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Monday, September 04, 2017

Another case against free trade

Steve Keen, arguably the most important economist alive today, turns his formidable guns on David Ricardo, specialization, and free trade.
David Ricardo extended Smith’s vision of specialization within a given industry to specialization between industries and nations, and made the argument that two countries can benefit from free trade even if one country is absolutely less competitive in both industries than the other. In his hypothetical example, Portugal could produce both cloth and wine with less labor than England. If England specialized at the industry it was comparatively better at (cloth, obviously) and Portugal specialized in wine, then the total output of both industries would rise.

This concept of the advantages of specialization became the core insight of economics, and it continues to be ingrained in and promoted by economists today. Lionel Robbins’s proposition that “Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses”3 is the dominant definition of economics. It implicitly emphasizes the importance of specialization, so that those “scarce means which have alternative uses” can be efficiently allocated to achieve the maximum level of output.

This belief in the advantages of specialization lies behind the incredulity with which economists have reacted to the rise of populist politicians like Donald Trump in the United States, as well as the United Kingdom’s vote for Brexit. They have, at their most self-righteous, blamed the rise of anti-globalization sentiment on the public’s irrational failure to appreciate the net benefits of trade. Or, more commonly, they have conceded that perhaps the electorate has reacted negatively because the gains from trade have not been shared fairly.

There is, however, another explanation for why anti–free trade sentiment has risen: the gains from specialization at the national level were not there to share in the first place, for sound empirical reasons that were ignored in Ricardo’s example. That ignorance has been ingrained in economics since then, as Robbins’s definition—dominant and superficially persuasive, but fundamentally limited—gave economists a starting point from which they could not properly perceive either the advantages or the costs of globalization.

Deus Sine Machina

Robbins’s definition codifies arguably the most egregious oversight in economic theory. It omits a realistic treatment of resources that do not “have alternative uses,” by which the great wealth of modern society has been created: machines. Today, with 3-D printers, increasingly adaptable robotics, and the beginnings of AI, we can contemplate the eventual creation of a single machine that could be deployed across a range of industries. Yet for the foreseeable future, most machines are tailored for specific tasks in specific industries and are useless in any others, as was also the case in the distant past when the theory of comparative advantage was invented. Smith acknowledged the need for specialized machinery in pin production (and attributed the development of that specialized machinery to the division of labor itself, though it can just as easily be argued that the specialization of machinery is what gave rise to the specialization of labor):

A workman not educated to this business (which the division of labour has rendered a distinct trade), nor acquainted with the use of the machinery employed in it (to the invention of which the same division of labour has probably given occasion), could scarce, perhaps, with his utmost industry, make one pin in a day, and certainly could not make twenty.

Ricardo also acknowledged the need for machinery. But in considering not one industry but two, Ricardo assumed a crucial and false equivalence between physical machinery and monetary capital that has bedeviled economics ever since: he treated the specialized machinery in different industries as if it were equally as liquid (and so could be as easily repurposed) as the money with which it had been purchased.

The gain from trade arose, Ricardo asserted, because of different production technologies in different countries (whether that was due to different labor skills, different weather, or different machinery). These differences could not apply within one country, but did apply between them, so that “the produce of the labour of 100 Englishmen may be given for the produce of the labour of 80 Portuguese, 60 Russians, or 120 East Indians.” The reason for this difference between domestic and international trade was, he claimed, because capital moved easily within a country, whereas it was effectively immobile between them.

This is a confusion of monetary capital (which Ricardo, as a stockbroker by trade, knew intimately) with the physical machinery in factories (about which he knew very little). Yes, monetary capital moves easily in search of a profit—today, even internationally. But machinery is specific to each industry, and the crucial machines in one industry cannot simply “move” to another without loss of productivity.

The archetypal machines for cloth and wine manufacturing in Ricardo’s time included the spinning jenny and the wine press. It is stating the obvious that one cannot be turned into the other, but stating the obvious is necessary, because the easy conversion of one into the other was assumed by Ricardo, and has been assumed ever since by mainstream economic theory.

In fact, the relative mobility which Ricardo assumed for his ubiquitous concept of “capital” is the opposite of what applies to machinery. Machinery designed for one industry simply cannot move to any other, even in the same country; but machinery in one industry can (and frequently is) shipped between countries.
This is a conceptually devastating critique of comparative advantage, which, in combination with my labor mobility argument, should suffice to convince even the most enthusiastic free trader that free trade is intrinsically and inherently disadvantageous in certain specific circumstances, many of which happen to be applicable to the USA today.

Free trade is not always and inherently inimical. The important point is that, contra Ricardo and his mindless adherents, it is not always and inherently beneficial either.

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79 Comments:

Anonymous Looking Glass September 04, 2017 7:15 AM  

The externalities for Free-Trade are extremely high. The problem with simplistic models is that they quickly miss the large effects of their assumptive errors. They also don't take into account Redundancy & Fragility, both extremely important calculations for any complex system.

On a random thought, in Biology, it's well understood that danger of "monocultures" for good food stock. Free-Trade assumes there's no risk in similar localized modularization.

OpenID benkurtzblog September 04, 2017 7:32 AM  

This is an interesting critique, but I wouldn't push this line of reasoning too far.

Machines can be packed up and shipped abroad. Entire power plants, sugar mills and car factories have been boxed up and moved to other countries when they became redundant or obsolete in their original locations. On the flip side, machines also go out of date and get scrapped regularly. You can't turn a spinning jenny into a winepress, but you can ship all the Portuguese spinning jennies to England (and all the English wine presses to Portugal) and put each to work in the right place. More importantly, when spinning jenny 2.0 and winepress 2.0 come out, you can be smart enough to locate the rights machines in the right places from the get-go.

I think that free trade between socially and economically unequal partners is the real problem. Critiques of NAFTA focus mainly on Mexico and mention Canada only in passing. Brexit was about free movement of people -- Polish plumbers and Romanian welfare cheats -- and not about complaints that good French cheeses were too widely available at fancy supermarkets like Waitrose.

The discussion continues here: https://benkurtzblog.wordpress.com/2016/11/02/towards-a-better-free-trade/

Blogger VD September 04, 2017 7:36 AM  

Machines can be packed up and shipped abroad.

That doesn't help your case. It helps his. Keen specifically addresses that.

