Cloth for Wine: The Principle of Comparative Advantage 200 years on: Introducing a new free eBook

Two hundred years ago, with a simple yet profound example about England trading cloth for Portuguese wine, David Ricardo introduced the Principle of Comparative Advantage. In this eBook, leading trade policy analysts examine whether Ricardo’s insights remain valid in a world where services as well as good cross borders as does data and technology, where there is a rising China whose growth is heavily dependent on exports, and in the face of a backlash against globalisation.

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vox.eu
Cloth for Wine: The Principle of Comparative Advantage 200 years on: Introducing a new eBook
Simon Evenett | Professor of International Trade, University of St. Gallen; Research Fellow, CEPR

Brad DeLong — Ricardo’s Big Idea, and Its Vicissitudes

Brad DeLong shows how Ricardo's version of economic liberalism based on free trade explained by comparative advantage is bourgeois liberalism that enriches the ownership class.

Washington Center for Equitable Growth

Ricardo’s Big Idea, and Its Vicissitudes

Brad DeLong | Professor of Economics at the University of California, Berkeley

Nick Johnson — The ‘organised hypocrisy’ of US industrial policy

Maintaining the core-periphery dichotomy of imperialism and colonialism under neoliberalism, Neo-imperialism, and neocolonialism.
The Political Economy of Development
The ‘organised hypocrisy’ of US industrial policy
Nick Johnson

Ingrid Harvold Kvangraven — 200 Years of Ricardian Trade Theory: How Is This Still A Thing?

On Saturday, April 19th 1817, David Ricardo published The Principles of Political Economy and Taxation, where he laid out the theory of comparative advantage, which since has become the foundation of neoclassical, ‘mainstream’ international trade theory. 200 years – and lots of theoretical and empirical criticism later – it’s appropriate to ask, how is this still a thing?

This week we saw lots of praise of Ricardo, by the likes of The Economist, CNN, Forbes and Vox. Mainstream economists today tend to see the rejections of free trade implicit in Trump and Brexit as populist nonsense by people who don’t understand the complicated theory of comparative advantage (“Ricardo’s Difficult Idea”, as Paul Krugman once called it in his explanation of why non-economists seem to not understand comparative advantage). However, there are fundamental problems with the assumptions embedded in Ricardo’s theory and there’s little evidence, if any, to back up the Ricardian claim that free trade leads to benefits for all. On this bicentenary, I therefore think it’s timely to revisit some of the fundamental assumptions behind Ricardo’s theory of comparative advantage, that should have led us to consider alternative trade theories a long time ago....

Good summary backgrounder. "It's more complicated than that," the "that" being what is assumed.

The following quote contains an important lesson about logic and epistemology.

Rather than accept that there is something wrong with the exchange rate theory itself, empirical discrepancies are explained by measurement problems and/or imperfections in the market because of currency ‘manipulation’ (see for example Eichengreen 2013 or Gagnon 2012). In fact, neoclassical trade theory is so highly regarded that economists, almost across the board, cannot imagine any reason for China’s trade surplus with the US other than the Chinese manipulating their exchange rate in order to stimulate their exports.

What has happened here is that the theoretical model become the criterion for assessing truth rather than a model to be compared with observation in measurement.

Take probability theory. Probability theory shows the outcome of a long run roll of a coin toss, regardless of whether it is an ensemble of 1000 coins tossed at once or a single coin tossed a 1000 times. If the outcome does not converge on 0.50, then the fairness of the coin becomes suspect and not the theory.

This is not necessarily the case with a scientific theory. In the case of an anomaly scientists check the experiment but after checking and finding no errors, the theory becomes suspect. Repeated failures result in re-thinking the theory.

Because it is difficult to impossible to run controlled experiments in economics in many cases, trade being one of them, the dominant theory is never questioned. It serves as a criterion of truth whose truth is privileged from question.

Developing Economics

200 Years of Ricardian Trade Theory: How Is This Still A Thing?
Ingrid Harvold Kvangraven | PhD student in Economics at the New School for Social Research

Lord Keynes — The Cult of Free Trade in a Nutshell

Debunking another economic myth.

You might wish to save these sources for future reference and citation.

Social Democracy For The 21St Century: A Post Keynesian Perspective
The Cult of Free Trade in a Nutshell
Lord Keynes

Tony Wikrent — Commerce, Christianity, and Civilization Vs. British Free Trade: Henry Carey's replies to the London Times, February 1876

The American system of Alexander Hamilton and the British system of Adam Smith and David Ricardo.

The Times editor excoriated by name Henry C. Carey, the leading USA economist of the time, a staunch protectionist who had written the economic policy planks of the 1860 Republican Party platform on which Abraham Lincoln ran for President. But American protectionism was much more than simply a rejection the concept of comparative advantage. Michael Hudson explains in the Preface to his 2010 book America’s Protectionist Takeoff: The Neglected American School of Political Economy:

"The protectionist doctrine that shaped America's industry and agriculture... went beyond the narrow boundaries of today's economics discipline by deeming public policy and technology central to economic theorizing, not 'exogenous.' Analyzing what was needed to increase productivity, the American School emphasized that wages and prices had to be high enough to sustain rising living and educational standards for labor, and investment in rising energy mobilization by capital."

