Ricardo
In 1817, David Ricardo formalized the Law of Comparative Advantage. Since then, it has stood the test of time as one of the very few laws that an economist can point to and say: “This is indisputably true.” It’s because of this law that you only rarely find an economist who doesn’t believe in unrestricted free trade. But Ricardo added an important caveat when he discussed free trade and comparative advantage, and it’s one that most modern economists seem to have forgotten…
Let’s quote straight from Ricardo:
In one and the same country, profits are, generally speaking, always on the same level; or differ only as the employment of capital may be more or less secure and agreeable. It is not so between different countries. If the profits of capital employed in Yorkshire, should exceed those of capital employed in London, capital would speedily move from London to Yorkshire, and an equality of profits would be effected; but if in consequence of the diminished rate of production in the lands of England, from the increase of capital and population, wages should rise, and profits fall, it would not follow that capital and population would necessarily move from England to Holland, or Spain, or Russia, where profits might be higher.
This is the Achilles heal of comparative advantage — the flaw in the foundation of free trade that causes outsourcing woes. Those who say that the law of comparative advantage proves that free trade is good are absolutely right, but they’ve forgotten his caveat.
Because, in Ricardo’s world, it was true that capital was not particularly mobile. It is not true in our world, and it wasn’t true in the Victorian world.
In a world in which I can move my capital freely between locales, in which I can also move my profits freely, and in which I don’t have to live where my capital is working, there is no reason to invest in any productive activity in my home country if I can make more money elsewhere.
The higher surplus locale is going to get as much free capital as it can soak up and as is available. The logic behind this is simple: Let’s say I have one million dollars to invest, and I can invest it in two different locales. In one place, I’ll get five percent return, in another a ten percent return. In both locales, I can take my profit and do what I want with it. I can live in either locale and, in both places, my money is secure from being seized by the government or destroyed by violence. Obviously, I’m going to put my money into the place with the higher returns.
When I get those profits, I’m going to sink any reinvestment into the place with the higher returns again. It’s a virtuous circle — if you’re the place with the higher returns, and it ends when returns even out or there is no more excess capacity.
If the higher-return country runs out of investment opportunities that pay higher than the low-return country, it makes no sense to invest in it. What matters here is the marginal rate of return — that is, the return on the next dollar of my investment. In principle, there ought to be diminishing returns; people snap up the good opportunities and, over time, the opportunities get worse and worse until returns equalize (this happens faster when currency values are decided independent of government intervention, but it doesn’t always happen — even in the long term, when we’re all dead).
Profit is just how much surplus you’re receiving. Let’s say my workers are capable of producing $5 of goods for every hour they work and my costs are $3/hour for everything (property, taxes, capital costs, and wages). I’m making $2 an hour for every worker I have working for me.
That’s Country A. In Country B, the average worker produces $10 an hour, but my costs are $9, so my surplus is $1. This is half the profit of Country A, even though my workers are more productive.
That’s why US workers are more productive and people are shipping jobs to China and India. Costs in the US are higher for property, wages, and taxation.
To stop capital (and jobs) moving from Country B to Country A, you have to increase surplus. There are two ways to do that: You can reduce costs (most easily by cutting taxes or wages), or you can increase productivity. If the average worker produces one more dollar of goods while costs stays the same, and Country A’s worker’s productivity doesn’t increase, then you’re even.
Or Country A could increase wages, taxation, or property costs and become less competitive.
In a world without mass capital flows, there was another way. You could have lower capital costs. But having the Fed set lower capital costs than another country means little — borrow in the US, invest it where the ROI is higher.
More than that, money you can’t use is, well, useless. Let’s say you’re investing in a factory in China, but you want to live in Europe or the US — and Europe and the US won’t let you use the money you have in China in their countries (or will only let a fraction back in). In this scenario, you’re not likely to invest in China, are you? In addition, money that can’t move is captive to political unrest and other such events, which gives mature, stable countries a big leg up. If moving money is hard or slow, then you’d better be sure that where you have it is stable because if something goes wrong, you can kiss it goodbye.
A key problem right now is demand. Capital flows to low-production-cost/high-surplus domiciles. But there’s only so much demand for goods and only a limited amount of growth in demand for goods. So you’ve got your profits, and you have to figure out what to do with them. You can’t plow all of it back into productive investment, because you’d wind up with more productive capacity than there is ability to buy the goods. As a result, the excess money has to go into nonproductive uses.
The money that does go into productive uses will go to the domiciles that produce the greatest surplus (profit). Many people have pointed out that the US hasn’t lost jobs to outsourcing, that’s only true in a technical sense. What has happened is that the new jobs have been mostly created overseas (in cases where they can be done overseas). Old jobs haven’t been moved (mostly) because of sunk capital costs. Once you’ve paid ten million dollars to create a factory, spending another ten million dollars to relocate the factory usually doesn’t make sense. But if you have to build a new factory anyway (either because you need more capacity or because the old factory would have to be replaced for some reason), then it makes sense to build it in the domicile with the higher surplus production. That’s exactly what we’ve seen over the last few years: China and India getting the new jobs in non-protected sectors. It’s not rocket science, it’s just ROI (Return On Investment).
