As Ray Harrell has noted in a recent post there are possibly thousands
(millions?) of ways to interpret a piece of text, depending on its length and
complexity.
Now my interpretation of Mike Hollinshead's excerpt on the "Myth of
Comparative Advantage" is not that free trade is poppycock, but rather that
nation-states have screwed it up! "Any country which locks itself into a free
trade agreement now" is blind to the chaotic nature of the global economy. If
that is the case then perhaps we should welcome attempts by the WTO and
supporters of the MAI to undermine (probably not intentionally!) and
ultimately dismantle this system of states.
However, Mike was right on in identifying the static assumptions of the
principle of comparative advantage as a major shortcoming. But such a flaw is
not beyond remediation. One simply has to recognize that decisions based on
comparative advantage are under continous review (though not viewed with that
lingo!). One can see the evidence for this in the increasing rate at which
companies form, merge, disappear and transform. Dynamism is in.
Many factors influence changes in comparative advantage: climatic change, soil
depletion, rising/falling transportation costs, cost of production, cost of
living, etc. All of these are vulnerable to technological change (from
electromechanical to bioelectronic and beyond) and, indeed, it is arguable
that this is the most important contributor to dynamic shifts in comparative
advantage. We are entering a Kaleidoscopic Economy in which changing patterns
of relationships must be matched by equally complex systems of pattern
recognition (Ashby's "Law of Requisite Variety"
<http://pespmc1.vub.ac.be/ASC/Law_varie.html>).
If not nation-states then what should (might) be the unit of decision-making?
In a borderless world embedded in a system of pervasive computing it may be
the individual producer or a team of such producers, who may be a
self-employed legal entity or a component of a larger entity. Such "entities"
may, in turn, emerge as a result of the "falling away" of the chrysalic
corporations which nurtured them (by building the global systems which their
successors take for granted!). Rather than the corporation as individual what
we may have is the individual as corporation.
Comparative advantage in its most optimistic interpretation enables the least
among us to make as worthwhile a contribution as the most talented. In that
thought is perhaps buried a rationale for basic income.
Bob
Mike Hollinshead wrote:
> I said in a previous post to Ed Weick "The whole comparative advantage
> argument for free trade is bogus, even from the point of view of national
> economic development (a subject for a future post)."
>
> Here is that future post, in the form of an exerpt from my new book, The
> Myth of Canada.
>
> "Not every myth writer has been so disinterested, though. Henry Tudor
> certainly wasn't and neither are today's mythmakers in the corporate world.
> There is no difference between the way in which today's giant business
> corporations use the mythology of the market to buttress their political
> power and to create a new international charter for capitalism, in the form
> of the MAI, putting them on a level with nation states, and the way in
> which Henry Tudor and the Parliamentarians of 1640 used the myths of
> previous golden ages.
>
> Margaret Thatcher continually harked back to the First Industrial
> Revolution as a golden age of free markets for Britain to emulate. Yet it
> reflected social reality then no more than it does now. The English cotton
> industry, the driver of that Revolution, was protected in its home market
> by an embargo of Indian cottons and supported in its export markets by a
> subsidy on printed goods. Goods imported to Britain could only be brought
> in English ships, a rule enforced by the British Navy. The great Carron
> ironworks in Scotland, where Watt began his experiments with improving
> Newcomen's steam engine, was heavily subsidized and supported by generous
> contracts for artillery from the British Army and the British Navy (the
> heavy naval gun, the carronade, was named after the works, where it was
> made). Henry Maudslay's specialized cutting and boring machines, which
> were the first machine tools on which manufacturing industry came to be
> based, and made identical parts which could be assembled without fitting -
> another innovation of modern manufacturing (often attributed, incorrectly
> to Samuel Colt), was all done under contract to the British Navy which
> needed to rectify a shortage of blocks (devices used in great quantities in
> the running rigging of sailing ships). That is to say, the state played a
> heavy handed role in the first Industrial Revolution.
