The Ultimate Putdown for Libertarian Ideologues

This is the relevant quote that you need to hit libertarians with:

There are two novels that can change a bookish fourteen-year old's life: The Lord of the Rings and Atlas Shrugged. One is a childish fantasy that often engenders a lifelong obsession with its unbelievable heroes, leading to an emotionally stunted, socially crippled adulthood, unable to deal with the real world. The other, of course, involves orcs.

John Rogers is the author of the above devastating putdown. And here's his own carefully crafted profile of himself from his blog:

John Rogers started doing stand-up in 1988, got his Physics degree in 1990, began writing television in 1995, writing movies in 1999, writing comics in 2005 and writing for RPG's in 2007. He plainly needs to focus.

Sounds like a truly interesting character. Oh... and I bet he sleeps with a copy of Tolkien's Lord of the Rings under his pillow every night!

My problem with libertarians is that they live in fantasy world.

• Ayn Rand argued for self sufficiency and spewed poisonous verbiage about social programs, but when she became sick with cancer, she maximized her use of every social program available to her to cover her costs. But she carefully kept this "character flaw" hidden from her followers.


• Friedrich von Hayek was induced to come back to the US and join a right wing think tank where his job would be to rant about FDR's entitlement progams and to do everything possible to destroy that "socialist" program. But before he would agree to come back he had to make sure that he would qualify for Medicare. Of course he never advertised this inconsistency between the social philsophy he espoused and his own personal standards of looking after No. 1 at the expense of those he could fleece.

These "individualists" are only too eager to convince you to take on the heroic pose and rage against the world, but they were cowards who took advantage of every penny of entitlement money they could get. They were utter hypocrites.

What really, really drives me crazy is that they espouse a "social philosophy" which is a pure fantasy. They deny any social relationships and declare that the only "glue" holding a society together are freely entered "contracts". But how many families negotiate a contract with their newborn? Nobody lives in the fantasy world of absolute independent self-made "individualist" that these crazies espouse.

Free Trade and Jobs

Here is the honest message from Dean Baker in his Beat the Press blog. This is not the message you get from "official sources":

The Loss of Middle Class Jobs Is By Design

Marketplace radio had author Don Peck on this morning to tell listeners that middle class jobs are disappearing because of globalization and automation. This is not true.

The reason why factory workers lose their jobs to people in developing countries rather than doctors and lawyers is that we designed trade rules to make our factory workers compete with low-paid workers in China, Mexico and other developing countries. We largely protect our doctors and lawyers from the same sort of competition.

If we had designed our trade policy to put our highly educated professionals in direct competition with their counterparts in the developing world, they would be no more successful than our factory workers. The difference is that professionals have enough political power to mostly preserve the barriers that protect them from such competition.

The over-valued dollar also worsens the situation for U.S. factory workers. If the dollar adjusted to a level that allowed for balanced trade we would have more than 4 million additional jobs in manufacturing.

I've always enjoyed the Anatole France quote the sums up the "equality" enjoyed by rich and poor:

The law, in its majestic equality, forbids the rich and the poor alike to sleep under bridges, to beg in the streets, and to steal bread.

The Brave New World of "Property Rights"

I find it funny and frustrating to live in Canada, right next door to the US, and get bombarded by advertisements and news from the US, but when I attempt to access some of the stuff fired at me, I come up with something like...

Click to Enlarge
Painting is from Paul Mutant, Flickr
Yep... owners of "rights" deny me access to their "property" even though they hound me with ads and information telling me that it is "available" and that I should "access it", or even worse "buy it".

To add insult to injury, the Canadian dollar is now soaring about the US dollar, but to buy US goods in Canada still means to pay about a 10% premium over what people 30 miles south of me would pay for the very same item. I should be getting a 4% discount using my "stronger" dollar, but the owners of "property rights" conspire to ensure that prices are set by them and they like the prices to be 10% higher than what a truly "free" market would imply.

Oh, and of course, all these property "owners" laud the concept of "free enterprise" and "free trade". They just mean it should be free for them and they should be able to stick it to anybody else by putting a surcharge on what they are selling (or, as in the above, simply deny me access to the item). So much for what "free" means.

A Society's Ethics

Here is a very important post by Paul Krugman on his NY Times blog:

I keep encountering discussions of health economics in which patients are referred to as “consumers”, after which the usual mantra of freedom of choice is invoked on behalf of voucherizing Medicare, or whatever.

We used to know better than this.

