
[ Parent ]
Several cups of Italian coffee in the morning would kill you.

Being of British and Irish ancestry, I have little doubt that you're right.  But my ancestors' side of Europe has better beer.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Thu Jun 15th, 2006 at 11:16:37 AM EST
[ Parent ]
Assuming you drink it chilled...

Warm bear, ugh!

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 Thu Jun 15th, 2006 at 11:22:25 AM EST
[ Parent ]
Depends on what you're drinking.  I was surprised to find that Guinness was quite enjoyable when served a bit warmer.  But I would certainly never advise you to drink Budweiser or one of the other disgusting American beers at anything higher than 34F or so.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Thu Jun 15th, 2006 at 11:30:01 AM EST
[ Parent ]
That's the only rational explanation for the fact that Americans can drink a dozen cups of coffee a day.

Coming back to this a little late - I suspect this one fact on its own explains a huge amount of US politics and culture.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Fri Jun 23rd, 2006 at 09:35:09 AM EST
[ Parent ]
:-) You go into your doctor's office.  He diagnoses you. He says you 'might' have a deadly disease that 'maybe' could be cured with treatment X.

What would be your reaction?

No raindrop believes itself responsible for the flood that follows.

by Benito (haplo1998 at yahoo) on Mon Jun 19th, 2006 at 10:35:52 PM EST
[ Parent ]
I'd ask "can you run another test to make sure I have the disease", and "is that the most successful treatment that we know"?

Both are experimental questions.

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 Jun 21st, 2006 at 11:00:08 AM EST
[ Parent ]
And therein lies the problem. Economics, like most social science, is hampered by it's inability to conduct real experiments and the 'squishy' nature of the variables it measures. As a social scientist I'm of course sympathetic, but that just means I understand how tentative all these 'findings' really are.

Social Science, especially economics, is collectively at the point where physics was while Newton lived, or where Biology was when Darwin made his first trip on the Beagle. We've found some empirical correlations. We have a few theories that seem internally consistent. Do we have great working models of real economies or real social systems? No. We know more about the weather.  

No raindrop believes itself responsible for the flood that follows.

by Benito (haplo1998 at yahoo) on Thu Jun 22nd, 2006 at 01:12:43 AM EST
[ Parent ]
For no reason. But if you want to institute a change the burden of proof (and of compensation) lies with the advocates of the change (and its beneficiaries).

If people wanted to institute new trade barriers I'd probably oppose it on the grounds that not only you hurt some people but the likely aggregate loss (from comparative advantage) would prevent you from compensating the losers.

So let's just wrap up my position with this:

  • If you're going to use side payments to argue that a change is fair to most people, the side payments need to be actual, not hypothetical [mathematically: Kaldor-Hicks with actual side payments is probably close to Pareto]
  • If you're going to advocate a policy change because of an aggregate benefit, you have to use (part of) the aggregate benefit to actually, not hypothetically, compensate those who would otherwise oppose the change because they would be hurt.
  • On the issue of globalization, probably the thing to do is to liberalize trade while at the same time instituting a fund to help your own workers who will be forced to retrain into abother industry [such a "globalization adjustment fund" has been proposed at the EU level]
  • I remain unconvinced that with free movement of labour, capital, goods and services it makes sense to talk of separate economies. You then need a common economic policy with explicit redistributive elements to protect people from the whims of capital movements. With fixed labour and capital and moving goods, you can really talk about free trade between distinct economies.


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 Thu Jun 15th, 2006 at 10:54:59 AM EST
[ Parent ]
Either of you want to write up a human readable summary of this for the front page or should I do it?
by Colman (colman at eurotrib.com) on Thu Jun 15th, 2006 at 11:08:25 AM EST
[ Parent ]
This thread, not Migeru's position!
by Colman (colman at eurotrib.com) on Thu Jun 15th, 2006 at 11:08:59 AM EST
[ Parent ]
I'll do it if you'd like.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Thu Jun 15th, 2006 at 11:14:25 AM EST
[ Parent ]
I should probably do it: I've learned more than you here I think.
by Colman (colman at eurotrib.com) on Thu Jun 15th, 2006 at 11:18:28 AM EST
[ Parent ]
I'm not sure about that.  You, Miguel, ATinNM, and others have helped to pull a lot of information back.  Beyond discussions here at ET, I haven't really been involved in any economics-related activities, so it helps to keep my mind going.

Now if I could only get off my lazy ass long enough to read some of those textbooks....

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Thu Jun 15th, 2006 at 11:26:57 AM EST
[ Parent ]
But you have the requisite knowledge of academic economics to properly put the whole thing in context.

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 Thu Jun 15th, 2006 at 11:29:50 AM EST
[ Parent ]
You assume that I'm able to keep my thoughts together for a long-enough period to allow me to do that.  I must remind you that flattery will get you nowhere. ;)

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Thu Jun 15th, 2006 at 11:34:34 AM EST
[ Parent ]
Reading original works and figuring things out for yourself are more fun and more productive than reading textbooks. You can make a killing selling those to unsuspecting undergraduates ;-)

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 Thu Jun 15th, 2006 at 11:31:10 AM EST
[ Parent ]
I agree about the original works.  I got more out of Keynes and Friedman than I ever got out of a textbook.

And, yes, there is big money in textbooks, if the author is well known and can, therefore, convince other professors to assign it to students.  I'm sure Krugman, Mankiw and Romer have earned plenty on textbooks, alone.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Thu Jun 15th, 2006 at 11:43:16 AM EST
[ Parent ]
I was talking about the second-hand market.

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 Thu Jun 15th, 2006 at 11:45:09 AM EST
[ Parent ]
Oh, the second-hand market is fantastic for all of the textbook stores around here (all two of them).  I was under the impression that collusion was illegal, but I suppose it is not when the university is one of the parties that benefit from it.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Thu Jun 15th, 2006 at 11:51:55 AM EST
[ Parent ]
Write it then: I'll complain if I think you missed anything! I really want the point that free-trade theory tells you what could happen, not what must happen included.
by Colman (colman at eurotrib.com) on Thu Jun 15th, 2006 at 11:32:45 AM EST
[ Parent ]
Write it then: I'll complain if I think you missed anything!