>
> Moreover, it was achieved by ruining the Indian cotton industry through
> trade restrictions, and heavily subsidized by cheap cotton fibre produced
> by black slaves on plantations in the Carribean and the Southern United
> States. Nothing much free market about any of that. The financial capital
> which made all this possible was obtained from the production of sugar in
> the West Indies again using slaves and from the exploitation and plundering
> of the Indian subcontinent by the East India Company. As the historian
> William McNeill documented in The Pursuit of Power, the European Powers
> expanded economically by using superior military technology to wrest
> control of existing production and trading systems in the Indian Ocean, the
> China Sea and the Americas from native rulers and traders. The gold and
> silver earned from the sale of sugar ultimately came from Spanish mines in
> South and Central America which were manned, again, by slaves who died in
> their millions. Again, not much of the free market about all that.
> Modern capitalism grew by exploitation of military technology by the state
> for the benefit of traders and industrialists and by rigging markets
> through state power. Britain in her time and the United States now have
> only adopted free trade policies when they dominated the world economy and
> had made it play by their rules on a precipitously slanted playing field.
> Trade in free markets, poppycock.
>
> The classical economic theory of comparative advantage, which is the
> central myth used by the free traders, suffers, like all myths, from having
> been abstracted from its original context and thus presents a distorted,
> abstract and unrealistic view of the world. It was first proposed by the
> English economist, David Ricardo in his Principles of Economics in 1817.
> He based his discussion on an example of trade in wine and cloth betweeen
> Portugal and England, an example which has been faithfully followed in
> every economics textbook in the English language ever since. It has been
> used to argue that free trade will always benefit everyone, even a country
> which is a low cost producer of all goods. Ricardo's example of trade
> between Portugal and England had a basis in a historical controversy over
> the Anglo-Portuguese trade treaty of 1703. But let us begin at the
> beginning, as we must if the issue is to be understood properly.
>
> The real beginning of the story is a 1654 treaty between England and
> Portugal which England gained use of Lisbon as a naval base and access to
> the Portuguese market for cloth. By the treaty, Portugal gained England as
> an ally in its war of independence from Spain. Portugal was a satrapy of
> Spain at the time, though it had its own king, and had been in revolt since
> 1640. Spain eventually recognised Portugal's independence in 1668.
> England gained an ally in its own efforts to prevent Spanish hegemony in
> Europe. England's allies in the war were France and Sweden. It was
> essentially a cleaning up operation from the Thirty Year's War (1618 to
> 1648) which was about religion and politics in the Holy Roman Empire (most
> of present day Germany plus sundry other bits of Europe) which was ruled by
> the Hapsburgs who also ruled Spain. The Spanish Hapsburgs had been put in
> their place regarding the Holy Roman Empire, now they were being put in
> their place in regards to their ambitions in the rest of Europe. England
> sought the quid pro quo of exporting cloth to Portugal to help pay for the
> war and the defence of Portugal. Spain eventually backed off it's
> ambitions in the Treaty of the Pyrenees signed in 1659. Having Lisbon as a
> naval base materially helped the alliance defeat Spain.
>
> The Portuguese, once they had independence, reneged on the deal. This was
> highly inconvenient for England at the time. It was fighting a series of
> wars to contain the expansionary ambitions of the French under Louis XIV.
> The linch pin of this whole strategy was the subsidies which England paid
> to its allies, the Austrians and the Dutch, who fielded most of the armies.
> Gold and silver on the barrel, so to speak, and Portugal had England over
> it, for that was its primary source, through the abrogated trade deal. The
> wily old King Manuel of Portugal by a commercial treaty of 1703 got from
> the English a promise to allow Portuguese wine into England for two thirds
> the duty paid by the French, who were the Portuguese wine trade's biggest
> competitors in the English market. In return, exports of English cloth to
> Portugal could resume. Everyone at the time thought that the English had
> the short end of the deal.
>
> Adam Smith, framed his discussion of the 1703 treaty entirely in terms of
> the benefit to England from the flow of specie, though he did not mention
> the background I have just presented. He framed it entirely within the
> context of the mercantilist theory of economic development which states
> that the country with the most gold wins.
