Home > The Economics Profession > 1,000,000 economists can be wrong: the free trade fallacies

1,000,000 economists can be wrong: the free trade fallacies

from Steve Keen

Not only did the global financial crisis catch the vast majority of economists completely unawares, they instead expected tranquil and even buoyant times just as the biggest economic crisis since the Great Depression began. My favourite such observation is from the OECD‘s Economic Outlook for June 2007—in which the Chief Economist suggested that, “the current economic situation is in many ways better than what we have experienced in years . . . Our central forecast remains indeed quite benign.” But there are countless other such utterly wrong prognostications about the economy, from the profession that is supposed to be the font of wisdom on the economy.

Those “in the know” understand that this is not an isolated failing. The Neoclassical model that dominates economics today is riven with logical and empirical fallacies. If economics were a real science, it would have long ago been overthrown and replaced by something more realistic.

Yet at least 90% of academic economists believe in this model, as do almost all economists working in government and private industry. Left to their own devices, they will continue thinking that this model does describe the economy as the real economy falls deeper and deeper into a crisis, even though their model says that this can’t even happen.

Since economics has failed to clean out its own intellectual stable, it will be the public that finally forces reform upon it – as once-supporters like Anatole Kaletsky of The Times calls for “a revolution in economic thought” and George Soros funds an Institute for New Economic Thinking. With luck, in a decade or two, a more realistic approach to economics might emerge. But in the meantime, here’s a simple guide for the public: Anything the vast majority of economists believe is likely to be wrong.

Which brings me to “Free Trade.” The belief in Free Trade is one of the hallmarks not just of the Neoclassical school which began in the 1870s, but also of the original Classical school which began with Smith in 1776. It argues that almost everyone’s material welfare will be increased if all countries specialise in what they are good at—a proposition that on the surface seems plausible, and a formidable body of mathematical economic theory has been erected to support it.

Unfortunately, like so much else in economics the model of Free Trade is, to quote the humorist H.L. Mencken, “neat, plausible, and wrong.” The theoretical fallacies at its core have been there since David Ricardo first coined his model of comparative advantage during the political battle to repeal the “Corn Laws,” which restricted the importing of cereal crops into England.

The arguments in favour of the Corn Laws included the belief that if trade were unregulated, English industry—in particular its agriculture—might be wiped out by foreign competition. Ricardo, in a brilliant debating ploy, conceded his opponents’ case that a rival country (Portugal, which was then one of Britain’s major rivals) was better at both agriculture and manufacturing than England and then preceded to “prove” that England would still benefit from Free Trade.

He assumed that in Portugal 80 men could produce a quantity of wine (say, 1000 gallons), whereas England would need 120 men to produce the same amount and that Portugal was more efficient too at producing cloth—needing 90 men to produce a quantity of cloth (say, 100 square yards of cotton) whereas England needed 100.

Without trade, both countries would have to produce both goods for themselves so that per 1,000 workers, Portugal would produce some combination lying between the extremes of 12,500 gallons of wine and 1,100 yards of cotton, while England would produce a combination lying between 8,333 gallons of wine and 1,000 yards of cloth.

If however Portugal specialised only in wine and England specialised only in cloth, the total output would be 12,500 gallons of wine and 1,000 yards of cloth. This is more than the total output of the two countries in the absence of trade. With Free Trade, they could specialise in their comparative advantages and welfare in both countries would be higher.

This argument was so clever that it aided the campaign to repeal the Corn Laws and it has seduced almost all economists ever since.

But there is an obvious fallacy to this neat and plausible argument: To effect specialisation, England has to shift labour and capital from wine to cloth (and Portugal has to do the opposite). Arguably labour can be retrained—a vigneron can become a machinist—but how do you convert wine press into a spinning jenny?

The obvious answer is that you don’t. Instead, you sell the wine press and buy a spinning jenny with the proceeds. But because of the introduction of trade, the price of wine in England would have fallen, so that the sale price of the wine press will also fall (economists have modified Ricardo’s model to introduce curves where Ricardo had straight lines, so that total specialisation is no longer required and there would still be some wine production in England under the “new” model of Free Trade), while the price of spinning jennies will have risen, given the new export market to Portugal. Some capital is necessarily destroyed by the opening up of trade and it applies in reverse in Portugal as well.

Since capital is destroyed when trade is liberalised, the watertight argument that trade necessarily improves material welfare springs a leak. If economics were a real science, this real-world complication to Ricardo’s argument would be considered, but it has never been seriously addressed.

