I agree with you. Paul Craig Roberts' article is mostly rubbish. He might have been the Assistant Secretary of the Treasury in the Reagan administration but he seems to know about as much of the basics of trade and currency as the present Treasury Secretary, John Snow -- whom Alan Greenspan was actually correcting yesterday when he gave the lecture to the Economic Club of New York (to which I refer in my previous posting today).
Roberts starts off with a mistatement straightaway. Ricardo never said that capital has to be relatively immobile relative to traded goods. Where on earth did Roberts get that from? He's putting words into Ricardo's mouth and then condemning him. Straw man argument.
In Ricardo's day, not a lot of capital for investment purposes moved around internationally but he didn't exclude the possibility. In fact, his daily experience as a young man of life in his father's banking firm showed him that gold moved backwards and forwards just as easily as most goods did. In speaking out for free trade in corn in the House of Commons in order to prevent more people falling into starvation, Ricardo was speaking against the high tariffs on imported corn, not against the movement of investment.
The comparative advantage of capital is no different from the comparative advantage of traded goods. It's a two-way traffic. The Chinese are now beginning to invest directly in America in just the same way as American firms have been investing in China. The investments will go to the firms and sectors in America which offer opportunities for the most efficient methods (as devised by the Chinese management). For example, Hyundai Motors are investing over $1 billion in Alabama (and, of course, offering new jobs for Alabamans) because the Koreans feel that they can produce a better car, and more cheaply, than General Motors.
Keith
At 09:31 21/05/2005 -0700, you wrote:
Chris,
Most of what this guy writes is nonsense.
I'll take the time to nobble it if you like, but just
remember the object is not to work, but to receive. Wages
are more important than the expenditure of exertion.
If other people are supplying us with things - who is better
off? Those who work in the factories, or those who enjoy the
fruits of that exertion?
It's a political rant - not an economic analysis.
Harry
*******************************
Henry George School of Social Science
of Los Angeles
Box 655 Tujunga CA 91042
818 352-4141
*******************************
-----Original Message-----
From: [EMAIL PROTECTED]
[mailto:[EMAIL PROTECTED]] On Behalf Of
Christoph Reuss
Sent: Thursday, May 19, 2005 12:38 PM
To: [email protected]
Subject: [Futurework] Why Ricardo's "Comparative Advantage"
is Obsolete
http://www.counterpunch.org/roberts05192005.html
Out Through the In Door
The Politics and Economics of Outsourcing
By PAUL CRAIG ROBERTS
Statement at the US-China Commission hearing on May 19,
2005
in New York at the Council for Foreign Relations
Offshore outsourcing is misunderstood by economists and
policymakers. The phenomenon is misperceived as an
extension of the
mutual benefits of comparative advantage-based trade.
Comparative advantage has two necessary conditions, neither
of which
is met today. One condition is that capital is immobile
internationally relative to traded goods. The other is that
the
trading countries have different opportunity costs of
producing the
traded goods. (The economic concept of opportunity cost is
an
in-kind measure; for example, the quantity of wine that is
not
produced in order to make a yard of cloth.)
The condition of capital immobility is required to insure
that a
country's capital seeks comparative advantage at home
instead of
absolute advantage abroad. Different internal cost ratios
of
producing one good in terms of another are necessary if
low- and
high-cost countries are to experience mutual gains from
specializing
and trading.
David Ricardo discovered comparative advantage when he
investigated
the question of why a country that could most cheaply
produce all
tradable goods would trade with a higher cost country.
Ricardo's answer is that the opportunity cost of producing
one good
in terms of the other was different in the two countries. He
was able
to show that total output would increase if each country
specialized
in the product in which it had relative advantage. He then
showed
that the increased output would be shared by the terms on
which the
countries would trade one product for the other.
In Ricardo's example, the different opportunity cost ratios
of
producing wine and cloth in the two countries are due to
inherent
differences in geography, climate and soil.
Modern production functions, however, are based on acquired
knowledge. They operate the same in all countries. These
production
functions do not reflect country-specific inherent
differences that
result in different opportunity cost ratios on which
comparative
advantage depends.
When I point out that the conditions on which the case for
free
trade is based are no longer met in today's world,
economists either
evade the issue or drag red herrings across the path. They
talk
about shifts in the terms of trade, about productivity
gains abroad,
and about the pervasiveness of factor mobility even in
Ricardo's
time. They equate the rise of the high speed Internet and
collapse of
world socialism, which made vast quantities of cheap labor
available
to first world capital, with innovations such as lower
transport
costs that turned previously non-traded goods into traded
goods.