>
> The whole business of comparative advantage doesn't enter the discussion
> until 1817 when David Ricardo published his Principles of Economics. It
> was Ricardo who proposed that England didn't get the short end of the stick
> after all. He reasoned that England gained in the deal because it was
> exchanging a good which it produced comparatively efficiently for one which
> it produced comparatively inefficiently in contrast to the trading partner.
> It's scarce resources would thus provide a bigger bang for the buck if they
> were diverted to cloth production from wine production and the cloth
> surplus exported in exchange for wine.
>
> All of this, was, of course quite abstract, as while England had been a
> major producer of wine from the 9th through 14th centuries (and was in fact
> accused by French wine producers of dumping cheap wine on the Continent!)
> when the climatic warming known as the Little Optimum made it practicable,
> she was not producing wine in 1817. Where the real problem emerges
> however, is that free traders ever since have used the theory to justify
> free trade on purely economic grounds, completely ignoring the political
> realities that have always surrounded it and directed it in practice. It
> is quite correct and all very nice to say that comparative advantage proves
> gains from trade, but it totally ignores the fact that trade is never in
> fact free and that it always serves a higher political purpose. And that
> is as true today as it ever was.
>
> More importantly, it only applies to established, stable economic regimes.
> It does not apply to the turbulent periods during which new economic
> regimes or economies are being created. An understanding of this point is
> best approached through Complexity Theory. In Complexity Theory, there are
> four possible states for a system: State One in which there is a single
> equilibrium; State Two in which there are two or more equilibria between
> which the system continually cycles; State Three in which the system falls
> into chaos; and State Four in which the system bootstraps (self-organizes)
> itself into a new State One or State Two. When a new regime is being
> created, we have a State Four situation. Future growth is mazimized during
> such periods by being in a position to influence the new rules of the game
> and that in turn is influenced by how influential a player you are. To be
> an influential player, you have to have leverage, which in the past has
> meant denial of your market to others and being at the cutting edge of new
> technologies (which gives you economic and military muscle).
>
> The Theory of Comparative Advantage shows how you maximize wealth (ignoring
> externalities) within an established State One economic system like Modern
> Industrialism. It has absolutely nothing to say about how you maximize
> wealth during a State Four. That is far better described by the German
> School of economic development, started by Friederich List in the 1830s
> after he carefully studied the way in which England had risen to her then
> economic preeminence. It is the way in which Germany, the United States
> and Japan caught up and then surpassed England. (As an interesting
> historical sidelight, Richard Ely and John Bates Clark, who founded the
> American Economic Association, received their economics educations in
> Germany and set up the Association as a vehicle for the German School of
> economics in the United States. They were also leaders of the Progressive
> Movement, which sought to impose social rules based on Christian values on
> the robber barons of America's industrial revolution of the late 19th
> century and early twentieth century. There are interesting and compelling
> parallels between the Progressive Movement and the Civil Society which was
> behind the Seattle protests.)
>
> So, comparative advantage is an example of a state one science. It is a
> neat piece of Newtonian clockwork which ticks away in its case, isolated
> from the real world of the dynamic social and political and ecological
> context of the State Four situation we are now in. Like all state one
> science it describes a temporary way station in a dynamic world.
>
> Moreover, it contains an unstated assumption of the Enlightenment, the
> notion that it is a natural state of affairs founded on natural advantages.
> You will recall the fascination that Polynesians and Amerindians had for
> savants like Rousseau, seeking "natural" human societies, before
> civilization spoiled them. A large part of the fascination with science
> was the conviction that answers lay in "nature" and could be found by
> observing it. The English radical sects were convinced that God was to be
> found in "nature". God had made nature and he could be found and
> understood in it therefore.