Medical care is an area in which crucial decisions — life and death decisions — must be made; yet making those decisions intelligently requires a vast amount of specialized knowledge; and often those decisions must also be made under conditions in which the patient is incapacitated, under severe stress, or needs action immediately, with no time for discussion, let alone comparison shopping.

That’s why we have medical ethics. That’s why doctors have traditionally both been viewed as something special and been expected to behave according to higher standards than the average professional. There’s a reason we have TV series about heroic doctors, while we don’t have TV series about heroic middle managers or heroic economists.

The idea that all this can be reduced to money — that doctors are just people selling services to consumers of health care — is, well, sickening. And the prevalence of this kind of language is a sign that something has gone very wrong not just with this discussion, but with our society’s values.

This is an excellent and very pointed commentary on what has gone wrong under the dominance of right wing "free market" thinking with the idea of "let the market decide because it is all knowing". It isn't. It is a blind beast. Worse, it is a beast without an ethics. Nature is indifferent to human values. We impose our ethical vision on the world. To let "markets decide" is to turn this relationship upside down and put people at the cruel and indifferent forces of nature. Our ancestors invented superstitions, religions, and ethics to deal with the cruel indifference of nature. To let right wingers return us to that blighted time is purely insane.

Do We Downsize or Supersize the Role of Government?

Here is an argument that you need to "right-size" government. From the blog Everybody is entitled to his own opinion, but not his own facts>:

Right-sizing government

by Michael O'Hare

Can the assertion “Government is too big [or too small]” ever mean enough to support a serious conversation, much less a policy decision? How about “California [or the US; plug in your own jurisdiction larger than a small town] can’t afford [plug in a program]“? What could such statements mean, or be shorthand for?

To begin to talk about pseudo-ideas like these, I think we have to take two or three steps back and disentangle some language. California, for example: the word slides around, sometimes in the same sentence, from meaning all the people and enterprises in the state to meaning the state government to meaning the state government as currently funded. Pronouns are especially weaselly here: yesterday, John Boehner justified the job loss from the public sector decimation his party proposes with a casual “we’re broke!” But who is the we in that utterance? Let’s, then, immediately distinguish a society as a whole, and especially its economy, from the special agency – government – it might decide to task with a larger or smaller set of its productive activities. There’s often lots of flexibility in choices like this: in Europe, the fine arts are usually presented by government agencies, while in the US our museums and symphonies are typically private non-profits; European child-care and pre-school is mostly municipal, while ours is mostly private enterprise. The society isn’t broke, whether or not the government has spent all we gave it last year; we (the whole society) could easily “afford” to shift a lot of activities into the small government part of it if we find it wise.

If you have loosened the stone libertarian mind-vise enough to admit that there is such a thing as a market failure, and enough intelligence or education to understand that market failure is a technical property of a good or service and implies no rap on markets, you will be OK with the idea that government is exactly the right agency with which to get stuff we want that the market won’t supply (enough of) by itself, and to avoid stuff we don’t want, like pollution, that the market will overproduce. If you have a heart, you will also be OK with ideas like “death by starvation is cruel and excessive punishment for ‘not having been able to save enough to retire on’, even for ‘having been too careless to save enough’, certainly for ‘having been unlucky enough to be smitten by illness or accident’” and you will find government is also well suited to correct some important unfairness and injustice, even when the best it can do along these lines entails some moral hazard and bad incentives. It’s worth noting that absent slavery, every productive activity, whether managed (or obligated) by government or by private enterprise, is in the end carried out in the private sector: public schools are built by private contractors, and government workers are economically just small private businesses with no employees.

As is true at every moment of every year, we have governments doing the tasks they have been given so far, and consuming economic resources to do so. Among those are some tasks a reasonable person might ask not be done at all, like making a second, redundant engine for the joint strike fighter, and tasks others might think better done entirely in the private sector, like building and operating a bridge or a piece of highway. We also see tasks not being done at all that some claim should be, and would if government were assigned the work, like stabilizing the climate, and tasks (some claim) would be better done by government than however they are being accomplished in the market. We could ask similar questions about everything in and out of the public sector, but for some of them, like whether the army should be shut down and left to the market, it’s hard to get grownups to waste time on the conversation, so the political debate tends to focus on programs at the deliberative margin of the public-private boundary.