Because you can’t put all the money back into production, you’ve got to stick some of the money elsewhere. And what we have going is a nice, reinforcing trend. Oldman has called it strip mining the US economy. The money is used to buy your customers’ assets or lent to your customers. In exchange, they put up as collateral either the full faith of their government (we’ll see how good that is in a few years) or their assets, which in the current case means mortgage-backed securities, bonds, and common shares in companies (which represent ownership of assets). They then use that money to buy your goods, and the cycle continues.
This vicious cycle (or virtuous if you’re the one getting rich, and you get out in time) results in excess productive capacity, a slow decline in employment in the low-surplus domicile, and an increase in debt in the low-surplus domicile. It also pushes costs in the low-surplus domicile lower (meaning wages and taxation, primarily).
In the meantime, if the developed world (and specifically the US) were to stop borrowing to buy, the entire engine would collapse. This is not a sustainable development; if the US were to buy only what it could afford, based on its own exports, there would be an economic shockwave — not just in the US, but in China, India, and other high-surplus/low-cost domiciles. And right now, the dynamic is being funded by taking money out of the US and other high-cost domiciles, which must ultimately end in a reduction of demand. If the low-cost domiciles, which have been getting the capital investment, are not capable of soaking up the excess capacity when the US’s consumption comes in line with what the US can afford, then you will have a worldwide recession at the least — and likely a depression.
Economics views systems as moving towards equilibrium. But it’s more useful to view systems as subject to multiple different tendencies. At any given time, different tendencies may be stronger than others. What should be happening is that US costs should drop and developing country costs should rise. It is happening, but it’s not happening very fast. Where these costs meet is going to be somewhere a lot south of the current US standard of living. In the meantime, the dynamic has the US shipping its capital and its growth in productive capacity to lower-cost/higher-surplus domiciles. This will continue until the conditions enabling it end and not before. The conditions which can end it are increased shipping costs (favouring more localized production), the evening out of surplus production, a political decision to discourage either trade or capital flows, or an unwillingness or inability of either the US to borrow or its creditors to lend (the end of the housing bubble strikes directly at this). Until then, capital will go to the higher returns, and since the highest returns on production are mostly not in the US, capital that creates production jobs will flow disproportionately away from the US while asset bubbles form in the United States in order to pay for imports. (And the assets they have bought, or allowed the US to borrow against, are likely to crash in the final days of this system. A suckers’ game all around, but the only thing worse than playing is trying to stop playing.)
(Originally published years ago at BOP news, I put it back up here because this is what is at the heart of problems with globalization and why comparative advantage no longer works. April 25, 2015 — and back to the top again, in honor of the Trans-Pacific Partnership Trade Agreement. Sept 2021, and again, twice a decade seems appropriate.)
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Tom Hickey
Another oldie but goodie.
Henry C. K. Liu, Dollar Hegemony (April, 2002)
Albatross
I worry about the “waste” of money: when the wealthy take capital out of corporations and put it into their own pockets. Being a layman, I don’t quite know where that wealth goes, but it strikes me that the wealth sits idle and eventually loses value. What work is wealth doing when it’s socked away in a Cayman Islands or Swiss bank? Are those organizations using the wealth for purposes that benefit anybody? What’s the gap between what that wealth could produce if a) distributed to workers as higher pay; b) re-invested it the originating company; c) actively invested in other companies, or; d) being squirreled away in some Swiss Bank until it’s paid out to the kids as inheritance? How much does hoarded wealth cost all of us?
Bolo
My worry is that manufacturing, industry, and applied science are all keys to economic growth, technological development, and (over the longer term) increases in the standard of living. People who work with materials and technologies learn from them, they develop a mindset for building, investing, and tinkering that leads to innovations. By shipping so many of these jobs overseas, we’re losing the people and skills that lead to further innovations and growth. The future will be built by the producers of today, and while the US is still a manufacturing giant, we’ve slowed and reversed our growth in that area.
The future will not be built in the US, and while the economic picture outlined above is the cause, political decisions are to blame. We’ (or at least, our political class) have decided that high returns on capital outweigh investment in our material future.
lambert strether
The political class didn’t decide this. Their owners did.
quixote
This is a side issue (sort of) but I’m bothered by the line that “in the long run, we’re all dead.” Yes, I know what Keynes meant. And it’s certainly true that it can’t be all about the long run. We live in that shortest of runs called “now.”
It bothers me, though, because it’s not true. Or it better not be. Economists don’t really expect humanity to die out soon, do they? So what the phrase really means is, “In the long run, I’m dead, and forget everyone younger.”
It’s used that way, too. Generally, it’s used to say, “Screw posterity,” and not to mean, “We need to balance short term and long term interests in a total least cost solution.” (Hmm. That sure wouldn’t make much of a bumpersticker.)
Just for the record, I’m old enough where I can trash posterity at no cost to me. But I don’t get it. If they don’t care about anyone else, don’t these people have grandchildren?
Formerly T-Bear
Off Topic. Have you seen this Ian? Just being reported at Al Jazeera. Commodity prices will short those at greatest risk.
http://english.aljazeera.net/news/europe/2010/08/20108514946473957.html
different clue
There is a third way to stop the flow of capital from higher cost areas to lower cost areas.
Abolish Free Trade and restore Protection.
(Everybody say it together)— Free Trade is the New Slavery. Protectionism is the New Abolition.
Ycp
I don’t think Indians and Chinese are particularly happy about being dominated by foreign economic elites. “Shipping jobs overseas” is a bit like “he hit my fist with his face”.