These and many other failings that explain why, when Dani Rodrik took a careful look at the empirical record of trade liberalisation, he found that it had frequently reduced material welfare rather than increasing it. Writing back in 2001, he summarised his findings for Foreign Policy magazine with the statement that:

“Advocates of global economic integration hold out utopian visions of the prosperity that developing countries will reap if they open their borders to commerce and capital. This hollow promise diverts poor nations’ attention and resources from the key domestic innovations needed to spur economic growth.”

As an economist who has specialised in dissecting the empirical claims for the role of free trade, Rodrik has the might of the majority of the profession against him. As noted above, that’s a good rule of thumb that Rodrik is right.

  1. October 1, 2011 at 1:18 pm

    What else is new?

  2. October 1, 2011 at 3:09 pm

    Yes, capital goods are destroyed when trade is liberalised, and this has been addressed. The result is the same as with technological change: what Schumpeter called “creative destruction.” It is better called “creative reconstruction,” as the new capital goods improve productivity, which normally offsets the loss of the now obsolete capital goods. Trade liberalization often shifts production into already existing industries that expand. What the protectionists have not explained is why, if trade limitation is good, it does not generalize to limiting domestic and local trade also. Why is it better for me to inefficiently grow my own vegetables rather than buy them at a store? Why would a lawyer who types faster hire a secretary? As for history, if trade is bad, why did Taiwan become wealthy after 1950?

    • Guilherme da Fonseca-Statter
      October 4, 2011 at 2:55 pm

      «Why is it better for me to inefficiently grow my own vegetables rather than buy them at a store?»
      This is a valid question if you put it at the «micro» level of individual families of producers and consumers… BUT,
      if you consider national economies – and if you take that argument to its logical limits – a nation-state may end up in the situation of not being «as efficient as» any other country in all kinds of products and services and therefore not being able to pay for imports while – at the same time – having idle resources not producing some basic goods and services. The problem than arises «how to pay for all those imports» (that were being produced «more efficiently» elsewhere)… This is currently the situation of a number of countries…
      The result of taking to its limits the fallacy of «free trade»…

  3. October 1, 2011 at 4:55 pm

    I think that the above article demonstrates that most economists are advocates for the powers-of-the-day rather than people seriously interested in understanding the dynamics of their profession. So they should be regarded as such and the value of their statements weighed accordingly.

    Trade is as old as humanity itself and has the potential of conferring great benefits on everybody concerned. However, I think it behooves a nation/state to be relatively self sufficient in supplying itself with essential goods and services. That way, its citizens are not subject to the whims of predatory groups, the worst of which today are financial traders.

  4. john mcdonald
    October 1, 2011 at 5:14 pm

    “Why is it better for me to inefficiently grow my own vegetables rather than buy them at a store?”
    It would seem that you have not tasted the difference between the two.

    “why, if trade limitation is good, it does not generalize….” One might also ask, why, if something is good, it does not generalize to the notion that more of it is better? If rain is good then more must be better, but more is not always better. If efficiency is good then more….but even efficiency, just as perfection, is a false god. Seems economics has it’s share of false gods. And for a value free science that is a miracle in itself.

    • Garrett Connelly
      October 2, 2011 at 10:19 pm

      Yes, John, and the even more disturbing disconnect is malicious choosing what is to be regarded efficient. Land grabbers around the world have statistics to show efficiency per labor hour is much better for corporate agriculture. Semi-slave labor drawn from the ranks of the dispossessed is efficiently hired to produce at as much as one half as efficiently as formerly free citizens, measured per acre. And the corporate land stampede is on, in some cases funded by university endowments.

      • October 2, 2011 at 11:21 pm

        When England was a developing country the only source of revenue was land value. Why don’t we teach the new developing countries what we have forgotten?

  5. Mike Meeropol
    October 1, 2011 at 5:26 pm

    Smith, by the way, was a complete nationalist about trade. In his only reference to THE INVISIBLE HAND in the Wealth of Nations he argued that business owners in order to safeguard their investments would ALWAYS prefer domestic to foreign production — and Smith made clear elsewhere that such domestic production would set in motion more labor than would similar investments in other countries.

    On the historical record of free trade, there is an interesting story that Noam Chomsky tells. He was invited to speak to the Harvard Economics Department by Juliet Schor. After a short discussion of the social responsibility of intellectuals, he decided to challenge them on free trade. He said (I am paraphrasing) that he “must be wrong” but his investigation of the historical record suggests that there is NOT ONE SINGLE example of a country that successful made the transition to advanced economy status (achieved “development” if you will) while following the practice of free trade — and this includes, of course, Great Britain with its vast empire and informal empire.

