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Contesting Free Trade Orthodoxy

by TGeraghty Thu Mar 29th, 2007 at 02:42:47 AM EST

The standard pro-free trade argument:

Nations prosper by focusing on things they do best -- their "comparative advantage" -- and trading with other nations with different strengths. . . . [rich-country] trade with large low-wage countries . . . will make all of them richer -- eventually. . . . trade can create jobs . . . and bolster productivity growth.

is being called into question in some unusual places recently:

Wall Street Journal: Pain From Free Trade Spurs Second Thoughts

For decades, Alan S. Blinder -- Princeton University economist, former Federal Reserve Board vice chairman and perennial adviser to Democratic presidential candidates -- argued, along with most economists, that free trade enriches the U.S. and its trading partners, despite the harm it does to some workers. "Like 99% of economists since the days of Adam Smith, I am a free trader down to my toes," he wrote back in 2001.

Politicians heeded this advice and, with occasional dissents, steadily dismantled barriers to trade. Yet today Mr. Blinder has changed his message -- helping lead a growing band of economists and policy makers who say the downsides of trade in today's economy are deeper than they once realized.

Promoted by Colman


Although still accepting of the traditional gains-from-trade argument, Blinder argues that the costs of free trade and outsourcing to US workers (and, by extension, possibly European workers as well) will be far higher than most economists have yet acknowledged:

[Blinder]is saying loudly that a new industrial revolution -- communication technology that allows services to be delivered electronically from afar -- will put as many as 40 million American jobs at risk of being shipped out of the country in the next decade or two. That's more than double the total of workers employed in manufacturing today. The job insecurity those workers face today is "only the tip of a very big iceberg," Mr. Blinder says. . . . the harm done when some lose jobs and others get them will be far more painful and disruptive than trade advocates acknowledge.

Ralph Gomory, former head scientist at IBM, argues that "changing technology and the rise of China and India could make the U.S. [and Europe?] an also-ran if it loses many of its important industries." Gomory more directly challenges the traditional economic logic of free trade:

. . . Mr. Gomory has done research challenging the relevance of David Ricardo's 1817 theory of "comparative advantage" . . . in an era in which the global scale of industries is huge and technology rapidly crosses borders.

Mr. Gomory recruited economist William Baumol . . . The pair produced computer models showing that an increase in trade between nations could lead to harm . . . If one nation were to gobble up enough of the powerful industries of the other, the losses would be so widespread for the losing country that its national income would decline, they found. Producers in the losing nation would lay off workers, and consumers there wouldn't have as much income to pay for imports. Trade no longer would be a win-win proposition. . . .

Large corporations, freed by technology, no longer can be counted on to locate plants and research facilities at home. "What's new is that globalization makes it possible for companies that we think of as American to take their technology and capital and put it in almost any work force in any country."

Harvard's Dani Rodrik is another free-trade skeptic:

The 49-year-old, Turkish-born, American-educated economist's primary target is what he calls the "ideology" of free trade. That's the notion that the economic gains from trade are so vast that they benefit every nation, even if some sectors suffer. Sometimes countries are better off protecting growing industries and subsidizing their exports, he argues, as China, Japan and other Asian nations have done. . . . [Rodrik also] warned that economic integration could lead to "domestic social disintegration" in rich countries unless governments do a better job at protecting middle-class workers.

In his FT op-ed The Cheerleaders' Threat to Global Trade, Rodrik further emphasizes that the most succesful modern developing countries have not followed orthodox free-trade nostrums.

So what should be done? Blinder recommends a fairly traditional center-left approach:

Mr. Blinder's answer is not protectionism, a word he utters with the contempt that Cold Warriors reserved for communism. . . . He wants government to do far more for displaced workers than the few months of retraining it offers today. He thinks the U.S. education system must be revamped so it prepares workers for jobs that can't easily go overseas, and is contemplating changes to the tax code that would reward companies that produce jobs that stay in the U.S.

Oops, was that a whiff of industrial policy? Gomory and Rodrik are more explicit about this:

Mr. Gomory would reduce the corporate tax rate for companies that produce "high value-added" jobs in the U.S. -- the kinds of jobs that pay high salaries for high productivity work. . . . Mr. Rodrik . . . recommends [developing nations need to look to different ways to spur growth, such as] reviving industrial policies . . . subsidizing domestic industries and protecting new exporting companies

So don't throw out the industrial policy playbook yet, Europe! And you may want to hang onto that social safety net as well. It's going to be a bumpy ride.

h/t Max Sawicky

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Migeru wrote a diary some time ago that supports these points in a way I hadn't seen before. My informal summary of what his mathematical analysis says is that:

  1. Comparative advantage can (of course) completely displace production of a good X from Country A to Country B.
  2. This displacement will (of course) be costly to the workers and owners who no can longer produce X.
  3. Given efficient price competition, this complete displacement will happen even if gains in efficiency are almost negligible.
  4. Therefore, seeking gains from trade can produce disproportionate costs, hence net damage.