I think the passivity of Americans is somewhat accounted for by the feeling of power they get from the idea that their own elites are keeping the ‘furriners down.
different clue
Yep,
I hope your analysis of the majority attitude in India/China/etc. is correct. Because if the majorities there can rise up and force the foreign elites to leave, perhaps the foreign elites will have nowhere to leave to but the countries they came from. Bringing “their” jobs ( OUR jobs) back with them.
“Yankee Go Home!! And take your jobs with you!!!” We should only be so lucky.
tatere
What about currencies and rates of exchange? It seems like it’s not just about the rate of return on an investment, but the probability of being able to spend that return in the currency you require. If you’re paying your bills in dollars, and earning your returns in reals, then a bad movement in the exchange rate could wipe out your “profits”. Yes?
Tony Wikrent
Well, two weeks ago I finished listening to Walter Isaacson’s new book, The Innovators: How a Group of Inventors, Hackers, Geniuses, and Geeks Created the Digital Revolution. I think it provides two vivid examples which show that Ricardo’s theory is without basis in the real world.
Hungary should have been the world leaders in computers and computer science, and nuclear weaponry. Just look at a partial list of leading mathematicians and scientists born in Budapest at the turn of the 2oth century.
John von Neumann (born in Budapest, Hungary, December 28, 1903), Quantum Theory, Game theory a pioneer of digital computing and the key mathematician in the Manhattan Project.
Victor G. Szebehely (born in Budapest, Hungary, August 21, 1921) a key figure in the development and success of the Apollo moon program. His first book, The Theory of Orbits, is the definitive text on the restricted three-body problem as applicable to an Earth-Moon spacecraft system such as Apollo.
Zoltán Lajos Bay (July 24, 1900 in Gyulavári, Hungary) who developed microwave technology.
Imre Gyula Izsák (born in Zalaegerszeg, Hungary, February 21, 1929) determined the precise shape of the Earth.
Leó Szilárd (born in Budapest, February 11, 1898). He conceived the nuclear chain reaction in 1933, patented the idea of a nuclear reactor with Enrico Fermi, and in late 1939 wrote the letter for Albert Einstein’s signature that resulted in the Manhattan Project that built the atomic bomb.He also conceived the electron microscope.He conceived the linear accelerator and the cyclotron.[
Wigner Jenő Pál (born in Budapest, November 17, 1902), winner of 1963 Nobel Prize in Physics “for his contributions to the theory of the atomic nucleus and the elementary particles, particularly through the discovery and application of fundamental symmetry principles” Wigner is also important for his work in pure mathematics, having authored a number of theorems. In particular, Wigner’s theorem is a cornerstone in the mathematical formulation of quantum mechanics, which explains the inner workings of atoms.
Edward Teller (born in Budapest, January 15, 1908) known colloquially as “the father of the hydrogen bomb”.
John George Kemeny (born in Budapest, May 31, 1926) co-developer of the BASIC programming language in 1964 with Thomas E. Kurtz.
Charles Simonyi (born in Budapest September 10, 194) head of Microsoft’s application software group, oversaw the creation of Microsoft’s flagship Office suite of applications.
Theodore von Kármán (born in Budapest May 11, 1881) mathematician, aerospace engineer and physicist who was active primarily in the fields of aeronautics and astronautics. many key advances in aerodynamics, notably his work on supersonic and hypersonic airflow characterization.
With this extraordinary concentration of scientific genius and technological acumen, how is it that Hungary never emerged as a world center of computers, software, aeronautics, and nuclear weaponry? Of course there is the problem of anti-Semitism and pograms – many of these scientists and engineers were Jewish. I cannot see how Ricardo’s theory helps us at all in understanding this puzzle. But I can easily conceive of a reason – the power, patronage, and purse of the U.S. government completely derailed the “natural development” of Ricardo in these areas. In other words, deliberate actions and policies overwhelmingly can trump Ricardo’s theory. I.e., a “Hamiltonian” policy of nation building, which encourages scientific inquiry and technological innovation as the most noble of human mental endeavors. As different clue comments above: Abolish Free Trade and restore Protection.
In fact, how can Ricardo’s theory explain anything about the development and deployment of new scientific and technological knowledge, and its application to economic processes? As I have argued before, it is exactly the development of science and technology that is the most important economic activity any society undertakes. It is new scientific and technological knowledge which allows a society to avoid the “limits to growth” imposed by natural resources at one particular point in the economic development of a society. From this perspective, it should be easy to see that Ricardo’s corpus of thought and work, like all of the work done by the British oligarchy, fails to deal with the most important aspect of human existence because it does not understand, nor celebrate, the creative powers of human mentation. It is oligarchical, and all it can comprehend is a finite world of fixed rules and strict hierarchy.
I want to mention one person discussed by Isaacson, Herman Goldstine, a mathematician at the University of Michigan who became a captain in the U.S. Army during World War Two, and supervised calculations of ballistic trajectories at the Ballistic Research Laboratory (BRL) at Aberdeen Proving Ground, Maryland. It was Captain Herman Goldstine who, in June 1943, recruited and directed John Mauchly to design and build ENIAC at Moore School of Electrical Engineering at the University of Pennsylvania. It was Goldstine who a few months later recruited and directed John von Neumann as von Neumann visited universities, companies, and military facilities around the country, gathering all the information he could on the problem of building a computer. Goldstine wrote to his Army superior, “We propose a centralized porgramming device in which the program routine is stored in coded form in the same type storage devices suggested above.” It was Goldstine who decided to openly distribute 24 copies of von Neumann’s report “First Draft of a Report on the EDVAC” in June 1945. This report became the foundation of computer development for the next decade and a half.