Fair enough.  Will do.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Thu Jun 15th, 2006 at 11:36:28 AM EST
[ Parent ]
I'll complain if you forget Migeru's position. </snark>

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 Thu Jun 15th, 2006 at 11:49:12 AM EST
[ Parent ]
"Migeru hates freedom."  How's that? :D

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Thu Jun 15th, 2006 at 11:53:02 AM EST
[ Parent ]
Perfect.

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 Thu Jun 15th, 2006 at 11:53:38 AM EST
[ Parent ]
Ah, the debate tactics I've learned in the Era of Bush.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Thu Jun 15th, 2006 at 11:55:06 AM EST
[ Parent ]
I'm sure you'd do a great job.

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 Thu Jun 15th, 2006 at 11:21:24 AM EST
[ Parent ]
Gracias.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Thu Jun 15th, 2006 at 11:43:44 AM EST
[ Parent ]
I thought flattery would get me nowhere.

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 Thu Jun 15th, 2006 at 11:45:25 AM EST
[ Parent ]
Alright, I lied.  So I'm a sucker for flattery.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Thu Jun 15th, 2006 at 11:48:10 AM EST
[ Parent ]
I suggest the following change to the 5th Amendment of the US Constitution, to bring it into line with Kaldor-Hicks optimality. Where it says "...nor shall private property be taken for public use, without just compensation", let's say instead "nor shall private property be taken for public use, without just compensation being able to be given in principle". </reductio ad absurdum>

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 Thu Jun 15th, 2006 at 08:20:57 AM EST
[ Parent ]
The Fifth Amendment might as well say this today.  Have you seen the level of "just compensation" people are given for their property?  Every few months, there will be a story about how a state government has screwed an elderly woman or a black family, who happen to live in an area where property values have jumped, simply because the state wants a developer to build condos and bring in more tax revenue.  It happens all the time, and it's nothing short of organized crime.  The Florida government is doing it to blacks in Riviera Beach right now.

The amendment should state that private property cannot be taken without the owner's agreement.  Period.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Thu Jun 15th, 2006 at 10:40:04 AM EST
[ Parent ]
As I wrote my comment I thought about a diary tying up  the Kelo decision, just compensation, cost-benefit analysis, hypothetical redistribution, K-H and Pareto.

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 Thu Jun 15th, 2006 at 10:57:50 AM EST
[ Parent ]
You should write it.  It would make for a great diary and discussion.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Thu Jun 15th, 2006 at 11:04:28 AM EST
[ Parent ]
Do you think they'd give me a BA in Econ for it? </snark>

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 Thu Jun 15th, 2006 at 11:07:34 AM EST
[ Parent ]
Assuming you've satisfied the foreign-language requirement.  (Yes, that's why I have a BSc.)

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Thu Jun 15th, 2006 at 11:12:53 AM EST
[ Parent ]
That's a non-starter, sorry, I can't do foreign languages.

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 Thu Jun 15th, 2006 at 11:28:22 AM EST
[ Parent ]
Not to worry.  The BSc is still within reach.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Thu Jun 15th, 2006 at 11:54:11 AM EST
[ Parent ]
Drew is basically using an apparently very popular sleight-of-hand called Kaldor-Hicks optimality" which is used by economists to escape 1) the fact that multiple competing criteria of goodness prevent you from totally ranking all possible outcomes; 2) the need to worry about the (re)distribution of wealth.

Drew's Response:
First of all, (2), which I agree with depending on what form redistribution takes, is irrelevant to the current discussion.  That's politics, and the questions surrounding it cannot be answered until we come to a conclusion on comparative advantage and free trade.

Calling it a sleight-of-hand implies that I'm hiding something in my argument, which I am, to my knowledge, not.

This is my first post on EuroTrib...this debate, and this comment in particular made me sign up...

Drew, your response in the comment above suggests that a pure world of objective, disinterested, scientifically-informed world of economics exists out there, that there is an 'economic world' that is separate from and independent of the world of 'politics'.

That simply is not now nor ever has been the case. It simply is not true, and depending on that argument to get around critiques of free-trade policy is like waving your hands and wishing they would go away. The two are simply inseparable.

Questions revolving around the appropriateness of free trade ultimately are political ones. In the end, I think almost everyone buys into the simple, common-sense model you mentioned upthread wherein individual differences in productivity lead to gains from trade. No man is an island.

But trade involves more than the simple model of bread and wine presented in Ricardo's models. It's about wealth. Who gets it, who doesn't. Because it's about wealth, it's ultimately about power. Again, who gets it, who doesn't. And, because it's about power, ultimately its about who determines what values we live by and who matters in society.

Trade may enrich China, may eventually aid its democratization in the long run, but what does that get us in the meantime if China continues to be the last great dictatorship on Earth? How well does the cheaper consumer goods Walmart provides compensate those communities that is devastates? Should countries that that shoot you for speaking out or for forming a union be allowed to trade freely with those that do not? If so, why should the workers in liberal-democratic states feel any loyalty to governments that helped sell them out?

Economic policy simply cannot be detached from the political world that surrounds and, indeed, is part of it. Declaring that's 'just politics' is irresponsible   and intellectually lazy. Politics is deadly, deadly serious.    

 

No raindrop believes itself responsible for the flood that follows.

by Benito (haplo1998 at yahoo) on Fri Jun 16th, 2006 at 11:56:21 AM EST
[ Parent ]
Welcome aboard. Who'd have thought a thread this geeky would have drawn a lurker out of hiding!
by Colman (colman at eurotrib.com) on Fri Jun 16th, 2006 at 12:06:39 PM EST
[ Parent ]
European Tribune is on a league of its own, apparently ;-)

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 Sat Jun 17th, 2006 at 11:32:56 AM EST
[ Parent ]
Welcome aboard, Benito.

