Comparative Advantage and Global Trade Fragility

One of the cornerstones of the global economic status quo is globalisation and integration of markets. Here’s the growth in world trade as a percentage of global GDP since the 1970s:

worldtrade

There have been two key forces behind this outgrowth in global trade. First of all, the American military acting as hegemonic global policeman with bases in more than 150 countries and backed has created a situation generally known as the Pax Americana where goods and intermediaries can be shipped around the globe with minimal fear of piracy, seizure, theft, etc. Second, the international community has incentivised trade liberalisation through the policies of organisations including the International Monetary Fund (IMF), and World Trade Organization (WTO) requiring nations requesting loans or aid to open their markets to foreign trade competitors.

Most global policymakers and trade economists remain committed to and ultra-bullish about the agenda of global integration of markets. The OECD claims:

If G20 economies reduced trade barriers by 50%, they could gain:

More jobs: 0.3% to 3.3% rise in jobs for lower-skilled workers and 0.9 to 3.9% for higher-skilled workers, depending on the country.

Higher real wages 1.8% to 8% increase in real wages for lower-skilled workers and 0.8% to 8.1% for higher-skilled workers, depending on the country.

Increased exports: All G20 countries would see a boost in exports if trade barriers were halved. In the long run, many G20 countries could see their exports rise by 20% and in the Eurozone by more than 10%.

The overarching intellectual motivation for these policies is found in the work of the English classical economist David Ricardo and his neoclassical successors. The concept of comparative advantage introduced by Ricardo and expanded and formalised via equilibrium models by neoclassical economists including Samuelson, Mankiw, Hecksher and Ohlin (etc) has underpinned most of these policies.

Comparative advantage is the idea that nations benefit from specialising in what they are best at. Ricardo introduced the notion during debates about Britain opening her markets to European trade. Ricardo pointed out that total output and welfare would be greater for all countries in total if they specialised in what they were best at, and traded with each other to get what they wanted.

This principle works in Ricardo’s simple verbal model (and in the more sophisticated equilibrium models developed since). However empirical studies and meta-studies of modern day trade liberalisation suggest that there are some problems with this theory in practice.

Dani Rodrik noted in 2001:

Do lower trade barriers spur greater economic progress? The available studies reveal no systematic relationship between a country’s average level of tariff and nontariff barriers and its subsequent economic growth rate. If anything, the evidence for the 1990s indicates a positive relationship between import tariffs and economic growth.

The evidence on the benefits of liberalizing capital flows is even weaker. In theory, the appeal of capital mobility seems obvious: If capital is free to enter (and leave) markets based on the potential return on investment, the result will be an efficient allocation of global resources. But in reality, financial markets are inherently unstable, subject to bubbles (rational or otherwise), panics, shortsightedness, and self-fulfilling prophecies. There is plenty of evidence that financial liberalization is often followed by financial crash — just ask Mexico, Thailand, or Turkey — while there is little convincing evidence to suggest that higher rates of economic growth follow capital-account liberalization.

So what’s the difference between theory and reality?

There are a number of potential reasons why the theoretical promise of comparative advantage has not played out in reality.

First is graft and corruption. If countries are taking on loans from international institutions, and those loans are being deposited in the Swiss bank accounts of corrupt officials or businessmen instead of being spent on improving industry, skills or infrastructure, then what chance do developing countries have of developing?

Second is the danger of bubbles during the liberalisation process. Global capital flows into newly-liberalised countries can stoke bubbles in almost every sector (but especially equities, real estate, etc). When the bubble bursts, capital flows out, leaving the domestic economy deeply depressed.

Third is the social upheaval costs to labour, skills and institutions. As we have seen in the United States, manufacturing jobs and skills migrated abroad. Workers often cannot be retrained cheaply and easily, and often do not want or cannot afford to migrate to wherever their skills would be best-compensated. This stickiness can result in endemic unemployment and resultant economic weakness.

Fourth is the cost to capital stock.

As Steve Keen noted:

Some capital is necessarily destroyed by the opening up of trade.

Since capital is destroyed when trade is liberalised, the watertight argument that trade necessarily improves material welfare springs a leak.

Converting capital stock again and again to keep up with changing economic winds can be an expensive, difficult and mistake-ridden process.

Fifth is the problem of trade fragility.  Events like natural disasters and foreign wars can disrupt production and trade flows. Specialisation could cripple a country that depends on imports from foreign disrupted countries. Dependency on imported goods and intermediates renders countries vulnerable to shocks outside their borders. Wars and disasters that affect exporters have at times seriously disrupted and damaged the economies of importers, and vice versa.

The fact that trade liberalisation can have large social costs, create economic fragility and produce asset bubbles is a cause for pause. Is IMF-imposed globalisation opposed by the wider public really producing freer markets, or is it a misguided central planning experiment? Has the dogmatic pursuit of globalisation left global industry fragile to supply chain shocks caused by natural disasters and wars? Can the status quo really even be considered free trade, given that it is supported and smoothed by huge military-industrial subsidies? Does freedom of trade not also include freedom of nations to choose to protect domestic industries, institutions and supply chains from foreign competition? Why should the industries of developing countries be expected to compete against corporate multinational juggernauts?

