Tag: economics

EJ takes exception to my previous post critiquing Ricardian comparative advantage:

I have to disagree with you regarding free trade.

You write: “This example assumes that there is something that the old man can do that is of value to the young man. But that’s not necessarily true. What if instead of 2 people, there are 20 and all the old man can usefully do is gather 5 coconuts a day when two young girls with no other useful skills can gather 100, more than the castaway society needs, in the same time? Yes, total production will increase +5, but so what? No one is going to give him anything for his worthless coconuts because there is already a coconut glut thanks to the highly productive young girls. Austrian-savvy individuals should be able to see the seeds of an Austrian critique of Ricardo here.”

Your example fails to take into account that there are always other needs to be satisfied, needs which require other goods beside coconuts. Either the old man or the young girls can, for instance, gather berries, help build a hut, etc. Ricardo is right in that, by shifting the old man’s production into that which he does comparatively best, society benefits. The only time this isn’t true is if every need has already been satisfied and there is absolutely no other task that the old man can do. Your assumption strikes me as an unwarranted; it is certainly not true that all needs have been met in the world we live in.

Ricardo’s discovery has astounding consequences for libertarians. I’ve noticed in your writings that your libertarianism seems to stem from an understanding that men is fallen, and that, therefore, it makes little sense to allow a fallen man to lord it over his fellow creatures. This was largely my take, too, but thanks to Voxiversity, I’ve been reading my Rothbard. Since voluntary exchange benefits both parties, free trade between two people is a good which should be extended as far and wide as possible.

This is not to say tariffs are always wrong. As Ilana Mercer pointed out in last week’s column, a revenue tariff on all goods would be a reasonable way to fund a minimal state. But free trade itself remains sound.

There are two significant errors here that render EJ’s criticism invalid. The first flaw is this erroneous simplification. “The only time this isn’t true is if every need has already been satisfied and there is absolutely no other task that the old man can do.”

The proper formulation would have been as follows: “It isn’t true whenever there is no other need that the old man is not only capable of satisfying, but willing to satisfy in return for the compensation that he is offered in return.” It is irrelevant to argue that all needs have not been met in the world; the old man on his desert island has no ability to meet the needs of a hungry child in Somalia and the meager compensation he is offered for collecting sea shells may be insufficient to move him to collect them.

Furthermore, there may be no demand for the services he can supply. The bankruptcy of Say’s Law can be seen in the way the old man’s ability to donate sperm to his nubile female castaways in no way creates any demand for the product. In much the same way, the international market for American workers whose only skills concern filling out paperwork for regulatory compliance and creating Powerpoint demonstrations is extremely limited.

The second and much more serious error is in the statement that “voluntary exchange benefits both parties”. This is both logically and empirically false because it posits a non-existent human rationalism without temporal limits. While it is true that value is subjective, thereby allowing the possibility to defend totally irrational actions as at least nominally rational, this still doesn’t avoid the problem of how the subjective values that the Misean acting man assigns are necessarily momentary in nature. What the acting man defines as a beneficial exchange at one moment he may very well not define as beneficial in the very next moment for a wide variety of reasons. And it is this fatal flaw in the logical foundation that causes the entire edifice in support of free trade to collapse.

S asks about reconciling trade barriers with distrust of government:

as always, great work with the blog. I’m a big fan of your writing on economics, especially when applying Austrian theory to show how badly Keynesians misunderstand the subject. As such, I was hoping to ask you for some clarification regarding free trade. I read your book, The Return of the Great Depression, and found your comments on free trade rather interesting. (It’s been 9 months since I read the book so I apologise if I misrepresent any of your arguments.)

If I understand what you write correctly, it seems that the paradigm of comparative advantage espoused by Ricardo and his intellectual descendants doesn’t really make sense because of what you characterise as “the n-body problem”. In other words comparative advantage might work when dealing with two isolated counterparties, but what works for two entities does not necessarily work for three or more because of the exponentially increasing complexities introduced by additional trading entities. On this basis, you argue that a policy of unrestricted free trade doesn’t make any sense from a theoretical or practical perspective.

Here’s my question: given that the conclusions of praxeology generally argue that government intervention is a bad idea, how can this be consistent with a policy of government intervention in trade using tariffs to support specific industries or the general economy?

I’ve been trying to figure this out for a while. The articles at Mises.org generally reference Ricardo’s theory to support their arguments even though Ricardo wasn’t an Austrian theorist. Then there’s this article which makes a lot of interesting points in favour of protectionism, even though it’s written by a guy who is a Keynesian (as far as I can tell). What are your thoughts on the “correct” policy regarding trade?

There are three ways to consider the problem. We can look at it logically, we can look at it empirically, and we can look at it historically. The Ricardian position fails by all three metrics, in part because there is an inherent fallacy in your observed dichotomy. To observe that government is always inefficient and to mistrust its application of power is not synonymous with saying that there is absolutely no role for national governments. Libertarian minarchy is neither anarchy nor the U.S. Constitution, but I think it is worthwhile to note that protecting the borders and funding itself through tariffs are two of the very few genuine powers that the U.S. Constitution grants the federal government.

It is a very odd and perverted form of American conservatism that supports democracy-building on the other side of the globe, but argues against American industry-protecting import duties.

But that’s a tangent. Getting back to the logical angle, the Ricardian notion of comparative advantage completely fails because it is too focused on the TOTAL production rather than the nation-specific production or the effects on a nation of being forced to exchange its manufacturing from one set of goods to another. But the biggest problem is that because it relies on a labor theory of value, it fails to take demand, much less the limits of demand, into account. Furthermore, being a pre-industrial concept, comaprative advantage simply does not envision that a nation could possibly have nothing to physically produce that is considered worthy of trade. Consider the Wikipedia example.

