Adam Smith, David Ricardo Had It Right 11 comments
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This severe recession (Great Recession?) has given life to the isolationists among us in America. I see more and more calls on our President and Congress to close our borders to protect jobs. This happens every time unemployment rises, but becomes fever-pitched when it approaches 10% as it does right now. I feel compelled to provide the reasoned arguments against protectionism.
The primary point against isolationism is that business is now global. The internet has seen to that. The jingoists among us will just need to deal with the fact that this ball of yarn can't be unwound. If the Iranian and Chinese governments, with their lack of Constitutional protections for their citizens, can't stop the Internet, most certainly neither can Obama nor our Congress.
The study of economics reveals that first, in the 1700s, Adam Smith through his "Invisible Hand" analogy theorized that labour would be directed to those who can do the work best (at the lowest total cost). Half a century later and building on Smith's work, David Ricardo developed the "Principles of Political Economy", and introduced the theory of "Comparative Advantage". According to Ricardo's theory, even if a country could produce everything more efficiently than another country, it would reap gains from specializing in what it was best at producing and trading with other nations.
Here is a little background information on both of these seminal economists:
I would add a corollary: If a country is less efficient than another at producing a good, then most certainly it will reap gains by trading with other nations who are better (lower cost) at that task (China and India).
Disclosure: No Positions
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This article has 11 comments:
The Reasoned approach works during the Day-Cycle. But the Irrational rules the Night-Cycle. The Fire of Mind (the Sun's logic) gives way to the Water of Emotion (the Moon's logic) and hope and ambition give way to fear and lost expectations.
Well where are the arguments for allowing illegals in, and to stay on once here; they got mixed into your hyperbole on isolation??
Do you know the difference between sealing the boarders to trade and people?
You seem to think in simplistic circles about globalism,illegals, trade and the internet. None of these have anything to do with allowing the breach of the immigration laws of a state.
Well where are the arguments for allowing illegals in, and to stay on once here; they got mixed into your hyperbole on isolation??
Do you know the difference between sealing the boarders to trade and people?
You seem to think in simplistic circles about globalism,illegals, trade and the internet. None of these have anything to do with allowing the breach of the immigration laws of a state.
I would add a corollary: If a country is less efficient than another at producing a good, then most certainly it will reap gains by trading with other nations who are better (lower cost) at that task (China and India).
======================...
Theories are always interesting, but one has to question the practicality and actual implementation of them. They rarely work in the real world as the theory suggests they should. All one needs to do is look at some real world examples.
1. US software and entertainment products - There is little doubt that the US is probably the world leader in software (eg, MSFT) and entertainment (eg, Hollywood). Yet China, Indonesia, and many other countries ignore copyrights and pirate and reproduce much of these thus negating much of the US advantage in these areas. Losses are estimated in the hundreds of billions of dollars annually.
2. Healthcare products - US pharma companies have developed many leading edge products. They can and have been pirated, copied, etc by other countires. For example, Brazil desparately needed the latest AIDS drugs, yet they would not pay the lowest costs negotiated by drug companies. Subsequently Brazil effectively copied them and used local production to mass produce them with little if any benefit to US pharma companies.
3. Taxation and special interests - taxation and special interests significantly distort the whole production/trade/effic... arguements. If one looks at the US computer programming, offshoring, Hb1 visa, etc debates and results .... with the resulting massive declines in US computer and programming jobs over the past years .. one has to question the premise of Ricardo.
Further to the above examples, most of these theories implicitly assume that "conditions" are roughly the same in countries regarding these trade theories. That is hardly a reasonable assumption. For example, as has been demonstrated India might well be using child labor, paying them 10-cents an hour, and producing clothing for import to the US. Which is then compared to US sweatshops (if any exist anymore) paying even minimal wages by US standards. One would hardly think that the US would want to support this type of exploitation despite the fact that trade would result in cost advantages.
In short, trade is a hughly complex issue with many dimensions and considerations. Simplistic theories simply do not cover much of the complex issues that result from actual practice. It is pretty apparent that the US trades at significant disadvantages on many different levels with many countries in the world today.
There is nothing absolute about the idea of comparative advantage: it is an ideal. What is the alternative if we are looking at absolutes: imperialism? This is what your line of reasoning suggests. Either the developed world agrees to trade freely with the less developed world and give up jobs to lower cost sources, or the developed world freezes out the LDCs and leaves them to their frustrations.
This concept is the source of anger and hatred that infects the populations of LDCs and fosters extremism, borne of envy. Opening our borders, and allowing our goods and services to be freely traded, even if sometimes there is not equal reciprocity, is much better than the alternative.
On Aug 02 06:33 PM untrusting investor wrote:
> According to Ricardo's theory, even if a country could produce everything
> more efficiently than another country, it would reap gains from specializing
> in what it was best at producing and trading with other nations.
>
>
> I would add a corollary: If a country is less efficient than another
> at producing a good, then most certainly it will reap gains by trading
> with other nations who are better (lower cost) at that task (China
> and India).
> ======================...
> Theories are always interesting, but one has to question the practicality
> and actual implementation of them. They rarely work in the real world
> as the theory suggests they should. All one needs to do is look at
> some real world examples.