While global trade may have provide a major disincentive against trade-disrupting wars, it seems probable that it has created a deep underlying systemic fragility. Trade interdependence means that regional or domestic shocks to production like a war or natural disaster may have consequences throughout the entire world, transmitted through dependencies. Similarly to the interconnective global financial system and the 2008 financial crisis, geopolitical shocks in coming years may well be magnified by globalisation.

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78 thoughts on “Comparative Advantage and Global Trade Fragility

  1. “Some capital is necessarily destroyed by the opening up of trade” is virtually equivalent to saying… “because doing X sometimes costs the people involved more money than they receive in profit, doing X is, in general, not profitable” … Also…these loans are given to governments…the system itself, with central bank employees of about 500 or so across Earth making such important decisions in combination with semi-nationalised banks (explicitly, now)…could hardly be called a free market! You say “nations” but what is a “nation” ? It’s just people!

    • Well the current frameworks are ones of national democracy. Neither system of IMF-style globalisation nor semi-protectionism is perfect. I’m just trying to work out which is freer, and my honest answer right now is semi-protectionism.

  2. I would say, though, that the comment

    “Does freedom of trade not also include freedom of nations (people) to choose to protect domestic industries, institutions and supply chains from foreign competition”

    A person, I think, can do whatever they want to protect the cafe they own, or the industry they oversee, so long as it’s peaceful and not forcing other people to not buy their competitors’ products/services- if I, as a cafe owner, paid the local Mayor to imprison/threaten people with imprisonment/monetary fines if they were to visit the cafe on the other side of the road to mine, that I think is not very good governance!

    • Nations are configurations of people. If one configuration decides democratically to impose tariffs on imports from other configurations, I don’t really see any problem with that so long as those who disagree with that decision are free to leave (which is actually not the case a lot of the time in places like America).

      • I don’t know why those who disagree and are aggrieved should have to leave. With Bitcoin anonymous assassination pools, the aggrieved may in the future be able to purchase some justice against those who trample their freedoms.

      • Yeah, exactly! That’s the problem with such “configurations”, or groups of people (necessarily?) being bound together by a certain type of (majority?) rule which they have not volunteered to be contractually bound by;

        We were all born into democracies, remember.

        It’s a point this scholar, a guggenheim fellow, elaborates on far more eloquently than I ever could, when discussing the problems involved with succession, in light of its ability to create (unwilling) minorities amongst the newly succeeded group.

        IE>

        Say X succeeds from Y – what if Z, who was and remains in X, never wanted to succeed from Y?

        The idea that mob rule may legitimise the application of unwanted force onto others (whether for torture or tariffs is, to say the least, problematic). This is all stems from the idea of “national sovereignty”, which has built-into-it an implicit assumption that citizens are the (“public”) property of a government. This is largely subconscious, particularly in the minds of elites, but observable when ‘subjects’ or citizens are referred to in ways like:

        ‘We need to protect our people’ – as if a farmer were talking about defending his cattle from wolves, for example.

        You are permitted to rent space and operate businesses, but you finally must exist to serve your master, the government, through the supply of (forced) revenue or some such other “mechanism”…

        It will not, I trust, surprise anyone to realise that self-governance and democratic-governance are largely mutually exclusive phenomena: after all, do you ever vote against yourself? No! Your choices are your own! That is explained here

        http://archive.mises.org/13557/hoppes-argumentation-ethics-again/

        • Thanks for the excellent links. I’m adding both Neuwirth and Barnett to my reading list. I especially liked http://stealthofnations.blogspot.com/2012/01/candy-man-can.html Neuwirth’s lecture about the candy man who does nothing more than hawk candy bars because I believe the problem of economic collapse is so related to the idea of velocity. The candy hawker turns over his inventory probably 300 times/year with, probably, no more than 2 hours of labor/day. Compare this to http://research.stlouisfed.org/fred2/series/MZMV where the aggregate velocity is approaching one and you will see how capitalism always rejuvenates itself, a notion that got Kondratieff shot in a labor camp.

          BTW, not to be a pointy head but the word you want is “secession” rather than “succession”.

        • I am not fully convinced there really is any such thing as a generalised velocity of money. It’s just an indirectly observed variable used to join up MV=PQ. All money has a different true velocity. V is just a fudge.

        • I also did not voluntarily agree to the distribution of wealth that was in place when I was born. And yet this is how it it and I cannot change it. That’s just life, learn to deal with it in a reasonable way rather than following ideological fantasies.

        • I was remarking on Allister’s comment basing his arguments on the fact that he didn’t agree to the form of government that was in place when he was born. While that point is true, it is really not a very useful one.

