Brad DeLong's Semi-Daily Journal (2004)

damn Brits. What gives them the right to change the spelling?

As usual, The Economist looks at the global picture but does not address the impact of globalization on employment in developed countries, which is often the unstated underlying impetus behind the anti-globalists' actions.

No, The Economist likes "smarter" Paul Krugman.

I can't help thinking that there's a false dichotomy underlying this whole debate.

Does this book explain why globalization and free
trade lead to an increase in the median wealth
of those involved? (Assuming that they do, of
course.)

I could believe that free trade increases the
average wealth, but I would love to understand
why it can't happen that most of the wealth goes
to the owners of the companies involved (for
example), while the rest of the population ends
up worse off.

" (Sometimes businesses respond to such monitoring, and the possibly ill-advised demands that follow from it, in ways that slow development and therefore hurt the poor.)"

The Economist, tiresome all the way down.

I'm still not sure I understand the insistence, in Bhagwati too, that environmental regulations belong outside the scope of trade agreements. He would prefer government action and consumer boycotts. Well, you can see where we are wih THAT... heck, the government is subverting environmental protection in THIS country; even trying to squelch consumer right-to-know and citizen input.

Why do I always have to go and FIND OUT whether a certain food comes from abroad, and whether its cultivation pollutes their rivers, decreases biodiversity, disenfranchises the natives? An insulting waste of time! Why not just disallow trade in environmentally damaging products--and avoid all these new, monumental transactions costs?

You mention everything except the negative impact of globalization on wages in the developed world -- which could be your undoing yet. In personal conversation, Bhagwati made the point that it is not enough that compensation, in principle, can make everyone better off under free trade: the compensation must actually be implemented. Yet nary a word about this in your review, nor, I presume, in his book. What's wrong with you guys?

"...he rather uncritically applauds the business-monitoring role that NGOs play in many developing countries. (Sometimes businesses respond to such monitoring, and the possibly ill-advised demands that follow from it, in ways that slow development and therefore hurt the poor.)"

Oh please.

I read this morning about mercury in the SF Bay from the gold mining of the late 19th century, how it' STILL coming down the rivers, poisoning us, the fish, the bay and how much it will cost to clean up. They got rich, we're poisoned AND have to pay to clean it up.

We sure didn't follow any "ill-advised demands" to "slow development" back then, and look where it got us now: Poisoned and paying for it, too!

If you think about it a while you might make the connection.

lee a.-
I don't think trade policy should be used to force foreign countries to fix their environments. One, because trade policy is an ineffective stick. Two, because something like a tariff or a quota will lead to distortions in both consumption and production - overall social surplus will be lowered in the U.S. and dead weight loss will exist because of underconsumption and overproduction. A better, less distortionary way to fix the environments in other countries, if that's really a high priority, is for the U.S. to subsidize the clean up. This represents a more direct, less threatening way to get the job done, and leads to far less market distortion and deadweight loss.

abc-
if a country has a comparative advantage in labor-intensive industries, workers will have increased wages and capitalists will have lower profits. Moreover, capital-intensive goods will be cheaper than they would have been in autarky. So under free trade, in a country where labor-intensive industries enjoy a comparative advantage, workers will be unambiguous winner and capitalists will probably lose out. However, the gains of workers should be greater than the losses borne by capitalists.

Developing countries tend to have a comparative advantage in labor-intensive industries, while developed countries tend to have a comparative advantage in capital-intensive industries.

There's no doubt that trade results in winners and losers. The key is for government to redistribute wealth so both capitalists and laborers benefit from free trade.

el gringo-
bhagwati was krugman's professor at MIT. if you like krugman, you'll probably like bhagwati - he's a really good writer and he's funny. So far, In Defense of Globalization is as good as anything I've read by Krugman (The Accidental Theorist, The Age of Diminished Expectations, and Peddling Prosperity).

"f a country has a comparative advantage in labor-intensive industries, workers will have increased wages and capitalists will have lower profits."

Uhm, isn't that wrong by definition? To have a comparative advantage in labor-intensive industries is to have a plentiful supply of cheap labor.