My comment suggests no such thing.  What my comment suggests is that we, first, have to decide whether or not comparative advantage exists and whether it is likely to raise living standards in the aggregate.  I submit that the evidence strongly suggests that it does exist, and that it will raise aggregate purchasing power (real income).  If we come to the conclusion that both of these hold, we can, then, decide whether free trade is desirable -- a discussion during which we can remark upon potential issues of distribution.

Economic policy cannot be detached from the political world.  You're right, although I'm not sure at what point I disagreed with this observation.  You're confusing economic policy with economic theory.  There is nothing political about evaluating two businesses and saying, "Hmm, Juan produces the same quantity at a lower cost than Jeff.  Maybe it's because the climate in his country lends itself more to sugar production.  Consumers in Jeff's country would probably be better off with free trade, because Juan will cut down their grocery bills."

Once we agree on that, if we do, then we get into policy and politics, at which point I say, "Sorry, Jeff.  Here's some money to live on for a while, and to receive retraining in another field, but it's not fair for you to expect the rest of us to support your inefficient sugar production."  And that is to say nothing of the fact that, in a system without free trade, we're probably doing the most damage to Juan, just as we damage companies like JetBlue and Southwest when we prop up the idiots at Delta and United.

Politically, I'm with Migeru all the way on helping those who are hurt by free trade to move into another industry.  No argument from me on that.  I am, however, not a believer in the idea of trade barriers being, somehow, an exercise in "fairness".  That's simply bullshit, in my opinion, because barriers are certainly not fair to domestic consumers, foreign producers, and efficient domestic producers.

If you accept that tariffs and subsidies are fair, you should also accept that China's policy of currency manipulation is fair.  Same game; just different strategy.

Trade may enrich China, may eventually aid its democratization in the long run, but what does that get us in the meantime if China continues to be the last great dictatorship on Earth?  How well does the cheaper consumer goods Walmart provides compensate those communities that is devastates?

What it should bring us are cheaper products (higher real income) and a new, enormous market.  But, again, no one, as far as I know, has answered the question of why some workers should be given an advantager over others.  Why is the farmer in Iowa, who is receiving subsidies to prop up his inefficient production, more important than the construction worker in Boston, who has to pay twice the market rate for corn?

You're focusing on those who are hurt by free trade while ignoring those of us who are hurt by trade with barriers.  Why should my living standard be dragged down simply because an ethanol producer outside of Des Moines can't produce corn well enough to compete with a farmer elsewhere?

Should countries that that shoot you for speaking out or for forming a union be allowed to trade freely with those that do not?

Look, you're preaching to the choir.  I've said several times in the past that we should cut trade with all countries that do not allow for basic freedoms and democracy.  You're not going to pry a defense of China out of me.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Sun Jun 18th, 2006 at 02:23:25 PM EST
[ Parent ]
I think the profit to transnational capital shouldn't be "aggregated" to any country. How does that change the analysis?

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 Sun Jun 18th, 2006 at 03:43:24 PM EST
[ Parent ]
Don't make the mistake of believing that transnational corporate profits are, along with closed plants here in the developed world, the real story.  Remember the consumers who benefit.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Sun Jun 18th, 2006 at 05:41:14 PM EST
[ Parent ]
I am questioning the computation of "national aggregates", in particular that profits (or even the capital) of transnationals should be aggregated to any nation.

How about analyzing a two-country, two-product Ricardian model with a transnational intermediary? How much of the benefits of free trade accrue to each of the three players?

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 Sun Jun 18th, 2006 at 06:20:56 PM EST
[ Parent ]
What my comment suggests is that we, first, have to decide whether or not comparative advantage exists and whether it is likely to raise living standards in the aggregate.  I submit that the evidence strongly suggests that it does exist, and that it will raise aggregate purchasing power (real income).  If we come to the conclusion that both of these hold, we can, then, decide whether free trade is desirable -- a discussion during which we can remark upon potential issues of distribution.

My point above is that most people buy into the argument that free trade increases overall wealth (i.e. `no man is an island'). Ricardo is just, as someone pointed out above, Smith's specialization of labor argument writ large and applied to states. I don't think anyone really disputes this, the real issues come with the relevant problems associated with distribution of those gains from trade and the accompanying shifts in political power that come with it. Dismissing these issues as `just politics' is meant to distract attention by focusing on the absolute gains that accrue rather than the relative distribution of those gains that are really at issue.

Economic policy cannot be detached from the political world.  You're right, although I'm not sure at what point I disagreed with this observation.  You're confusing economic policy with economic theory.  There is nothing political about evaluating two businesses and saying, "Hmm, Juan produces the same quantity at a lower cost than Jeff.  Maybe it's because the climate in his country lends itself more to sugar production.  Consumers in Jeff's country would probably be better off with free trade, because Juan will cut down their grocery bills."

Yes and no. There is nothing political about evaluating two businesses and seeing which has lower financial costs. Decisions made via this calculus, however, have very important repercussions that inevitably affect the political system. A recent study in Social Science Quarterly, for instance, established a link between the entry of a Walmart into a given local market and subsequent increase in poverty in that very same community. Walmart not only undermines wages in manufacturing industries in the US, but by offering lower prices than local competitors it destroys both them AND the local business-services firms that usually provide local political leadership. Now, in aggregate, Walmart may increase overall societal wealth, but clearly there are important distributional issue that suggests the particular equilibrium that results after Walmart's entry may not be socially optimal. There are, in other words, externalities to having many higher-price local competitors rather than one low-price monopolist not fully captured by a simple Ricardian analysis.

My point is that this is a result in the real world, the world people live in, not the abstract world of mathematical economics. Where is the gain here? Is there a pure body of economic theory that tells us what clearly should be done? Or must our decision necessarily be based on the context of given situations? If it is the latter then concentrating on whether or not there is an in general `aggregate gain' is at best a pointless exercise.

Once we agree on that, if we do, then we get into policy and politics, at which point I say, "Sorry, Jeff.  Here's some money to live on for a while, and to receive retraining in another field, but it's not fair for you to expect the rest of us to support your inefficient sugar production."  And that is to say nothing of the fact that, in a system without free trade, we're probably doing the most damage to Juan, just as we damage companies like JetBlue and Southwest when we prop up the idiots at Delta and United.