        • Yes, it’s a fair criticism.

          I didn’t agree to the legal-judicial-social compact that existed when I was born. I can try to change the things I don’t like — or leave and go somewhere I like better — but deconstructing or denying the pre-existing social compact won’t make it go away.

        • @Nicolai Hähnle and Aziz…you both need to “get real”. It is not “ideological fantasy” to think there ought to be some underlying principles regarding human freedom/liberty. And, neither is it a denial of what we live under today.

          You talk as if the “majorities” are benign.

          The problem with your argument(s) is that it implies that there is a moral equivalent between the democratically elected government of 1934 Germany (just to pick one of many examples), which in its early days fits your test of “(political) freedom to leave”, and today’s “configuration” in USA (even with its imperfections as discussed above). You think the folks who live in each have to “deal with it”, because “that’s just life”.

          The more we leave in the hands of a central power (majority elected or not), the more we will see that power abused against the very people subject to it, invariably to the benefit of the few.

          History has repeated this pattern over and over.

          Aziz, you especially make some interesting and well thought out posts here. Sad to see that you just adopt this intellectually lazy notion.

        • @bigmac: I actually agree with what you write. The problem lies in what you _don’t_ write, namely the fact that the “central power” doesn’t need to be in government, because private power can be equally corrupting (and, in fact, I would say that it is _more_ corrupting, since at least the contemporary forms of public corruption tend to be caused by the influence of private financial powers).

          It really boils down to this: You didn’t agree to the constitution and law of the land as it existed when you were born, and you are suspicious of those who hold powers explicitly granted to them by law. That’s all well and good.

          But do you appreciate the fact that you also didn’t agree to the distribution of wealth as it existed when you were born? Do you appreciate the fact that this wealth, especially when wealth inequality becomes extreme, also creates power for those who own it?

          And most importantly: Do you realize that, to somebody who is subjected to some abuse of power and suffering from it, it doesn’t matter whether this power is wielded by government or by some corporation? And would you go to the same lengths to fight against corporate power as you go against government power?

          If your answer to all those questions is Yes, then we agree. If your answer to them is No, then we agree on many things but not all. Furthermore, I would claim that only somebody who is blind to many forms of injustice could ever answer No to all those questions.

          One should be suspicious of _all_ forms of power. If you are suspicious of government power but applaud private power, then you’re simply a hypocrite.

        • Nicolai, thanks for your response. No hypocrisy. I am against “abuse of power” and no principles come immediately to mind under which an exception is justified. I think our agreement may end there, though, if I read between the lines of your posts…

          “But do you appreciate the fact that you also didn’t agree to the distribution of wealth as it existed when you were born?”

          This “distribution of wealth” argument gets a little tricky. Your underlying assumption appears to be that the wealth is derived from some involuntary process (abuse of power). In our (largely open) society, a good deal of the exchanges have been voluntary. I’m sure you’d come back to say, yes, but there were at least some amount that was not voluntary (e.g. from government, or other instances of “independent” abuse of power). I would respond that existed/exists to the extent that some individuals/corporations have leveraged the power of government for their own benefit, and does not negate my point, but reinforces it.

          BTW, you conflate “corporate power” and “extreme wealth inequality” for individuals. Non-the-less, in context of exercising power, without the aid of government, neither is nor should be able to force an exchange in a competitive marketplace.

          The challenge is, can a government structure be set up (can ours be improved upon) to have exclusive use of power (force), yet have limiting principles and laws that prevent it from being abused (what our Founding Fathers attempted)? Or, can a strictly private based approach resolve this (e.g. per Anthony de Jasay – linked below by Alister)?

          I am unclear what you would have in mind and how that would resolve the abuse of “all forms of power”?

        • @bigmac: I agree that the challenge you pose is essentially the key. I believe that modern solutions are actually fairly good, and just need a bit of tweaking here and there. Where they do fail spectacularly, it is because of corporate influence and terrorism scares.

          As for the strictly private approach, the historical evolution of despotism and feudal systems convinces me that such an approach cannot be stable in the long run. Basically, accumulation of wealth and accumulation of power form a self-reinforcing cycle (wealth creates influence creates power creates unfair advantages in the market creates wealth). This is a given, unless there is some explicit framework of power in place to dampen this cycle – you might quibble about words, but I would consider any such framework to be (part of) a state.

          So a purely private system cannot be stable, because the cycle eventually leads to a point where either the winner(s) essentially take all (regress into some form of despotism/feudalism), or the people re-learn the historical lesson that some kind of state is necessary to keep private power in check. Of course, this process will most likely take some decades or even a century (I don’t think it would take much longer, because after that time, the people who grew up under the old order will have died out).

          Finally, you write: “This “distribution of wealth” argument gets a little tricky. Your underlying assumption appears to be that the wealth is derived from some involuntary process (abuse of power).”