> 1. US software and entertainment products - There is little doubt
> that the US is probably the world leader in software (eg, MSFT) and
> entertainment (eg, Hollywood). Yet China, Indonesia, and many other
> countries ignore copyrights and pirate and reproduce much of these
> thus negating much of the US advantage in these areas. Losses are
> estimated in the hundreds of billions of dollars annually.
> 2. Healthcare products - US pharma companies have developed many
> leading edge products. They can and have been pirated, copied, etc
> by other countires. For example, Brazil desparately needed the latest
> AIDS drugs, yet they would not pay the lowest costs negotiated by
> drug companies. Subsequently Brazil effectively copied them and used
> local production to mass produce them with little if any benefit
> to US pharma companies.
> 3. Taxation and special interests - taxation and special interests
> significantly distort the whole production/trade/effic... arguements.
> If one looks at the US computer programming, offshoring, Hb1 visa,
> etc debates and results .... with the resulting massive declines
> in US computer and programming jobs over the past years .. one has
> to question the premise of Ricardo.
>
> Further to the above examples, most of these theories implicitly
> assume that "conditions" are roughly the same in countries regarding
> these trade theories. That is hardly a reasonable assumption. For
> example, as has been demonstrated India might well be using child
> labor, paying them 10-cents an hour, and producing clothing for import
> to the US. Which is then compared to US sweatshops (if any exist
> anymore) paying even minimal wages by US standards. One would hardly
> think that the US would want to support this type of exploitation
> despite the fact that trade would result in cost advantages.
>
> In short, trade is a hughly complex issue with many dimensions and
> considerations. Simplistic theories simply do not cover much of the
> complex issues that result from actual practice. It is pretty apparent
> that the US trades at significant disadvantages on many different
> levels with many countries in the world today.
The 1000+ empirical economic studies of the Great Depression have several common thread of which one is: that Protectionism deepened and lengthened the Depression.
The reference to Ricardo’s “Principles of Political Economy”: maybe basing a Stimulus plan on Political-Economy rather than Political-Political would have been a grand idea. Design matters!
Just like the efficient market hypothesis, predicting increased productivity from open markets ignores the actual, gritty processes involved.
So in reality, the theory of specialised national production lead to the MIF insisting, for instance, on Haiti opening it's markets to theoretically more efficient food producers.
In reality, the producers in Europe and America are massively subsidised, and forcing the Haitians to open their markets to this produce bankrupted their own farmers and has lead directly to the present situation where much of the populace has to subsist on mud biscuits to assuage hunger.
A similar process has happened to US manufacturing, where imports have decimated indigenous production.
Who benefited? Perhaps briefly, many people enjoying cheap produce.
The process has now gone full circle, and wages are being forced so low that overall demand is being impacted and living standards
declining.
Henry Ford knew that you have to pay your workers well enough to afford to buy the things they produce.
That insight has been ignored in favour of efficient market hypothesises, and international capital has benefited at the expense of Main Street.
No country ever rose to prominence and wealth without controlling markets and regulating commerce.
The rising power of the present age, China, is well aware of this, and is moving to own and control essential commodities.
Under the cover of market rhetoric, the US has for many years engaged in essentially mercantilist behaviour, pouring vast sums into it's military to control oil and energy resources, escalating the true costs far, far above it's overt market cost.
In practise a small elite controls the great bulk of real assets, and the present market crisis is being used to further accentuate this concentration of wealth. with whole countries in danger of having their assets seized and put to the service of international figures, whilst their population is reduced to effective servitude.
These countries should repudiate their debts, which were often incurred by banks loaning money to dictators to finance the military in keeping the population at large down.
Guff about efficient markets is the sales pitch used by the elite to justify their asset seizures.
Any additional costs from having less than perfect efficiencies are dwarfed by the huge costs that the elite is imposing to maintain their position - see the bank bail-outs.
How did this happen? 100 million Japanese had their standard of living raised from post-War poverty and starvation to among the highest in the world, all within a 40 year period, or about one generation. Germany is the same story. It had suffered massively all the way back to the end of WW1 in 1918. Both nations now compete with America on a more or less equal footing (there are still some trade barriers to take down, but they are minimal compared to past inequalities).
Both of these nations were "reconstructed" after their infrastructure and labor force (young men) were destroyed by war, and within a generation, rose to the top the world in per capita income. And at what cost to America? Some manual labor jobs shipped to the factories of our former enemies? Some financial investments made that have returned the original investments many times over? This resulted in more trade. Two aspiring nations who previously resorted to war to advance their economies are now among America's best friends.
There is a temporary cost to allow trade between two nations with inequality in wages, laws and social safety systems (which require high taxation). But, once that investment is made, within a generation, and maybe less time for economies that do not have to be rebuilt from the very ground up after war losses, the payback is tremendous in greater world security which then leads to freer trade.
I am much more interested in making this type of investment than in paying higher taxes for the security required in an isolationist existence. Would I rather build a 30 foot tall wall between Mexico and America and staff it 24/7 with an army of thousands? Or would it be better to help Mexico build it's economy and standard of living so that its citizens can find prosperity at home?
Market economics was pretty thoroughly fixed in that economy in the period you refer to.
Of course, comparative advantage etc has it's place.
It is just nowhere near as great as many economists in thrall to idealised efficient market hypotheses assume.