Blogger Cloom Glue September 04, 2017 7:40 AM  

I think he is saying if you buy the wrong machine you cannot change its use and that matters to your country if you chose incorrectly.

Using that argument without discussing the life expectancy of a machine is an incomplete idea. Depreciation is often just three years to ten years. Also there are many specialized machines. Your country cannot always be wrong.

So I think his argument is not so devastating.

Additionally, an error in machine choice can occur within a country. California could grumble about Florida's better machine choice and then what happens? End trade between Florida and California?

Blogger Ingot9455 September 04, 2017 8:01 AM  

How could one measure or characterize the illiquid sale of the wine press to money? Thence to liquidly buy some amount or fraction of a spinning jenny? Is this held to be impossible, or just too slow, or just unquantifiable across all industries?

Anonymous Rocklea September 04, 2017 8:20 AM  

The countries with the wine press economies, be it agricultural or mining, are subject to commodity price fluctuations, with little to no chance of value added profits. Depending on yields or price, no profit and even loss. What profits that are to be had belong to the elites and western foreign aid can feed their workers when required.

If such work forces are capable of unskilled work in manufacturing then businesses can move factories there. Labour need not be much more expensive than the going rate in that country as it is in plentiful supply. In countries where the IQ is high enough and labour is plentiful, business can send high tech industries, along with people from the countries where those industries are being closed, to train their replacements. What they produce can then be shipped back to the countries they used to be made in at a value added profit to the elites.

As trade deficits increase, the past is consumed in the form of foreign investment or acquisition. Labour supply increases, the "good jobs" go global and everyone learns to be a barista in the new "service economy".

Blogger Jimmy Glover September 04, 2017 8:27 AM  

As a designer and builder of specialized equiptment, in the US what is shipped abroad is end of life or waning production models.

A lot of what is currently going to Mexico is just stuff items. And what we have found, is that when it gets there it is not maintained. They do not have the support staff.

Even a lot of new equiptment does not originate there. And that is true in China as well. I know labor must move, but intellectual property must also move. Some countries are 3rd world for a reason.

Anonymous SanityClause September 04, 2017 8:31 AM  

An important difference between the old theory and practice as it is now.

In olden times, when the theory was made, the equipement was simpler but the people able to use it needed more skill, and the equipement was harder to move from country to country. Now, the opposite is true, the equipement is much more sophisticated, does most of the work, so anyone from any country can use it, and it is far easier to move that equipement from one country to another.

The result, the equipement is moved to whichever country the manufacturer thinks they can get cheaper labor (assuming the equipement can be supported there by infrastructure). The result, "free trade" by moving the equipement from a free country, where labor is more expensive due to free laborers asking more, to unfree countries where unfree people have to take whatever they can get. In olden days, we used slaves in our own country to lower labor costs, now, we use slaves in some other country, nothing has really changed, we just move the slavery so "out of sight, out of mind".

Is it still free trade if the country we are trading with is not free?

Oh, and after you move the machinery, the corrupt government if the new host coutry will demand bribes, steal the technology, nationalize (steal) the equipment, and the new host country may simply collapse, taking the equipment down with it.

Blogger bosscauser September 04, 2017 8:33 AM  

Results of free trade. We end up buying n selling foreign goods borrowing the money from foreign sources!

So if the money sources are threatened...we kill a lot a people!

Economic dead end is the result

Gab.ai/GaryCauser

OpenID benkurtzblog September 04, 2017 8:45 AM  

@VD (3):

"Keen specifically addresses that."

Where?

Blogger Chris Lutz September 04, 2017 9:00 AM  

@1 That is one of the problems with maximizing efficiency. As you point out, it leads to fragile systems. You end up with one or two plants that make a critical component and something happens and suddenly you have a shortage. It also leads to a lack of innovation. Instead of 15 companies approaching a problem from 15 different ways, you end up with one monolithic approach.

Also, inefficient national industries are something like loss leaders in a grocery store. You lose money on them but they are necessary for a well rounded economy. No grocery store stops selling milk because it can't compete with the price of their competitors.

Slightly OT: Some moron wrote an article about how it is moral to price gouge in providing services to victims of Harvey. The people supporting the claim were amazing. Some guy charging you $1,000 for a bottle of water because he is the only one with the water to save your life is perfectly moral.

Blogger ZhukovG September 04, 2017 9:07 AM  

For some the word 'Free' has an almost fetishistic quality.

Clausewitz said, "War is the continuation of politics by other means." I would suggest that, 'Trade is war by other means'. This may seem distasteful, but I believe it is true.

As war is complex, so is trade, and I am afraid most economists lack the intellectual capacity to engage in it effectively. Thus, the temptation to latch onto simplistic models. Not because the models are correct, but because the majority of economists can understand them.

Anonymous krymneth September 04, 2017 9:11 AM  

Cloom Glue wrote:Depreciation is often just three years to ten years. Also there are many specialized machines. Your country cannot always be wrong.

I think you, and already a couple of other commenters despite how few there are, are making a category error. Keen here is not making a positive argument in favor of the idea of free trade being bad; he is attacking a specific economic argument made by Ricardo a long time ago. This argument wouldn't necessarily rise to the level of a "mathematic proof" in the mathematics domain, but it was the sort of argument that was presented; given facts A, B, C, and D, we can conclude E and F.

What Keen is showing here is that pretty much all of A, B, C, and D are false, and therefore the argument that we can conclude E and F is completely unsound.

Pecking around the edges about how B may be only mostly untrue instead of entirely untrue is an inadequate defense of the original argument. For Ricardo's logic to hold, he needs to be entirely correct.

It obviously is not, to anyone with any sense, free to change machinery around, nor is it a trivial cost that can be ignored. It especially isn't trivial once we consider that since Ricardo's time, one should probably consider the ever-increasingly-exotic skills necessary to design, maintain, and run the machines as part of the machine itself in terms of the original argument. The actual day-to-day operation of a machine may be easy enough for someone to walk in off the street and operate it, but maintaining it, integrating even off-the-shelf machines into your plants, optimization, integration with the software that helps you stay efficiently competitive, etc., this is all very expensive and difficult and would surprise you with how poorly portable it is between industries.