          Of course, a fair amount of wealth (though definitely only a part of it) is indeed _accumulated_ by abuse of power (though not necessarily derived from it). You need look no further than the contemporary financial sector to see that.

          However, I do not need this as an assumption for my distribution of wealth argument. For my argument to work, it is sufficient that nobody can influence the events that happen before their birth. Even if all the wealth inequality had been created by some process that I would consider “fair in principle”, the fact remains that the wealth inequality remains unfair _for me_ (though of course I would only complain if I were born into a poor family), simply because _I personally_ had no opportunity to affect it before I was born.

          To make the point more clearly: If parents sell their child into slavery to pay off debts, then this is clearly unfair to the child, _even in the unlikely case_ that the parents’ debt was entirely their own fault under some “fair in principle” process.

  3. I am sure you are right. Even though globalization expands markets the inter-connectedness of participating economies makes them all vulnerable to sudden changes at either end of the trade which cannot be forseen. That giant sucking sound foretold by Ross Perot has been far more characteristic of the much-heralded international trade agreements than any benefit I am aware of. Wars, natural disasters, political revolution, new technologies and changing international relationships between nations do not happen without consequences.
    Bhutan may have the right answer to the mad race for more and more, environmental degradation, unecessary wars, multi-culturalism, etc. Higher standards of living do not necessarily translate into happier societies. Maybe we should be more concerned with gross national happiness than gross national product.

  4. Nixon is a good teacher in this regard. To loose something, one presumably once had to of ‘had it’, or even ‘owned it’ … like… “I lost my phone”…or “I lost control”…in either scenario the communicator is presumed to have once ‘had the thing’ (phone or control) under his discretion…

    ”The stakes are high and we are playing as if it were a penny-ante game,” Nixon wrote. ”The hot-button issue in the 1950′s was ‘Who lost China?’ If Yeltsin goes down, the question ‘Who lost Russia?’ will be an infinitely more devastating issue in the 1990′s.”

    http://www.nytimes.com/1998/08/30/weekinreview/the-world-moscow-dashes-american-illusions.html?pagewanted=2&src=pm

    • Alister, thanks for your links, especially de Jasay. I was unaware of his writings until now. Some interesting thinking. I decided to respond to an earlier post thread above.

  5. See, China is not debating the role of central bank employees, whereas the US is. The conclusion, if indeed there ever could be some conclusion to such a debate, is less important in this regard, insofar as the US discourse is already more advanced than what occurs amongst any other elite, and suggests that it is not silly to believe that a loosely defined ‘Western’ aristocracy, realising its own objectives align with those held by most people, might well avoid the type of dominance at the hands of the so called Eastern bloc which so many seem to consider inevitable.

    http://www.eurasiareview.com/12122012-krugman-attacks-us-oped/

  6. John, I think the IMF is beginning to reconsider its unconditional promotion of trade liberalisation. It has recently produced a paper that suggested capital controls might be a good idea under certain circumstances – it is only a short step from there to accepting that trade tariffs and import controls might also be a good idea…..

  7. The IMF has in its current mandate a requirement to be an obstacle to trade liberalisation, just by virtue of the fact that it free rides thanks to the application of (unwanted) force. The IMF is not a liberal institution. Quite the contrary, in fact, so that it runs away from free trade should be no surprise.

    It might also be a bit presumptuous to think of the IMF as a global institution, particularly if compared to the World Trade Organization, and to leave unquestioned the idea of its sustainability in any case, and to also not more readily accept that its intellectual authority may be about to undergo a quite meaningful decline.

    To dismiss out of hand these talking points may be to act like what Jim Willie calls a ‘bright blockhead’.

  8. It may pay you to learn a little something from Detlev Schlichter, Frances, as he demonstrates with a degree of clarity that is quite frequently lacking in your own work that, once again, calls for a devolution of currency control from the ECB back to a local lira makes no logical sense unless you’re willing to, then, break the lira into even more miniature components for (artificial) debasement via market manipulation, to say nothing of the Greek State, which you seem to particularly care for, despite forgetting to mention that the former, primary Statesman of Greece now has hundreds of millions in his Mum’s bank account. But, then again, I suppose it’s not fair to allow people to spend their own money how they choose, and we should support the middle man so he can divert funds from practical production to benefit society in order to allow him to engage in sloth.

    http://detlevschlichter.com/2012/12/what-is-wrong-about-the-euro-and-what-is-not/

    Let the record show I consider you, Frances, to be intellectually dishonest.

  9. Pingback: The Doom Collective &raquo Comparative Advantage and Global Trade Fragility

  10. Modern economics is about opening and controlling markets. The military is used to open and maintain, whereas the political system is used to destroy competition.

