The Free-Traders' Hypocrisy

THE FREE TRADERS' HYPOCRISY

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.

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 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/

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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.

that global free trade is not the means within in which to establish a universal utopia. If all profits are going for the common or collective good seems good on the face of it. The big BUT is that some countries are capitalists which means system efficiences, resources/capital and net profits are available for the few. The argument is truly around philosophy. Fundie Free traders are arguing process theory and cash flow projections. ;)

Excellent post! Welcome to DU!

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."

welcome to DU :hi:

It fits

Maybe someone can enlighten me as to how much of an article I can quote, before the entire quote is removed. It greatly diminishes what I wrote, when supporting documentation is removed. The administration may not be aware of this, but sometimes links don't work. Sometimes computers crash when you try to go to the link. I've had all of these happen, and recently as well. Sometimes readers never, EVER locate the source of the quote. Again, this happens to me frequently, so I appreciate seeing as much of the quote as possible. Furhtermore, the subject of "Comparative Advantage" is a hotly contested issue. So it's nice to have a reputable source as a back-up.

So can I get some guidlines as to the maximum length allowed for a quote? I could have used a lot less, but I didn't want to be accused of taking it out of context.

Let me try posting part of the missing quote here, regarding the requirement that "factors of production" must be internationally IMMOBILE for the "Comparative Advantage" doctrine to be valid.

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

"For comparative advantage to reign, two conditions are necessary:

One is that capital and labor must be mobile within each country..."

"The other necessary condition is that capital and labor (factors of production) cannot be internationally mobile..."

"Ricardo makes it clear that for trade to make both countries better off, trade must be based on comparative advantage. Ricardo gives reasons why, in his time, factors of production are internationally immobile..."

"If factors of production are as mobile as traded goods, the case for free trade--that it benefits all countries--collapses. There is no known case for free trade if factors of production are as mobile as traded goods..."

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


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.

about the total effect when low-wage workers overseas replace high-wage workers here. It could well be that dollar-denominated world income goes down when $2-a-day workers overseas replace $90-a-day workers here.

But for progressive economic arguments to prevail, they must deal with valid lines of attack on them right-wing economists might make. For instance:

(1) Wouldn't declines in dollar-denominated world income due to trade occur mainly because of overvaluation of the dollar relative to third-world currencies? For more accurate assessments, wouldn't world income have to be measured in exchange-rate-independent units, such as baskets of equal amounts of goods consumed by people in all countries, bought at local prices?

(2) Also, couldn't more than one low-wage worker--maybe even ten or twenty or 45--replace each high-wage worker?

(3) And couldn't workers in third-world countries come from agricultural sectors where their previous wages were closer to zero than to $2 a day?

(4) And what would be the subsequen wages of $90-a-day Western workers displaced by trade? On average, could they be closer to $90 than to zero?

(5) Also, couldn't differences in input-output matrices between countries lead employment of some number of $2 a day workers to result in much more economic expansion than displacement of $90 Western workers leads to economic contraction?

And wouldn't you like to know what the ACTUAL numbers are, rather than your hypotheical $90 and $2?

A short nontechnical entry by a top economist in a social science encyclopedia has a good bibliography of economists' work that deals with some of the "open-economy" "positive trade economics" issues you're raising here. The "Austrian economics" website you cited is maintained by extreme ideologues who wouldn't be aware of recent EMPIRICAL economists' work dealing with the specific arguments you have made about globalization. See http://www.ucd.ie/economic/staff/pneary/pdf/kuper.pdf .