The Free-Traders' Blind Spot

[unlawflcombatnt]

THE FREE TRADERS' BLIND SPOT

Many economists appear to have a blind spot when it comes to free trade. Free trade advocates are like a religious cult. Their advocacy is based on pre-conceived theory with little regard for actual reality. They just keep chanting "free trade is good. Free trade is good. Free trade is good." Some economic theories are based on a carefully selected set of facts and concepts, while completely ignoring others. In addition, the application of some of these theories does not work in reality. This also seems to be ignored. The benefits of unrestricted free trade, along with unrestricted free flow of capital, is one such phantom belief.

The argument frequently used is that of "comparative advantage." Modern economists often ignore one important aspect of this theory. It requires that CAPITAL AND LABOR CANNOT BE INTERNATIONALLY MOBILE.

Let me repeat this. In order for the "Comparative Advantage" theory to work, CAPITAL AND LABOR CANNOT BE INTERNATIONALLY MOBILE.

Here is the quote from Paul Craig Roberts article regarding David Ricardo's original Comparative Advantage theory:

EDITED BY ADMIN: COPYRIGHT

The following is the link to the article:
http://www.mises.org/fullstory.aspx?control=1420&id=64

It truly is amazing that economists constantly regurgitate the free trade mantra, and attempt to support it by misapplying the "comparative advantage" theory.

A big problem with some economists is that they "miss the forest for the trees." They often develop complicated mathematical equations to explain theories that don't make any sense. It's almost as if they try to prove mathematically that the sky is red, instead of blue. Then they ignore the fact that most non-economists agree that the sky is actually blue.

I'm going to take a stab at disproving the benefits of unrestricted "free" trade, using a simple equation -- the GDP equation. I think economists will agree that it goes as folloows:
GDP=Consumption+Invstmt+GovSpending+TradeBalance

If applied globally, "trade balance" should be zero (unless Martians are buying some of our goods.) Therefore, this should be the "global" GDP equation:

GlobalGDP=GlobalConsumption.+GlobaInvestmnt+GlobalGovtSpending

Economists state that consumer spending, or consumption, is 2/3 of all economic activity. Thus, global consumption is 2/3 of all global economic activity. It's the generally accepted consensus that consumer income is the biggest determinant of consumer spending. Logically, it is essentially the only long-term determinant of consumption. (Consumption financed by borrowing cannot last indefinitely) Thus, global income is the biggest determinant of global GDP. If the aggregate loss of American wages is not compensated for by aggregate foreign wage increase, global income goes down. So does global GDP.

How does global income decrease affect the remaining factors? Let's start with global investment. Global investment will not make any real contribution to GDP if global consumer spending declines. Increased investment is supposed to increase production. If global income falls, so does global demand for production. If global demand falls, there is NO benefit to increased investment. There is no need to build more production facilities or provide more services, if there is no demand for them. Excess "investment" would simply go into corporate coffers, in the form of CEO salaries, stock holder dividends, "cash-on-hand" and bank accounts. In actual reality, as opposed to economists' "pseudo-reality," this investment would add absolutely 0 to global GDP in the long-term. (It's mis-allocated money that would have contributed to global GDP, if it had it gone toward global consumer spending.)

How about government spending? Government spending is financed exclusively from taxes. Taxes subtract directly from private wealth. Thus, government spending reduces private wealth, dollar-per-dollar. However, the "marginal propensity to consume" concept needs to be considered here. ( Which basically states that the more affluent devote a smaller percentage of their wealth towards consumption. The more affluent they are, the smaller the percentage.) Taxes on lower income individuals reduce consumption more than those on higher income individuals. Taxes directed mainly at consumers, such as sales tax, reduce consumption spending dollar-for-dollar. In contrast, taxes on corporations primarily reduce investment spending. Thus, the type of taxation affects how much it subtracts from consumer spending. But it is clear that government spending subtracts significantly from consumer spending. In addition, reduced consumer income reduces the money availabe for taxation. Government spending cannot make up for consumer spending reduction. Not only does it depend on consumer income, it subtracts from consumer spending.