The only way a sane person can want to move tasks like these in or out of the government part of society’s productive ensemble is to ask whether doing so will give us more of the stuff we want(physical and other) than we would have to give up to get it. The fancy name for this test is cost-benefit analysis, and of course it’s as much art as science because the accounting requires that we judge the value of things that don’t have market prices, like a fair trial and a polar bear and health and whether our kids learn music in school. The size of government and tax rates are completely irrelevant to choices like this; they are incidental consequences of making good decisions on proper grounds.

Here’s an example from NPR this morning: all across the northern US, diesel school buses owned by, or contracted for, by government school districts uncontroversially carry kids back and forth to school. The school district could tell parents to get their kids to school themselves, and give out the phone number of a private bus company; government would be smaller, but except for a lot of wasted time on the parents’ part arranging bus transport in phone trees, nothing important would change. About the same amount of fuel, buses, tires, and driver labor would be used up, and about the same value created. If arranging this service privately were so complicated and daunting that people started driving their kids to school, of course, the costs of the private system might be much higher, wasting parents’ labor as private chauffeurs, using much more fossil fuel, and congesting the roads.

Among the costs of school busing, whether private or public, is asthma and respiratory disease caused by the diesels idling for hours to keep the buses warm, polluting the pickup areas with toxic chemicals and soot. It turns out that a propane heater in the bus would allow us to get the same transportation service and save a lot of illness and medical care. How much? According to the EPA, twelve times as much as the heater costs. As the heater isn’t free and the bus company doesn’t pay for the asthma, these heaters are a market failure and undersupplied unless the government does something. What can it do? There are several ways to skin this cat. We could have government issue a job-killing oppressive regulation administered by jack-booted thugs to require that every school bus not only have headlights and good brakes but also a propane heater if operated north of some latitude. We could raise economy-crippling taxes and pay school districts all or part of the cost to install these heaters. We could gin up a nanny-state intrusive public relations campaign to motivate parents to demand that their kids’ buses have and use heaters. The differences among these are interesting and getting it right can save some resources, but at the level of this discussion, if they get the heaters installed and operating, they all cost about the same and provide the same benefits.

Amazingly, EPA has zeroed out the clean diesel program that gets this 12:1 bonanza in the president’s budget. How could this be a good idea? Well, it will make government smaller. A bad idea? Pollution from vehicles is a classic market failure; the market won’t abate it and in this case, it hasn’t, even though ending this particular pollution creates twelve dollars’ worth of health for every dollar’s worth of propane and metal it uses up. Not putting heaters in the buses will also make taxes lower, but the locals will pay at the doctors’ office and the drugstore, twelve times as much. Deciding this question on a “less government” or “lower taxes!” criterion simply destroys net value, in this case in the form of children’s health, impoverishing the citizenry in the name of a vacuous slogan.

What can it mean that we “can’t afford” heaters in school buses? One could better ask, can a society afford to sicken its children this way - when this incredible bargain, where a dollar gets you twelve, is offered for sale, can we afford not to buy all we can get? We are spending the tax dollar it costs privately for things that aren’t even close to being worth what we could get for that dollar in this deal, so we can obviously afford the trade.

Neither of the two decisions, public vs. private provision of school bus transport, and public provision vs. non-provision of bus heaters, is illuminated in the slightest degree by their effect on tax rates or on the size of government, and “can’t afford” in a context like this is simply a lie. Taxes are too high when there are programs in government that create less value than they use up, and too low when there are programs that would create net value if we assigned them to government. Government is too big or too small by precisely the same rules. Trying to make the conversation simple enough for Fox News analysts to rant about by reversing these rules of inference (which actually seem pretty simple to me) is monomaniac lunacy, or cynical mendacity in the service of selling advertising time or getting votes, or both; it’s not politics and certainly not governance.

Funny, but arguments about government are a lot like arguments about parenting. It is silly to call for supersizing or downsizing parental care. It depends on the situation, and the kid, and the parents, and the history of their relationship, and the support of the community, etc. So it comes down to "right-sizing" the parental care. But the free market nuts would argue that we toss out mother love and paternal support for a cash economy where the kid pays for the support he gets from parents and the parents put the kid to work to earn his way in the family unit. All decisions should be left to the workings of the mysterious "invisible hand" of the market. That is how best to get a family to succeed over evolutionarily long periods of time, right?