    He asked them “what is wrong” with his statement since he “knew” (ha ha) that he MUST be wrong.

    THey had no answer.

    • Alice
      October 3, 2011 at 7:10 am

      “Smith was a complete nationalist about trade” and Keynes was a complete nationalist about “keeping your banks at home and trading everything else ie goods and services globally”.

      The problem with great economists is that subsequent not so great economists only focus on what they want to hear and dont / cant digest properly the whole message…same with Smiths “central planning authority”….unfortunately it got king hit by “the invisible hand” in the popularity stakes.

    • Guilherme da Fonseca-Statter
      October 3, 2011 at 6:36 pm

      As «Development Political Economist» I have to, every year, go to great lengths to explain to MSc students of «African Studies» how, ALL the countries in the world started by being «protectionists»… England only started to preach the gospel of «free trade» when she gained the upper hand in industrial production.

  6. Edward Allen
    October 1, 2011 at 5:37 pm

    Paradigm shifts are very difficult. One reason is that “When a paradigm shifts, everyone goes back to zero” (Joel A. Barker). This truth is especially unpleasant for those who’ve succeeded under the old model. Moreover, the prevailing set of assumptions generates layer upon layer of defense against new thinking.

    Herman E. Daly’s “The Perils of Free Trade” (_Scientific American_, November 1993), Ha-Joon Chang’s _Bad Samaritans_, and Erik Reinert’s _How Rich Countries Got Rich . . . and Why Poor Countries Stay Poor_ could be helpful, though, as noted, long-established patterns of thought will produce but after but.

  7. ezra abrams
    October 1, 2011 at 6:57 pm

    the reason that other sciences, say physics or chemistry or astronomy look better is because we care less about them; not a whole lot of people really care about how many quarks are in a proton, or the resonance model of benzene, or the value for hubbles constant.
    However, whenever science does doe something that people care about, nuclear power or global warming or whatever, then is starts to look, at least to the avg person, more like economics.
    If economics concerned itself with , say, cost of shipping goods in cardboard vs fiberboard, not a whole lot of people would care.
    The other odd thing is how much prominence we give to economists; the president has the CEA, but no council of psychologists or sociologists; yet surely many more people look for love and happiness then look for a larger paycheck.

    • Guilherme da Fonseca-Statter
      October 3, 2011 at 6:37 pm

      «how much prominence we give to economists»
      Quite right… The new high priests of a secular religion…

  8. paulc156
    October 1, 2011 at 7:39 pm

    Who said trade is bad? Free trade was practised by almost no one whilst they were getting rich. Not the UK until well after the industrial revolution had granted it overwhelming dominance. Not the US under the stewardship of A.Hamilton. Not Germany or France or the Nordics. Certainly not China today.Taiwan? Like all those I just mentioned they nurtured industries in which they were deficient but wanted to develop. Taiwan compensated for its lack of large private companies by using state-owned enterprises and state-financed R&D to pursue upgrading. They hardly adopted the Ricardian methodology of sticking to what you know best.

  9. October 1, 2011 at 8:50 pm

    >>>Yet at least 90% of academic economists believe in this model, as do almost all economists working in government and private industry. Left to their own devices, they will continue thinking that this model does describe the economy as the real economy falls deeper and deeper into a crisis, even though their model says that this can’t even happen. ….. With luck, in a decade or two, a more realistic approach to economics might emerge. But in the meantime, here’s a simple guide for the public: Anything the vast majority of economists believe is likely to be wrong.<<<

    Your statement up there is entirely correct. Except for one small happy detail: The problem has been solved mathematically some months ago. The error of classical macroeconomics is frighteningly simple: It has been accounted for incorrectly. If one includes the total capital in the balance, then one can predict correctly the development of GDP and capital stock as well.

    The classic balance only lacked the so-called investment banking. That was at the beginning of the development of an economy not bad, but now the investment banking industry is the largest of all participants at all. And therefore can not be taken out from the balance sheet. The crisis arises because all products are in competition and that includes financial products of the investment industry too, which in fact also substitute products of the real economy in the complete balance sheet. The mathematical algorithm is well known, it is the general field theory, as used in any technical application of science.

    I published a book in German on this issue. Its called Macroeconomic field theory: general theory of economic growth in substitution competition. I am working on an English translation at the time. Anyone who speaks a little German can get the book on the German Amazon „Heribert Genreith: Makroökonomische Feldtheorie“.