More in general, I refuse to take any discussion of globalization seriously that does not at least make the distinction between free trade and free investment and their effects. David Ricardo himself made the strong distinction between the case of England and Portugal where capital was imobile and where capital was mobile. Even the standard trade models do this, because as far as I know the Hecksher-Ollin model doesn't even take the impact of free investment into account. As one of the "Anti-globalists" I'd be the first to point out that I'm not anti-free trade, its free investment (a.k.a international capital mobility) that I take serious issue with.

Lorenzo:

I'm right. You're wrong. Here's why:

In autarky, a country with a comparative advantage in labor-intensive industries will be able to produce labor-intensive products relatively cheaply compared to the rest of the world. HOWEVER, once the country enters the world market, because it can produce labor-intensive goods relatively more cheaply than other countries, world demand will force the price of such goods in the country to rise. And because of the Stopler-Samuelson effect an increase in the relative price of a product will raise the return to the factor of production that is used relatively intensively - that is wages of workers WILL INCREASE.

Also, Bhagwati, within the first 2 pages, makes clear that he addresses economic globalization, and explains what he means by economic globalization. He addresses investment - you should check out his argument. I think he says that investment can be a good thing if it is well-regulated and prudently administered.

Brad quotes Economist: Indeed, if the book has a weakness analytically, it is that Mr Bhagwati is occasionally too generous to his anti-globalist opponents—as when, for instance, he rather uncritically applauds the business-monitoring role that NGOs play in many developing countries. (Sometimes businesses respond to such monitoring, and the possibly ill-advised demands that follow from it, in ways that slow development and therefore hurt the poor.)

I always get Economist on the red-eye flights - a great sleeping aid. Highly recommended.

I'm not against globalization per se as touted, but I have a big problem with all free trade arguments - the implicit assumption that facts on the ground necessarily agree with the theories espoused. I think if there is any similarity on the Bush trade program and his predecessor Clinton and the Iraq war, how all of these are curiously detached from any falsifiable thesis and agreed metrics on results.

I am not so much concerned with esoteric matters as comparative advantage as simple good old anti-competitive behavior, dumping, market share dominance, cheating, stealing, breaking trade agreements, excessive currency manipulations, and intellectual property rights encroachment.

I think these are the main factors, and are overlooked again and again - even after the manifest problems with the export dominant economic growth model, the failure of capital control deregulation in the Asian Financial Crisis, and the possible reccurence of the event again.

http://www.atimes.com/atimes/Asian_Economy/FE01Dk01.html

http://www.atimes.com/atimes/China/FE01Ad04.html

All of these little "practical facts" are generally overlooked by arguments for the benefits of globalization as it ought to be, rather than as I think a reflection of globalization as it exists.

I've always thought globalization was, in anything longer than the very short run, much like the weather. Perhaps you can hand out umbrellas to people who are getting rained on, but attempts to stop the rain, or build a canopy over the city, are unlikely to be helpful and likely to do more hamr than good.
Not to understate the importance of developing and distributing umbrellas.

hume an: Are you familiar with the (Marxist) concept of the "reserve army of the unemployed"?

Consider a situation where the demand for the labor-intensive goods of your economy is limited, even if large, but the economy has an oversupply of potential workers (relative to demand for the goods). In the situation the price of the goods may go up, but it may not be passed through to the workers. Anybody who asks for a raise will be fired and replaced with a new person happy enough to get a job. That of course holds only if the cost of this transition low, e.g. the labor does not require rare or difficult to learn skills.

Economy is a bit more complex than a system of communicating pipes. Think of it at least as communicating pipes with spigots in various places, and people controlling the spigots filling (insert your favorite fluid) into their own bottles.

CM wrote:
"hume an: Are you familiar with the (Marxist) concept of the "reserve army of the unemployed"?"

Hume's response:
no.

Globalization, in the sense that we have a highly global economy is a fact. However, the question is how, and to what extent, should the existing governing institutions of the current system, be reformed. Or should we scrap them and start over? Capitalism is fine, assuming appropraiate contraints and regulation. Free trade is fine, but the system needs to pay more attention to externalities and the vulnerability of those countries who tend be dominsated by the enforcers of the system, the global corporations, and the rich, industrialized countries.