But what if there are significant positive externalities associated with financially inefficient production? Under what conditions are these positive externalities likely to exist?  In what form will they come? Unless we know this how will we be able to determine if trade leads to more efficient outcomes?  Your model is too simplistic.

Furthermore, you are also disregarding the affects trade may have on the distribution of power in the political system itself. Here Rogowski' work Commerce and Coalitions is important to consider. Trade changes the prices factors of production in a given country receive which, in turn, changes the relative amount of political resources each factor is able to muster in the political system. If these changes caused by trade result in an upsetting of the political system and a reinforcing and entrenching of interests opposed to redistribution and or democratization then what has trade achieved?  Who has gained? Is the simple Ricardo model really applicable in this case? Again, is our policy decision best informed by an abstract principle derived from a simple two-good model of world trade, or is it informed by a more context dependent examination of the repercussions of a given policy? If it is the latter then using Ricardo to make policy decisions is like using only the germ theory of disease to fight HIV. The theory's claims are interesting and a building-block of knowledge, but are ultimately trivial to the issue at hand.

Politically, I'm with Migeru all the way on helping those who are hurt by free trade to move into another industry.  No argument from me on that.  I am, however, not a believer in the idea of trade barriers being, somehow, an exercise in "fairness".  That's simply bullshit, in my opinion, because barriers are certainly not fair to domestic consumers, foreign producers, and efficient domestic producers.
If you accept that tariffs and subsidies are fair, you should also accept that China's policy of currency manipulation is fair.  Same game; just different strategy.

But that's my point. Determining what is optimal is complex and context specific. You've resolved the need to dig into the specifics of policy by simply stating that all barriers are inherently bad and all trade is inherently good. Would you take treatment from a doctor that said all classes of drugs are inherently good for you and all types of non-drug treatment are inherently bad?  How about a doctor that said all surgeries are good and required or a doctor that said no surgery is good and should be forbidden?  

Trade may enrich China, may eventually aid its democratization in the long run, but what does that get us in the meantime if China continues to be the last great dictatorship on Earth?  How well does the cheaper consumer goods Walmart provides compensate those communities that is devastates?

What it should bring us are cheaper products (higher real income) and a new, enormous market.

The key word in your statement above is should. In reality your simple model tells you very little about what outcomes on the ground will look like. Would you believe in a medical science or physics that had such indeterminate answers?

But, again, no one, as far as I know, has answered the question of why some workers should be given an advantager over others.  Why is the farmer in Iowa, who is receiving subsidies to prop up his inefficient production, more important than the construction worker in Boston, who has to pay twice the market rate for corn?

The why is context specific and will vary according to case. Perhaps the overall increase in the Boston construction worker's real income is so miniscule that he does not even notice it. Can you for certain tell me that you notice a .0002 increase in real income that a 2% decrease in the cost of cornflakes brings? That's assuming, of course, that competitive markets exist and consumers see decreased costs at all.  Condemning all trade barriers is just as nonsensical and ignorant of the real world as supporting them all.  

You're focusing on those who are hurt by free trade while ignoring those of us who are hurt by trade with barriers.  Why should my living standard be dragged down simply because an ethanol producer outside of Des Moines can't produce corn well enough to compete with a farmer elsewhere?

Not at all. I'm saying that knowing who is hurt and by how much is something that cannot be determined at all using such a simple model like Ricardo's. It's like trying to use, again, the germ theory of disease as a basis to diagnose what is wrong with you medically. It's a stepping stone to knowledge, a piece of the puzzle, but I would want my doctor to know a hell of a lot more than just that, wouldn't you? Comparative Advantage is a best a rule of thumb until we know more about the issues at hand. Would you trust your health to rules of thumb?

Should countries that that shoot you for speaking out or for forming a union be allowed to trade freely with those that do not?

Look, you're preaching to the choir.  I've said several times in the past that we should cut trade with all countries that do not allow for basic freedoms and democracy.  You're not going to pry a defense of China out of me.

You just did. Did you not just say this:

But, again, no one, as far as I know, has answered the question of why some workers should be given an advantager over others.  

and this:

If you accept that tariffs and subsidies are fair, you should also accept that China's policy of currency manipulation is fair.  Same game; just different strategy.

How is putting restriction on Chinese goods due to their human-rights policies not a restriction on trade? Trading with China should, after all, bring us huge new markets and lower prices. What are a few (tens of thousands) political prisoners in the face of that? Some lose (their lives, freedom), but many more win (.02% decrease in the cost of my Tennis Shoes). Why should I support inefficient industries (and local democratic institutions) when more efficient producers (police-state work camps) are being unfairly denied my dollar?

In your heart you know Ricardo's model is too simple for real-world decision-making, else you would have no problem trading with China or any other despotic regime.


No raindrop believes itself responsible for the flood that follows.

by Benito (haplo1998 at yahoo) on Mon Jun 19th, 2006 at 10:12:20 PM EST
[ Parent ]
from the link:

The combined Kaldor-Hicks criterion ... can be non-transitive (A may be an improvement over B, and B over C, but A may not be an improvement over C).

Nothing to add.  I thought it was worthy of being thrown into the mix.


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

by ATinNM on Wed Jun 14th, 2006 at 10:57:42 AM EST
[ Parent ]
That's one reason why it's not taught.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Wed Jun 14th, 2006 at 11:58:05 AM EST
[ Parent ]
Why would that exclude it from being taught?
by Colman (colman at eurotrib.com) on Wed Jun 14th, 2006 at 12:00:06 PM EST
[ Parent ]
Consistency, I suppose.  (Believe me when I say that over half of the students in my math econ class would've needed months to make the transition.)  Also, the small amount of time meant that the classes dealing with this area never went beyond Pareto.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Wed Jun 14th, 2006 at 12:09:35 PM EST
[ Parent ]
Was Arrow's theorem mentioned/discussed/explained?

