Fri Oct 10th, 2008 at 12:30:19 PM EST
One of the key points of the version of popular economics that gets passed around as Conventional Wisdom is that constraining the movement of capital is equivalent to erecting tariffs.
Intuitively, this does not seem right: If capital is free to cross borders while workers are not, it can go to where labour is cheapest - meaning that all other things being equal, I should think that capital would get a larger share of the value added.
That goods are free to cross borders without tariffs, however, does not intuitively appear to permit capital to leverage differences in laws, degrees of worker organisation, etc. to its advantage.
My first problem is that I have a hard time constructing a convincing toy model of trade between countries. So how many different kinds of goods would I need in order to construct a convincing toy model, and how many countries would I need? My own guess is at least three countries and at least two different types of goods.
With only one kind of good, there would either be no trade, or at least one country would be in permanent current account deficits, which would be A Bad Thing for said country and encourage it to close its markets completely, giving us the no trade situation.
With only two countries, I think (but cannot prove) that the model would yield results that cannot be generalised to a scenario with more than two countries.
And the problem here is, of course, that the number of combinations that need to be analysed increase much faster than linearly with the number of goods and countries involved. So I'd like to keep things as simple as possible.
So how many goods and countries do I need?
[editor's note, by Migeru] Renamed from Socratic Economics.