In summary, the global GDP equation is almost overwhelmingly dependent on global consumer income. Labor cost reductions reduce global income, and global GDP. When $90/day workers are replaced with $2/day workers, global consumer income drops. Global consumer spending spending then drops as well, further reducing global demand for goods and services. The increased profits made from the labor cost reduction do NOT help the world economy. The increased investment capital that results has NO benefit when global consumption drops. It merely provides a short-term gain in profits, at the expense of a long-term loss in global GDP. Unfortunately, many economists DO have a blindspot to this simple mathematical reality.

unlawflcombatnt

EconomicPopulistCommentary

http://www.unlawflcombatnt.blogspot.com/

_____________________________
Investment does NOT create jobs. It only "allows" for their creation. Increased Demand for goods creates jobs, because it necessitates hiring of workers to produce more goods. Investment "permits" job growth. Demand necessitates it.

Building a factory does NOT create jobs. Demand for production DOES create jobs. Goods are not produced if there is no demand for them. Without demand for goods, there is no demand for workers to produce them. Without demand, no amount of investment creates jobs.

[TreasonousBastard]

1. That covers it pretty well, and I'll only add...

a few small points.

Otiginally, comparative advantage sort of worked because the means of production were so difficult to move around and much of the world was agricultural. You can't grow cotton or bananas in Scotland, and even though you could move the mills to Haiti, the British government made it illegal.

So, part of it was natural-- the growing of agricultural products in certain areas, and some of it was artificial-- the various patent and secrecy acts that made it illegal to build a mill in the colonies. This made the British empire wealthy by buying raw materials and reselling the finshed goods. It didn't really do all that much for the colonies, though. The whole theory was interesting, but ultimately an apologetic for empire.

Comparative advantage has been subtly redefined by the Chicago types to mean cheap capital and labor, and no amount of railing against the tide will work. Not only do the Chinese work for less, it is far less expensive to open a factory there. It's not economic theory that counts here, but simple market forces.

And, yes, always forgotten is that it is demand that runs an economy. Supply-side was an extrordinary con job on everyone. There has rarely, if ever, been a real capital crunch in this country, and there is no problem building a production facility if someone sees something being sold.

One of the problems we have been having is that there is far too much capital, and far too few places to invest it. That's pretty much what caused the dotcom bubble.

[autorank]

2. unlawflcombatnt, This is what we need here..but not here in this forum

If you can snaz these up and post them in General Discussion or General Discussion: Politics it will get a broader readership. These are too good to keep out of the way (no offense to the Economy forum, it's very erudite).

Just a suggestion. Your web site is great and this post is perfect as a skewer for the stupidity of the dismal science.

:yourock:

[hatrack]

3. It's also worth noting that free-traders incessantly cite Adam Smith . . .

Except for that passage later in Wealth of Nations, where he notes that (paraphrasing) a businessman is most unlikely to quit his native land and to do business elsewhere, given the barriers of culture, language and law that obtain under such circumstances.

Worth noting, too, is that the entire premise of Wealth - inevitable prosperity and progress through unrestrained free-market capitalism - falls apart if this truism is breached - as it well and truly is by now.

[Tinoire]

4. Exellent post! And I second Autorank

This belongs in GD Politics or in GD- not here where your valuable post won't get seen.

Welcome to DU

:toast:

[cestpaspossible]

5. I'm having deja vu

did you post this at dKos today?

[Elwood P Dowd]

6. I'm trying to help get this a little exposure over on GD.

Keep it kicked.

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=104x3760784

[oblivious]

7. Thanks for bringing me here, Mr Dowd.

Isn't this better here so people can add to it at leisure instead of it getting locked after two days?

1. If factors of production are as mobile as traded goods, the case for free trade--that it benefits all countries--collapses.

This just seems like so much common sense to me.

I have a small publishing company. Right now, I sell all my books in Hong Kong, so I have them printed in Hong Kong. It just seems fair. But it's tempting to get them printed across the border in China and save 30%. It's just 2 hours drive. If and when I start selling them in China, I will have books for that market printed there. It seems fair.

Next year, I may start selling them in the US. It would make most sense to print them in China for world distribution, but it doesn't seem fair. If Americas are buying my books, it only seems fair to print them there. I'll pay 40% more, but I might save 10% or more on freight and have fewer rejects. And I can still make a good profit anyway.

Now I realise that most companies don't care about all that, so they'll get all their books made in China in large volume. If profit is your only motive, it seems crazy not to.