To support Ricardo here, it is not sufficient to say that Keen or I have slightly overestimated the costs of changing things; you need to show that the costs are effectively free for Ricardo's argument to stand.

Good luck.

This does not, on its own, prove that E and F are false. But one does not need to spend a lot of time around economics and mathematics in general to know that while incorrect proofs of correct statements are not unheard of, they're not something you can bank on. And it is also important for everyone to understand that your casual presumption that free trade is an unambiguously good thing comes from this one pillar of Ricardo's argument. Once that is struck away, the rational response is that the belief must be dropped. This makes way for the unproved, but far more likely, statement that it has good aspects and bad aspects and which are which probably even depends on which actor you are in the economy.

Blogger Kerryman86 September 04, 2017 9:23 AM  

In the time of Ricardo IQ, culture, Islam, outsourcing, automation, the welfare state, fiat currency, the petro dollar system, floating exchange rates either did not exist or were unknown or immaterial to the period in which he was alive. Therefore any theory from that time period should be taken with a grain of salt as would a physicist today when reading newton or Maxwell. one of which was a proponent of the luminous aether theory of electromagnetic and gravitational forces. With increasing automation, trade will continuously decline in all finished good categories since all manufacturing will become local and the only trade left will be in commodities. Countries that can maintain stable governments and can retain high IQ populations will be the most productive therefore the richest. AI robotic/cybernetic joint/stock companies modeled on the British East India company will reemerge to restore order to a globe in which traditional socialist democracies will fail due to demographic and technological change. A stratified cognitive elite will emerge living in their walled Xanadus, protected by well paid mercenary armies equipped with high tech weaponry and logistical technological support. Fiat currencies will give way to resource/productivity backed cryptocurrencies and free movement of people will cease due to crime and 4th generational urban warfare. All humans will be tagged digitally and will be restricted to where they can travel to. Northern European appearance and lifestyle will still be considered ideal and the elites globally will begin to genetically engineer their children to look and behave northwestern European. This cognitive elite and their progeny will be worshiped and hated simultaneously by the billions of poverty stricken equatorial/middle eastern sub populations. Crude bread and circuses will be provided to the low IQ masses and a "Running Man" like distopia will emerge throughout the world.

Blogger Zaklog the Great September 04, 2017 9:29 AM  

This is frustrating because I feel like I'm observing from the outside an enormously important argument which I do not understand at all. Now, I'm fairly intelligent. I think if I could sit down and concentrate on the study of economics for a few weeks, I probably could understand the questions being addressed, but life moves fast, and I simply do not have that opportunity right now.

Anonymous Panzer Man September 04, 2017 9:29 AM  

benkurtzblog wrote:@VD (3):

"Keen specifically addresses that."

Where?


Last paragraph.

Anonymous Anonymous September 04, 2017 9:35 AM  

Once all the machines are shipped to the most efficient, read lowest cost, country your own country has a lopsided economy and is highly dependent on cheap goods aboad and highly vulnerable. Plus you better hope everyone in your country is really happy working at that one industry your country is competitive at.

Blogger Sam September 04, 2017 9:44 AM  

@17
It doesn't end up like that for the same reason that cities don't specialize in a single commodity.
---

On topic, the best way to understand the issue is to realize the economy isn't just a method of allocating goods and services but status. Regardless of whether free trade is economically optimal, it will be promoted by some individuals and detrimental to others.

A certain amount of self interest is to be expected, but combined with firms gaming the system and the use of government subsidies it allows incredibly dysfunctional outcomes. If something is bad for everyone but you are immune to the effects, eventually you get someone willing to push the system to maximum to raise their status relative to everyone else.

You get similar perverse behavior with immigration. Not only can it make you richer, but it can make potential competitors poorer.

Blogger Orville September 04, 2017 9:47 AM  

I think some of you are missing the key point Keen makes, and while I'm not in any way conversant in economic theory, this mistake of Ricardo is unbelievable. Ricardo is imputing traits of capital to the traits productive equipment. The two are not fungible, so Ricardo built a theory on a false premise.

Ricardo assumed a crucial and false equivalence between physical machinery and monetary capital that has bedeviled economics ever since: he treated the specialized machinery in different industries as if it were equally as liquid (and so could be as easily repurposed) as the money with which it had been purchased.

Blogger Unknown September 04, 2017 9:49 AM  

Another problem with Ricardo's argument is that it does not take capital flows into account. Eventually, the lower cost producer buys out or bankrupts the competitors.

Anonymous View September 04, 2017 10:07 AM  

It seems to me the one advantage of free trade is maximized output...however the disadvantages have been historically and presently greater bc govts and plutocrats are able to manipulate the situation to their advantage and to the disadvantage of 95 % of the population. Different laws in different countries work to the advantage of the plutocrats. Also it seems free trade strengthens their monopoly on land .resources and money . The end result is far less freedom under "free" trade. The only way it could work is if the US and its freedom ideals takes the leadership role and the freedom system is looked upon as the model of how the other countries SHOULD be and not the other way around. For eg Bernie Sanders always talks about how great socialist countries are and how the US should be more like them. Thats a big problem when the international partnership pushes things in the wrong direction an anti freedom pro tyranny direction

Anonymous Lara Mycroft September 04, 2017 10:46 AM  

@ Vox: ... free trade is intrinsically and inherently disadvantageous in certain specific circumstances ...

and

Free trade is not always and inherently inimical.

Vox, looking back at some of your recent posts on free trade, you've taken a more sweeping anti-free trade view. Are you now moderating that appraisal?



Blogger Peter Jackson September 04, 2017 10:51 AM  

I'm not making a comprehensive argument for or against "free trade" but I do know this: The big three U.S. automakers were producing garbage in the 70s and 80s; it was only through foreign competition that they were forced to improve their products to where now they are only marginally worse than the competition.

I'm not interested in tariff protection for industries that are not producing world-class products. And if they are producing world class products, then tariff protection is counter productive as those products will be in demand globally, but global demand will be restricted by other countries' retaliatory tariffs; everyone loses.

Blogger Dos Voltz September 04, 2017 10:53 AM  

I used to be really interested in economics 25+ years ago or so, but then fell into the notion that it's sorta hopeless, with so many competing theories and models, so many people "smarter" than me who are in the field but seem like actual dolts, and so many people genuinely smarter than me that cannot agree.