    • Guilherme da Fonseca-Statter
      October 3, 2011 at 6:52 pm

      You said:
      «The problem has been solved mathematically some months ago. The error of classical macroeconomics is frighteningly simple: It has been accounted for incorrectly. If one includes the total capital in the balance, then one can predict correctly the development of GDP and capital stock as well».
      In response to the original post that you quote.
      Can you clarify what is the problem that has been solved?…
      Are we not «falling deeper and deeper into a crisis» ?…
      What is the relationship between «including the total capital in the balance», and «predicting correctly the development of GDP and capital stock as well», on the one hand, and us understanding the economic system better so that we can get out of the crises ?…
      In my humble view, one thing is the correct accounting of stocks and flows – which you seem to claim to have been able to provide – the other thing in the understanding of processes and mechanisms at work.

  10. October 1, 2011 at 10:37 pm

    If one reads my 2009 book THE KEYNES SOLUTION:THE PATH TO GLOBAL ECONOMIC PROSPERITY [Palgrave/Macmillan, New York], they will find that Keynes as early as the Twenties was exposing the fallacies of free trade — and as I have developed a long discussion to show that except for natural resources and climate effected industries, the law of comparative advantage is not applicable for trade.

    Under my 21 century version of the Keynes Plan (as presented in my Keynes Solution book) “International trade ” as Keynes noted in THE GENERAL THEORY “woulds cease to be what it is, namely, a desparate expedient to maintain employment by forcing sales on foreign markets….which if successful …merely shifts the problem of unemployment to the neighbour…”

    • Dave Taylor
      October 3, 2011 at 9:43 am

      “… the law of comparative advantage is not applicable for trade”.

      Paul, thanks very much for this. In conjunction with my own conclusion that neo-classical economic theory is not about the economic system as a whole but about trade (including of course the slave trade), then it is devastating. I think your exceptions (in natural resources and climate-effected industries), when expressed in terms of trading only in surpluses (not necessities), complete the triangulation necessary to capture the truth.

      The “short-cut” taken in the neo-liberal approach, of course, ignores both the necessities of people (whether or not producers) and the non-necessity of being able to acquire and recycle money when it can be recreated “out of thin air”.

      • merijnknibbe
        October 3, 2011 at 11:15 am

        There seems to be some misunderstandings about this ‘creating money out of thin air’. Once there is a monetary system, i.e. a system with a ‘unit of account, means of exchange, store of value’ AND a monetary economy (i.e. an economy adapted to using money, which among other things requires commodification of products and services AND of money (see the ‘unit of account thing’)EVERYBODY can create money out of thin air, IF THE OTHER PARTY ACCEPTS THIS. The most obvious example is a company (or an individual) who sells goods or services ‘on credit’. Legally, this credit (the debt of the buyer) is the means of payment, which usually is denominated in the usual ‘unit of account’ (though there are historically many examples that ‘unit of accounts’ were used which had long disappeared as ‘store of value’). As ‘store of value’ these debts enter the balance sheet either as a liability (the debtor, ‘trade creditor’) or as an asset (the creditor, ‘trade debtor’). They are as told nominated in the ‘unit of account’ and they surely (and according to the law!)serve as means of payment, while they also have some liquidity (they can be sold to specialized companies, though of course below par). This kind of money creation is in fact the essence of money, “In the beginning there was debt”, according the must read of David Graeber: ‘Debt, the first 5.000 years’. Credit systems preceded barter and money…. barter only takes place in economies which had been monetized in the first place and where people have learned to count.

        One example of how this works: the first Dutch seventeenth century settlers of what was to become Cape Town in South Africa had to pay the indigenous nomads (not to be confused with the indigenous hunter/gatherers) with uncoined copper for cattle, as these nomads had no use for silver and gold or coins. The indigenous hunter/gatherers were paid (for labor) with tobacco and (of course) gin. Money itself had not yet been ‘commodified’, i.e. taken the shape of coins – as the economies of the nomads and the hunter/gatherers had not yet adapted enough to make such an invention efficient.
        So, money is already created ‘out of thin air’, all the time (and disappears when the debts are settled). What you propose is that a system of debts and credits takes the place of ‘ordinary money’ – but that’s already happening, all the time. A mortgage is in fact the same thing: commodity backed money, the commodity being the house (and indeed, this is also how Central Banks look at this, though they do not seem to be aware of this).

  11. Alice
    October 3, 2011 at 6:41 am

    The only person I have ever read who is really about right (for me) on this business of dominant paradigms such as free trade / globalisation is John Ralston Saul who wrote a lovely book called “on equilibrium” and being a historian more than an economist maintains that in the long run business cycle (like really long run) we have all been here before with the globalistaion story…approx turn of the 1900s….until there was a backlash…whereupon in the 1920s we all went headfirst down the road of protectionsism.