In the long run, of course, even the tiniest gains would add up, and in the course of future decades and millennia, these tiny gains would more than compensate for the one-time adjustment costs -- or so naive economics would argue.

Words and ideas I offer here may be used freely and without attribution.
by technopolitical on Thu Mar 29th, 2007 at 12:02:31 AM EST
...even if gains in efficiency are almost negligible

I see that as a sad consequence of one-dimensional game theory models. You got to optimize the target function no matter what, no matter by how much... giving you no value but bad risks.

Of course, you can incorporate "everything" into a single optimizing function at any moment. But then your optimizing function changes faster than the climate with each new experience. Models with multidimensional optimization must be more robust. Solution process would be somewhat more complicated, but hey, we have brains for something. One of the solution features would be the notion of "having enough" of something. That might be a good ethical hint in general.

by das monde on Thu Mar 29th, 2007 at 03:35:35 AM EST
[ Parent ]
It's not only the maximisation of a single target quantity that is the problem. It's the fact that models with only one parameter are considered, so all the richness of behaviour of multivariable optimisation (e.g., saddle points and the associated dynamical bifurcations) is lost on the models.

It is a well known fact that David Ricardo's model of comparative advantage assumed 1) only one factor of production (labour) can change its use; 2) capital and land are constant and tied to the national economies; 3) full employment.

What we have now is not free trade, but global free movement of capital. Capital flees from comparative advantage to absolute advantage. In Ricardo's original example, an economy which was at absolute disadvantage (less efficient at making everything) would still have a role, because it must have comparative advantage for some products. and would benefit from trade. That was the unintuitive part of his argument. But if capital can flow between countries chasing absolute advantage, entire economies can get decapitalised.

This is the reason why huge disparities of wealth, unemployment, and population develop within countries: capital is mobile, as is population (but population much less than capital). And that is why national economies require redistribution policies (contrary to what economists[note1] claim, people are very reluctant to constantly move looking for work).

[note1] Adam Smith did say that of the factors of production, labour is much less mobile than capital. He had the common sense that modern economists lack.

"It's the statue, man, The Statue."

by Migeru (migeru at eurotrib dot com) on Thu Mar 29th, 2007 at 06:19:57 AM EST
[ Parent ]
It keeps coming back to the assumptions, and the money that we use.

Financial Capital - or "Fictitious Capital" as Marx called it - is denominated in the "Money as Debt" that we use, and consists of the two legal creations:
(a) bank-created "Debt"; and
(b) shareholder value style "Equity".

It is indeed mobile.

But true "Capital" consists of:
(a) the productive assets in which individuals may have "ownership", either directly or indirectly;
(b) the obligations that individuals take on to exchange "value" at a future point in time.

The majority of "Real Property" of land and buildings which underpins over two thirds of our "deficit-based" but "asset-backed" money in circulation - is certainly NOT mobile.

But contrary to the bollocks assumptions of virtually all Economics, such "Non-Financial" or maybe "Real" Capital is in fact "productive" in that it has a use value over time which is exchangeable for other value or "money's worth".

Unless we address the "Money as Debt" (see the recent diarised video) monetary system - which we are going to have to do sooner rather than later - we will get nowhere.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Thu Mar 29th, 2007 at 08:19:16 AM EST
[ Parent ]
Would you blame unemployment (of labour and capital) on money?

"It's the statue, man, The Statue."
by Migeru (migeru at eurotrib dot com) on Thu Mar 29th, 2007 at 09:18:28 AM EST
[ Parent ]
"Employment" pre-supposes that Capital "employs" Labour.

Which in the current paradigm it does.

But that need not be the case, since a productive Individual may work WITH productive Capital - in a "Capital Partnership" - and share the value created in agreed proportions.

The answer is yes: Money based on deficit and hence an economy based upon scarcity leads to unemployment of both "Labour" and "Fictitious/Financial" Capital.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Thu Mar 29th, 2007 at 01:16:16 PM EST
[ Parent ]
Employment as in "action and effect of being employed". I mean the fact of people or capital laying idle involuntarily because of lack of money.