    As this version of human society dis-integrates, the next version is taking shape. It will be a better system, as it will used lessons learned to create a more productive society until it, too, succumbs to the natural forces that will tear if apart, and so it goes…

  11. Interestingly, I am just reading that…Carl Jung (who was a Swiss psychotherapist and psychiatrist who founded analytical psychology…and who proposed and developed the concepts of the extraverted and the introverted personality, archetypes, and the collective unconscious…and who thought that the psychological process of integrating opposites, including the conscious with the unconscious while still maintaining their relative autonomy…was the central process of human development)…had done some interesting work on the State:

    Jung stressed the importance of individual rights in a person’s relation to the state and society. He saw that the state was treated as “a quasi-animate personality from whom everything is expected” but that this personality was “only camouflage for those individuals who know how to manipulate it”,[41] and referred to the state as a form of slavery.[42][43][44][45] He also thought that the state “swallowed up [people's] religious forces”,[46] and therefore that the state had “taken the place of God”—making it comparable to a religion in which “state slavery is a form of worship”.[44] Jung observed that “stage acts of [the] state” are comparable to religious displays: “Brass bands, flags, banners, parades and monster demonstrations are no different in principle from ecclesiastical processions, cannonades and fire to scare off demons”.[47] From Jung’s perspective, this replacement of God with the state in a mass society led to the dislocation of the religious drive and resulted in the same fanaticism of the church-states of the Dark Ages—wherein the more the state is ‘worshipped’, the more freedom and morality are suppressed;[48] this ultimately leaves the individual psychically undeveloped with extreme feelings of marginalization.

    http://en.wikipedia.org/wiki/Carl_Gustav_Jung#Views_on_the_state

  12. What about the role of China? It’s one of the largest economies but never a free market thus also skewing any potential gains from comparative advantage?

  13. Aziz: As is manifestly the case with a few of your posters, I am not competent to participate in the substance of the debate(s) you have ignited, but I DO understand and commend the process. BUT — isn’t your “Nailed it” legitimizing endorsement of impermanence’s (Dec 15 @ 03:17:05) sweeping generalization condemning globalization (a imprecise term) an aberration? ["All generalizations are false, including this one].

    • In the real world, things often don’t work out exactly as they were designed (as an engineer, I am sure you appreciate this point!). So I’m not saying that all globalisation is bad in principle or even in practice, or indeed that all global institutions or global systems are plutocratic. But there’s no doubt that well-connected insiders, corporations, politicians and bureaucrats have designed the system from the start with their own interests in mind. Well-connected big banks and corporations get bailouts and loopholes in regulation, small businesses that create far more jobs not so much.

    • DG, globalization [or any other form of centralization in human affairs] moves one further from the essence of ones individual potential in favor of the collectivization of resources [especially profits] for the few.

      Can you give me an example of centralization that is positive for the potential of the majority?

      Having said the above, I completely agree with your suggesting that I am anything but correct!

  14. Oops! I failed to add (a generalization!) that Pros&Cons is the best “process” for issues like this one. Well — second best: the best is the universal, “Select those alternatives whose probable consequences are preferable”!

    BTW: what is “bitcoin”?

  15. Umm. I distinctly recall Adam Smith discussing comparative advantage. Ricardo must have expanded the idea. Adam Smith to date is the only person to break down Economics into what it really is. Actions among individuals and the State, interfering! Socialists and Keynesians focus on the “Invisible Hand” paragraph, to discredit his theories. i.e. Invisible hand sounds weird and crazy. Calling someone crazy or alluring to one as is an old Soviet trick to discredit opponents.

    Societies must have all sectors of industry, because it allows all types of people in that society to participate in the economic development and trade of the country. You must allow different types of jobs to give meaningful work to all types of people. Migrants can make clothes or other non language requirement jobs.

    In Australia we have got rid of ticket inspectors and replaced with machines. Now members of society who were skilled in selling tickets have no meaningful employment. Instead we pay them welfare and pump them full of Prozac.

    We had a Diesel shortage the other day as the one and only plant broke down. The tanker from Singapore was still on its way. Bad luck if there was a war in the Singapore region, and operatives took out the plant. How would we get the crops in? How would we deliver Just in Time deliveries? How would we ship food around the country (Farmers were bringing in their harvests and were concerned about fuel shortages. Very important lesson for Australians about fragility.

    To be honest all this talk of fragility is giving the terrorists too many ideas. It shows how defenceless we are. I hope the people tracking these issues get it sorted out very quickly.

    • BR, do you really believe that TPTB give a rat’s ass about who has a job? It is the function of the middle/upper middle classes to fund unemployment compensation.

      The elite truly believe all the bullshit they espouse just like the majority believe that it OK to set up a system whereby the people who earn all the labor-value have their wealth stolen from them by the slugs who do nothing by organize this grand larceny.

      You have an economic system in which the greatest rewards go to those who produce virtually no economic value what-so-ever. How can this end well?

  16. I disagree that velocity is a fudge. Speaking in terms of aggregates i*T =(fv-pv)/fv = 1-u

    where i is aggregate interest, pv/fv = u is aggregate cost fraction. Then T = 1/V so that

    V = i*(1-u) and since i –> 0 by ZIRP, then V –> 0.