Or another example: How does Ricardo’s theory explain why Britain did not also emerge as a world leader in computers and computer science? It was British mathematican Alan Turing who wrote the crucial 1936 theoretical paper, “On Computable Numbers, with an Application to the Entscheidungsproblem” proving that a machine could be built to solve all mathematical problems. It remains a fundamental paper in computer sciences today. And the British had designed, built, and operated computers arguably better than ENIAC and EDVAC at the National Codes Centre at Bletchley Park and later the Manchester Mark 1, one of the earliest stored-program computers.
And just to erase any doubt that the policies which led the United States to dominate computerwere deliberate, look up the Moore School Lectures.. In July-August 1946, the Office of Naval Research and Army Ordnance Dept. sponsored a seminar now known as the Moore School Lectures. The formal title of the seminar was “Theory and Technique for the Design of Electronic Digital Computers.” Physicist John Mauchly, designer of ENIAC, made it clear to the participants that the purpose of the seminar “Purpose of course was to instruct and give background for design of new machines, not to learn operation of any machine already built,” according to participant Paul Gard. In other words, the Navy and Army intended the seminar not as a review of already existing programs, but as a free diffusion of scientific and technical knowledge to assist others in pushing forward the development of computers.
As Von Neumann explained a few years later, “I certainly intended to do my part to keep as much of this field in the public domain as I can.” He later explained that he had two goals: “to contribute to clarifying and coordinating the thinking of the group working on the EDVAC” and “to further the development of the art of building high speed computers.”
Ycp
The “jobs” aren’t dropped on mere mortals by American billionaires like mannah from Heaven, people have skills that they can put to use or sell to an employer. Without the foreign “job creators”, they’d become “job creators” themselves or go to work for local “job creators” who would be much more amenable to local political pressure than remote overlords.
Really it’s the fear of the latter happening among the USA ruling class that drives the ferocity of the outsourcing push. India and China are each taken alone nearly 2X larger by population than the entire Euro-American world. There’s no way for that world’s elites to avoid being muscled aside by Asian upstarts other than to institute a neo-Raj.
Ycp
[c’td]
Japan’s economic rise in the 1980s put enough of a scare into the Western ruling class for them to push through the Plaza Accords. India and China together have roughly 20x Japans population and aren’t military dependencies the way it was, so rather more frightening methods have been deployed.
different clue
Yep,
We don’t have to muscle them aside. We just could have stopped them from serving the International Free Trade Conspirators who plotted to muscle us aside inside our own countries.
That’s what Protectionism would be crudely about. That’s what Forced Equity of Trade would be about in a more fine-grained manner.
Why are all our knives, spoons and forks made outside the country at exploitive wages and conditions? Is it because Americans are too dumm to make a spoon or a knife or a fork? I think not.
Let’s go back to Equal Protectionism for All. Let China make all the silverware for China. Let India make all the silverware for India. And let America make all the silverware for America.
Capitalism in One! Country! For EVery country! Over and over again. And if the necessary evil of trade must be permitted between any of those countries, let it be under rigid restrictions designed to force Forced Equity of Trade.
Mary Bennett
Yep, the passivity of Americans is not explained by racism, but by the fact that people enjoy their comforts and don’t want those comforts to go away. Tacitus spoke of the Romans as having been bribed “by the enjoyable gift of peace.” Go to Walmart some weekend and see for yourself how much of the crowd buying tawdry consumer goods is the newly arrived. Unfortunately, consumers are not good citizens or good neighbors. The virtuous cycle Mr. Welch didn’t mention is the cycle in which citizens are encouraged to be and rewarded for being productive. Productive people are more honest, more capable and all around better people than are consumerist idlers.
Let us revive the American System of economic development. Let us produce for our own first. We should not be importing agricultural products at all; there is scarcely any plant that cannot be grown somewhere in the USA.
Willy
Ignored caveats are as American as triple cheeseburgers. The second part of practically every two part aphorism is often the important part, but too easy to forget even for the more “nuanced” among us.
Hugh
Free trade like free markets is never free. The question is who pays the cost. Workers who lose the jobs they had, or see the jobs they could have had disappear, or see their wages stagnate under the mantra of “competitivity” pay. For them, free trade isn’t free at all.
There is also the question of externalities. Companies don’t just go offshore because labor is cheaper but also where it is more abusable. And they go to places where they can pollute more with few or no questions asked.
Ian alludes to one way capital can be kept in a country and that is capital controls. The US could make it harder and more expensive for capital to go to countries like China. But we also see the other side of this where a country like China makes it harder for capital to get out of the country. So while China now has a lot of billionaires, they cannot move their money easily out of China to even lower wage countries. That is play the game the US elites have been playing. And this kind of control can be applied to the profits of foreign companies in China as well.
In economics, there is a selective use of the word “costs.” Anything to do with the use of capital that is not profit is a cost, from the point of view of the capitalist, the one with the capital. But the costs the capitalist imposes on everyone else don’t get called costs. They get called other things, like externality, advantage, profit and free.
Plague Species
Please don’t read this if you don’t like me and wish I was dead. Apparently the purpose of life is to be missed when you’ve passed.
