Home > globalization > New Video Deconstructs CGE Trade Models

New Video Deconstructs CGE Trade Models

from Jim Stanford

Every time the globalizers come along with a new NAFTA-style free trade agreement, they invoke the findings of yet another high-falutin’ computerized general equilibrium (CGE) model of the projected (and inevitably mutually positive) impacts of the deal.

We’ve seen this time and time again: a numerical simulation model (not based on econometric analysis, but constructed purely by attaching illustrative parameters to a Walrasian general equilibrium framework of simultaneous equations describing market-clearing in all markets) is solved, before and after some sypothesized trade policy liberalization, and the change in outcome is interpreted as the “predicted” impact of freer trade.  As we know, the positive outcome depends on sustained full employment, a lack of international capital mobility (and hence no change in aggregate trade balances), the sharing of gains (or compensation) within each participating country, a lack of cumulative causation in increasing returns industries, and a whole host of other assumptions that are necessary for the model to solve — but which have nothing to do with the real-world economy in which we live.

The Walrasian approach of these models has been critiqued repeatedly by heterodox writers.  See, for example:

Lance Taylor and Rudiger von Arnim, “Modeling the Impact of Trade Liberalisation: A Critique of Computable General Equilibrium Models,” Oxfam International, 2006.

Jim Stanford, “Economic Models and Economic Reality: North American Free Trade and the Predictions of Economists,” International Journal of Political Economy, 2003.

But the other-worldly assumptions and methodology of these models are never explained to the politicians who invoke them, nor the reporters who uncritically broadcast their “findings.”

There’s a new offsensive on in several countries (including the U.S., Canada, and others) to sign new FTAs as a “solution” to the current conditions of stagnation.  (Whether an FTA helps stagnation or hurts it, of course, depends on whether it boosts domestic activity or reduces it … and in a demand-constrained world, this is always an open question.)  One we’re fighting in Canada is a proposed deal with the EU that would deregulate public procurement, enhance patent protection for European pharmaceutical companies, and inevitably exacerbate Canada’s existing large quanitative and qualitative trade deficit with the EU (most of which is caused by bilateral trade with Germany … a condition which affects a great many countries in the world these dyas).

In conjunction with a Canadian coalition of anti-globalization activists, the Canadian Auto Workers union has posted a new 20-minute video, free for download, which deconstructs both the assumptions and the findings of the CGE model which the Canadian and EU governments commissioned to help “sell” the deal.  It reviews the assumptions and bizarre conclusions of the CGE approach.  While the video is focused on the Canada-EU case, the discussion of the failings of the CGE approach may be useful in other applications.

The video also refers to the findings of an alternative non-Walrasian simulation of the likely effects of the proposed FTA; that full report from the Canadian Centre for Policy Alternatives is available here.

  1. merijnknibbe
    July 25, 2011 at 12:22 pm

    One reason why these economists do not use econometric estimates to calibrate these models is that they use the void concepts of ‘social indifference curves’ and ‘social utility’ of the entire sector households, which is supposed to maximize these rather undefined concepts (intertemporal maximization, too!).

    To my knowledge, at this moment no economist has even come close to an useful definition of these concepts, let alone to estimating ‘social utility’.

    It’s just not modern, scientific economics. Let’s skip the whole idea of ‘well behaved utility functions.’

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