  17. I just want to make a comment in favor of free trade. The only way to really prevent trade barriers from being broken down is by some form of protectionism. So now we have to trust politicians and government officials to protect certain industries while not protecting others.

    It seems to me that this post is very anti-globalization, but I think in the developing world; globalization has really improved living standards. I would never have been able to have the amazing life I have today if it weren’t for globalization. Also, take a look at the countries that have been resistant to globalization. Take a country like India, which before 1991ish was extremely protected. Industries were still in their infancy and the standard of living hadn’t improved in the first 40 years of its independence. Then, the loosening of protectionist policies really allowed India to improve in its standard of living.

    Protectionism is not a solution to anything and it creates more problems that globalization does. The idea that you can protect your industries forever just seems absurd. You need to have adjustments occur often and in as small doses as possible. If you protect industries, workers, jobs, etc., how can your economy adjust to worldwide changes.

    I agree that the neoclassical view of free trade is completely wrong as it neglects all second and third order effects; however, I think the Austrian view of free trade is a much better alternative. Can you imagine by how much our standard of living would drop if a nation didn’t export or import anything? If we only consumed what we produce inside our country? Self-sufficiency is the road to poverty.

    • Protectionism is not a solution to anything and it creates more problems that globalization does. The idea that you can protect your industries forever just seems absurd. You need to have adjustments occur often and in as small doses as possible. If you protect industries, workers, jobs, etc., how can your economy adjust to worldwide changes.

      I agree protectionism can create problems. I think that only critical infrastructural industries (e.g. energy generation, medicine) currently need to be protected from external shocks. In the future if decentralisation grows (e.g. industrial production becomes localised via 3d printing), then even less protectionism may be necessary.

      I am all for economic freedom, but I think that excessive interconnection makes for excessive fragility. However, the only way this lesson can really be learned is through the growth of interconnectivity leading to a crisis.

      • Yes it is critical that anti depressant medication production and distribution is not stopped. This is in reference to your latesy twitter feed regarding shootings and anti depressantvwithdrawal

    • Whilst India and China have gained, the West has lost. What we gain in cheap imports we lose in national diversity of employment and critical engineering skills.

      but I agree it has evened out the income of the world. I guess the 1 % just travels to where the action is, leaving societies they have exploited behind.

  18. Hey people, put your theories down for a moment, get up, and go over tho the nearest window and have a look outside.

    Globalization works really well if you could care less about freedom, and happen to be the recipient of everybody else’s labor-value earned, but for the rest of us, it really sucks [big time].

    • Globalization gave me more freedom that I have ever imagined. It gave me more opportunity that I would ever have had in my wildest dreams. It gave this to my entire family and I was actually having a conversation with my cousin about this very same issue not too long ago; we were in agreement. I agree that there are risks to it(especially related to fragility), but to resort to protectionism as an alternative is absurd in my view. The spread of new ideas and technologies across borders can enhance human development a lot. It is easier for many people in the developing world to put food on their table than at any point in world history. Take countries like China and India where standards of living have shot up across the board. These countries were massively protected/communist(not communist in the case of India, but highly protected nonetheless), but standards of living in those two countries have improved dramatically–and these two countries have 1/3 of the world’s population.

      I don’t think globalization and free trade should be blamed. I think a much larger issue across countries is the explosion of credit that can create massive distortions and misallocation of resources and capital. I think that issue is far larger than the issue of free trade and I think free trade is absolutely necessary in most cases. Free trade provides a bottom-up way for prices to freely adjust and is absolutely essential towards not having a backward economy in the long run. I don’t think it’s really fair to blame globalization for the world’s ills. I think dealing with the massive expansion of credit and debt is a much bigger and more important issue.

      • I just want to add that China and India had almost no growth when they were sheltered and protected. They only started to have growth when they got rid of those stupid protections and opened their economies up. I actually think free trade benefits poorer countries much more so than in does the developed world. Dealing with explosion of credit and too much debt is a far, far more important issue than globalization.

        • What is your opinion on dumping, especially in the context of china having an under valued currency? Australia lead the world in solar cell tech only to have its industry gutted by cheap chinese imports. We had the comparitive advantage in that we had a sunny country to test and roll out, high skilled people, but still lost out.

        • Suvy, I am glad that globalization has worked for you, but this really isn’t about you.

          How about that instead of globalization, aka, the, “if you don’t do exactly what we tell you to do, we’re going to f******* kill you,” school of economics, each country decides how they wish to pursue their own brand of economic growth?

          This is called having a modicum of freedom and the right to self-determination.

        • For some reason, I can’t reply to impermanence and Buddy Rojek directly, so I’ll just reply to my own post.

