Saturday, November 26, 2016

Free Trade Fallacy

Thought provoking post on trade from the Archdruid. Dont agree with everything (especially some of the longer term associations I.E. free trade caused the great depression) but I think the post does a good job of conceptually laying out the argument against "free trade" wrt to jobs and income leading to income inequality and a fall in return on Investment which leads to ponzi finance. Its a pretty good logic chain and all in all, a worthwhile read.

It’s important to be clear about what’s under discussion here, since conversations about free trade very often get wrapped up in warm but vague generalities about open borders and the like. Under a system of free trade, goods and capital can pass freely across national borders; there are no tariffs to pay, no quotas to satisfy, no capital restrictions to keep money in one country or out of another. The so-called global economy, in which the consumer goods sold in a nation might be manufactured anywhere on the planet, with funds flowing freely to build a factory here and funnel profits back there, depends on free trade, and the promoters of free trade theory like to insist that this is always a good thing: abolishing trade barriers of all kinds, and allowing the free movement of goods and capital across national boundaries, is supposed to create prosperity for everyone.

That’s the theory, at least. In practice?  Well, not so much. It’s not always remembered that there have been two great eras of free trade in modern history—the first from the 1860s to the beginning of the Great Depression, in which the United States never fully participated; the second from the 1980s to the present, with the United States at dead center—and neither one of them has ushered in a world of universal prosperity. Quite the contrary, both of them have yielded identical results: staggering profits for the rich, impoverishment and immiseration for the working classes, and cascading economic crises. The first such era ended in the Great Depression; the second, just at the moment, looks as though it could end the same way.

6 comments:

Matt Franko said...

"no capital restrictions to keep money in one country or out of another. "

this is where the "free trade!" people are exposed as the morons they are...

Ignacio said...

Matt, if they think they are out of money, and that money comes from the sky (or well, the ground), it leads ultimately to a situation where 'free trade' is a necessity. See export obsession in "gold-bug lite land" (Germany).

Is all a logical necessity inside the same faux unsound belief system.

Moron fest...

Bob said...

"Free" trade was sold as being beneficial for all, but the result has not lived up to the promise. Time to pull the plug and drain the snake oil.

Matt Franko said...

And all the rote teachings/slogans on trade are from gold standard Ricardo era....

Imo you can only break out of the rote thru math...

Tom Hickey said...

It is arguable that since economics was formalized and mathematized, it has become degraded.

Math itself is not enough. As Paul Romer pointed out, it's really knowing how to apply math. Math is no magic wand, and it can become what Latin was to medieval priests.

Moreover, the knottiest issue resist being formulated mathematically in a way that is useful.

ISLM was supposed to encapsulate the General Theory. Wrong. It was simplistic. Keynes was a trained mathematician rather than an economist and he used mostly conceptual models for reasons he explained about the inability of math to deal with economic issues.

Of course, this is not saying to throw out the math. Use it where applicable.

MRW introduced me to Gerd Gigerenzer on heuristic decision making. (Thanks, MRW). He sums it up in this vid.

Heuristics that make us smart

He starts out with the example of a baseball player using a simple heuristic to catch a ball just by keeping the eye on the bass. The brain doesn't do the complicated math needed to solve the equation of the ballistics taking wind into account, etc.

MMT uses a similar heuristic in dealing with the deficit by looking at the length of the unemployment line.

GLH said...

I think that the EU is a good example of where "free trade" is taking us.