Brad DeLong Unhorses a Libertarian Nut

I get a good chuckle out of this. In his blog, Brad DeLong takes on the standard right wing libertarian nutty "economic" claim and demonstrates the foolishness behind it:

Will Wilkinson writes:

The corruption of economics: Larry Summers: neo-Keynesian aristocrat: Keynesianism tells us market economies will run themselves into the ground without expert government intervention. This strongly encourages the idea that elite academic macro- and monetary economists constitute a sort of secular priesthood. Only they are privy to the mysteries of the business cycle. Only they are armed with the esoteric knowledge necessary to tame an otherwise disastrously turbulent economy. It's only natural that these same men and women should be granted positions of considerable powers within government. It's only natural that they should be called upon as invaluable, and thus handsomely compensated, expert advisers to the nation's largest private financial concerns. And this is a recipe for corrupt and/or dangerous conflicts of interest.

Unfortunately, it is a fact that--as Milton Friedman was the first to admit--market economies regularly run themselves into the ground without expert government intervention. (And they also run themselves into the ground with depressing but less frequent regularity with expert government intervention.)

As some guy once wrote:

Let us clear from the ground the metaphysical or general principles upon which, from time to time, laissez-faire has been founded. It is not true that individuals possess a prescriptive ‘natural liberty’ in their economic activities. There is no ‘compact’ conferring perpetual rights on those who Have or on those who Acquire. The world is not so governed from above that private and social interest always coincide. It is not so managed here below that in practice they coincide. It is not a correct deduction from the principles of economics that enlightened self-interest always operates in the public interest. Nor is it true that self-interest generally is enlightened; more often individuals acting separately to promote their own ends are too ignorant or too weak to attain even these. Experience does not show that individuals, when they make up a social unit, are always less clear-sighted than when they act separately. We cannot therefore settle on abstract grounds, but must handle on its merits in detail what Burke termed: "one of the finest problems in legislation, namely, to determine what the State ought to take upon itself to direct by the public wisdom, and what it ought to leave, with as little interference as possible, to individual exertion..."

Thus, to me, Will Wilkinson's insistence that we should pretend that we live in a well-functioning organically-grown catallaxy and behave as if we do seems profoundly wrongheaded. It feels to me like a strange confusion of cause and effect mixed with some Ludwig von Mises-Ayn Rand combo sprinkled with American populism that, when mixed together, propel one far into the gamma quadrant. It is true that if we did live in a well-functioning catallaxy, we wouldn't need experts to help us manage the world to attain the greatest good for the greatest number.

But we don't.

And so there is always a flaw. Some people say it is the government. Some people say it is the government plus private fractional-reserve banking. Some people say it is the government plus private fractional-reserve banking plus human compassion.

But the project of getting rid of one or two of those three flaws so that we might then live without needing experts seems very strange.

The problem with fanatics like Wilkinson is that they adopt seductive but simplistic arguments. They are seduced by single factor theories. They want to see the world in a way that fits their prejudices, so they tend to grasp at simplistic theories. And they love the idea that perfection is out there except for the sullying hand of man. That nature is pristine. That unhindered economics is optimal. That government is a burden. That those at the top are a natural aristocracy deserving of their position of power and wealth, or intelligence and control. Funny thing, people like Wilkerson hardly ever bother to wonder or worry about the benighted, the broken, the unfortunate, the sick, the lame, the exploited, etc.

The Coming Trade Wars Around the World

Here is a very interesting blog posting by Robert Reich:

President Obama has vowed to double U.S. exports within the next five years. That’s because exports are critical for rebooting the American economy. It’s clear American consumers can’t get the economy going on their own. They can’t restart the jobs machine. They’ve run out of money and credit.

It’s not just that one out of four Americans is unemployed or underemployed (working part-time, overqualified, or at a lower wage than before). More significantly, the Great Recession burst the housing bubble that had let American consumers turn their homes into ATMs. Now the cash machines are closed.

So the Administration figures foreign consumers will have to fill the gap.

Problem is, most other economies also relied on American consumers.

...

Last week the representatives of the world’s 20 biggest economies vowed to slash their budget deficits by half by 2013. The result will be even less domestic demand and even more pressure to export in order to avoid higher joblessness.

We’re unlikely to see a repeat of the disastrous Smoot-Hawley tariffs that worsened and lengthened the Great Depression. But you can forget trade-opening agreements. In Toronto last week, the G-20 leaders dropped their 2009 pledge to finish the Doha round this year. In the U.S., agreements with South Korea, Panama, and Columbia are languishing.

And watch out for under-the-radar protectionist moves. Since the start of 2008, when the Great Recession began, countries around the world have already imposed at least 443 measures to block imports, according to the Center for Economic Policy Research.