It is tiresome to hear about globalists vs. anti globalists. I agree, this tends to be a false dichotomy. Let's not let pure, imaginary systems like free trade get in the way of solutions of real problems experienced by real people.

For starters, a system that allows the WTO to overturn environmental regulations because they interfere with "free trade" is wrong and needs to be fixed or scrapped. If the world's people demand a more transparent and democratic system, then there needs to be an accomodating response.

Unless we can fashion a more responsive and more democratic system, much of the debate will continue to be in the streets, and the baby will be thrown out with the bath water.

The review leads me to think the book is cheer leading for globalization. I don't think that is necesary or helpful as I think globalization is inevitable in one form or another.

The critical questions is how we mittigate the negative consequences. How do we enshrine worker and environmental protections?

Hume:

"I'm right. You're wrong. Here's why:

In autarky, a country with a comparative advantage in labor-intensive industries will be able to produce labor-intensive products relatively cheaply compared to the rest of the world. HOWEVER, once the country enters the world market, because it can produce labor-intensive goods relatively more cheaply than other countries, world demand will force the price of such goods in the country to rise. And because of the Stopler-Samuelson effect an increase in the relative price of a product will raise the return to the factor of production that is used relatively intensively - that is wages of workers WILL INCREASE."

That isn't at all necessarily true, as far as I know. I don't think you can necessarily state that an increase in global demand for a product produced in said country will increase wages because it would depend on the employment level, wouldn't it? I mean, if they could simply add more workers at the same wage rate, why wouldn't they? The price of the factor input shouldn't have to rise if the supply remains significantly in excess of demand.

"Also, Bhagwati, within the first 2 pages, makes clear that he addresses economic globalization, and explains what he means by economic globalization. He addresses investment - you should check out his argument. I think he says that investment can be a good thing if it is well-regulated and prudently administered."

You've missed my point. I didn't say that investment isn't addressed, rather that many writers treat it as indistinct from trade, especially on the "pro globalization" side.

Or: since the amelioration of Transactions Costs almost always involves an INSTITUTION, why don't Economists give more privilege to POLITICS in their Micro discussions of Internat'l Trade?

"Why do countries produce different goods?...The whole story goes under the name of the theory of 'comparative advantage'(Heckscher-Ohlin-Model).Loosely,comparative advantage says that countries trade in order to benefit from their differencies."

To hume an:Bhagwati (Free Trade, 'Fairness' and the new Protectionism) compared to Krugman (Int. Economics, Rethinking Int. Trade, Currencies and Crises, Pop In(t), etc, etc,) , sorry, no chance.PK, with respect to Bhagwati and (dixit): far better than his former master(s)....: a genuis!

So Brad, why post an article and not offer an opinion? At least this is a subject you should be able to provide some educated observations on. While posting article is valuable, an opinion on these subjects would add volumes to the subject, make us think, providing at minimum another point of view.

Hume is wrong about the theory. Ian Steedman and his colleagues demonstrated back in the 1970s that, for example, the Stopler-Samuelson theory, in its price form, is mistaken.

The demonstration that HOS theory is mistaken is a corollary of the Cambridge Capital Controversy.

Robert:

Would you please tell me the title of the Steedman paper. I want to read it.

Steedman had two books about that time on this topic. One is a collection of papers not exclusively from him:

Ian Steedman, Fundamental Issues In Trade Theory, MacMillan, 1979.

One paper is:

Ian Steedman and J. S. Metcalfe, "Reswitching, Primary Inputs and Heckscher-Ohlin-Samuelson Theory of Trade", Journal of International Economics, 1977.

While waiting for the rehash of the H-O debates, some might want to read Stephen A. Marglin's "Oursourcing Common Sense," April 25, 2004 (LA Times)
http://www.latimes.com/news/printedition/opinion/la-op-marglin25apr25,1,7371531,print.story

Harvard's Marglin argues, in part:

"The theory of comparative advantage was the brainchild of 19th century economist David Ricardo.... But the theory doesn't apply well to the contemporary world, and outsourcing shows why. ...