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 Jun 14th, 2006 at 12:10:55 PM EST
[ Parent ]
Yes, I vaguely remember it being mentioned, and I have it written down in my notebook, somewhere in the depths of my closet.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Wed Jun 14th, 2006 at 12:13:11 PM EST
[ Parent ]
Transition?  Transition to what?  

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Wed Jun 14th, 2006 at 07:45:55 PM EST
[ Parent ]
The equations we dealt with had to be transitive, according to (if I remember the name correctly) the Generalized Axiom of Revealed Preferences.  But, in all honesty, I took that class quite some time ago, and my memory of the lectures is more than a bit cloudy.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Wed Jun 14th, 2006 at 09:11:54 PM EST
[ Parent ]
Maybe that's one reason why the formal definition is not taught to undergraduates, but clearly you are taught to reason along the lines of "as long as it would be possible in principle to compensate the losers for their losses, it's an improvement".

We should introduce that reasoning into the legal profession. That would teach all those ambulance-chasing damage lawwers: as long as your clients could in principle be compensated for the damage done to them, there's no need for the court to impose any penalties.

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 Jun 14th, 2006 at 12:08:22 PM EST
[ Parent ]
Non-transitive statements can be True and Valid as in:

A is the FATHER of B
B is the FATHER of C
C IsNot the FATHER of A

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

by ATinNM on Wed Jun 14th, 2006 at 07:36:06 PM EST
[ Parent ]

if American capitalists can move all jobs except selling food, clothes, and gadgets, cleaning toilets, and building houses, to China and India

Producing non tradeable goods and services make a very large majority of jobs, even today.

When a T-Shirt is sold $10 in the US, a small fraction of a dollar goes to China, the rest is spent on services provided inside the US- the retail job, the logistics infrastructure, the construction of the store, the roads, the port, the tax administration, the IT installation the software, etc...

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

by Jerome a Paris (etg@eurotrib.com) on Tue Jun 13th, 2006 at 03:10:58 PM EST
[ Parent ]
Producing non tradeable goods and services make a very large majority of jobs, even today.
Even today, or especially today? Is that what the service economy is about, to avoid trade once it has been made free?

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 Jun 14th, 2006 at 07:11:34 AM EST
[ Parent ]
Some of the nontradeable services you mention are outsourceable.

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 Jun 14th, 2006 at 07:12:14 AM EST
[ Parent ]
Some assorted little links and stuff.

http://faculty.washington.edu/jacoby/BLS345/Compadvtutor.html

http://en.wikipedia.org/wiki/Comparative_advantage

Of course the Mises set have a response:

http://www.mises.org/story/1699

(precis: we are not counting the extra wealth created for capitalists
through free trade)

http://internationalecon.com/v1.0/ch40/40c000.html

has a section on Ricardo's original example and an example of their
own at the end

and Krugman's take lives here:

http://web.mit.edu/krugman/www/ricardo.htm

Of course, after scanning all these things, I wonder how good my
intuition about this idea is. But at the same time, a simple model
that shows (if it does, who knows if it does, but it doesn't seem that
anyone has tried) that even though comparative advantage may work to
bolster:

a) the country with competitive advantage
b) the investors within all countries

it results in:

c) mass unemployment (hence economic collapse?) in the country without
competitive advantage

might be a useful, simple thing to start people thinking about all this stuff.

by Metatone (metatone [a|t] gmail (dot) com) on Mon Jun 12th, 2006 at 01:03:18 PM EST
Krugman's piece adds up to "trust us, we're economists".  
by Colman (colman at eurotrib.com) on Mon Jun 12th, 2006 at 01:09:29 PM EST
[ Parent ]
I think the most amusing part to me is where he tries to paint all resistance to Comparative Advantage as resistance to mathematical modeling or even mathematics in general.
by Metatone (metatone [a|t] gmail (dot) com) on Mon Jun 12th, 2006 at 01:14:00 PM EST
[ Parent ]
Isn't that the usual line from economists though?

It really is remarkable - a hugely influential set of collective beliefs that can't pass even the most basic experimental test and seem to be held together with hand-waving, chewing gum, string, and the odd bit of self-assured disdainful academic snorting.

Why is no one calling these people out on their beliefs?

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Jun 12th, 2006 at 01:29:49 PM EST
[ Parent ]
 How's this for jumping in mid-stream, ill-prepared and ill-informed to offer comment where angels (ought to) fear to tread?:

  I suspect that Krugman is a little too smart to have missed a flaw the size of an aircraft carrier.  That doesn't mean that I believe--or that I'm sure--that Comparative economic advantage is as suited and valid for these our times as it may have once seemed to others.  But Krugman lives in these, our times, and he is typically a reliable defender of the interests of the average fellow against the wealthy elite--to whom he personally has much more objective resemblance.  That means he has been able to consistently argue against his own personal and purely selfish pecuniary class interests.

 So the upshot: whatever the real, valid faults of the theory of comparative economic advantage, they are probably not nearly so evident as it's being made out here.

One thing Krugman does not do is appeal to authority in an ultimate sense.  His case is supported empirically (not to be confused with "infallably"), and he certainly knows that bailing-wire and chewing gum are not going to stand up to the review of his fellow economists who could and would dismantle it if it were so implausible as that, even if most of us here cannot.

 I think that there is no question of the fact that the economic journals are full of contending arguments on every disputable point, including those held and defended by P. Krugman; so, we may rest assured that there are people "calling him out" as well as that he is answering them.  

 We can be sure of one other thing, too: there are no shortage of points on which the very best economists simply have to say, "We don't know the answer to that question; we haven't been able to solve that problem."

  I'd add as others above have said or implied that  there's a rather early point at which the economic problems become intimately political ones, as well.  On that I've  no doubt.  But I really think that this fact is not lost on Drew who is also smarter than some may be giving him credit for being.

 ( I think) We should play more politely until Paul Krugman joins the discussion.

:^)

"In such an environment it is not surprising that the ills of technology should seem curable only through the application of more technology..." John W Aldridge

by proximity1 on Tue Jun 13th, 2006 at 10:14:54 AM EST
[ Parent ]
Much appreciated.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Tue Jun 13th, 2006 at 11:17:24 AM EST
[ Parent ]
Faith-based social science.