          I think that manipulating your currency is akin to shooting yourself in the foot. Yes, you will stimulate exports, but you’ll also pull a Japan where you create a massive credit bubble while stimulating exports. I think it’s a terrible idea and it’s actually one of the biggest problems with a rigid monetary standard. It’s the problem that Spain and Greece had in the mid 2000s with the Euro. It’s a problem that other countries had in the early 1900s. In the long run, currency manipulation leads to trade across countries collapsing (just look at European trade over the past 5 years). The whole point of having flexible exchange rates is to fix imbalances in trade. Manipulating your currency distorts capital flows and I don’t think it’s the smartest idea in the world. It might feel good in the short run, but in the long run it usually doesn’t end well.

          As for impermanence, I just don’t think globalization is that big of a problem. Yes, it does carry fragility issues; and in some cases like energy and national defense, it does make sense to have some degree of protectionism. However, I think a much larger issue is the massive expansion in credit, debt, and leverage. I don’t think that globalization is the reason why the West is poorer than it was 40 years ago. I think the reason the West is poorer is because of the massive credit bubbles that went into financing the purchasing of assets. How many people were tricked into spending their entire life savings to put a down payment, only to see the value of the house plummet after the bubble burst as they watched their entire savings go down the drain? I think that is a much larger issue than globalization. Instead of focusing on improving worker productivity and capital stock; the West was overconsuming and wasting that precious capital in gambling on asset prices.

  19. People “import” things because they prefer to buy of said seller. The whole vocabulary of “import” and “export” is misleading, because it assumes boundaries, which cannot be permanently resurrected and also happen to now be rapidly fading, from legal boundaries to language, this is obvious to everyone!

    That “nation State” is over, it’s now mainly a matter of which elite group recognises this reality and starts working to provide the most congenial environment for their relevant constituents (a dynamic factor, not fixed in territory or ideology, of course).

    The European idea of the nation-state, realized after much horrific bloodshed in Europe itself, was always a poor fit for Asia’s diverse mosaic.

    Joseph Roth, who grew up in the multinational Hapsburg empire, was appalled by the imperatives of modern nationalism, according to which “every person must belong to a definite nationality or race” in order to be treated as an individual citizen. Roth, a Jew, suspected that members of minority groups, like himself, would be relegated to third-class citizenship, and vicious prejudice against them would be made respectable in the new nation-states built on the ruins of multinational empires.

    http://www.bloomberg.com/news/2012-12-10/why-asia-s-insurgencies-are-europe-s-shame.html

    The Harvard Business Review author was not wrong

    http://blogs.hbr.org/cs/2012/11/the_economically_out_of_date_n.html

    More inter-connectedness can cause problems, sure, what can’t? But its a balance between concentration and dilution, and if forced to choose the later is probably preferable. Personally, I think State sponsored cartels are the primary issue.

  20. “The crew, with weapons on show, resisted an attempt by Ghanaian authorities to move it by force to a quieter part of the port” – this is a typically ideological response one can expect from a State group: they refuse to acquise in thinking or amend their actions, presumably because like most “bright blockheads” they just cannot see the bigger picture and thus feel entitled to act aggressively by imposing their will on other people, even what that imposition inconveniences or makes poorer people who have not done any wrong by them

  21. If anyone should be termed a “vulture” it is the politicians in Argentina siphoning money off all their citizens by force to no doubt indulge themselves in sloth while simultaneously contributing virtually nothing of value to their subjets, or “citizens”. To not see this is mind boggling.

  22. Lost in all this debate is the simple but important fact that, the people of Argentina did not sign up onto this debt, lest we listen to manic theorists like Frances who will claim a magic “social contract” produced by “majority rule” through political voting opens the flood gates for said “representatives” to attach whatever amount of debt they think right to indenture their employers so that they can enjoy the sensation of making (mostly stupid) promises that either will not ever result as planned, or are instead simply decided to be a swindle.

  23. Well, you don’t have to be genius to realise financiers can begin to just advertise to people that if you don’t wont politicians loosing “your” assets, then stop voting people who run constant deficits, which Greenspan himself noted is simply a means of wealth confiscation! Ah, I’m off to walk in a park now :)

  24. Economic “development” or “progress” [measured in GDP or other similar metric] is a great example of how systems use absolutes to make their case in a relative economic reality. Quality of life has little to do with the overall wealth generated in a society.

    The economic structure [being pyramidal] encourages those at the top to create an phantasm that suggests to the masses below [the apex] that they keep working their hardest so they too might ascend to the top and enjoy the labor-value generated by nearly the entire working world.

    This is a massive scam that those just below the apex [the administrators] foist upon the rest as they dig their shiny black boots into the faces of regular working people in their never ending attempt to complete their journey up greased slope [proving that they are willing to do whatever it takes] near the terminus of their ascension.

    All systems are scams, designed by the few at the top, benefiting the few at the top. If time has done anything, it has allowed just about anybody [again, those willing to do whatever needs to be done] to occupy a top spot.