I agree with some of the commenters here that corrupt politicians gum up the works so badly that we are not even capable of seeing real outcomes of economic policies, be they bad or good in the first place.

The subject now simply requires more stamina and interest than I am able to muster. I do appreciate these posts, however.

I would posit an analogy, that the field is as complex as the mechanics of a race car engine, and so many things must be balanced and controlled perfectly for smooth operation. And it seems we are on the cusp, as engine designers, to maybe abandon the carburetor and push rods for fuel injection and overhead cams. And no matter what is done, backgrounds/knowledge of other subjects are required; physics, fluid mechanics, chemistry, thermodynamics, etc

I will leave this one to the Ferrari team and look on from afar, in admiration.

Blogger S1AL September 04, 2017 10:59 AM  

Once again, a beautiful theory is mugged by an ugly gang of facts.

Though this appears to be more an issue of "we changed our assumptions, but didn't change our model". That sounds familiar...

Anonymous Just another commenter September 04, 2017 11:05 AM  

Huh.
It's amazing how obvious a hole is... once it is pointed out.

Some low-tariff trade between economically compatible nations is likely a reasonable thing: US sells American cars to Germany, they sell German cars to the US, or US sells wheat to Chile in exchange for off-season grapes. But the whole-sale gutting of the US manufacturing economy to export our pollution and profits to international MegaCorps and banksters is clearly a problem.

Impose a flat 5% across-the-board tariff now, rising gradually to 40% over the next decade. Bring our mfg'ing home.

Blogger allyn71 September 04, 2017 11:06 AM  

"But real-world growth comes from innovation rather than allocation—the development of new products via the combination of knowledge from different but related industries. It relies upon combining knowledge embodied in single-use resources—in the form of both highly specialized workers and highly specialized machines—rather than multiple-use ones. This knowledge is more likely to exist in countries with diversified industrial systems, rather than specialized ones."

That sound you hear is a thousand midwits screaming out in one voice "Muh' Ricardo!"

To all you wannabe's that are sperging your stupidity. One piece of advise, read the linked source before typing, it will save us all your embarrassment.

Anonymous Looking Glass September 04, 2017 11:07 AM  

@22 Lara Mycroft

Categorical vs Generalized.

"Free Trade cannot work" vs "Free Trade didn't work". I haven't read Vox to change his position on Free Trade. It didn't work in a Globalized environment. It doesn't mean in certain microeconomic applications it wouldn't be the best system available.


@23 Peter Jackson

"Free Trade" didn't crop up until the 90s. Japan started selling Cars in the USA well before that. The policies that allowed them to make & sell cars in the USA is actually the proper approach to trade. "Make them here, with American Labor & American Parts". It's worked out well for everyone, actually. To the point that most "Japanese" cars are now designed in the USA.

But, again, that wasn't "Free Trade". That was high-tariffed trade that forced them to produce cars in the USA.

Blogger wreckage September 04, 2017 11:10 AM  

"free trade is intrinsically and inherently disadvantageous in certain specific circumstances"

I didn't think you'd be able to do it, Vox, but as an ardent free-trader I agree entirely with that.

Comparative advantage largely works, and does so by brute force. But it is an incorrect application of comparative advantage to suppose that it is always dominant, or that it works for nations as though they were individuals.

My understanding wass that this was a well established component of theory, but given the number of economists who can agree with Picketty, whose entire case rests on completely ignoring vital "moving parts" of the theory while retaining others, and thereby of course producing something far more dysfunctional than simple ignorance, I suppose I should be prepared.

Anonymous Bobby Farr September 04, 2017 11:11 AM  

As Ricardo explicitly limited his arguments re the benefits of free trade to cases where labor was immobile, I guess we can count on proponents of free trade to support shutting down immigration, right?

Anonymous Eduardo the Magnificent September 04, 2017 11:13 AM  

And it seems we are on the cusp, as engine designers, to maybe abandon the carburetor and push rods for fuel injection and overhead cams.

Very interesting analogy if you compare the economies of Ricardo and Smith to today. See, a carburetor is inefficient and needs tweaked on occasion, but easy to diagnose and fix if you know the basics. Plus, it'll run forever. FI may be streamlined, but relies on complex computers and often when (inevitably) a problem surfaces, it is hidden and you wind up "throwing parts" at it until you find something that works. Unless you take it to an expensive mechanic, but that's no guarantee he'll fix it either. Sounds a lot like our modern economic situation.

Blogger Noah B The Savage Gardener September 04, 2017 11:20 AM  

Keen's criticism of Ricardo's argument is fully valid, but what's bugging me is that I know I've read something very similar to this before. Did Debunking Economics address this?

Blogger wreckage September 04, 2017 11:20 AM  

@28, and yet, by comparison, Australia lost its car industry almost entirely while protections were still in place, and has had the same experience with other industries.

"Free trade" has become a fairy godmother, stepping in to magically fix broken policies, sloppy practice, malformed laws, and grossly distorted trade agreements.

Nothing could ever do the job it is expected to do.

The job it was intended to do was prevent princes and bureaucrats from interfering with men of competence and drive. That is where the benefits of free trade arise, where the penalties of government controlled industry accrue.

How many "free trade" policies of late have even waved their hand in that direction? The words "free trade" are now nothing more than a smokescreen for the globalist elite pillaging the nations at will, enabled by socialists who need to outsource everything after destroying industry, enterprise, and community.

Anonymous Taco Town September 04, 2017 11:27 AM  

What Keen said about machines also applies to people. Somebody well suited to a blue collar factory job isn't necessarily suited to working in IT. If all the blue collar jobs are shipped overseas, the blue collar worker is screwed.