This is just the start.

Nobody starts out with the idea of creating a trade war. But once you start down the path of trying to solve your problem at the expense of your neighbor, you are on your way to a trade war. And don't think the US is the innocent party. When the US economy went sour in 2008, the US imposed a "buy America" requirement for all stimulus money. They meant that the NAFTA agreement -- you know, the "free trade" agreement -- was unilaterally broken by the US. Canada didn't take the US to the binding arbitration court for NAFTA. Instead, Canada just swallowed and accepted the disruption in hopes of keeping the long term relationship solid. Canada went from having a positive balance of trade with a $20 billion surplus to a negative balance of trade with a $20 billion deficit. This hurts Canadians, but I don't think any Americans noticed. That's the problem with "trade wars". The bullets start flying before war is declared and the bodies start piling up and the costs go through the roof before the supposed "antagonists" realize they have themselves in a life-or-death struggle. Rather than compromise and arbitrate, trade wars start innocently and leave a lot of dead bodies around. Sad.

Stiglitz on Globalization

Real wages at the bottom in the U.S. today are about 30% below what they were 30 years ago, and in the last six years, even the middle [class] has seen real incomes decline. Joseph Stiglitz, 2001 Nobel Prize winner in Economics.

That is a quote from the following presentation at a Google Talks in 2007 (at minute 20:50):



At minutes 15:00 thru 22:00 in this talk he points out that "free trade" is not to find a fair trade or a win-win trade. It is to get an advantage for the U.S. But worse, it really means, get an advantage for those corporations that had contributed to the President's election. He points out that trade agreements on drug policy was "signing the death warrants on thousands of people".

Darwin & Economics

Here are bits from two articles by Robert H. Frank, an economics professor. He puts Darwin up against Adam Smith and claims that Darwin was the better economist. That fanatical free market theorists so in love with Smith's "invisible hand" will be deposed by the deeper insight of Darwin in individual versus group, and the needs for regulation to prevent extreme competition.

The first if from an article in the Guardian newspaper:

Though Adam Smith is almost universally regarded as the father of modern economics, most economists will eventually see Charles Darwin's ideas as the true intellectual foundation of our discipline. Smith's modern disciples celebrate his invisible hand theory, which says markets harness individual self-interest to serve society's interests. Smith himself was more circumspect, claiming only that self-interested actions often lead to socially benign outcomes. But that claim is remarkable enough. Competition among greedy producers often yields innovations that result in cheaper and better products for everyone.

It was Darwin, however, who better grasped the complex relationship between individual and social interest. And we must turn to his account if we are to understand the recent meltdown in financial markets. His deep insight was that natural selection favours traits and behaviours according to their effect on individual organisms, not groups. Sometimes individual and group interests coincide. But interests at the two levels often conflict.

...when individual rewards depend on relative performance. This payoff structure, common in financial markets, helps explain why those markets sometimes fail catastrophically. Wealth managers' salaries depend primarily on how well their investments perform in relative terms. Funds offering higher returns immediately attract cash from rival funds. If the invisible hand functioned as Alan Greenspan and other modern disciples of Adam Smith imagined, there would be no problem. Investors would be fully compensated for any additional risk they took in search of higher returns. But human brains forged by natural selection don't work as assumed in economics textbooks.

As our brains were evolving, immediate threats to survival loomed everywhere. Natural selection thus favoured a nervous system keenly sensitive to immediate relative payoffs, much less so to distant ones. Anyone disinclined to seize immediate gains at the risk of having to incur costs in the future would experience low relative rewards in the short run. And when competition was intense and immediate, such individuals often didn't survive to see the long run.

In market settings, a nervous system biased in favour of short-term relative reward is a recipe for disaster. When the price of an asset like housing is rising steadily, unregulated wealth managers can create leveraged investments that generate enormous rates of return. Even in the early years of this decade, many experienced analysts were warning that several mortgage-backed securities were poised to tumble. But investors faced a tough choice: they could earn high returns by continuing to invest in them, or they could move their money elsewhere. Many rejected the latter strategy because it would have required watching friends and neighbours pass them by.

Wealth managers felt compelled to offer the risky investments, since many customers would otherwise desert them. Managers also knew there would be safety in numbers when things soured, since almost everyone had been following the same strategy. The resulting collapse was inevitable.

Adam Smith's invisible hand is a truly extraordinary insight. But when rewards depend on relative performance, it doesn't always deliver.