Big Multinational
Under the influence of the CCP’s propaganda, and facing the withdrawal of foreign companies like Samsung, most people in the lower social class are completely indifferent, as if these leaving companies are all losers, since leaving China means leaving their biggest market.
In fact, the importance of foreign companies to China’s economy is not what they imagined. There are more than 20,000 foreign companies in Guangzhou, the output value from these companies account for 62% of the city’s total industrial output value from enterprises; in Shanghai, where giant state-owned enterprises gather, foreign companies contribute 2/3 of the city’s total import and export and total industrial output value; in Suzhou, an important industrial town in the Yangtze River Delta, the output value of foreign based companies account for 67.8% of the total; in Xiamen, foreign companies contribute 70% of the industrial output value. And in Shenzhen, the bridgehead to the outside, this proportion is already over 70%.
Foreign companies have brought about 40 million direct jobs to China, and if we include other companies in the industrial chain, the total number of jobs created is over 100 million. With so many people relying on foreign companies for their livelihood, it is hard to understand that the CCP is still inciting the public to hate foreign companies.
Apparently it is no longer considered profitable to manufacture out of China. Vietnam and India are the new destinations of thisn capital flight from China until Musk can ready Mars.
Plague Species
Yes! This is why we need Steve Bannon and Breitbart and McDonald Trump. So we can Make America Great Again. We need more fiulthy air. More poisonous water. We need to deplete our aquifers entirely and deplete any remaining topsoil. We need to return to the days of slave labor and living on 1,200 calories a day.
Mary Bennett
Sure, Plague Species. Producing or growing for export does not pollute. Umpteen million tons of corn and soybeans into the international market has not depleted topsoil or drawn down the Ogallala aquifer or poisoned the Mississippi River.
What does it take to get someone like you to understand that the USA, a country of continental dimensions, is not Singapore? A city state like Singapore lives by international trade, but that doesn’t mean we should. Protective tariffs means, among other things, that countries which don’t impose environmental regulations don’t get to dump their products on us and undercut our own producers. But for you and those for whom you speak, international trade, and travel, lets not forget travel, are the ne plus ultra. Nothing else matters and if little folks get hurt, oh well, they don’t count anyway.
I seriously doubt that Trump or his MAGA followers have ever heard of the American System. They despise history. Their program amounts to we want our scams to continue. They love sitting at the end of a 10,000 mile supply chain in which anonymous brown people do the work.
different clue
@Mary Bennett,
Here is a little item about Henry Carey and the American System.
https://americansystemnow.com/henry-c-carey/
The second place I ever read about Henry Carey was in Tony Wikrent’s articles about early American political economic policy.
The FIRST place I ever read about Henry Carey was in the book Unforgiven . . . the American System Sold for Debt and War.
https://bookstore.acresusa.com/products/unforgiven
Believe it or not, there was a time when Henry Carey was the headwaters of the Official Mainstream in the early decades of this country.
A good political goal for a genuine political party-movement would be to remove America from the Free Trade system and restore the American System within our own borders. It would probably take a cultural-political movement of tens of millions of people to begin forcing the DC FedRegime in that direction.
So . . . how do we begin growing that cultural-political movement of tens of millios of people pushing for the Abolition of Free Trade?
Mary Bennett
Are you another Acres USA reader? I have been reading that mag for years, even though I am not a farmer. I never bought into the pre-crash anyone can own a house mania because Charles Walters said it was a bubble about to burst. I first learned about the dangers of MSG at Acres USA. OK, I already know MSG is a natural product; so is cocaine; I choose to ingest neither.
How to grow the cultural political movement? IDK right at the moment, except for bringing it up whenever we can, and try to make people understand that free trade ain’t free. I don’t expect Yang to go there.
Hugh
Manufacturing jobs in the US peaked in June 1979 at 19.676 million (Not seasonally adjusted: NSA) in an overall US population of 225 million, or 8.7% of the whole. There was a steady decline over the next 20 years to 17.709 million (NSA) in June 1998 with a US population of 275 million, or 6.4% of the population. There were sharper drop offs between 2001 and 2004 and 2008-2010. Since then manufacturing jobs have ranged between 12 to just under 13 million. Today we are at 12.492 million (NSA) manufacturing jobs out of a population of 332.9 million, or 3.75%. If we had the same percentage of manufacturing jobs to population as we had in 1979, we would have 29 million manufacturing jobs now. The economy has certainly changed since 1979, but not that much.
Astrid
Joan and Trinity,
Thank you so much for your response to me on the other thread. Usually I’m pretty self sufficient, but sometimes I real appreciate an honest outside opinion to make sure I’m not making a total ass of myself.
Astrid
I don’t think Ricardo was unfamiliar with the problem of globalized capital, albeit in a way that’s beneficial to England at the time. The harshness of plantation slavery with absentee landlords was on everyone’s mind then and the production of English mills was driving millions of Indian weavers to utter destitution.
Ultimately, capital that started as a tool to facilitate trade, passed into the ultimate goal and authority in this world. Economics, which should be a minor specialization between psychology and accounting, is instead made to pretend to be a law of nature that justifies the enrichment of millions and impoverishment of billions. I don’t think routing “better” paths around it is sufficient.
different clue
@Mary Bennett,
Yes, I also read Acres USA. I also am a tiniest-scale backyard gardener, not a farmer. But still, I try understanding the material and seeing if I can pull some of it down to the back yard level.