So governments must use tariffs to protect local industry. If they don't of course most companies will send their production to the lowest cost countries. Local industry will die, jobs will disappear, purchasing power will weaken, economies will stagnate and countries will decline.

It's happening. Anyone who can't see that is a liar or a fool. It's just not fair.

[Robert Oak]

8. my conclusion after doing a lot of study

King Midas demanded the philosopher king to come up with a new
religion to justify his neve-rending greed.

Seriously, it doesn't add up, the theory itself. I've looked at the math and it's not a "win-win", especially in the modern world.

But what I find most disgusting what we are constantly presented
with as "Free trade" doesn't even follow free trade rules
since the China PNTR and so forth either favor the other country
(hysterical read, like would you buy the Brooklyn Bridge read,
the China PNTR) or they favor multinationals and a few powerful
families exclusively.

That's not even free trade, assuming the theory even was followed..
which if followed shows it's not a "win-win" as presented.

[aneerkoinos]

9. Marx&co beats Ricardo

It's been allways very clear that capitalism is inherently unstable system which survives only as long as there is room to expand, new productive resources to place under capitalistic utilization. In other words, the Corporate Beast by it's very nature is imperialistic, to stay alive it needs to conquer and pillage as long as there is something to conquer and pillage. When there is no more room to expand, when it's Global and can't grow any more, the Beast dies. And quite likely most of the humanity, if not all, with it.

However, it is plainly evident that labour does not move as freely as the post suggests, far from it. Workers do not move with factories to the other side of globe, only the elite class of managers and super-professionals do. Telecommunication services can move freely only if there is no language barrier between the buyer and the provider.

Most importantly, labour rights and protections don't move freely over national borders, which means that global capitalism is in reality becoming now second age of Feodalism, where the serfs are tied to their nation-state fiefdoms, in slavery under the globalized corporate lords and their vassals. With all the wonderfull prospects of race to the bottom to look forward.

There is no real alternative to this new feodalism except socialist internationalism.

[dcfirefighter]

10. Ricardo's Rent

Capitalism as we know it is unsustainable, due to the economic surplus going to individual, private resource owners.

The profit motive, and economic freedom, lead to higher productivity, and a faster rate of wealth creation. Taxes on wages, investment, and productivity lead to a lower rate of wealth creation. The legal fiction of private property in natural resources allows for increasingly disparate concentration of wealth.

Treating natural resources as gifts in common to (as large as a population as feasible) mankind, and 'renting' those resources as a source of government income, ensures an equitable share of wealth, while allowing an optimal rate of wealth creation.

Local property values are largely due to local infrastructure: population density, transportation, public education, public safety, etc; collecting rental values on them would more than pay for local and state government functions.

That being said, I don't think there is a moral problem with protecting domestic industries from competition from slave labor. The theory also implies collecting externalities such as pollution.

[Kerry 2008]

11. Blah blah blah

Blah blah blah. Same old rehashed socialist 'counterpoints'.:rofl:

[Elwood P Dowd]

12. That's exactly what my freeper friends say

In fact, it's almost word for word.

Why don't you give us an expert analysis rather than a Juvenal, freeper response?

[idlisambar]

13. It would be interesting to hear your thoughts on the subject n/t

[unlawflcombatnt]

14. The Free Traders' Blindspot

I appreciate all of the responses I got to this posting. I will take the advice given to repost this on the General Discussion - Politics Board. I'm going to call it "The Free Traders' Hypocrisy." I think that's more fitting.

unlawflcombant

[unlawflcombatnt]

17. Socialist counterpoints?

Do you think John Kerry would disagree with what I've posted?

[unlawflcombatnt]

18. Socialist Counterpoints?

Do you think John Kerry would agree with you?

[NMDemDist2]

15. unlawflcombatnt

Please be aware that DU copyright rules require that excerpts of copyrighted material be limited to four paragraphs and must include a link to the original source."

[unlawflcombatnt]

16. AZDemDist6 - Thank you

AZDemDist6,

Thank you for the information. I would MUCH rather have posted a smaller fraction of that quote. I now have a perfect justification for posting less - because it's "against the rules." Thanks again.

unlawflcombatnt

EconomicPopulistCommentary
http://www.unlawflcombatnt.blogspot.com/