>
> But England raising sheep and producing cloth was not "natural". It was
> founded on a long history of happenstance and deliberate human action, from
> the introduction of sheep to England by humans, to the development of
> advanced sheep raising and cloth production by the Cistercians hundreds of
> years before. The Cistercians got into these activities not for economic
> but for religious reasons. They were disgusted with the old sybaritic
> monastic life and determined to live an ascetic life remote from the
> temptations of civilization. Living remotely they had to be economically
> self sufficient and efficient. England became the European centre for
> woolen cloth production because the Cistercian originated industry was
> there to build on and because of Edward III's need for revenue to fight the
> French and his observation that the Dukes of Burgundy were wealthy because
> they could tax the Flemish cloth merchants. He therefore established an
> export tax on raw wool and from time to time banned exports altogether
> (know in Flemish history as the Wool Famines), deliberately undermining
> the Flemish cloth industry and stimulating it in England. He was helped by
> the greed of the Spanish monarchs who drew revenues from wool and
> encouraged sheep husbandry to such an extent that huge flocks of sheep
> overtaxed the pastures and eroded the Spanish landscape to such an extent
> that sheep farming dwindled to insignificance, laying the way open for
> English domination (a pre modern example of ecological damage caused by
> humans constraining a society economically).
>
> What the relation of these events clearly shows is, that like all state one
> models, the theory of comparative advantage does not describe the dynamic
> circumstances which led to the emergence of the state one condition in the
> first place, or the conditions by which it will descend into chaos, and
> undergo a dynamic of self-organization to be replaced by another state one
> solution (which will likely be ruled by an entirely different myth). That
> all lies in the ecological effects of changing landscapes through new
> economic activities (like sheep farming or three rotation agriculture or
> deep plough cultivation) and in natural climatic cycles which can turn
> England from an exporter of wines to France, to an importer from France and
> Portugal, as happened between 1300 and 1400 AD, and in the inventiveness of
> human beings which, as we have seen, is closely entwined with the history
> and development of human consciousness (the nonconformists and the
> technical innovations which drove the Industrial Revolution of the 18th
> century, or the the Cistercians and the innovations which drove the
> Medieval Industrial Revolution).
>
> It also ignores the organic dynamic within the larger economic process. As
> Portugal specialized more and more in wine it would have to put more and
> more arable land and pasture into vines, thereby reducing sheep herds
> (which provided most of the fertilizer for agriculture) and the production
> of grain for bread (the staff of life). Other things being equal, these
> events would cause the price of bread in Portugal to rise. Whether or not
> Portugal would benefit from concentrating on wine production for the
> English market thus depends on what happens to things like soil fertility
> and the cost or living flowing from the concentration on wine production.
>
> Moreover, in the long term Portugal would become locked into agriculture
> and lose it's capacity to develop manufacturing industry, the wave of the
> future, because the trade deal undermined the cloth industry out of which
> the industrial manufacturing era was to develop. This in turn would
> relegate it to the status of first a second class and then a third class
> military power incapable of influencing the geopolitical events which would
> set things like the ratio of agricutural to manufacturing prices and the
> whole regime of trade and production and prosperity. In essence the treaty
> locked it out of the next great state one to state four to a new state one
> transition of the European economy. It is only just joining it now, 250
> years later.
>
> What we should not lose sight of is that the mythology of Modernism is just
> that: a mythology. Modern myths like Locke's myth of property, or
> Ricardo's Theory of Comparative Advantage, on which modern capitalism are
> based, are no more complete and justifiable a picture of how the world
> works or ought to work than their mythological twin, Newtonian science,
> which we have seen to be an equally incomplete view of reality. The issue
> always is: does the prevailing mythology fit the times ? Does it help a
> society to move beyond where it is to a more desirable future which is
> better in tune with reality ? Where does it place it in the power stakes
> (and therefore its relative capacity to determine its own future)? These
> are all questions which Canadians should be asking themselves as they
> ponder what mythology will work best for them in a Post Modern world."
>
> The prime issue for us now is that we are the middle of a State Four. Any
> country which locks iself into a free trade agreement now, under rules
> established essentially by the United States, will find itself repeating
> Portugal's mistake of 1703 and it will pay the same price - it will be
> locked out of the main industries which are the cutting edge of the new,
> emerging State One/State Two and, like Portugal, be selling its future for
> a mess of pottage.
>
> So, I repeat, free trade poppycock !
>
> Mike
--
http://publish.uwo.ca/~mcdaniel/