None of these arguments engages the issue. Ricardo imposed
the
condition of relative capital immobility internationally in
order
that specialization according to comparative advantage
could occur.
Otherwise, a country's capital would flow to absolute
advantage
abroad. When US firms substitute foreign labor for domestic
labor in
their production for domestic markets, capital is flowing
to
absolute advantage.
Factor mobility from Ricardo's time to the recent advent of
offshore
outsourcing was qualitatively different. Foreign investment
was a
way to evade tariffs, quotas, and high transport costs.
Foreign
investment was not geared toward offshore production for
home
markets. Ford and GM produced cars in Europe to sell to
Europeans,
not to export to America.
Economists assume that offshore production for home markets
is trade
because the goods count as imports when they enter the US.
But what
is being traded when a US firm closes its American factory,
lays off
its American work force, moves its capital and technology
offshore
and uses foreign labor to produce the identical product for
the same
US markets? This is not trade in the traditional sense with
one
country specializing in cloth, the other in wine, and
sharing the
gains.
The old free trade argument that US labor has nothing to
fear from
cheap foreign labor, because US labor works with more
capital and
better technology no longer holds when US firms provide the
same
capital and technology to foreign labor. The international
mobility
of capital and technology and the advent of production
functions
that operate the same regardless of location mean first
world labor
will be displaced in tradable goods and services until
there is a
global equalization of wages and living standards.
Indeed, one reason the facts of offshore outsourcing are
evaded by
so many economists is that they look with favor on the
international
redistribution of income and wealth that is occurring.
As the BLS payroll jobs statistics make clear,
the US has ceased to create jobs in tradable goods and
services.
The higher productivity, higher value-added jobs that
provide upward
mobility are missing from the data. Our most prestigious
engineering
schools report a marked decline in enrollments in computer
and
electrical engineering. Business Week magazine reports that
US firms
are now outsourcing R&D, design and innovation.
As I report each month following the BLS release, so far in
the 21st
century the US economy has been able to create jobs only in
domestic
nontradable services. Independent studies by economists at
Northeastern University (reported in The Boston Globe by
Charles
Stein, Feb. 20, 2005) and by Edwin S. Rubenstein conclude
that most
of the new jobs in domestic services have gone to new legal
and
illegal immigrants. If these studies are correct,
employment growth
of native-born Americans has ceased in the 21st century.
In the 21st century, the US labor force has been acquiring
the
complexion of a third world country, with new jobs
available only in
domestic services. In contrast, China and India are
acquiring high
tech manufacturing and professional service jobs, the mark
of first
world countries.
How does the US gain from inability to create jobs in
export and
import-competitive goods and services?
How do Americans gain from the loss of the jobs, careers,
and
incomes associated with the production of the goods and
services
that they consume?
How do US firms gain, beyond the short-run advantage of CEO
bonuses
and share prices based on quarterly performance, from
becoming brand
names with a sales force marketing foreign made goods?
How does America as a whole gain when the US pays for the
cheap
foreign labor contained in the offshored goods and services
(a major
component of the rising trade deficit) a second time by
handing over
to foreigners more of its existing stock of assets? The
"cheap
Wal-Mart goods" are not cheap when properly measured.
How do US universities gain when there are no payoffs to a
university degree? The BLS estimates that the vast majority
of the
new jobs that the economy is expected to create during the
next ten
years require no university education.
Where is patriotism when politicians turn a blind eye to
the
decimation of opportunity for native-born citizens.
What is the state of economic education in the US when
economists
cannot comprehend the reality that confronts them?
Economists are not even aware of the latest and most
important work
in international trade. In 2000 M.I.T. Press published
Global Trade
and Conflicting National Interests by Ralph E. Gomory and
William J.
Baumol. This important work, which does not directly
address the
offshore outsourcing issue, shows that the comparative
advantage
case for free trade is too unsophisticated to be correct
even if its
required conditions are met.
It will take economists a decade or longer to absorb this
work. In
the meantime, they are operating with a defective trade
model that
leads them to incorrect conclusions and disastrous policy
advice.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
~~~~~~~~~~~~~~~~
SpamWall: Mail to this addy is deleted unread unless it
contains the keyword
"igve".
_______________________________________________
Futurework mailing list
[email protected]
http://fes.uwaterloo.ca/mailman/listinfo/futurework
_______________________________________________
Futurework mailing list
[email protected]
http://fes.uwaterloo.ca/mailman/listinfo/futurework
Keith Hudson, Bath, England, <www.evolutionary-economics.org>
_______________________________________________ Futurework mailing list [email protected] http://fes.uwaterloo.ca/mailman/listinfo/futurework