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 Tue Jun 13th, 2006 at 06:41:23 AM EST
[ Parent ]
Economists do not have the ability to reduce their phenomena-under-study to controlled experiments.  As a result they have a much harder time than those people studying the, comparatively simplistics, of Physics.  

Quoting kcurie, "je, je, je, je."

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

by ATinNM on Tue Jun 13th, 2006 at 10:06:16 AM EST
[ Parent ]
I have been told by economics graduate students that most academic economists' attitude to empirical studies is much like Einstein's
Then I would have felt sorry for the dear Lord. The theory is correct. — Albert Einstein — When asked by a student what he would have done if Sir Arthur Eddington's famous 1919 gravitational lensing experiment, which confirmed relativity, had instead disproved it.
Whole branches of the physical sciences cannot perform controlled experiments: astrophysics, geophysics. And yet they progress on the basis of empirical information.

Double jejejeje


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 Tue Jun 13th, 2006 at 10:09:13 AM EST
[ Parent ]
Well.  Yeah.  

But a mountain doesn't decide it is bored being a mountain and will be a llano for a while.  

(I've got to get to work.  ... To Be Continued ...)

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

by ATinNM on Tue Jun 13th, 2006 at 10:37:36 AM EST
[ Parent ]
The problem with social science isn't empiricism per say but the huge problem of measuring important theoretical concepts.

Take inflaation's most convenient measure -- the US Consumer Price Index. How many economists agree this is a good measure? What does it include? What does it leave out? Non-experimental physical sciences can advance at a faster rate because it is clear the things they measure are fairly easily measured constants.

I have yet to touch or measure 'utility'.

No raindrop believes itself responsible for the flood that follows.

by Benito (haplo1998 at yahoo) on Thu Jun 22nd, 2006 at 01:24:24 AM EST
[ Parent ]
Well, it all starts with these 'on aggregate' measures like inflation.

I think there's a question that economists are taught not to ask, which is 'In whose experience?'

Inflation is supposedly an objective measure of - something. But it will be experienced differently on Wall St, by the middle classes, and by a poor person in New Orleans.

Which of these different experiences is considered the most relevant and important 'on aggregate, and why?

by ThatBritGuy (thatbritguy (at) googlemail.com) on Fri Jun 23rd, 2006 at 09:45:30 AM EST
[ Parent ]
Agreed. If value is subjective, which it obviously is, then most standard economic measures have a huge amount of error in them. An economist would argue that the price system effectively aggregates supply and demand in order to convey value. This is in itself a fantasy as market prices even in those conditions most approximating Walrasin assumptions still come no where near meeting them. Then add the fact that 'vaule' out of necessity changes depending upon who is doing the evaluation....well, you get the picture.  

No raindrop believes itself responsible for the flood that follows.
by Benito (haplo1998 at yahoo) on Fri Jun 23rd, 2006 at 10:40:01 PM EST
[ Parent ]
I have thought of writing a diary linking the themes of this one (specifically, the implicit bargaining in Kaldor-Hicks) with the pie-cutting problem.

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 Sat Jun 24th, 2006 at 03:51:29 AM EST
[ Parent ]
Not to speak of the difference between "consumer price index", "producer price index" and "import/export price indices" (US Bureau of Labour Statistics).

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 Fri Jun 23rd, 2006 at 09:52:58 AM EST
[ Parent ]
Note that economists insist in NOT releasing the price data that is used to make those price indexes. All are funded with taxpayer money, but the only thing the taxpayer get is meaningless agregates.

Some personal rants at Bernard Salanie's blog

by Laurent GUERBY on Sun Jul 2nd, 2006 at 10:54:33 AM EST
[ Parent ]
Faith-based social science.

Exactly.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Jun 13th, 2006 at 05:20:50 PM EST
[ Parent ]
Well, ideology at least. You might want to take a look at  Amadae's Rationalizing Capitalist Democracy: The Cold War Origins of Rational Choice Liberalism. Marxism was in part so successful an ideology because it presented a coherent explanation of why things occurred -- i.e. the 'scientific' claim that Marxists made about it. What this book examines is the effort made by US intellectuals to counter that claim to scientific legitimacy and present 'scientific' evidence that contradicted Marxism.
 

No raindrop believes itself responsible for the flood that follows.
by Benito (haplo1998 at yahoo) on Thu Jun 22nd, 2006 at 01:20:46 AM EST
[ Parent ]
My own blog entry on the subject is of course infinitely superior to all others:

Salades  et Tomates

Call it globalisation of gardening (in French :)

by Laurent GUERBY on Mon Jun 12th, 2006 at 03:25:45 PM EST
One of the characteristics about theoretical arguments about economic theories is how far removed they are from the facts on the ground. "Ricardo was right", "No he no longer applies", etc.

Well another approach is to look at how things are doing in the real world and ignore the theories. Let's take trade and economic development. Several of the most successful countries in terms of development over the past 50 years have not followed the standard IMF patterns. Singapore is a good example, even China and India have been very protective of their internal markets and the degree of foreign investment they allowed.

On the other side, the biggest clients of the IMF and world bank have fared the poorest. This is primarily Latin America and Africa. Their standards of living have changed little, and much of the invested money has gone to waste. Many have had currency crises as well after following IMF advice. This include several countries in Southeast Asia as well.

There is a new book out about the (lack) of success in using the standard model to promote economic growth by William Easterly. I haven't read it yet, but I'm sure it pretty much echos his previous one. The inescapable conclusion is that the "free trade" model helps the big countries more than the small ones. The small ones know this which is why the trade talks are progressing so slowly.

Theories are fun to debate in the classroom (or in the blogosphere), but when they get in the way of progress it is time to move on to realistic programs.

Policies not Politics
---- Daily Landscape

by rdf (robert.feinman@gmail.com) on Tue Jun 13th, 2006 at 11:00:46 AM EST
I thought the point was that after 230 years (since Adam Smith), we would actually have identified some economic principles that could scientifically inform the "move to realistic programs". Instead, economic debates are as ideological as they has ever been. The frequent "deconstructions" of the Financial Times, The Economist, or the OECD, where it is argued that the data are sound but that the accompanying text ignores the data and just goes to the predetermined conclusion, are just depressing.