And when Charles Walters Jr. was alive, he wrote hundreds of thousands of words over the years about economics, politics, etc. which he felt to be of extreme relevance to the farming community. In addition to the hundreds of thousands of words he wrote on various aspects of agronomy itself.
While the paper itself is more Mainstream Organic, it still offers some of the parallel dissident agronomy which Walters founded the paper to preserve for the future; which is now somewhat here.
( In case any other readers might be interested in what this “Acres USA” of which we speak even is, here is a link.
https://www.acresusa.com/
bruce wilder
A couple of points:
1. Ricardo was making a point about the efficient allocation of factor resources. Later neoclassical economics focused almost exclusively on the efficient allocation of resources. Allocation of factor resources to productive uses can analyzed formally in terms of an equillibrium. There is more to economic life than the allocation of resources.
2. The efficient allocation of resources in practical organization of production and investment in productive capability and capacity is almost always dominated by technological development, which means learning to control production processes to reduce error and waste. Control systems with learning are dynamic — in contrast to the efficient allocation of resources, they cannot be usefully analyzed in terms of 1st order stasis.
3. Latching onto a virtuous circle of long-term technological development is how a Detroit or a Hollywood or a Seattle or a Silicon Valley becomes wealthy. That has nothing to do with the allocation of resources and the theory of comparative advantage in such a context is simply about how to exploit the advantages technological dominance bestows. (Ricardo knew this, but kept Britain’s dominance hidden from his argument, knowing full well that his target audience understood that context very well. No one hearing about the comparative advantages of Portugal and Britain thought free trade would do much to enhance the wealth of Portugal.)
4. If by “the long-run”, you mean the time period and investment horizon necessary to advance the frontier of technical competence in some particular branch of industry, and you short-sightedly squander your experience and the opportunities associated with it, as a Boeing has or an Intel has of late, you will be dead, because your mistake will kill you.
5. Money and finance are scorekeeping devices. There are several key places in Ian’s argument where he says, “cost” (which usually implies real opportunity cost), but should have said “price” (which is a financial variable). The most important industrial policy a state can have is sufficient financial repression to maintain the integrity of the scorekeeping.
6. Financial capital is power and “free trade” is an apology in sleight-of-hand for depriving the state of its capacity to constrain the power of financial capital to subvert the scorekeeping in predatory and fraudulent enterprise and disinvestment.
Mary Bennett
Different clue, I have been thinking about your question. I think the place to begin is with a robust and uncompromising antiwar, anti interventionist stance. When I say uncompromising I mean just that. People who can’t agree with that wouldn’t be welcome and neither would their money. And, a foreign policy of armed neutrality. Not some wimpy, and easy to ridicule, friends with everybody set of platitudes, but we leave you alone and expect the same in return. Point out what our military costs and what else could be done with that money. Propose an updated national service corps for things urgently needed here in the USA such as fire fighting, disaster relief, cleanup of streams and rivers. That would answer the objections of folks whose kids are sending remittances home from their military tours.
I think the left is in disarray because they are having to face the reality that their cherished Marxist ideology has not and will not take hold here in North America. Furthermore their other cherished belief, multicultural internationalism, has given us the likes of Neera Tanden. Meanwhile, the right is having to face some equally unpleasant facts, such as greed ain’t good, and male emotional development isn’t supposed to stop with puberty.
different clue
@Mary Bennett,
Thank you for beginning and advancing the discussion. We are at such an early stage that people making this effort will have to be forbearing of eachothers’ differences in style and outlook.
A serious non-interventionism might well have to include non-intervention in the affairs of all the other countries of this Western Hemisphere. It might well lead to a reduced standard of living. If it would lead to a counter-balancing increased standard of peace-of-mind, that would have to be offered as the equal-value tradeoff and see if people are ready to accept it.
I wonder whether a good place for serious minded people to move this discussion along might be in the threads on Tony Wikrent’s Sunday Wrap-Ups. After people have written what they are going to write about specific things that Tony Wikrent’s articles bring up, these broader longer questions could be raised and thought about.
A very early thing we could do is suggesting to people we know that Acres USA in particular is a valuable publication to buy and to read. That might start the process of moving some thought along right there.
Hugh
Efficiency is not an end. For most human activities including economic ones, all we need is efficient enough. Beyond that, it just gives cover to the senseless abuse of workers. Look at Amazon’s fulfillment centers, a malicious, idiotic attempt to turn workers into brainless disposable cogs.
“The most important industrial policy” is the one which builds and sustains the society its members want to live in.
bruce wilder
The antonym of efficiency is waste.
Confusing oppression with efficiency is a delusion of a fascist.
Hugh
Efficiency is econo-speak for fewer workers doing more for less. Fascism was notoriously anti-worker, but nice try.
nihil obstet
Efficiency is more output as profit with less input as cost. A lot of so-called efficiency is task shifting — see self-checkouts, use of phone trees, and the like to shift work from a cost of the owners to a cost to the customer.
Mary Bennett
I would argue that efficiency is a vice masquerading as a virtue.
Plague Species
Whether efficiency is good or bad depends on the context. In terms of how it’s used by economists and high finance, yes, it’s a vice versus virtue and it means what Hugh mentioned, but if we’re talking about a pioneer roughing it in the wild, using scarce resources efficiently is a virtue versus a vice. For example, pioneers, Native Americans too, efficiently used the entire animal when they slaughtered it. Nothing went to waste, not even the blood.