    Although the apologists [for any system] tell us how much we all benefit from the largess of the noble elite, it is these people [the professional class] who are imprisoned by their fear of having to make their own way in this world, and THIS FEAR is what the elite have always used to buy, bribe, coerce, or force their will upon these cowards.

    So, people see a new BMW or a diamond necklace as the reward for high-stepping in perfect cadence, slaves to TPTB who more than willing to throw these gutless intellectuals a trinket now and again for their timely delivery of the masses.

    And the people come [like clockwork] for their regular drubbing, wholly supported by ALL the institutions, celebrated by the most charismatic and codified as the rule of law just in case their might be a straggler or two out there who still believe in personal freedom.

    Globalization is the grandest scam of all-time, attempting to package the entire human race into one orderly unit in order to be chipped with all the ideas that will make them compliant and servile.

    The good news is that it can never work. But that doesn’t mean that they will never stop trying.

    • If the elite did not create endless governmentdepartments and programmes, then how would their sons and daughters find a job with a long title and excellent pay and benefits?

      All those years at elite schools learning polished grammar and verbose writing skills would be wasted.

      And to think they can have cheaper BMW and other imported brands, rather than the local “uncool” product.

      All I know is that when Australia was highly protected, people had jobs, cheaper housing and cars. It may not have had the consumer choice we have now but society worked. Now people sleep in cars. And we have imported products that break down after a years use. I still use an Australian made kettle that was made before I was born.

      My High School economics teacher argued that trade liberalisation would improve competition, innovation and make Australian products better. I argued the opposite. I won the argument. Now Australian business imports the crap to satisfy budget concious consumers who have seen real wage declines or unemployment. Just like I predicted 20 years ago. An economy is an island. Wealth accumulates when you bar entry to competitors but competitors need your resources they cant produce andmust import.

      Miners are using robots and automated machines to extract minerals, so we cant even have employment in our reources sector in the long run, and our mines are owned by overseas interests. But the elite are in Government and get their fill while welfare languishes behind the CPI rise in essentials.

      Fuck the elite. They are criminals.

      • “Fuck the elite. They are criminals.”

        No, in this convoluted world, they are the mentors and the heroes; those congratulated, emulated, and speculated [upon]; quoted, bloated, and stuffed full of delicacies born from the sweat and tears of every subsistence worker throughout history.

        These are people who suggest that their success had almost everything to do with their own hard work, when instead, the glaringly obvious reality that this system funnels almost all of their wealth to them like the thousands of tributaries to the Amazon, is simply lost in mathematical formulas and non-sensical theory.

        I agree with you, BR, fuck the Elite and their lying and cheating and stealing from most people who only want to take care of their family and live a simple life.

        • We need to promulgate a slogan, and promote it widely

          -100% for the 1%

          TOTAL WEALTH SEIZURE AND DISPERSAL TO THE 99% – Progressively of course :)

        • I worked for many years among a group of physicians who had come to believe that the rest of us were somehow inferior to them. These physicians associated almost exclusively among themselves, were catered to and indulged to the point where they came to believe it was the natural order of things, and they deserved virtually every advantage they received.
          Sexual harassment of nurses, verbal abuse and incredible arrogance were tolerated or ignored by the administrations because a) the physician was the money source, and b) to act against them might shorten one’s career.
          A friend of mine who was an M.D. commented that any group of people given the option of abusing others at will will do it.
          I agree. Fuck them. There are a few of us who will never, never surrender our human dignity regardless of the price and who would never excuse this attitude in ourselves or in others.The bankers and others who have raped and pillaged us have escaped justice for now, but forever is a very long time.

  25. Persistence of “tea party” grass roots volunteers (at least our local group) indicate that there are MORE than “a few of us who will never, never surrender our human dignity”.

    Another elite case: having served both in the military (though not in combat) and the civilian government bureaucracy, I can testify that the latter is more hierarchical — WHO you know, not WHAT you know. I was too junior in the military to judge, but I suspect that in both hierarchies the higher you go the worse it gets — politics and career vs. public interest.

  26. Its easy to take control of the 1% wealth.

    1. Real property seizure (The 1% have the best properties!), then appointment of “Property Managers” the rental going into consolidated revenue.
    2. Seizure of Public Corporation share register, then owners have to reapply, 1% excluded. The resulting 1% forfeited, going into consolidated revenue.
    3. Total reexamination of Government bureaucracy wages and salaries. Many at the top are overpaid!
    4. Retrospective examinations of all “commercial in confidence” agreements and imprisonment of Politicians who facilitated deals against the public interest. They owe the debts not the public. See this example http://www.theage.com.au/victoria/water-users-hit-with-320m-desal-charge-20121115-29ewb.html

    • Maybe simple, but NOT easy! In the US, we must amend the Constitution first.

      US government pay: the FEDERAL government pay scale, with perks, is about twice as high as average private rates. A few states and cities pay comparably or higher.

  27. Pingback: Economists vs the Public « azizonomics

  28. Pingback: Why China is Holding All That Debt « azizonomics

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