"It's the statue, man, The Statue."
by Migeru (migeru at eurotrib dot com) on Thu Mar 29th, 2007 at 01:39:44 PM EST
[ Parent ]
That sums it up.

Lack of money is built in to a system that allocates to Banks the power of creating money as debt based solely upon their own promise to provide nothing of value in return other than their guarantee.

A guarantee that is essentially indistinguishable in practice from - and being sold off to other investors as - the credit derivatives which currently add a further toxic layer of gearing to the existing one.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Thu Mar 29th, 2007 at 02:17:14 PM EST
[ Parent ]
Btw did you get my e-mail? The Half Moon, Stepney Green - maybe 7pm on Thursday 5th April?

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Thu Mar 29th, 2007 at 01:18:47 PM EST
[ Parent ]
Yes, I did.

"It's the statue, man, The Statue."
by Migeru (migeru at eurotrib dot com) on Thu Mar 29th, 2007 at 01:39:59 PM EST
[ Parent ]
What we have now is not free trade, but global free movement of capital.
Capital flees from comparative advantage to absolute advantage.
You just have endless objections to comparative advantage, don't you?

You probably think that exporting goods in exchange for other goods doesn't decrease local productive capacity, while the export of financial capital in exchange for future revenues to investors does. Hah! That would mean that financial capital investment results in productive, physical capital, and is anyway completely unrelated to your previous argument.

Deny it if you can.

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

by technopolitical on Fri Mar 30th, 2007 at 01:59:35 AM EST
[ Parent ]
I can't deny it.

Refute it if you can.

I just have endless objections to cartoon economics, which seems to be the only kind around.

"It's the statue, man, The Statue."

by Migeru (migeru at eurotrib dot com) on Fri Mar 30th, 2007 at 02:44:06 AM EST
[ Parent ]
Sorry, I can't refute it right now. Maybe when I recover my cartoon-economist-superhero powers.

Words and ideas I offer here may be used freely and without attribution.
by technopolitical on Fri Mar 30th, 2007 at 03:23:18 AM EST
[ Parent ]
Superhero powers? All you have to do is wear your briefs outside your pants. With a '$' printed on the briefs for added effect.

"It's the statue, man, The Statue."
by Migeru (migeru at eurotrib dot com) on Fri Mar 30th, 2007 at 07:36:36 AM EST
[ Parent ]
Yes, there's a theoretical sense in which decisions must be explainable in terms of optimising some single function (at least, those decisions that don't imply A > B > C > A), but this isn't very useful in practice.

Your point about the function changing rapidly is, of course, theoretically wrong, because one can concoct a stable function that takes account of the whole space of possible changes. This theoretical move, however, moves the whole exercise further into fantasy-land if considered as anything but a high-level abstraction. Regarding the relationship between the theory and reality, your observation about rapid change is a good criticism.

The nice world of linearity is another door through which models depart from unreality. Many human concerns look more like constraints than like bits of additive value. "Having enough" often means satisfying a constraint, with "having more" beyond that point providing value (if any) that is different in kind.

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

by technopolitical on Fri Mar 30th, 2007 at 12:39:08 AM EST
[ Parent ]
TGeraghty!!

"Once in awhile we get shown the light, in the strangest of places, if we look at it right" - Hunter/Garcia
by whataboutbob on Thu Mar 29th, 2007 at 03:49:41 AM EST
Oops, was that a whiff of industrial policy?

Industrial policy. Industrial policy. Industrial policy. Industrial policy. Industrial policy. Industrial policy. Industrial policy. Industrial policy. Industrial policy. Industrial policy. Industrial policy. Industrial policy. Industrial policy. Industrial policy. Industrial policy.

You can't say it too many times really...

Mr. Gomory would reduce the corporate tax rate for companies that produce "high value-added" jobs in the U.S. -- the kinds of jobs that pay high salaries for high productivity work.
This is exactly what I tell everyone I know, but oh no! All politicians, right to left, only talk about the "service sector", or as I prefer to call it, the servant sector.

Hello? How are we supposed to stay rich without high productivity jobs? Anyone? No?

Then lead, follow or get out of the way!

And the very fact that they have to put high value-added within quotes very nearly makes my head explode. We are talking about a paper which is supposedly read by the American elite?


Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Thu Mar 29th, 2007 at 05:36:32 AM EST
Producers in the losing nation would lay off workers, and consumers there wouldn't have as much income to pay for imports. Trade no longer would be a win-win proposition. . . .

They need computer models to figure this out??

by Torres on Thu Mar 29th, 2007 at 06:02:21 AM EST
Yes, they're idiots.

