Yes, it is short and clear and not applicable in todays world. It will certainly be applicable in a future utopia where wages, work conditions, and environmental standards are equal all around the world. I have no doubt that US workers can easily compete with workers from anywhere in the world if wages were equal. But to think that we will have a competetive advantage in ANY field against employees who are making one tenth of our salaries is the height of racism.
As I stated above, there is little debate that free trade is good for the economy as a whole. But it is not good for all individual people. Your simple unemployment numbers completely miss job quality as mentioned above by scotandrsn. The only reason the standard of living for US families has maintained at current levels is because of the huge rise in two income families. Most studies show that real inflation adjusted wages have been dropping for years. If this trend continues, do we go to polygamy or child labor to get enough employees per household?
The whole point of Ricardo’s theory is that free trade is economically advantageous between two countries with different production costs even if all costs are higher in one country - as long as the ratios between the costs of the goods are different. It does not require equal wages or conditions at all.
I agree that the consequences may be socially/politically undesirable, but that’s not what the theory is about.
I still don’t understand what comparative advantage has to do with this discussion at all?
The basic reason why outsourcing is good for the economy is that it encourages insourcing, which is good for all the obvious reasons that outsourcing is bad. More precisely, regulations that encourage outsourcing also encourage insourcing, and the overall effect is positive. I think that’s what Sam was getting at.
You didn’t really read the link, did you? Differences in wages (or, more generally, production costs, of which wages are an important factor) don’t eliminate the applicability of the theory of comparative advantages. On the contrary, they’re the basic idea behind it. The idea is not only that if country A produces a given commodity cheaper (in absolute numbers, i.e. dollars per unit) than country B, then it’s advantageous for both sides to trade. That’s obvious. Comparative advantage means that even if country A produces everything cheaper than country B in absolute numbers, it can still be advantageous to trade.
This is a nitpick, since the overall conclusions are right, but comparative advantage doesn’t really apply when countries are proportionally good at everything they do. In the example in the link, country A produces commidities 1 and 2 for fifteen and thirty “dollars” respectively, and country B produces them at ten and fifteen. I’d think the present economic state would be closer to country B producing them at ten and twenty dollars.
Ah, yes. In most sorts of economics (including trade theory) only relative prices matter. When the price ratios are the same there is no trade.
More sophisticated trade models that include economies of scale/ scope/ specialisation show potential gains from trade even when prices are initally the same.
Please clarify this for me. You are saying that if Mexico can produce wine for $2 and wheat for $1, the US can produce wine for $20 and wheat for $10, there will be no trade becasue the ratio is 2:1 in both cases? Not that all US sales of wine and wheat will dissapear as we buy the cheap Mexican wine?
All sales of wine and wheat will go bye bye (though, it’s not necessarily that simple: buying that cheap wheat could drive up the price of the Mexican stuff, and force US producers to lower their own prices). But now American consumers have all the wine and wheat they want for that lower price AND, for every purchase they would have made, an extra 18$ and 9$ extra to spend on something ELSE that they previously had to forgo. That extra spending power has to go into something. Overall, the welfare of the consumers increases, and some other perhaps totally unrelated industry gets a boost (and generally a domestic one, since most things people spend money on are domestic).
Yes, this is exactly what I said before. The overall GNP goes up. But individual segments of the population take it in the shorts. Those with wheat farms go bankrupt. And once again, I say give me not the tired homily of “Just retrain! It’s easy at age 53 with no income, a mortgage, and 2 kids in college!”
What would they want them for? Because they are a major world currency and are fungible around the world to purchase things even if those things are not from us? Your argument implies that it is impossible to have a trade imbalance because no-one would want our money, something that is clearly contradicted by the fact that we HAVE a trade imbalance.
You’ll notice I was the one saying earlier in this thread that trade imbalances are not driven by trade.
But the point I was trying to make is that US currency is only acceptable because people can use it to buy goods. This may well be rather indirect in its effect, but the only reason that the $US is worth something to foreigners is that it can be used to buy US goods.
Now, one way of looking at the trade deficit is the way I’ve been talking about it: as the flip side to the imbalance between domestic savings and investment. But taking this “ultimately it’s all about goods” idea a bit further, you could say that people are willing to invest in the US because they believe (in aggregate, indirectly) that the production generated will enable the US to pay for the investment in goods. In other words, trade will balance over the long haul, and the current account deficit is nothing more than exchanging current imports for future exports.
Now personallyl I (and most other professional economists) think that’s probably pushing the argument a bit far, and that whilst any current account deficit is not something to worry about, it can get to be a problem.
Now trade theory.
My remarks about Ricardian trade theory were not intended (as David, God of Frogs suggests) to suggest that it’s a bad theory: simple is good. Ricardo expressed an extremely powerful idea in a deliberately unrealistic way: that’s what good models do.