"Where does it go wrong? First, we don't live in Reicardo's world, where trade is determined by fixed natural resources. In [Ricardo's] world technology and capital are immobile.... Second, the theory imagines a world of generic Eniglishmen and Portuguese who are both worker and consumer, both worker and owner. ... Today,.... Consumption is separate from production. Even more important, few of us own the machines, tools and equipment needed to produce goods and services. Instead, we work for wages....

"... In today's world, we can't understand international trade in terms of abstractions like 'Americans' and 'Indians' because the consequences of outsourcing are dramatically different for different groups. American owners can gain while American workers lose. Consumers can gain while workers lose.....

"... John Maynard Keynes [observed] that before we can construct relevant thories for the present, we have to unlearn the useless theories of the past. In Keynes' view, shedding the old was more difficult than building the new."

Shedding old useless theories seems very hard indeed here in these forums. Nowhere is this more true than in discussions of "comparative advantage." dave

In my previous post, I forgot Stephen Marglin's conclusion on "Outsourcing" and "Comparative Advantage." Here it is:

"The practical men and women who are responsible for trade policy today are equally the slaves of outmoded dogma. The first step to a better trade policy is to clear our minds of the cobwebs of comparative advantage, the refuge of those who find it easier to justify the havoc wrought by outsourcing than to re-examine received ideas. We need trade and we need trade policy. We don't need free-market mantras."

Stephen A. Marglin's "Oursourcing Common Sense," April 25, 2004 (LA Times)
http://www.latimes.com/news/printedition/opinion/la-op-marglin25apr25,1,7371531,print.story

For a clearer understanding of the H-O debate, on what Joan Robinson called "Begger-My-Neighbor Remedies for Unemployment," and more see:

Robert A Blecker. "Global Keynesianism Versuse the New Merchantilism: International Economics After Joan Robinson." October, 2003
http://nw08.american.edu/~hertz/Spring%202004/Blecker%20on%20Robinson%202003.pdf

Blecker builds on the base of Robinson and others, and concludes, in part:

"... the perpetual recycling of Asian net export earnings into the acquisition of American debt and the maintenance of an overvalued dollar cannot be sustainable, long-run equilibrium for the international payments system, and when this house of cards collapses, it may well take the global economy down with it unless measures are put in palce to prevent a collapse. ...."

"The risk of a new mercantilist trade war and the concomitant need for global Keynesian macro-management and policy coordination are now greater than at any time since the Great Depression of the 1930s." ...

Dollar devaluation alone will not fix our problem. It is, indeed, one of four "begger-thy-neighbor" strategies long ago elaborated on by Joan Robinson. The other three are: wage reductions, export subsidies, and import protection.

Blecker, Paul Davidson and others help us better understand the difference between comparative advantage and absolute advantage during the path-dependent meanders of contemporary economic development.

Blecker includes this quote from Robinson:

"Export lead [sic] growth' is the most convenient way of running modern capitalism. Who succeeds at any moment is accidental, largely depending upon historical circumstances and political and psychological influences. Success leads to success and failure engenders failure."

dabbler dave quotes Marglin:
"Where does it go wrong? First, we don't live in Reicardo's world, where trade is determined by fixed natural resources. In [Ricardo's] world technology and capital are immobile.... Second, the theory imagines a world of generic Eniglishmen and Portuguese who are both worker and consumer, both worker and owner. ... Today,.... Consumption is separate from production. Even more important, few of us own the machines, tools and equipment needed to produce goods and services. Instead, we work for wages...."

Hume writes:
Doesn't Heckscher-Ohlin address many of the shortcomings of Ricardo? Marglin's article isn't particularly devastating to comparative advantage. Moreover, since when does economic theory mirror the real world? It is a deliberate simplification, but one that has great explanatory power.

dabbler dave writes:
"Shedding old useless theories seems very hard indeed here in these forums. Nowhere is this more true than in discussions of "comparative advantage."

Are you saying comparative advantage is one of those "old useless theories?" Are you basing this insight on a couple of L.A. Times articles you read? You may have a considered grasp of the theory, but your cavalier attitude belies that possibility. I'll be the first to admit that I don't know much about international economics, but I'm working hard to learn, and I have a lot of respect for the theory. So let's hear it. Tell me in your own words why the theory of comparative advantage is completely invalid or as you call it "old" and "useless." I have a lot more respect for people who at least make the effort of backing up what they say, especially when they so quickly and easily consign bedrock economic thought to the rubbish pile.