Anonymous Fisk Ellington Rutledge III September 04, 2017 11:28 AM  

All this theorizing is simply one more specious rationalization by Globalists. The simple facts are that the Left made it increasingly impossible for people to do business in this country through over-regulation and draconian hostility by the permanent Leftist bureaucracy. In order to respond to complaints about this by corporate donors, the Left and the (((neoCons))) came up with the malignant idea of simply shipping bad, dirty old manufacturing to third-world hellholes where slave labor and toxic pollution weren't a problem. The fact that this hollows out the entire economy of the U.S. doesn't bother Leftists at all. They hate the U.S. They want to destroy it. What this all reminds me of is when the Mafia would get control of a business and they would "bust it out." They would run up huge amounts of debt using the business's credit, sell what they bought at basement sale prices and then strip as many assets as possible before a fire would complete the destruction; leading to a big insurance pay day. Bankruptcy followed, and the Golden Goose was dead. Of course when they finish busting out the U.S., the Leftists and (((neoCons))) will have lost their power base. But these grasping criminals are living in a Leftist dream in which debt doesn't matter. This is clinically insane. It has nothing to do with theory. This theory is a very flimsy facade behind which these traitors can hide. Disprove the theory, and they will simply find another rationalization. Or, even simpler, just force us to accept our dispossession, just as they force us to accept the invasion of third-world savages and the normalization of deviancy.

Blogger rumpole5 September 04, 2017 11:31 AM  

The problem with all of these economic theories is that they ignore the effect that the characters of the economic actors has on the system as a whole. I would much rather produce something in a country where people are intelligent, honest, clean, friendly, diligent, and punctual than in one where the greater mass is stupid, corrupt, dirty, hostile, lazy and late. You can hypothesize about capital, labor, and natural resources all you want, but I avoid the products labled from the latter described places.

Blogger JACIII September 04, 2017 11:32 AM  

Most people sense international free trade is bullshit instinctively. The problem with Ricardo is his theory is used to convince otherwise sane folk to excuse politicians looking to impoverish them.

Blogger Chris Lutz September 04, 2017 11:32 AM  

@28 But, again, that wasn't "Free Trade". That was high-tariffed trade that forced them to produce cars in the USA.

And Reagan telling the Japanese that if they wanted to sell cars in the US they had better produce them here.

Intel and AMD only exist because the US protected them from foreign chip makers.

Anonymous Brick Hardslab September 04, 2017 11:34 AM  

While the field of economics has scads of problems the worst is that everyone who's got a square peg starts their equation with, "presume all holes are square."

Blogger Dos Voltz September 04, 2017 11:35 AM  

@31 Thank you, Eduardo. Good summation.

I used to be somewhat confident in my knowledge of economics, leaned hard toward Austrian school. Read Mises, Rothbard, Hayek, etc. I got the basics, but no more.

But then as Vox says, when reality doesn't give you the results you want or expect, you have to revisit your premises. So - confidence shaken.

At the moment there is no one I trust more on the matter than Vox, as he is much better read and more knowledgeable on the subject, and can hold his own even with "real" economists.

But yeah, maybe we better go back to our old carburetored economy that allowed for simple tweaks, until we get better software to handle fuel injection, (or until we get honest and incorruptible politicians *choke**gasp*)

Blogger Sillon Bono September 04, 2017 11:39 AM  

A.I. this, A.I. that...

A.I. is nothing but another IT industry buzzword.

A plane can fly in the beginning of the 20th century because it is a working proven idea, a modern plane can fly because it is a better refined version of a working proven idea.

A.I. is nothing of the sort, it is nothing but a database and brute-force computing, same we've been doing since the 60's.

"A.I." will not lead to "better A.I.", people who think we have anything like they are imagining "A.I." to be are either delusional or completely ignorant about computing science.

We will get better automation, yes, will we get better robotics? yes.

We will not have thinking computers, ever, not with the technology we use, and while I will not say it will "never" be done, I can assure you that faster processors and more memory you do not solve the problem.

Anonymous FP September 04, 2017 11:42 AM  

I think what gets me the most about many free traders is how they will suddenly get very moralistic over price protections for certain industries. I'm a horrible person if I want to re-import a product sold cheaply overseas for far less than locally. That case of college textbooks that made it to the supreme court a couple of years ago is a prime example. Others are pharmaceuticals and even video game keys/licenses.

Oh the gnashing of teeth over people buying grey market cd keys to save $10-20 or more.

Anonymous Viiidad September 04, 2017 11:43 AM  

Taco Town wrote:What Keen said about machines also applies to people. Somebody well suited to a blue collar factory job isn't necessarily suited to working in IT. If all the blue collar jobs are shipped overseas, the blue collar worker is screwed.

Exactly. And the remaining elite die from a plague spread by dirty telephone receivers.

Blogger Noah B The Savage Gardener September 04, 2017 11:44 AM  

The Ricardian argument also ignores the political aspects of free trade. When a nation outsources the industries that enable it to wage war, then it should be obvious that the outsourcing nation will lose power and influence to its long term detriment.

Blogger pyrrhus September 04, 2017 11:44 AM  

Ricardo's model also assumed a gold standard, so that trade imbalances would be reflected by gold outflow and a weakening currency, which would eventually feedback into balanced trade....He didn't foresee modern government in that respect!

Blogger Nathan September 04, 2017 11:49 AM  

Specialization between nations is also antithetical to democracy. Instead of communities that produce most of their own essentials and luxuries, and therefore have a level of freedom and autonomy that allows them to keep government and regulation small, we have communities that produce a few specialized products and must rely on the money people and the government to keep trade flowing smoothly.

There is a reason the American Dream was to homestead instead of to make a more "efficient" economy by everyone working in a car factory.

Blogger tz September 04, 2017 11:51 AM  

It goes beyond machines. There are huge sunk costs and accumulation of capital, and establishmemt of supply chains. Move the textile plant to Portugal... oh, wait, no sheep or wool! Move wineries to Ireland ... how well do grapes do?

It scares me to have the existing web of supply chains. You can't just rip one piece out and have it reappear elsewhere. It took years to outsource, first to Japan, then to Mexico and China.

Anonymous dystonia September 04, 2017 11:56 AM  

This critique of Ricardo is on the same level as pooh-pooh-ing Newtonian Mechanics on the grounds of an example that uses two perfectly elastic billiard balls on a smooth frictionless surface.

Like all real world systems, if Portugal and England suddenly come into contact having reached autarkic equilibria of their own, what happens is not overnight, but as English wine-presses break, the smart money will buy looms instead, and vice versa in Portugal.

Blogger tz September 04, 2017 12:03 PM  

@41 agreed. AI can do some strange pattern recognition. It has no will.
I suspect Google and the rest are having trouble because AI is amoral and perfectly logical. So even not knowing the race or gender, it will correctly determine things that make "the bell curve" look like a leftist tract.
Damore made a light, well reasoned and cited argument and was fired (whatever happened to the town hall?). AI is likely to be worse than David Duke and Roosh combined.