    The moral of this short book is that when we go too far in one direction….the market will correct it for us. There will be a backlash and the backlash will carry us back to that from which we fled..

    But like a long run figure 8 moving pathway – equilibrium lies in there, in the balance, somewhere. Its a shame more pure economists cant take a longer term view.

    • Guilherme da Fonseca-Statter
      October 3, 2011 at 6:28 pm

      Alice, just one brief comment:
      «There is no long run – somewhere in the future»

      • Alice
        October 4, 2011 at 12:25 am

        Oh so true Guilherme – we are, we are.. there is no such thing really as silly as (when put like that).. waiting for a long run!

  12. Dave Taylor
    October 3, 2011 at 3:07 pm

    Merijn @ #15: “There seems to be some misunderstandings about this ‘creating money out of thin air’”.

    That is certainly true of nearly everybody, Merijn, because that is the basis of the scam (or “Ponzi scheme”). After all of twenty years of trying to understand it, and listening to what other people were saying (not least in the American “Money Masters” documentary about what Reserve Banking means, and here the Huber and Robertson arguments in “Creating New Money”), I’ve realised it is literally true, the misunderstanding still meticulously protected being that “guilt-edged securities” (not even gold-plated but created by a few strokes of a Chancellor’s pen) are equivalent to the gold in the old goldsmith’s vaults, so that money lent as drawing rights on this gold (so much in excess of even the nominal amount of this legally “gold-equivalent” reserve that it is almost totally fictitious) gives the bank a right to demand equivalent drawing rights on the real value of our houses.

    You are right, therefore, when you say: “So, money is already created ‘out of thin air’, all the time”. You are wrong when you add – not qualifying what you are saying – “(and disappears when the debts are settled)”. The more than twice as much as we borrowed paid in interest goes into the bankers’ pockets, bubble-blowing and invester’s dividends, while the economy has grown since we took out our mortgage: most of the new debt created has NOT YET been written off.

    Put another way, the earth went round the sun even though it looks as though the earth goes round the sun. The one way of looking at it makes life unnecessarily complicated, the other has enabled to get a grip on the nature of physical reality. I see inverting the understanding of the direction of flow of value in moetary transactions as necessary for us to get a grip on social reality.

  13. Guilherme da Fonseca-Statter
    October 3, 2011 at 6:22 pm

    The other problem is that, since reality does not agree with the model (and the ceteris paribus, clause is a crucial escape route for theorists…), then lets make reality fit the model. One example, «are there ‘rigidities in the labor market’» ?… (rigidities that arise quite naturally and are explained by other «social sciences»), then lets finish with these «rigidities» and «voilá» there will be no more unemployment…

    • Dave Taylor
      October 3, 2011 at 6:48 pm

      Yes, Guilherme, that Promethean approach is another classic example to doing the mirror image of what we should be doing.

      In my comment below, I’ve spotted a significant error. My apologies. Money “is created as an account of DEBT, which reduces as debt is paid back but still overall has NEGATIVE value as it still exists”. It is not this but USURY, however, which is “continuing to impoverish both mankind and nature”. The Muslims and Medievals were right to make it illegal.

    • Alice
      October 4, 2011 at 12:33 am

      Yes those rigidities in the labour market…my favourite fractured fairy tale..
      Its a shame no-one looks above the certain salary levels of the labour market to see the rigidities that abound up there (look up…not down)….like the extraordinarily large rigidities in the nice closed shops behind the high barriers to entry of executive remuneration committees and their beneficiaries.

  14. Dave Taylor
    October 3, 2011 at 6:26 pm

    My comment at #17 was rushed, so I must apologise for my typos and not entirely doing the detail of Merijn’s argument justice. It’s wrong initially about “unit of account thing” being a commodity: it isn’t a thing but a concept applicable to things: a reference not even to a thing but to a way of codifying order numbers. It’s also manifestly wrong to imply that it is a store of POSITIVE value: it is created as an account of DEBT, which reduces as debt is paid back but still overall has NEGATIVE value as it still exists, continuing to impoverish both mankind and nature. Houses used as collateral already exist, and paying back the debt on them adds not a jot to their real value, though it may lead to neglect of their maintenance.

    These points are fundamental: it is no wonder a million economists are wrong when they haven’t caught up with the dynamic meaning of negative numbers (i.e. going in the opposite or wrong direction), never mind the necessity of complex numbers/relations to account for continously varying destinations of motion. But that’s the way life is. There comes a time when we see what no-one has ever noticed before, as when Newton realised the apple is pulling the earth, and so the moon was too.