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 Tue Jun 13th, 2006 at 11:20:19 AM EST
[ Parent ]
That's because economics is ideological.

I'm not sure if the proponents of globalisation genuinely believe that a rising tide raises all boats. Perhaps some do. But the reality seems to be that economics is primarily a tool of social control, and not of asset management and collective wealth development.

So economics isn't about money or goods or trade. It's about power relationships between the weak and the strong. Until this fact becomes a central part of the discourse around economic theories, its relationship to reality is a side-issue.

There's no reason why a socially literate form of economics couldn't be developed. But what we have today has its roots in the evangelical and imperalist world view of the 19th century. And there's little room there for more humane values.

Creating a reality-based non-monopolistic economic structure is probably the most important thing that needs to be done. That's going to mean dismantling most of what's around now, which isn't going to be painless or easy. But it is essential, because without that connection to reality, basics like eco-debt and long term asset husbandry don't figure in today's calculations.

What we have today isn't interested in those externalities because they're not part of the social calculus that keeps the pyramid arranged the way it is now. It's almost like being back in the 17th century again, before any of that nonsense about democracy and revolution happened. Royalty isn't nationalistic or monolithic now, it's international, corporate, and partly anonymous. But the pattern of exploitation of both populations and natural assets is similar. If anything it's worse because mechanisation makes natural asset stripping far more efficient than it used to be.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Jun 13th, 2006 at 04:51:00 PM EST
[ Parent ]
That's because economics is ideological.

Yes and No.  No and Yes.

Certain insights of economics are ripped out of context, qualifying phrases stricken, and deployed by media whores (MW) in the service of the paymasters.

Free Trade in the long run will benefit more people than tariff walls.  (See Great Depression, History of; Smoot & Hartley Act, Consequences of.)  Free Trade in the short run will cause economic dislocation as firms and workers are out competed.  Both of these are true and neither affects & effects can be ignored.

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

by ATinNM on Thu Jun 15th, 2006 at 11:24:45 AM EST
[ Parent ]
I think you're misunderestimating the degree of indoctrination.

Economics reduces to simple concepts like Free Trade, Inflation and Unemployment which are colouring book caricatures of the economic forces that really shape people's lives.

If I grow bananas in South America, the concept of free trade vs protectionism is irrelevant when I can't get a fair price for my product because the supposedly level playing field is skewed - sometimes by force - to give the big corporates all of the leverage.

Anomalies like this mean that economics is wrong in so many ways that if you stripped it down to essentials and left the elements that have some connection with reality - meaning everyday reality, not the reality of the super-rich - there would be very little left.

Worst of all is the way that economics promotes an implicit moral code of mindless speculation and accumulation. Shared prosperity isn't a bad thing, but whatever the PR says, the real goal of economics today seems to be personal wealth accumulated with total disdain for the greater good, and the limited selection of social metrics that are used in economics - inflation, unemployment and GDP - are so crude that they exclude all social responsibility.

It's surely possible to create economic metrics that live in the real world, and not in some superficial 19th century abstraction of it. But for now these fake abstractions are treated as if they're the most important thing on the planet - which is literally an insane state of affairs.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Fri Jun 16th, 2006 at 07:23:39 AM EST
[ Parent ]
You're confusing mathematical/theoretical economics with economic polemics  - the inappropriate application of economic theory to real-life examples in order to get the answer you wanted.
by Colman (colman at eurotrib.com) on Fri Jun 16th, 2006 at 07:43:00 AM EST
[ Parent ]
Is there more to economics than polemics? </polemic>

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 Fri Jun 16th, 2006 at 07:44:25 AM EST
[ Parent ]
That was my point, in fact. If I am getting the two confused - whcih I don't think I am, so much as questioning the motivations that produced today's models - I don't seem to be the only one.

When someone talks about 'economic realities' supporting a reform agenda, are they doing economics, or polemic?

Do the Economist and the FT do economics, or polemic?

The underlying problem is that the concepts and measures used in economics lend themselves everso elegantly to one kind of political discourse, while making alternative views and metrics difficult to conceptualise, quantify and discuss.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Fri Jun 16th, 2006 at 09:28:54 AM EST
[ Parent ]
Free Trade in the long run will benefit more people than tariff walls.

Not necessarily. That's the whole point of this debate. And since there's no such thing as free trade we don't actually know anything much about what it will do, only what it might.

by Colman (colman at eurotrib.com) on Fri Jun 16th, 2006 at 07:40:50 AM EST
[ Parent ]
The key qualifying phrase was "in the long run."  By which I meant a hundred years or so.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Fri Jun 16th, 2006 at 09:52:32 AM EST
[ Parent ]
"In the long run" is a mathematical fantasy. It's not a qualifying phrase, it's an admission the model doesn't apply usefully to the real world, unless you can bound the convergence. If you could show monotonicity that'd be a start, except it would rely on unrealistic conclusions.
by Colman (colman at eurotrib.com) on Fri Jun 16th, 2006 at 09:58:45 AM EST
[ Parent ]
One of the joys of this thread is that I feel free to make statements like that without explaining them for lay people. Anyone who's in here knows the risks.
by Colman (colman at eurotrib.com) on Fri Jun 16th, 2006 at 10:01:05 AM EST
[ Parent ]
Hahaha!

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 Fri Jun 16th, 2006 at 10:07:45 AM EST
[ Parent ]
By "monotonicity" I assume you are refering to the act of playing a one string banjo?

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Fri Jun 16th, 2006 at 11:46:00 AM EST
[ Parent ]
Any decent model of economic praxis must included Feedback loops.  Feedback loops - of all kinds - affect agents and the Fitness Landscape over time.  While the specific effects are unpredictable the model qua model must include them to have a hope of accuracy.  