The alt-right and alt-tech aren't afraid of truth. In fact, it gives them their power. Lies always unravel.

Marxism ignored that capital had to be saved and spent amd created. The cultural marxists deny the social capital and institutions didn't just appear by magic. Tolerance and freedom of conscience and speech are rare and hard won. Antifa will burn down their own universities. Converged companies will go bankrupt.

Anonymous map September 04, 2017 12:05 PM  

dystonia,

"Like all real world systems, if Portugal and England suddenly come into contact having reached autarkic equilibria of their own, what happens is not overnight, but as English wine-presses break, the smart money will buy looms instead, and vice versa in Portugal."

But that is exactly what doesn't happen. Nobody waits for the machines to break. There is a sudden shift of production elsewhere and poof it is gone.

Go to Buffalo, NY. See the rusted hulks of factories.

Blogger tz September 04, 2017 12:10 PM  

@48 assuming Portugese like wearing English styles, and England like Portugese wines. Pins may all be identical, but with higher orders of production, you don't get anything identical. Even here in 1790, the south had seersucker (cool) and the north had heavy woolens.

That would take time to adapt.

Also gold (real money, not fiat or debt) would flow one way or the other to alter the price equilibrium limiting the exchange.

Blogger VD September 04, 2017 12:14 PM  

This critique of Ricardo is on the same level as pooh-pooh-ing Newtonian Mechanics on the grounds of an example that uses two perfectly elastic billiard balls on a smooth frictionless surface.

That's remarkably stupid. He didn't choose the example. Ricardo did, because he thought it worked. And it doesn't. For multiple reasons, including those Keen gave.

Anonymous Crew September 04, 2017 12:16 PM  

However, because Keen said Diversity is Strength the globalists will be telling us that it means MOAR immigrants, ignoring the fact that Keen was talking about diversity of production.

Blogger Cail Corishev September 04, 2017 12:26 PM  

The big three U.S. automakers were producing garbage in the 70s and 80s; it was only through foreign competition that they were forced to improve their products

Correlation != causation. It's very easy for people to see fact A, hear experts claiming A is caused by fact B, think to themselves, "That makes logical enough sense," and never reexamine the question.

But did B (lack of foreign competition) really cause A (crappy domestic products)? I don't know, but if it did, why did cars not suck in the decades before that? Why are my 50-year-old American-made tools far better than anything made in today's trader's paradise?

The main thing I remember about 70s and 80s cars and all the stuff they had under the hood that sapped horsepower and made them a pain in the ass to work on, is that all that stuff had to do with government regulations. The car companies didn't put in catalytic converters and PVC valves and all that other junk just for fun because they had no competition. They did it to meet emissions and mpg requirements, which I think were mostly imposed in the 1970s. Is it possible that the technology finally caught up to those requirements in the 1990s, making better cars possible at about the same time that there started being more imports?

Anonymous Crew September 04, 2017 12:27 PM  

Like all real world systems, if Portugal and England suddenly come into contact having reached autarkic equilibria of their own, what happens is not overnight, but as English wine-presses break, the smart money will buy looms instead, and vice versa in Portugal.

You ignored another aspect of the failed comparison. England is no country for wine.

Perhaps Ricardo should have used other examples, like cloth and coal, or cloth and weapons, or cloth and pins ... but fundamentally, since the machinery in one industry could not be re-purposed for another industry and still cannot today, one of his fundamental assumption is completely invalid.

At least when moving from perfectly elastic billiards and frictionless surfaces we can account for the differences, however Ricardo failed to account for the fact that you have to throw away the capital invested in the machines you currently have if you want to move to a different industry and that is a huge impact to the model. Kind of like replacing the billiard balls with lead weights or marshmallows.

Blogger Sam September 04, 2017 1:03 PM  

@41
Isn't the issue that to build an AI (essentially a program that can problem solve like a human does) we need to know
-how humans do it
-how to turn that into programmable code

We don't know the former and we can't turn human intuition into the latter (since the human brain operates under a bunch of constraints and with capabilities an AI won't be subject to or have).

I suppose it might be possible to find an alternative way to think, but that is presumably even harder (since we don't think that way).

Blogger DJ | AMDG September 04, 2017 1:05 PM  

"Additionally, an error in machine choice can occur within a country. California could grumble about Florida's better machine choice and then what happens? End trade between Florida and California?"

I believe this is exactly what happened in the "butter industry." Machines used for butter making created 1lb blocks of 1 rectangular size all over the country. The East Coast, being more established and having more influential restaurants and chefs than west of the Mississippi started asking that butter be delivered in 1lb packages predivided into 1/4 sticks. So, the East Coast and Midwest butter makers invested in new machines that created 1lb blocks made up of 4 long narrow prewrapped sticks. Since not all chefs and institutional cooks were asking for this, western butter producers went with a different machine that created 4 short fat sticks of butter. The companies who invested in the former machine ended up with a much section of the butter market. The latter were pretty much regulated to west of the Rockies. Modern refrigerator trucks came along nationalizing the diary market, but guess what, not the butter sub-market....because machines.

Blogger Ostar September 04, 2017 1:21 PM  

Machines are the key in industrial trades. My company makes medical grade plastics, requiring very expensive and specialized machines. We had an older machine that made non-medical plastics, at a low profit margin. We sold it to a Chinese company, and trained their employees on it for 3 months. Now they produce at a higher profit because of reduced labor and government regulation costs.

Anonymous just some guy September 04, 2017 1:45 PM  

Ricardo was an advocate for British bankers. His analysis was very biased to support financial interests and he twisted much of Smith's work.

Moreover, the Anglo-Portuguese relationship was complex. Portugal had been under Spanish control at one time and the Portuguese needed external support to have independence. They tried the French and Dutch first, after being rejected, they gave away control of their economy to the English. It devastated Portuguese industry.

At the same time, the English crown was heavily involved in industrial policy.

Keen is really good. Another really good one is Michael Hudson ("Killing the Host" and "J is for Junk Economics " are his most recent books).