    One of the interesting phenomena now happening is that supermarkets etc have so much in transit and retained credit that they are now able to bypass the banks and hire purchase agencies by renting it to their customers themselves. Another nail in the coffin of banking?

  15. October 4, 2011 at 6:08 am

    Will have to read Paul Davidson and Dani Rodrik have to say. And I agree with the fallacy of free trade, but I don’t understand quite:

    >>The obvious answer is that you don’t. Instead, you sell the wine press and buy a spinning jenny with the proceeds. But because of the introduction of trade, the price of wine in England would have fallen, so that the sale price of the wine press will also fall (economists have modified Ricardo’s model to introduce curves where Ricardo had straight lines, so that total specialisation is no longer required and there would still be some wine production in England under the “new” model of Free Trade), while the price of spinning jennies will have risen, given the new export market to Portugal. Some capital is necessarily destroyed by the opening up of trade and it applies in reverse in Portugal as well.<<

    Wouldn't the impetus be to trade spinning jennies and wine presses, too?

    Levering open the developing economies to free trade by the powerful has obviously been a disaster for those economies. I believe Ha-Joon Chang has it right in this regard. We see the devastation of the Mexican agrarian economy through 2005 as a result of NAFTA as an example, and the breakdown of the Doha Round as resulting from the understanding of these economies that they were being sold a bill of goods.

    One of many instructive events of the GFC was that while many feared a "new protectionism," it didn't happen, but trade collapsed anyway. Smoot-Hawley has been described as one of the main causes of the Great Depression by free traders, but according to our most recent experiment, it was likely tangential at best.

    Nice to see the post and happy to see all the comments. I have often advocated a compulsory fee on trade so that the many losers from trade could have a resource to be made better off financed by the few winners. (For a moment granting the free trade principle that gains from trade are such that losers could be made whole and still a net benefit would be realized.) I suppose such a compulsory fee might need a name. Tariff?

  16. Dave Taylor
    October 4, 2011 at 11:00 am

    Good to see you joining in, but the problem with tariffs is that they make unprofitable trading so much more loss-making that they cede trade to the profitable. Were one to call it “tax”, without Keynesian currency controls international traders can so muddy the waters as to where their profits are that no country can see how to lay enforcible claim to them. The internationalising of the US dollar and US dominance of the IMF make even a UN tax impractical. It seems to me the real solution is to make traders internationally responsible for balancing the real, not just monetary value of their OWN international trade. I would, of course, like to see all economics based on earning one’s living, with generous but fixed and therefore non-inflationary rewards for honourable real achievement. Profits made by stealing money from the vulnerable by making yourself able to name your own prices are in my eyes “sins crying out to heaven for vengeance”.

  17. Dave Taylor
    October 4, 2011 at 11:47 am

    I’ve just been sent this outline of the Distributist “heresy”, which emphasises self-sufficiency and beneficial cooperation rather than employment and dog-eat-dog competition.


    How many of the million wrong economists have even considered it, I wonder?

  18. October 4, 2011 at 3:38 pm

    In response to Guilherme da Fonseca-Statter Oct 4, the macro economy arises from micro action. The whole economy benefits from comparative advantage, since this uses the least resources to obtain an amount of output. As to how to pay for imports, exports pay for imports, including the sales of assets. The US trade deficit is due to idiotic tax policy. Countries with VAT subtract the tax from exports, but the US cannot deduct its income and excise taxes from the price of exports. We need to change the WTO rules, but nobody is talking about it. If WTO will not change the rules, the US should shift to VAT or better yet LVT to make our exports the cheapest in the world.

    • Guilherme da Fonseca-Statter
      October 4, 2011 at 4:01 pm

      Yes… «the macro economy arises from micro action»… That is what they call – in complexity studies – «emergence»… And yet, you correctly added «including the sales of assets».
      In the case of a country that solution «of last resort» may end up in the situation of a country – as a whole – being «sold out» and the property of «foreigners»…
      Countries in the European Union do have VAT but are not better off than the USA in what regards «trade deficit» (with the notable exception of Germany). Hence, as in a scientific research endeavor, we should rule out the «idiotic tax policy» as a valid explanation.
      On the other hand, you are 100% right in saying that «We need to change the WTO rules, but nobody is talking about it»… We should also consider «social dumping» as a «crime» and try do devise ways of imposing ILO rules of «fair labor practices» to all the member countries of WTO… Only then, I believe, would it be reasonable to expect the «theory of free trade based on comparative advantages» to come into play…

      • Dave Taylor
        October 4, 2011 at 7:07 pm

        Your response here is greatly appreciated, Guilhereme. Do you mean here by “social dumping” what I’ve been trying to resolve by suggesting traders (not nations, especially those weaker than big businesses) are made responsible for balancing imports with exports? (Fred, of course, with his unfailing fallacy of composition – reducing distributions of effects to single numbers – is assuming everyone benefits when [not even if] this balancing happens automatically).