Temporal Logic, a branch of Modal Logic, exists to abstract the impossible, the possible, the necessary.  Such that:

P{x,y}

where y achieves, gains, or has the P referent through Time via x and P is a quality or a quantity - All XOR Some XOR None. If we get lucky, the quantity maybe first order - 'a' number assigned to 'a' variable, tho' it's much more likely to be a second or greater order quantity, such as a Complex Number, or a series of mathematical statements grouped into inter-related families of mathematical statements.    

One result of this, using the Lowenheim-Skolem Theorem, is the (potential and unpredictable) bifurcation of model functions from D -> T to D -> T' where T' is who-the-hell-knows-what.  ;-)  One known occurance of this is the transformation, in Catastrophe Theory, of control to state or state to control variable(s).  Time, then, can become a control variable in certain of these transformations.

Modeling (certain) Feedback Loops, therefore, we have to acknowledge the potential for Time to 'jump' between playing a role as a control or as a state variable leading to qualitative change of of the Fitness Landscape.

Note:  I am not saying Time isn't constant.  That would be ... weird.  

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

by ATinNM on Fri Jun 16th, 2006 at 11:41:06 AM EST
[ Parent ]
You still owe us a diary explaining exactly what you're going on about.

I hate temporal logic. Nasty icky stuff.

by Colman (colman at eurotrib.com) on Fri Jun 16th, 2006 at 12:03:42 PM EST
[ Parent ]
Chortle

It's just another dimension.  What are we up to now?  18 +/-?

I know I owe the diary and I plan on finishing it Real Soon Now.  Any day.  

yup, yup, yup.

Of course if I tell you, you'll tell Migeru, he'll tell Sven, and pretty soon today will be tomorrow and yesterday will have had been next month.  8^p

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

by ATinNM on Fri Jun 16th, 2006 at 08:52:51 PM EST
[ Parent ]
I don't mind the extra dimension: I tend to regard anything ordered set with a bottom element as time-like (technically any downclosed topology).
by Colman (colman at eurotrib.com) on Sat Jun 17th, 2006 at 10:59:51 AM EST
[ Parent ]
Just a bottom element, or do you require an infimum function?

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 Sat Jun 17th, 2006 at 11:28:45 AM EST
[ Parent ]
Congratulations: your comment here is now the #10 Google hit for "infimum function".

Words and ideas I offer here may be used freely and without attribution.
by technopolitical on Tue Jun 27th, 2006 at 12:53:11 AM EST
[ Parent ]
You've got to be kidding me.

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 Tue Jun 27th, 2006 at 03:02:31 AM EST
[ Parent ]
I try to stay away from analytical Topology by deploying Fuzzy Logic in a non-Boolean Decision Space:  I Don't Care.

(laughing)


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

by ATinNM on Sat Jun 17th, 2006 at 11:56:26 AM EST
[ Parent ]
The problem about international economics is that (i) you need to draw a quarter-cycle or a "production possibility frontier" (which I never saw in my life), (ii) draw a "social utility curve" tangent to the quarter-cycle (I never saw this curve either) (iii) then draw another set of quarter-cycles and flip them over to the upper righthand corner of the diagram, and (iv) draw one straight line which is simultaneously tangent to both production quarter-cycles (under the simplest two-country model).

I felt it was a medieval science when I first learned it.

I will become a patissier, God willing.

by tuasfait on Tue Jun 13th, 2006 at 12:24:14 PM EST
You mean like this?

You can spice it up with a little catastrophe theory...


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 Tue Jun 13th, 2006 at 02:28:09 PM EST
[ Parent ]


I will become a patissier, God willing.
by tuasfait on Tue Jun 13th, 2006 at 10:04:14 PM EST
[ Parent ]
Hey, the epicycles were a precursor of Fourier analysis... And they kept increasing the number of terms of the Fourier series on the basis of empirical data...

Cut medieval astronomers some slack: not everyone can be a Hipparcus, a Ptolemy, a Brahe, a Kepler, a Herschel.

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 Jun 14th, 2006 at 07:08:03 AM EST
[ Parent ]
There's a lot to be said for this analysis of the history of Science.

Cut medieval astronomers some slack: not everyone can be a Hipparcus, a Ptolemy, a Brahe, a Kepler, a Herschel.

The way I always put it is that not everyone can build the cathedral, Some people have to build the scaffolding to help in the construction.

Science is a process of building explanations for how the world works. We often learn as much if not more from science that turns out to be wrong (not that the people who worked with epicycles were actually wrong, but that's a whole other barrel of fish)


Any idiot can face a crisis - it's day to day living that wears you out.

by ceebs (ceebs (at) eurotrib (dot) com) on Fri Jun 16th, 2006 at 03:46:41 PM EST
[ Parent ]
Here are some interesting numbers from the June 12 edition of EETimes (a trade paper for electrical engineers)

Total US employment for EE's (BLS)
2000 = 444,000
2005 = 325,000

Computer Hardware engineers
2000 = 83,000
2205 = 81,000

The article states that those analyzing of the numbers don't know what has happened to the missing workers. They surmise that they may have left the profession.

Is this a consequence of less demand since the telecom bubble burst or is it a sign that more work is being done elsewhere? They don't know.

We already know that X-rays and other medical test results are being read by doctors in India, so the promises of being an educated professional may not be true too much longer either.

To get back to the main point of "trade". As long as there is no cost assigned to social dislocation, resource depletion, pollution and monetary revaluation determining whether trade is beneficial is based upon an unrealistic, oversimplified model. This has been documented by several recent critics of the World Bank/IMF model of development. Two such are Joseph Stiglitz and William Easterly. The both have books out and are both former employees of the World Bank.

But why should we listen to them when we can refer to Ricardo as if he were the last word in economic theory?

Policies not Politics
---- Daily Landscape

by rdf (robert.feinman@gmail.com) on Wed Jun 14th, 2006 at 09:44:34 AM EST
I know of more than one EECS engineer who has left the profession after the dotcom bubble burst (including myself) ! That is in France, so it's not in the US stats though.

Pierre
by Pierre on Wed Jun 14th, 2006 at 10:01:53 AM EST
[ Parent ]


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