The financial meltdown that caught Adam Smith's disciples off guard would not have surprised Darwin. One of his central themes was that because much of life is graded on the curve, wasteful arms races create conflict between individual and social interests. The good news is that unlike other animal species, humans can often resolve such conflicts through intelligent regulation.

And here is an article by Robert H. Frank in the NY Times:

IF asked to identify the intellectual founder of their discipline, most economists today would probably cite Adam Smith. But that will change. Economists’ forecasts generally aren’t worth much, but I’ll offer one that even my youngest colleagues won’t survive to refute: If we posed the same question 100 years from now, most economists would instead cite Charles Darwin.

Darwin, renowned for the theory of evolution, was a naturalist, not an economist, and his view of the competitive struggle was different from Smith’s in subtle but profound ways. Growing evidence suggests that Darwin’s view tracks economic reality much more closely.

Smith is celebrated for his “invisible hand” theory, which holds that when greedy people trade for their own advantage in unfettered private markets, they will often be led, as if by an invisible hand, to produce the greatest good for all. The invisible hand remains a powerful narrative, but after the recent economic wreckage, skepticism about it has grown. My prediction is that it will eventually be supplanted by a version of Darwin’s more general narrative — one that grants the invisible hand its due, but also strips it of the sweeping powers that many now ascribe to it.

...

In Darwin’s framework, then, Adam Smith’s invisible hand survives as an interesting special case. Competition, to be sure, sometimes guides individual behavior in ways that benefit society as a whole. But not always.

Individual and group interests are almost always in conflict when rewards to individuals depend on relative performance, as in the antlers arms race. In the marketplace, such reward structures are the rule, not the exception. The income of investment managers, for example, depends mainly on the amount of money they manage, which in turn depends largely on their funds’ relative performance.

...

But humans can and do. By calling our attention to the conflict between individual and group interest, Darwin has identified the rationale for much of the regulation we observe in modern societies — including steroid bans in sports, safety and hours regulation in the workplace, product safety standards and the myriad restrictions typically imposed on the financial sector.

Ideas have consequences. The uncritical celebration of the invisible hand by Smith’s disciples has undermined regulatory efforts to reconcile conflicts between individual and collective interests in recent decades, causing considerable harm to us all. If, as Darwin suggested, many important aspects of life are graded on the curve, his insights may help us avoid stumbling down that grim path once again.

The competitive forces that mold business behavior are like the forces of natural selection that molded elk. In each case, we see instances of socially benign conduct. But in neither can we safely presume that individual and social interests coincide.

These are excellent articles. You need to go read the originals to get all the details of the argument. Frank has given a devastating critique of the Chicago school of free market extremism.

Robert H. Frank is famous for his books The Winner Take All Society and Luxury Fever. Those are both worthy of taking the time to read them.

The Economics of Trade

I was fritzing around mulling over the US Democrats who put a "Buy America" clause into their stimulus package. This shows a lack of understanding of simple economic truth that has been known for two centuries: Comparative Advantage. This is a concept developed by David Ricardo in 1817.

Here's how it works...

Suppose there are two countries Northland and Southland and each has an advantage in one industry. Northland has 100 people and Southland has 100 people. Assume that a person needs $4,500 of food per year and $1,500 of clothing per year.

• Northland needs 100*$4500 = $450,000/year in food and 100*$1500 = $150,000/year in clothing. So the GDP of Northland is $450K + $150K = $600K/year.


• Southland has exactly the same needs.

Assume that Northlanders are better agriculturists than clothiers:

• A typical Northland person can make $10,000 per year working at agriculture and only $2727.27 per year in the clothing factories.


• A typical Southlander is relatively better at clothes, they can make $5,333 per year in agriculture and $5,000 per year in clothing.

If there is no trade:

• Northland: 45 people at agriculture @ $10000 = $450K/year and 55 people at clothing @ $2727 = $150K/year. The country meets its needs! Its total GDP is $600K/year.


• Southland: 80 people at agriculture @ $5625 = $450K/year and 20 people at clothing @ $7500 = $150K/year. The country meets its needs! Its total GDP is $600K/year.

But suppose they trade, each country specializes in what it does best:

• Northland: 100 people at agriculture @ $10000 = $1000K/year.


• Southland: 100 people at clothing $7500 = $750K/year.

Previously these two countries met their needs with a combined GDP of $1.2M. But if they specialize, the total GDP is $1.75M. Northland can trade $450K of agriculture to Southland for $450K of clothing. And they end up having...