  19. October 4, 2011 at 3:49 pm

    Regarding “the Distributist “heresy”, which emphasises self-sufficiency and beneficial cooperation: Self-sufficiency is impossible, and that is why cooperation is necessary for mutual benefit. I considered this and reject it as naive: Pronouncements that uncritically use the terms “socialism” and “capitalism” are almost always nonsense. I translate “capitalism” as “I don’t know what I’m talking about.”

  20. Dave Taylor
    October 4, 2011 at 6:40 pm

    The arrogance of the man, “considering” and rejecting what I didn’t say! In the article linked to, Fred, Capitalism and Socialism were quite specifically identified with Big Business and Big Government, both of which take a few people employing most of us for granted.

    Far from being an uncritical pronouncement, this was the point of a critique made before the First World War by an uncomfortably brilliant historian, Belloc, and mulled over by those who have heard of it ever since; though of course it was misrepresented at the start of the Second World War by another of Fred’s dishonest Austrians, Hayek, whose anti-communist “The Road to Serfdom” glossed over the fact that “The Servile State” was a critique of Government by Big Business in Britain, to the effect that it was no better than the socialism it was giving rise to. The title of Ch 8 reads “The Reformers and the Reformed are alike making for the Servile State”. Becoming Wage Slaves instead of Co-owners.

  21. October 4, 2011 at 8:34 pm

    “Capitalism is for the rich” does not define the term. This propaganda term mixes up private enterprise and government-granted privilege. There is no arrogance in pointing out a term without meaning.

  22. Merijn Knibbe
    October 5, 2011 at 10:25 am

    I once figured out how economic historians define: “agricultural capitalism”.

    Some define it as: farmers who sell products on ‘markets’.
    Some define it as: farmers who invest in all kind of technology (drainage mills, ..) and sell products on ‘markets’
    Some define it as: a situation where inputs (land, fertilizers, seeds,…) als well as outputs are traded on markets
    Some define it as: farmers who have specialized on producing goods and are not self sufficient anymore which and sell their products on ‘markets’
    Some define it as: farmers who use labor from outside the family (wage labor or bound labor, i.e. slaves or serfs)
    Some define it as: farmers who explicitely do not use paid or other labor from outside the family, but take part in market transactions (this one is very wrong, of course)

    The most consistent definition I came across can be found in: Niek Koning, “The failure of agricultural capitalism”, who defines it as an agriculture were, on average, more than 50% of labor is non-family labor. However, as this lumps eighteenth sugar plantations together with seventeenth century wheat farmers in Friesland while it leaves out nineteenth century dairy farmers around amsterdam I’m not too happy with this one either.

    A scientific discussion requires more precise definitions – which by necessity will be more complicated and which take historical and geographical differences into account.

    • Guilherme da Fonseca-Statter
      October 6, 2011 at 9:54 am

      I would suggest that «agricultural capitalism» (or should one say «capitalist agriculture» ?…) is capitalism as applied in the agricultural field of activities. In that sense – an continuing – «agricultural capitalism is that set of activities where the production is mainly (and principally) for the market with the aim of obtaining a profit»…. The issue of the type of labor seems to me to be irrelevant as it is the «profit motive» and the concomitant «accumulation» that define capitalism…

  23. Dave Taylor
    October 5, 2011 at 2:11 pm

    The popular term “Big Business” may leave out some things that could be included, but it is entirely meaningful in that refers to a concept which captures today’s empirical reality. Neo-classical free trade Capitalism is not about doing something USEFUL but about “making money” (Capital) by talking up EXCHANGE values. Even small businesses, with the possible exception of charities like “meals on wheels” and life-style choices like family farms, now have to go where there is money is to be “made”, if only to pay taxes.

    • October 5, 2011 at 2:54 pm

      There is no “free trade Capitalism.” Why do you think it is called CAPITALism? Because capital dominates labor. To dominate, they harness the power of the state to get privileges. Privilege is the oppose of freedom, so capitalism excludes true free trade.

      • Alice
        October 6, 2011 at 8:43 am

        Fred – so what is dominated when people dont have to harness the power of the state (im presuming you would rather do without a state?)
        What then Fred? because someonje always dominnates and if there was no state to dominate they would surely dominate with guns….and / or gold. Dont tell me the people would settle down to a peaceful happy life of liberty because I wouldnt believe you.