Two men live alone on an isolated island. To survive they must undertake a few basic economic activities like water carrying, fishing, cooking and shelter construction and maintenance. The first man is young, strong, and educated. He is also faster, better, and more productive at everything. He has an absolute advantage in all activities. The second man is old, weak, and uneducated. He has an absolute disadvantage in all economic activities. In some activities the difference between the two is great; in others it is small.

Despite the fact that the younger man has absolute advantage in all activities, it is not in the interest of either of them to work in isolation since they both can benefit from specialization and exchange. If the two men divide the work according to comparative advantage then the young man will specialize in tasks at which he is most productive, while the older man will concentrate on tasks where his productivity is only a little less than that of the young man. Such an arrangement will increase total production for a given amount of labor supplied by both men and it will benefit both of them.

This example assumes that there is something that the old man can do that is of value to the young man. But that’s not necessarily true. What if instead of 2 people, there are 20 and all the old man can usefully do is gather 5 coconuts a day when two young girls with no other useful skills can gather 100, more than the castaway society needs, in the same time? Yes, total production will increase +5, but so what? No one is going to give him anything for his worthless coconuts because there is already a coconut glut thanks to the highly productive young girls. Austrian-savvy individuals should be able to see the seeds of an Austrian critique of Ricardo here.

Anyhow, that’s just a superficial first pass at the intrinsic logical flaw of Ricardian comparative advantage. More on the empirical and historical flaws as well as the government question in future posts.

LR asks about low interest rates:

So this may be a dumb question, but I was reading an article that was talking about the returns bank were receiving on home loans (5-6%) and the returns that savers were receiving on their savings accounts (practically nothing) and how elderly people that had previously been able to live off of Social Security and the interest from their savings were now having to spend their principal. My question is why don’t people take their savings out of the banks so that the banks then have to compete for their business by offering decent interest rates? If enough people did this, could it force the banks to operate differently?

Because people primarily use banks as a place to store their money. They aren’t going to take the risk of stuffing their cash under a mattress and only one in a thousand Americans utilizes precious metals as a store of value, so the Fed has realized that it can crush depositors with impunity without having to worry about mass withdrawals. In other words, what you’re describing is theoretically possible but realistically implausible. If people aren’t withdrawing their money because two percent of the banks are failing every year, they’re not going to withdraw it over zero interest either.

MB wants to know if a Republican sweep in November can stave off economic contraction:

I’m hearing from a few pundits that if the Republicans take the House (at least) the stock market will pick up because business will trust that no more insane bills will pass for two years or more. They’ll “trust” that govt won’t make things worse. If the equities market does swing up, when will this Depression hit home if the day of reckoning keeps getting postponed?

There might be a very short term bump, but the reality is that the central problem with the economy isn’t the Obama administration, the health care act, or the business community’s inability to calculate future employment and regulatory costs. The central problem is the massive amount of debt that is crippling the private sector and no amount of change in the political makeup of Congress is going to change that. Furthermore, there is absolutely no reason to expect that the Republicans aren’t going to do pretty much the same thing that they did before and resolutely defend the interests of Wall Street and the Federal Reserve against the futile fury of the electorate.

MM asks about different waves of immigration:

I would like to first say that though this is my first time to write you, I enjoy reading your blog, and I do so regularly. Second, I would like to ask you a question regarding immigration, I have been reading your posts on that subject, and would like to get a clearer picture of your opinion on the subject (or maybe of the US history as well).

Here is my question: I would like to understand how you differentiate what happened during the 16th and 17th centuries (even the US as a nation was founded by early settlers from other countries or at least their children) from the immigration which is recently happening in the US? If you can label the latter as detrimental do you consider the former to have been so as well?

Again, you mentioned in a previous post that there were 3.3 million more people in the US every year during the period (1997-2010). Do you think that this is necessarily a bad thing to the US nation? What if the 3.3 million were not mostly Mexicans, Somalis and people from the third world, but rather wealthy and skilled western Europeans, would that be okay?

The main differentiation between the various waves of immigration was ethno-cultural. The English and Dutch immigrants were very different from the later Irish, German, and Scandinavian immigrants. They, in turn, were very different from the later Asian, African, and South Central American immigrants. The significance of these ethno-cultural differences is much greater than most people can imagine, let alone understand.

For example, the present American public school system would not exist were it not for the heavy German influence, hence the term “kindergarten”. Having grown up in Minnesota, I can testify the reason the upper Midwest is so inclined to the left is due to the German/Scandinavian heritage of the immigrants who settled there; this is the reason that the University of Wisconsin, Madison is more socialist than the erstwhile Patrice Lumumba University and why Democrats in Minnesota are more properly known as the Democratic-Farmer-Labor Party.

So, I don’t regard the formative Anglo-Dutch immigration to have been harmful; that was the America of the Constitution, after all. The German/Irish/Scandinavian immigration transformed the Constitutional Republic into a Progressive Democratic Empire and laid the groundwork for the present Third World immigration that will convert the Democratic Empire into an Authoritarian Oligarchy. I consider that to be detrimental, but those who prefer authoritarian oligarchs will obviously feel otherwise.

In answer to the last question, one percent new immigrants every year is simply too much for any nation that is even nominally democratic. If you consider that the average presidential vote margin is around 3.5 percent, such an immigration rate means that new immigrants can theoretically control national elections within a single electoral cycle. Immigration and democracy are simply not compatible and I am confident this will soon become eminently apparent as the recent wave of immigrants transform the areas they settle into plausible replications of the lands from whence they came.