• Northland: $550K of agriculture and $450K of clothing, total GDP $1M.


• Southland: $450K of agriculture and $300K of clothing, total GDP $750K.

Both now exceed their $600K basic need, and each meets its base needs of $450K agriculture and $150K clothing. They now have surpluses! Northland has a surplus of $100K of agriculture. Southland has a surplus of $150K of clothing. Both are better off because of trade!!

If the above looks "contrived" because each has its own specialty. Consider a case where one country is clearly superior in both classes of prodcution:

Assume that Northlanders are better agriculturists than clothiers:

• A typical Northland person can make $18,000 per year working at agriculture and $9000 per year in the clothing factories.


• A typical Southlander is only half as productive, so they make $9,000 per year in agriculture and $4,500 per year in clothing.

If there is no trade, then each meets its needs, but Northland is over twice as affluent and the combined GDP is $2.088M:

• Northland: 83 people at agriculture @ $18000 = $1.494M/year and 17 people at clothing @ $9000 = $153K/year. The country meets its needs twice over! Its total GDP is $1.647M/year.


• Southland: 66 people at agriculture @ $9000 = $594K/year and 34 people at clothing @ $4500 = $153K/year. The country meets its needs! Its total GDP is $747K/year.

But suppose they trade, each country specializes in what it does best:

• Northland: 66 people at agriculture @ $18000 = $1.188M/year and 34 people at clothing @ $9000 = $306K. Total GDP: $1.494M.


• Southland: 100 people at agriculture @ $9000 = $900K/year.

Northland can trade away $150K of clothing to meet Southland's needs.

• Northland: $1.338 of agriculture and $156K of clothing, total GDP $1.494M.


• Southland: $750K of agriculture and $150K of clothing, total GDP $900K.

In this trading scenario, the combined GDP is $2.394M. This is greater than their previous $2.088M if they didn't trade.

Play with the numbers. Convince yourself that trading always leaves both parties better off if they use trade to take advantage of the "comparative advantage". This second case shows that a comparative advantage does not require an absolute advantage in some productive ability. It just means that you rationalize your production to take advantage of your trading partner. Each uses the other to advance themself, so the overall result is better for both!

Trade, like Beauty, is in the Eye of the Beholder

Here is a post by Dean Baker in his Beat The Press website at The American Prospect. Generally I'm a big fan of Baker, but here I think he as fallen short.

Baker argues that you show contempt for workers by passing legislation that doesn't shackle it to a "Buy America" requirement. He goes on to argue that Canadians are going to be happy enough with this restriction because they will realize this is the "best possible" stimulus given political realities. Is that so?

Canadians have their own stimulus, but no "Buy Canadian" restriction. Think about this. If every country decided that any stimulus should be restricted to its own borders, then a lot of American exports would be blocked. Why would China buy airplanes from Boeing given the poor treatment by Americans? Wouldn't they rather buy from Airbus, from Europeans that trade fairly and openly? Why would Canadians want to buy machinery from the US? Why not buy from the Germans who trade fairly and openly?

Carry this thinking to its logical extremes... why would any country buy anything outside it borders? Any purchase will put some countryman out of work. In fact, carry this logic a little further. If you live in California which is suffering from hard times, why would you want to trade with some stranger in New York when your fellow Californian needs the work? Why not restrict all purchases by Californians to just California. In fact, why doesn't every city impose a "buy only from your city" restrictions on all trade? Certainly if you live in Los Angeles, why would you want to let the jobs slip off to Sacramento where there is so much obvious unemployement in Los Angeles? I'm beating this into the ground because it is such ridiculous logic.

Anyway... I'll let Dean Baker speak for himself. I won't embargo his words. I'm a free trader in economics and ideas...

The Post has repeatedly expressed its contempt for ordinary workers in both its news and editorial sections. It does say again today in its discussion of "buy America" provisions of the stimulus package.

The article notes that these provisions have shut out some Canadian firms from portions of the stimulus. While the article asserts that these provisions have created friction with Canada, as a practical matter the stimulus has almost certainly increased jobs in Canada, even with the buy America provisions. This is due to the fact that the buy America provisions apply to only a small portion of the stimulus. Furthermore, insofar as the stimulus increases demand in the economy more generally, it will also increase demand for imports from Canada.