But trade theory has moved on to more complex cases.
In Ricardo, trade is driven by differences in technology, and there are constant returns. This implies complete specialisation (which doesn’t happen) and that trade would disappear if there were common technology (which isn’t true). But nonetheless, his story that differences between countries create opportunities is quite correct. As a country, you’re no longer bound to produce what you consume: you can swap some stuff with other people for a different consumption bundle.
The next bit of trade theory is about other exogenous differences between countries. These could be tastes, but more importantly, factor endowments. This is Hecksher-Ohlin-Samuelson neo-classical trade theory. You can see Ohlin’s Nobel page about it here. The wikipedia page is ok. This story involves incomplete specialisation and diminishing returns to factors (the production possiblity frontier is convex, rathen than a straight line, as it is in Ricardo). The idea that in a labour scarce country like the US, labour gets screwed by decreased protection is suggested by the Stolper-Samuelson theorem. Most would argue for the US that’s misleading, as labour is really a labour/ human capital composite.
In H-O-S, it’s still true to say that inital differences drive trade and explain the pattern of trade. But various people have talked about endogneous comparative advantage. I don’t particularly like it, but you can get the flavour from this wiki page. If there are scale economies (increasing all inputs by 1% increases production by more than 1%) then even if relative prices in both countries are initially the same, beneficial trade can occur (and indeed, under stategic trade policy, the protectionist country can get most of the gains).
Another possiblity is specialisation. Combining two ex ante identical countries with free trade makes for a bigger market and the allows a new degree of specialisation to occur. I suppose I could find some links, but they’d probably be pretty technical.
Finally, a comment on:
This is quite true. Any reputable economist will tell you that the gains from trade are more properly called the potential gains from trade, and that in the real world reducing protection does create losers. Of course it does.
Sensible policy involves looking at how much people will lose and either compensating them or at least easing their transitions. It is not about rejecting all the opportunities because there will be transitional costs. And it’s certainly not about pretending that everyone gains from reduced protection.
It seems to me you could have made the same argument against the mechanization of agriculture. Or the rise of the automobile, which put all those blacksmiths, saddle makers, and livery stable owners out of business. For that matter, maybe we should have prevented the automation of the telephone system, because tens of thousands of operators lost those jobs, and I’ll bet some of them were single moms with children to feed.
How could we be so heartless? Our society would be much better off if we were all just toiling in the fields every day for our basic sustenance.
Well, look at it this way. Those wheat farmers were using the law (in the form of protectionism) to BILK consumers out of money: artificially keeping the prices of wheat high when it was available for much much cheaper. If anything, those farmers should pay us restitution for legally extorted high prices, not the other way around.
I mean, if what you care about is fairness, then I think your judgement of what’s “fair” is being skewed by the failure to see the consumer side of the issue. Why isn’t what I propose just as fair?
Sam Stone’s and Apos’ arguments are pretty familiar to me. I’ve used them. I used to use the undertaking industry in Sam Stone’s bit. But I’ve mellowed to the point where I now say
I say it about protection and I say it about water policy and greenhouse and all sorts of things. The main reason is that pointing the finger at protected industries or subsidised farms and saying that they are living off immoral earnings or whatever doesn’t work.
Secondly, from an efficiency point of view, easing transitions and/or compensation makes a lot of sense if done sensibly. Unwinding protection is a fairly small deal, the programmes won’t have to be huge and most of the costs of transitional programmes will net out due to better job matching. Done right, transitional compensation schemes should reduce resistance to policies that pass the compensation tests (and if they don’t that should be a signal that it’s bad policy). In the case of tech change, why wouldn’t we want to do this in the absence of strong evidence of disincentive effects?
Thirdly, the unwinding of bad policy is not like tech change in important ways.
Well yes, but. In the US, the industry at issue is sugar. The major benefiaries are (as I understand it) some brothers. Maybe they know they’re bandits. But their employees? And all those in upstream downstream industries?
Most people involved will be ignorant. Most of them won’t know anything about it. And amongst the farmers and suppliers and workers who do know will be those who are simply following the incentives set up by the government of the day. Why should these people, taking the established policies of government as something be condemned as parasites? I mean, government policy in the US towards owner-occupied dwellings is foolish and redistributive towards a non-poor group - but does that mean that it would be fine to screw home owners?
Apos says these people are using government to bilk consumers. It might instead be said that politicians bilking cosumers in order to keep vulnerable people on the hook.
All costs count and past dumb government policy is not the fault of the little farmer or worker. The wider gains from reducing protection ought not leave them bleeding.
(I may get to post again in the next 24 hours. After that, I’ve not lost interest -I’m gone for a while.)