I asked my int. econ. prof. Robert Lawrence about whether Stolper-Samuelson has been invalidated. Here's what he said:

"I would disagree with those who say the Stopler-Samuelson theorem is "invalid". I believe it is correct given its assumptions. There is no problem in measuring the returns to labor --i.e. the wage rate, to skilled labor and to land. So for these factors there is no problem with Stolper-Samuelson."

I don't think there's a general consensus among economists over the invalidity of Stolper-Samuelson. I'd be willing to bet that most economists believe it is valid.

Hume asks me, "Are you saying comparative advantage is one of those "old useless theories?"

NO. All I am saying is that we need to consider things in total AND at the margin, following old advice from Ronald Coase.

People who believe that they can apply the theory of "comparative advantage" in real-world policy making, particularly when they ignore the theory of "absolute advantage," and a host of other theories, lead us down paths to destruction.

Here are a couple of my snippets from earlier DeLong forums:

-----------------------------
("The Politics of Outsourcing," 3/18/04)

PS.. Anybody want to help me better understand whether Paul Davidson is right, and according to whom, in his remarks on “comparative advantage,” suggesting that:

"… if there is anything economists should have learned since Keynes, it is that one cannot prove that there will be gains from trade that both economies will share unless one assumes that there is full employment in both economies both before and after trade.

That brings us to a second problem in applying the law of comparative advantage to the real world. The textbooks assume that the gains from trade due to the law of comparative advantage occurs only if neither capital nor labor are mobile across national boundaries. If capital is internationally mobile than the usefulness of this "law" in determining trade patterns is diminished. With free international capital mobility, a good will be produced where it is most profitable, i.e., where units labor costs are lowest. Thus in your two economy model if one country has an absolute advantage in that unit labor costs are lower for the production of both bicycles and computers, then that nation will attract enough foreign capital to produce all the bicycles and computers for the global market. Production and employment in the other country will decline to zero."

http://csf.colorado.edu/forums/pkt/jan98/0124.html

--------------------------
("Keep Interest Rates low," 3/25/04)

PSS.. If nothing else, remember the words of Frank Akelman from his paper subtitled “Alternative Theories of Free Trade and Globalization”—
http://www.ase.tufts.edu/gdae/policy_research/tradetheoryQuebectalk.pdf

“…there are undeniable benefits of specialization and trade.” And
“… the unregulated market does the best possible job of producing things that consumers are willing to pay for – IF we accept a long series of unrealistic assumptions about how the world works.”

Hume: If trotting out the HOS argument is the best you can do, then you need to stop studying economics and live some. Advantage is brutal and mean, and capital has the total advantage in the world. Now capital makes more profit in the thrid world where it is scarce, than in the first world where it is plentiful. The only reason why capital is scarce is that it is insecure- you should read some Mancur Olsen as an antidote to those beautiful mathematical and mechanical constructs. Or read the history of country like Argentina which should be rich, but is not.

"Why do I always have to go and FIND OUT whether a certain food comes from abroad, and whether its cultivation pollutes their rivers, decreases biodiversity, disenfranchises the natives?"

You have to go and find out because you're the one who is purporting to care. Why should others be forced to pay for your desire to know? (This is especially true when your desire to know is about some very subjective things, i.e., "decreases biodiversity," or "disenfranchises the natives.")

" Why should others be forced to pay for your desire to know?"

Why should the global society be forced to pay for the externalities you're benefitting from but not paying for? When you purchase products that are produced in an environmentally degrading, if you do not pay the cost of, say, water polloution it doesn't mean that the cost goes away; just that it is paid for by other people. You, however, are the one gaining the benefit from the product. I think that, since you're the one gaining the benefit, you should be the one "forced" to pay the full costs incurred.

Dear God, I should really preview before posting...

Sentence 2, para 2 in the above post should read "...produced in an environmentally degrading [i]manner[/i], if you do not pay..."

And pollution isn't spelled that way.

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