"It's the statue, man, The Statue."
by Migeru (migeru at eurotrib dot com) on Thu Mar 29th, 2007 at 06:04:20 AM EST
[ Parent ]
I'm starting my reading of "The Great Transformation", a recent edition. I'm still in the forewords and prefaces and that conclusion is already explicit.

I mean, both the effect on people and that they are idiots.

From Stiglitz foreword to the book:
"Today there is no respectable intellectual support to the proposition that markets, by themselves, lead to efficient, let alone equitable, outcomes".

by Torres on Thu Mar 29th, 2007 at 06:22:10 AM EST
[ Parent ]
As a mathematician, trying to read Paul Samuelson's magnum opus convinced me that neoclassical economics is idiocy.

"It's the statue, man, The Statue."
by Migeru (migeru at eurotrib dot com) on Thu Mar 29th, 2007 at 06:25:34 AM EST
[ Parent ]
They're not idiots. They're sociopaths.

The ideology is a useful intellectual fig leaf for straight-out pillage and theft.

I'm not sure if they believe the nonsense themselves. But it seems obvious that the sum total of the ideology comes down to supporting anything and anyone that makes the rich richer, and the poor even more poor.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Mar 29th, 2007 at 08:26:33 AM EST
[ Parent ]
As always, "garbage in, garbage out".

Or, given the realibility of economic models "put complicated finished product in, get scrap iron out."

keep to the Fen Causeway

by Helen (lareinagal at yahoo dot co dot uk) on Thu Mar 29th, 2007 at 07:13:33 AM EST
[ Parent ]
They're economists, what do you expect?

How dare facts trump their theory.

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

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Thu Mar 29th, 2007 at 02:30:30 PM EST
[ Parent ]
"Like 99% of economists since the days of Adam Smith, I am a free trader down to my toes," [Alan S. Blinder] wrote back in 2001.
Has this "Princeton University economist, former Federal Reserve Board vice chairman and perennial adviser to Democratic presidential candidates" actually read Adam Smith?
Such regulations may, no doubt, be considered as in some respect a violation of natural liberty. But those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments; of the most free, as well as or the most despotical.
I don't know about Fed neck honchos and political advisors, but as an academic I would expect a Princeton professor to read the classics of his discipline and understand what he read.

"It's the statue, man, The Statue."
by Migeru (migeru at eurotrib dot com) on Thu Mar 29th, 2007 at 06:31:54 AM EST
I'm quite convinced that most of the greats, if they were writing today, would make debunking the free-trade religion their task in life.
by Colman (colman at eurotrib.com) on Thu Mar 29th, 2007 at 07:44:02 AM EST
[ Parent ]
Nobody would listen to them.

"It's the statue, man, The Statue."
by Migeru (migeru at eurotrib dot com) on Thu Mar 29th, 2007 at 07:47:56 AM EST
[ Parent ]
Wait till the equity based economies (where most shares of companies are held by individual investors rather than banks) fall off the demographic cliff when the post war generation starts to cash out their investments en masse.

In the Continental and Scandinavian economies, capital is largely held by banks, rather than diffuse investors like in the Anglo American world.  With such large actors they move the market when they move, thus they can't engaged in excessive speculation without destroying the value of their investements.  Millions of smallholders can engage in profitable speculation where they are able to profit while they destroy social value.  

Imagine what happens when the quarter or half of shares held by the post war generation begin to be converted to more stable bank and bond based assets.  The market falls if not collapses.  They only shining point of hope in this is that the post war crowd kick the bucket before they are able to cash out.  Such a positive and caring world we've created here.

The only long term "benefit" is that the shock of market collapse will lead to the concentration of capital into actors who are large enough that they feel the pain when they bleed society, because the net loss to society is sufficiently large that the private gain they recive is offset by their share of the social loss.  

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

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Thu Mar 29th, 2007 at 02:43:13 PM EST
[ Parent ]
I just love the way they agressively justify a system of catastrophic consequences so long as a tiny fraction of the population of the US benefits, but as soon as that benefit is threatended suddenly it's everybody else's fault.

I bet right now the Chinese think free trade is the tops.

keep to the Fen Causeway

by Helen (lareinagal at yahoo dot co dot uk) on Thu Mar 29th, 2007 at 07:15:36 AM EST
Very good diary and find TG.

Maybe that professor ought to talk to his servants more.

"When the abyss stares at me, it wets its pants." Brian Hopkins

by EricC on Fri Mar 30th, 2007 at 07:36:42 AM EST


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