Any bill that gets through Congress requires political compromise. If the options were to exclude any buy America provisions, and therefore not get a stimulus bill through Congress, or to get the stimulus bill through with buy America provisions, then Canadians will undoubtedly see more demand for their products in the latter case. The Post badly misrepresents the issue by not pointing this fact out.

It is also striking that the Post has never once mentioned the buy America provision in the Treasury's Public Private Investment Partnership plan. This provision has an absolute prohibition on the participation of any investor not headquartered in the United States. This omission is consistent with the Post's editorial policy which has consistently supported large taxpayer subsidies for the banks.

Free Trade Boogyman

I don't have much patience with the anti-free trade crowd. At worst it says "I'm rich and I don't want to have to share it via open borders with the poor". But most on the left dress it up as a question of sweatshop labour and a fair playing field. I'm all for that, but not if it is used as a club to beat back the third world from economic access to markets in the first world. What I'm in favour of is a fast track to getting everybody a decent life through good wages. I think that is best done by opening borders. I enjoy Dean Baker's "Beat the Press" blog because he points out that most of the upper middle and upper class are all for "free trade" but only for manufactured goods. They are not for allowing in doctors and lawyers and other professionals freely to compete in the first world. Well, I'm all for free trade in everything and open border for everything. I think we get to a better world best by this, the direct route, which is a kind of democracy of the feet and ballots via the pocketbook. Here's an article by James Surowiecki in The New Yorker that points to surprising aspects of free trade:

It’s an understandable view: how, after all, can it be a good thing for American workers to have to compete with people who get paid seventy cents an hour? As it happens, the negative effect of trade on American wages isn’t that easy to document. The economist Paul Krugman, for instance, believes that the effect is significant, though in a recent academic paper he concluded that it was impossible to quantify. But it’s safe to say that the main burden of trade-related job losses and wage declines has fallen on middle- and lower-income Americans. So standing up to China seems like a logical way to help ordinary Americans do better. But there’s a problem with this approach: the very people who suffer most from free trade are often, paradoxically, among its biggest beneficiaries.

The reason for this is simple: free trade with poorer countries has a huge positive impact on the buying power of middle- and lower-income consumers—a much bigger impact than it does on the buying power of wealthier consumers. The less you make, the bigger the percentage of your spending that goes to manufactured goods—clothes, shoes, and the like—whose prices are often directly affected by free trade. The wealthier you are, the more you tend to spend on services—education, leisure, and so on—that are less subject to competition from abroad. In a recent paper on the effect of trade with China, the University of Chicago economists Christian Broda and John Romalis estimate that poor Americans devote around forty per cent more of their spending to “non-durable goods” than rich Americans do. That means that lower-income Americans get a much bigger benefit from the lower prices that trade with China has brought.

Drinking the Kool-Aid of the 'New' New Political Left

Bill Clinton's former US Secretary of the Treasury Lawrence Summers continues to make the case for globalization. But he now tries to present it in a way that is sensitive to the concerns of the left who are anti-trade, anti-immigration, and increasingly isolationist.

... the US is better off with than without trade agreements and that the world will be a richer, safer place with increasing economic integration. ...

But I suspect that the policy debate in the US, and probably in some other countries as well, will need to confront a deeper and broader issue: the gnawing suspicion of many that the very object of internationalist economic policy – the growing prosperity of the global economy – may not be in their interests. ...

... there are reasons to think that economic success abroad will be more problematic for American workers in the future.

First, developing countries increasingly export goods such as computers that the US produces on a significant scale, putting pressure on wages. ...

Second, the growth of countries such as China raises competition for energy and environmental resources, raising the price for Americans.

Third and most fundamentally, growth in the global economy encourages the development of stateless elites whose allegiance is to global economic success and their own prosperity rather than the interests of the nation where they are headquartered. ...

In a world where Americans can legitimately doubt whether the success of the global economy is good for them, it will be increasingly difficult to mobilise support for economic internationalism. The focus must shift from supporting internationalism as traditionally defined to designing an internationalism that more successfully aligns the interests of working people and the middle class in rich countries with the success of the global economy. This will be the subject of my next column...

The justification for free trade is sound, but many on the left decided it is a good issue to push because it is a populist appeal to nationalism, an "us versus them" view of the world, that can effectively mobilize political action. But it is a cynical, manipulative left that does this.
Traditionally the left was internationalist. The idea that free trade maximizes wealth should be a no-brainer for the left. But the "new" new left has decided to cynically ride this issue.

I, for one, and looking forward to the next column by Summers.