Willy
I looked up the antonym of efficiency. It’s disability, impotence, inadequacy, incapacity, ineptness. It’s more efficient for big tobacco to get more smokers of their products by using propaganda and buying lawmakers, than it is for them to reinvent their products so they’re healthy. Same for big oil, I suppose.
I never understood the efficiency of Amazon. We already had catalog shopping for decades. Amazon just put it on the internet. Plus they propagandize the crap out of impulse buying guaranteed to make you smile when it arrives very quickly, before the buzz of the impulse wears off. So maybe that’s efficiency. Doing what big tobacco and big oil did to be efficient but just more efficiently.
Ché Pasa
We should be aware — I think we are — that global trade is on the verge of collapse due to financing, supply, production, warehousing, transportation and other snafus including substantial cuts in personal income for the masses of people — that were already paid too little to afford much of anything beyond the barest of necessities.
Everything is in the process of breaking down in other words. The fantasies that economists have been putting forth for generations are losing their pre-eminence in practically everyone’s imaginations of what an “economy” is, how it works, and what it’s for.
When Ricardo wrote, most Brits and their colonial counterparts lived little better than the natives they conquered, arguably worse than some of the plantation slaves in the Islands. We seem to be reverting back to a similar reality for the many. Almost eagerly.
And if supply chain and other economic problems persist (it’s been a year now, right?) we’ll have little choice. Or rather the choice will have been made for us.
We have a wheezing system that appears to be on its last legs.
What comes next? Have our economists even considered that?
Willy
It sure seems like our leading economists were bought. We had a discussion here a while back about how economics is hardly a science, closer at best to an ivory tower land of philosophical debates, sorta like the current state of psychology. Seems in that world efficiency usually wins. I mean the money. Otherwise they’d all be talking about scientific studies and proven statistics instead of propagandizing, philosophically.
Who were the guys that predicted that neoliberalism was a ruse? All I can think of was a political cartoonist who drew one for my local newspaper showing pinstriped suits preaching to bib-overalled workers that they’d be getting better jobs thanks to “efficiency”, and the cartooned bib-overalled workers had these pessimistic looks on their faces. Apparently, my local political cartoonist was smarter than the neoliberal economists.
Hugh
Selling down as up is the essence of the con. So we get told that ten thousand mile supply chains are the new efficiency –until somebody coughs somewhere and they all fall apart. Hoocoodanode?
Purple Library Guy
It never worked, if you were a third world country. We’ve noticed now that it’s stopped working for (the people living in) first world countries.
The theory of comparative advantage takes existing costs and capabilities as a given. The conditions of the present are eternal. The conclusion it reaches implies that, for instance, no country should ever try to industrialize–third world countries should do what they are good at, like stoop labour growing sugar cane, and let first world countries like, say, for Ricardo, England, do the manufacturing and make the real money. However well the math works, and indeed however sincere Ricardo may have thought he was being, the math and the set of assumptions were basically picked for the purpose of getting absolute advantage for developed countries, and specifically mainly Britain. Nobody would have paid attention to the theory if it hadn’t helpfully told the British that in taking advantage of the wogs in the colonies they were actually doing the best thing for everyone.
The problem is that developing industrial capacity and getting good at it requires doing industry. But under free trade, you can’t do the industry because you’re not good at it yet. So for a country to stop being third world, it HAS to go protectionist. Almost every country that has ever developed did in fact go protectionist to develop new industries, including the United States, as well of course as Japan, South Korea and so on. Argentina has actually experienced both directions–they developed local industry under import substitution, but not quite to the point of being competitive with like Germany or Japan, then had it die under free trade.
There is a secondary problem, which is also ignored by the “eternal present” assumptions of the theory: What if resources are finite? Say your country has a comparative (and, indeed, absolute) advantage in silver mining. So you devote your economy to silver mining and ignore everything else, like Bolivia did back in the day. The economy booms, you have boom towns all over the place, there’s rich people and fancy houses and let’s not pay attention to the slave labour in the mines . . . then you run out of silver and you have nothing. The towns dry up and blow away, the economy falls apart. It has happened over and over around the world. Why? Because during the boom you didn’t put any money or effort into things you didn’t have comparative advantage in. If you had, there would be something to fall back on once your comparative advantage ran out.
Comparative advantage would make sense in the absence of time or change or ability to plan.
Plague Species
A massive die-off and for those who survive, an involuntary but well-needed weight loss program.
Seriously, how can it be the stock market hasn’t plummeted to zero at this juncture?
Let Us Pray
Trump Ordered A Nuclear Strike Against China
Jan Wiklund
There is another caveat, which Ha-Joon Chang has pointed at.
Ricardo thinks you should always do what you are good at for the moment. You should never learn any new things to be good at. So if your expertise only deals in washing dishes, you should go on with that forever,
Economists don’t follow this rule for their own children, says Chang. They send them to schools, to learn new and more profitable things.
Hugh
“Ricardo thinks you should always do what you are good at for the moment.”
In the class-bound society that Ricardo came from, this is exactly the kind of self-reinforcing class thinking you would expect. As you say, once a dishwasher always a dishwasher.
Mark Pontin
It shouldn’t be forgotten that Ricardo was a finance guy who actually made most of his fortune in 1815 by spreading the rumor that Wellington and the allies had lost to Napoleon at Waterloo, so he could then buy low as many in the City sold off in the subsequent panic.