        Im not sure I can see that and as faulty as the system is right now (which could be all corrected in one simple piece of legislation – publicly funded election campaigns)…

        So your implicit suggestions re the government being at fault I only see as a chance to correct government for thr better – except that we have had too many bandaids and we have never addressed the root cause (private money -= get the candidate you want in congress) of the problems we face (the mixing of private business with government business to the detriment of both and the majority of people).

      • October 6, 2011 at 2:17 pm

        In response to Alice who advocates “publicly funded election campaigns,” the main problem would still remain – mass democracy. The more radical reform is small-group democracy –

        Small-group bottom-up multi-level democracy was the model proposed by left-anarchists and then by the Bolsheviks, with the slogan “All power to the Soviets!” “Soviet” means “council.” The basis of power would be the local Soviet – a worker’s council or neighborhood council. But the power instead went to the top-down Communist party.

        If something needs to dominate, let it be “All power to the Soviets!”

  24. Dave Taylor
    October 6, 2011 at 11:19 am

    Exactly. That’s why a million economists are wrong. But because it is that way it doesn’t mean it has to be. Bad habits can be replace by better ones.

    I’ve just been listening to David Cameron’s keynote speech, in which he blames socialists for trying to look after employee’s interests. “How Economics Forgot History”: Cameron didn’t even refer back to the abuses and folly (specialisation in “service industries”) of the Thatcher government, never mind Henry VIII’s privatisation of the church (i.e. community-based) welfare system, with subsequent enclosures depriving most of the population not only of their jobs but with the feudal livelihoods which went with them. Within sixty years Elizabeth I was having to build almshouses and Francis Bacon to reinvent science in the hope of generating employment for them dispossessed. Cameron’s all in favour of localism, but forgetting we can do our share only if we have livelihhod. The American answers to this usury were communally agreed Constitutional Law to which(c.f Benedict’s 6th Century “Rule”) and Greenbacks (issued as communal credit, not private credit in exchange for a mortgage from those who have accumulated monetary surplus).

    In one of his books, Obama commented on how much more meaningful the accompanying discussion of the reasons for them were than the bald statements of the Constitution. The brief comment on its success in my copy of Benedict’s Rule is not wisely dismissed as “not invented here”, Fred, and perhaps it will give Alice too another perspective on the problem.

    In the unsttled, strife torn Italy of the sixth century, Benedict’sRule offered definite direction and established an ordered way of life that gave security and stability. He sought to lay down “nothing harsh, nothing burdensome”, but was intent on encouraging the person coming to the monastery: “Do not be daunted immediately by fear and run away for the road that leads to salvation”.

  25. joe magner
    November 28, 2011 at 5:51 am

    So much verbiage here i hear. What about a simple way of looking at it. Knowing the exchange rates effect lots lets just:

    draw a circle around a nation and look at how much goes in and how much goes out, if more goes out then somehow the money that went out has to trickle back it for any kind of balance so china either keeps its forex in a bank(?) a loan to someone or buys other things or maybe buys u.s. treasuries. Back several decades Japan bought buildings – a sort of collectibles unless they rented them – and that money came back to pockets here. The when the market went bust Japan’s ownership was just cancelled out as losses. So far China things is wiser to buy U.S. notes but then Japan learned that lesson also.

    Europe brought that money back into the investment banks as savings or rather exchanges for U.S. Mortgage Derivatives, and we know what happened to them.

    The draw the line works well anywhere to decide if whats inside is loosing or gaining but one does have to be careful for figuring out what to count and how much it counts.

    Sure there is innovation possible by importing goodies, ask any of the Semiconductor Mfg’s here – well the ones still left – how well this works, they have been manufacturing over seas for many moons. I can take my Chinese made shovel and dig lots of neat ditches here or even some foundations for builders…..ops..those jobs go to mexican workers and they truely do excellent work and dont bitch (in english) about their bosses who no longer hire the expensive Americans…and those Chinese shovels keep everything going.

    Nations, empires, burn at the edges with trade because thats where the activity and money is. The interior of the Empire suffers as inequality, made at the edges from cheap products, forces division between the classes and when the inequality is high enough chokes off the ability to have an inside the country cash flow and those in business know what that means and the British found this out and the Americans are finding it out now and the Romans finally had to ask the Christians who were taking care of the poor INSIDE the empire to loan them out for a bit in exchange for becoming part of the ruling class and we now have the Roman Catholic Church from that bit of internal economic dying that took when Rome was burning hot economical at the margins/fronter of the empire.

    Can anyone say Boston Tea Party?

  1. No trackbacks yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.