Free trade is great for bankers and for oligarchs, but bad for everyone else. America developed into the leading economy of the world because the early Republican Party followed the American School of economics, consciously rejecting the British School of Ricardo.

Build infrastructure, restrict imports, etc. Economic nationalism FTW.

Free trade is also by nature imperialistic and so must force them open. It sees any closed market as the enemy (ex. Opium Wars)

Blogger Chris Lutz September 04, 2017 2:37 PM  

@54 The regulations worked to the benefit of the foreign makers which made smaller cars and had a higher MPG. Yes, Detroit was making some crappy cars in the 70's. Part of it though was because the gov't let one union handle all auto employment. So you ended up with the same work rules across the industry instead of allowing some significant variation.

Plus allowing some foreign competition to keep domestic manufacturers on their toes is different than entire industries getting shipped overseas.

Anonymous JamesD September 04, 2017 2:38 PM  

It comes down to capital preservation and capital accumulation. Where the capital is, there will be the high standard of living. The low Fed rates funded capital formation in China and capital destruction in the USA. The Chinese build the coffee machines, and the Americans pour the coffee. Note it is important not to get myopic in opposing free trade. You also have to have an environment that fosters capital formation and protection: low taxes, low regulations, and fair courts, to name a few.

Anonymous VFM #6306 September 04, 2017 3:14 PM  

Man. The British, Portuguese AND Russian judges are all going to give the Ricardians on this thread a ten-point-oh for gymnastics.

You can't restate Keen's argument in your own words and claim you aren't raping Ricardo in order to defend him.

I am surprised: Keen's argument (machine scarcity) may be better for rhetoric than Vox's definitional demonstration (labor flooding).

"Free trade wastes machines" might just be more effective persuasion than "Free trade lost your job," or "Free trade is invasion" even though they all ultimately defend the same truth.

Blogger White Knight Leo #0368 September 04, 2017 3:33 PM  

This... was a genuinely good argument against Ricardo's theory. I've certainly never seen better.

Blogger DonReynolds September 04, 2017 3:46 PM  

As a graduate student in economics from the mid-1970s to the mid-1980s, I was not the first to reject Ricardo or his assumptions bundled into comparative advantage. I thank my (most important) professors, many of whom have since died, for tolerating what must have seemed the most determined heretic ever to sit in their classroom.

Ricardo is a difficult read and every economist has had ample opportunity to understand him, but there has always been a lineage of economists who rejected the absolute benefits of free trade and comparative advantage.

Trade does not occur because of absolute advantage or because of comparative advantage or because of anything that economists might say. Trade occurs because of a basic disagreement between a willing buyer and a willing seller. They fundamentally disagree about the value of the good or service being traded. It does not matter if the trade is in a neighborhood, or between states, or international. The seller values the good or service LESS than the buyer does. That is why trade occurs. Like effective demand, mere wants (and needs) are not enough, but must be backed up with the ability to pay...even if it is credit driven.

Anonymous A Deplorable Paradigm Is More Than Twenty Cents September 04, 2017 4:16 PM  

@62
The British, Portuguese AND Russian judges are all going to give the Ricardians on this thread a ten-point-oh for gymnastics.

It's not easy to perform gymnastics on an Escher staircase.

Anonymous Crew September 04, 2017 5:28 PM  

It is strange that Ricardo would compare wine production between England and Portugal because during his lifetime he lived in the Little Ice Age where Wine production in England dropped sharply, but Portugal would have been more favorably positioned, geographically, for Wine production (but of course, it always was as well unless it became too hot in Portugal.)

https://realagenda.wordpress.com/tag/the-little-ice-age/

Anonymous A.B. Prosper September 04, 2017 5:53 PM  

Sillon Bono wrote:We will get better automation, yes, will we get better robotics? yes.

We will not have thinking computers, ever, not with the technology we use, and while I will not say it will "never" be done, I can assure you that faster processors and more memory you do not solve the problem.


which is moot, the vast bulk of jobs don't require a great deal of thought.

without prosperous average workers your society is poor and while some oligarchs may get rich, in a broader sense you have a society that stops working

Also in case you haven't noticed, the fertility levels in the West and the industrialized world is terrible . A lot of this is cultural but I don't think having a mainly urban population (80% in the US) without work is conducive to a fertile society well unless you want a nation sized ghetto.

Too much automation and AI without regulation will result in a societal endgame , arguably we started to reach that in the 1930's with automation (1.8 fertility) and the baby boom was a bubble we though was a recovery , maybe not. But automation and fertility do share a correlation

Your best case scenario is Japan, safe, clean, homogeneous, doomed

Work and prosperity or modernity and very possibly all Civilization ends . Choose wisely

Anonymous GM September 04, 2017 7:10 PM  

The point about real vs. nominal capital is essential. The brainless substitution of liabilities (nominal) for stuff (real) underlies a lot of economic confusion.

And the real vs. nominal problem is at work in most of our insanity, from nations to gender.

Blogger Snidely Whiplash September 04, 2017 8:13 PM  

"Free trade wastes machines" might just be more effective persuasion than "Free trade lost your job," or "Free trade is invasion" even though they all ultimately defend the same truth.
It will work better with economists and others who have been insulated from the consequences of Free Trade Theory.
"Free Trade lost youb job" is already the default thinking among the working class.

Anonymous Tear it down and build it back up. September 04, 2017 10:38 PM  

I'm actually in the business of buying and selling industrial equipment. When a factory is closed, there's typically an auction and people show up to buy the equipment. What isn't bought by people who need a particular unit is bought by people like me, for resale. What we won't touch gets bought by scrap merchants.

Where Robbins is just wrong is in his assumption that machinery is dedicated to a particular product. That may be true for some particular examples, but most equipment has multiple uses. And not just obvious general purpose stuff like a lathe, a fork-lift or a scanning electron microscope. Example: a distillation tower is a good sized pretty specialized piece of equipment. We bought a 50' tall one from the Olympia brewery in Tumwater, WA and sold it to a corn farmer in Iowa. So it moved from the liquor for humans business to the biofuel business and from running on beer tailings to distilling corn alcohol. Totally different markets, different commodities, different consumers.

If you get a book on industrial chemical processes, you'll discover that there just aren't that many different pieces of equipment that are used in those businesses. So they get repurposed all the time. But when you start out in the field, it can seem that there are thousands of different kinds of machines. There are. But thousands ain't so many and the US will have multiple uses for most of them.