(News traveled slower in that pre-electric era, obviously; one of Wellington’s reasons for his alliance with the Rothschilds was they had the fastest, best information network of semaphores and carrier pigeons in Europe then!)
Back to Ricardo: the truth is, he made his money by spreading a fraudulent item of what today we call ‘fake news.’ One can argue that Ricardo’s doctrine of comparative advantage amounts to more of the same via a vast simplification of how the world really works, as many here have noted.
Australian economomist Steve Keen, Michael Hudson’s pal, had an article a couple of years back going into this: –
‘Ricardo’s Vice and the Virtues of Industrial Diversity’
https://americanaffairsjournal.org/2017/08/ricardos-vice-virtues-industrial-diversity/
‘By analyzing the enormous Standard International Trade Classification database of international trade flows, data scientists at Harvard University, working on what they have christened The Atlas of Economic Complexity, have found that diversity, rather than specialization, leads to national success in international trade …
‘The theory of comparative advantage would lead you to expect that in a world with very low trade barriers—basically the modern globalized world—most countries would have specialized trade profiles, so that they would score low in both ubiquity and diversity. This proved to be true of underdeveloped economies like Ghana, in which the top three exported products—fuels, precious metals, and cocoa—make up 81 percent of its exports. But it was not true of advanced economies like Germany, where the top three products account for only 46 percent of its exports. Nuclear reactors and boilers accounted for 18 percent of Germany’s exports, but Germany also exported a wide diversity of goods—including “pearls, stones, precious metals, imitation jewelry and coins” at almost 1 percent.’
‘(Thi)s … is the opposite of the dogma preached by economists ever since Ricardo—and given the flimsy foundation of the comparative advantage argument, this is hardly surprising. But it is revelatory nevertheless: the secret to success in trade and economic progress, in general, is not specialization, but diversity.’
Mark Pontin
Anthony Wikrent wrote: ‘How does Ricardo’s theory explain why Britain did not also emerge as a world leader in computers and computer science? … the British had designed, built, and operated computers arguably better than ENIAC and EDVAC at the National Codes Centre at Bletchley Park and later the Manchester Mark 1, one of the earliest stored-program computers.
So this brings up a little-known turning-point of history, pivoting on Winston Churchill.
As soon as WWII was over, Churchill went out of his way to have the Colossus machines broken up and all knowledge of them suppressed. Under the Official Secrecy Act, Tommy Flowers — the working-class engineer from the Post Office, who’d designed them —
https://en.wikipedia.org/wiki/Tommy_Flowers
–wasn’t allowed to talk about what he’d achieved for three decades.
What was on Churchill’s mind? Why did he do this?
Well, though it’s not well-known alongside Churchill’s outstanding record as a warmonger — and it was for that the British made him PM for WWII and voted him straight out again in 1945 — he was also something of a futurist and had a strange, combative friendship with H.G. Wells.
So you find Churchill writing articles in the 1930s advocating the likelihood of extraterrestrial life and the replacement of cattle agriculture with cell-cultured meat (something we’re only starting to get around to now). Similarly, Wells had written about the possibility of “atomic bombs” back in 1914, and so in 1941 Churchill presided over the world’s first atomic bomb development project, code-named ‘Tube Alloys’ and later subsumed into the U.S. Manhattan Project —
https://en.wikipedia.org/wiki/Tube_Alloys
https://en.wikipedia.org/wiki/British_contribution_to_the_Manhattan_Project
(While the U.S. is rightly decried as a nuclear bully and mass-murderer, a post-WW-II alternate history where the imperialist Churchill has the atomic bomb and it’s run by his old mate, the psychopath Arthur Harris of RAF Bomber Command — Harris had been part of the post-WWI bombing of the rebels in Mesopotamia/Iraq, which Churchill had been a big advocate of — is far more frightful.)
As regards Colossus and Churchill: my best guess is that Churchill, being a crypto-futurist, imagined these computers as the gateway to more advanced thinking machines that sooner or later wouldreplace human beings, at least at the top of the heirarchy. To prevent that — or delay it, anyway — he had them broken up and knowledge of them suppressed.
As far as I know, Churchill’s reasoning is not on record. Still, I’d love to know the truth.
Trinity
“What if resources are finite?”
They are, at any human time scale. Or, we could figure out how to live 100 million years (a guesstimate) while waiting for the earth’s crust to do a full recycle. So then what’s inaccessible now becomes accessible again from the surface. Or we could go to Mars, which is exactly why we are trying to get to Mars.
Or, we could learn to live within our means, and live healthier, more contented lives, instead of living in a hamster wheel driven by the most insane among us.
And the opposite of efficient is inefficient. It only means “waste” in terms of physics. And we are certainly wasteful, in terms of physics and energy and the waste by products poisoning our bodies, our world, and our minds.
The dictionary I consulted also said the opposite of efficient is incompetent. That seems like a Western Civ tack-on to me. I’ve never heard of an incompetent machine, although certain machines appear incompetent when loaded with software from Big Gates. I’ve never met anyone who was totally incompetent, we are all good at something. But there’s plenty of the non compos mentis among us. That’s close enough, isn’t it? Same word root?
Che, i’m with you on that growing feeling of dread because things aren’t getting done, things that worked aren’t working well anymore, things are unwinding. I mentioned Beltway driving, and trees aren’t being trimmed, and signs are obscured. Little things that are eventually going to add up to very big things.
PLG, that’s some pretty awesome stuff you posted. Much appreciated history.