Most people probably think "machine shop equipment" when thinking on this subject. And the same piece of that equipment obviously goes into many different industries.

The most specialized equipment I can think of are stuff used on farms. But farms don't move abroad. They may change what they grow but they're still going to use a tractor.

Blogger Doc Rampage September 04, 2017 10:54 PM  

There is a word for this; it's called a straw man argument. You invent an easily-refuted position that is vaguely related to your opponent's position, refute the position, and then claim that you have refuted your opponent.

No economist ever assumed that machinery could be re-purposed without cost. Nor does Ricardo's argument assume that.

Blogger tuberman September 04, 2017 11:31 PM  

This comment has been removed by the author.

Anonymous A.B. Prosper September 04, 2017 11:31 PM  

Doc, even if Ricardo was correct inn his day , economies and technology change, same with Bastiat or Marx or anyone else

Its folly to assume that economic theories developed in the early 19th century make a lick of sense in the early 21st , human nature hasn't changed but technology which a massive component of economics and its radically different now .

we can gain some insights from all their works, even that fool Marx but our choices and policies must be informed by our technology and our social needs

Its pretty clear the current system doesn't work since not in one major city can a typical person afford a new car

http://www.autoguide.com/auto-news/2017/06/most-americans-can-t-afford-a-new-car-report.html

And the usual whinging about regulation and taxes isn't going to do a damned thing about wages arbitrage either

Wages up or costs vastly down (by half for all goods) or a more impoverished nation

Blogger tuberman September 04, 2017 11:38 PM  

Sillon Bono wrote:
"A.I. this, A.I. that...

A.I. is nothing but another IT industry buzzword.

A plane can fly in the beginning of the 20th century because it is a working proven idea, a modern plane can fly because it is a better refined version of a working proven idea.

A.I. is nothing of the sort, it is nothing but a database and brute-force computing, same we've been doing since the 60's.

"A.I." will not lead to "better A.I.", people who think we have anything like they are imagining "A.I." to be are either delusional or completely ignorant about computing science.

We will get better automation, yes, will we get better robotics? yes.

We will not have thinking computers, ever, not with the technology we use, and while I will not say it will "never" be done, I can assure you that faster processors and more memory you do not solve the problem."


What about A.I. patterned after neurons and the human brain, or sensors connected to a feed-back loop. Say you have a camera or cameras, a motion detector, a heat sensor all connected to feed-back loops capable of probing, and learning deeper and subtler patterns, then connecting them in total to do something or many things effectively.

All this would have to be done through movement, of course, and the flexibility would have to be built-in to do whatever work is necessary.

Anonymous Selat September 05, 2017 12:38 AM  

While desires might be limitless the supply cannot - I hope at least this is evident. Therefore following this logic no entity (be it town/city/state/country) can supply all of the demand as consequence there is place in the market for those countries which even producing at higher cost, too can sell their products even if competition can do it better, because competing country cannot supply all the products.

Now, second issue mentioned here the collapsed industries. This might surprise you but this is very important feedback mechanism. This a way that economy tells you that either whatever you are doing you are not doing it well enough or your economic environment was poisoned by your government to the degree that made you noncompetitive.

But instead to go and complain to your government, you chose to accept welfare (at the cost of other industries - making them also noncompetitive). The broken factories are more of responsibility of your own government than foreign competition.

Blogger Jorge Morales Meoqui September 05, 2017 2:50 AM  

The writer of this blog is clearly a big fan of Prof. Keen. I’m aware that Prof. Keen correctly predicted the financial crisis of 2007, and I am sure he has some other areas of competence as well. His critique on Ricardo and comparative advantage, though, merely reveals that these topics should not be counted among his strengths.

The mainstream interpretation of Ricardo’s famous numerical example has been completely overhauled in recent years, and this process is not even complete yet. It has been shown, for example, that the so-called Ricardian trade model of economic textbooks is a misnomer, because it is based on blatant misinterpretations of the original numerical example. Moreover, the unrealistic assumptions of the textbook trade model do not apply to Ricardo’s example.

For a more detailed account of the differences between Ricardo's numerical example and the textbook model, see:
https://www.worldeconomicsassociation.org/files/journals/economicthought/WEA-ET-6-1-MoralesMeoqui.pdf

Prof. Keen does not seem to be aware of this reappraisal of Ricardo's numerical example. Moreover, his critique that Ricardo made a false equivalence between physical machinery and monetary capital is bogus. It can be easily debunked by consulting chapter XIX of Ricardo’s Principles titled "On Sudden Changes in the Channels of Trade”.

Ricardo recognised there that any sudden change in the channels of trade causes considerable distress and some loss for both capital owners and their employees. He also proposed the proper remedy for this: a gradual implementation of free trade.

That free trade might occasion sunken costs is a fact, but it is a poor argument against this trade policy. As Ricardo himself stated (Principles, p. 271), technical progress often renders complete industries obsolete. Notwithstanding, it would be foolish to prohibit the inventions and improvements of machinery.

The mainstream case for free trade can and should be criticised, as I have done in my dissertation. See here:
https://jorgemoralesmeoqui.academia.edu/research#journalarticles

But the alternative is a more realistic case for free trade, like the one envisioned by Smith and Ricardo, and not the kind of reactionary protectionism that Prof. Keen and President Trump are proposing.

Blogger Aeoli Pera September 05, 2017 5:29 AM  

This is such a good point that we really ought to have come up with it sooner, seeing as it's not very complicated. Always a bit unnerving to see we aren't actually that smart, as a species.

Blogger Aeoli Pera September 05, 2017 5:30 AM  

Should have been economic dogma 100 years ago.

Blogger Thucydides September 05, 2017 9:52 PM  

For a bit of humour (or perhaps unintentional irony) the Canadian delegation to the NAFTA talks is standing firm on "supply management" of agricultural produce in Canada (i.e. farmers can only produce eggs, milk and other produce under Canadian government licence and only to certain quotas). This Soviet practice is also used as a basis for closing the door on agricultural imports.

The Liberals are such idiots they think holding a pair of 2's and a 3 in their hand gives them some leverage in the negotiations. Even the Mexicans will clean their clocks. Weep for my nation.....

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