 But the American School even went beyond that. Carey and other American School economists always kept in view the ultimate goal of economic policies: the establishment and enhancement of civilization. 

In the Conclusion to his 1851 book, The Harmony of Interests: Agricultural, Manufacturing & Commercial, Carey wrote that the British system of free trade "looks to pauperism, ignorance, depopulation, and barbarism," while the American School aims "to increasing wealth, comfort, intelligence, combination of action, and civilization."

Real Economics
Commerce, Christianity, and Civilization Vs. British Free Trade: Henry Carey's replies to the London Times, February 1876

Tony Wikrent

Lars P. Syll — The end of comparative advantage

Tom Palley quote on Jack Welch's barge, the rise of transnational corporatism, and why it is no longer true that whats good for GM (or GE) is good for America that is, for Americans but rather for owners of the transnationals and their top management.

All the blather about comparative advantage and free trade justifying the trade agreements now being negotiated is just more elite BS to rationalize rent-seeking and more rent extraction.

Lars P. Syll’s Blog
The end of comparative advantage
Lars P. Syll | Professor, Malmo UniversiTy

Simon Johnson and Andrei Levchenko — The Trans-Pacific Partnership (TPP): This Is Not About Ricardo

The administration and its supporters on this issue, including leading Republicans, argue that the case for TPP rests on basic economic principles and is only strengthened by the findings of modern research. On both counts their claims are greatly exaggerated – particularly with regard to the notion that more trade, on these terms, is necessarily better for the United States. 

There is a strong theoretical and empirical case – dating back to David Ricardo in 1817 – that freer trade should make countries better off. However, modern-day trade agreements, including those currently being negotiated, are very different from earlier experiences with trade liberalization. 

The TPP is not only – perhaps not even mostly – about freer trade, and thus who gains and who loses is very much dependent on what exactly are the details of the agreement. The exact nature of the provisions matters and at this point, because the TPP text is not available to the public, we cannot be sure whom this trade agreement will help or hurt within the United States or elsewhere.

The Baseline Scenario
The Trans-Pacific Partnership (TPP): This Is Not About Ricardo

Simon Johnson, Ronald A. Kurtz Professor of Entrepreneurship at MIT Sloan, and Andrei Levchenko, Associate Professor of Economics at the University of Michigan

David F. Ruccio — Noah’s (free trade) ark

David Ricardo's (bogus) argument for free trade is repeated ad infinitum by the ownership class that Ricardo designed it for. Recall the economic history. 

Classical economics was aimed at freeing the growing bourgeois class of developing capitalism from the grip of the landed class that governed under feudalism. The chief means of production in the Agricultural Age was cultivation of land and the surplus went to the owners of the land — the monarch, along with the aristocracy, and the landed gentry to whom the monarch had granted titles that could be rescinded. When that began to shift toward owners of capital with the onset of the Industrial Age, there was a conflict over power and control between the owners of land and the owners of the capital, the haute bourgeoisie. Property rights came into play legally, for instance, and international trade became much more significant as factories churned out product in excess of domestic needs and wants.

This also created a new subclass of finance and commerce involved in distribution of the capitalist production, which unlike agricultural goods where generally imperishable. Some of these like financiers and ship owners were haute bourgeoisie, but there were also many minor owners who worked but were also owners of their means of production. These were the petite bourgeoisie that aspired to becoming haute bourgeoisie if they became extremely successful. 

As a result, production increased domestically, and foreign trade grew with the need to import natural resources for production and to distribute surplus production internationally. This also gave further impetus to imperialism and colonialism., as well as the rise of mercantilism, the counter to which was protectionism.

So-called free trade under Ricardo's theory of comparative advantage all but guaranteed that colonies would be frozen into providing resources and being provided with the output of capitalist production without ever developing an industrial base built on technological innovation. American leaders recognized this and adopted the American System to protect their infant industries, instead of adopting the British system based British classical economics. 

Now that the US is a developed country it is playing the part toward less developed countries that Britain played while the US was developing. Surprise! Not.

Free markets are free to the degree that barriers to entry are lowered, artificial scarcity reduced, and  governments don't intervene, in order to prevent asymmetric economic power. Free trade is free to the degree that countries can compete not only economically, which may still benefit some countries more than others and some within a country more than others, but also politically with respect to national interests as a whole based on national sovereignty.

Contemporary trade agreement are largely about imposing asymmetric economic power on lucrative markets based on intellectual property rights, for example, and reducing the ability of sovereigns to take their national interests as whole into account through legally privileging transnational commercial interests by treaty.

Occasional Links & Commentary
Noah’s (free trade) ark
David F. Ruccio | Professor of Economics University of Notre Dame Notre Dame

JW Mason — What Do People Need to Know About International Trade?

Not what most introductory texts teach — more brainwashing for neoliberalism.

The Slack Wire
What Do People Need to Know About International Trade?
JW Mason | Assistant Professor of Economics at Roosevelt University

Robert Reich — Beware Capitalist Tools

Forbes Magazine likes to call itself a “capitalist tool,” and routinely offers tool-like justifications for whatever it is that profit-seeking corporations want to do. Recently it has deployed its small army of corporate defenders and apologists in the multi-billion dollar fight to keep the effective tax rates of global corporations low.

 

One of its contributors, Tim Worstall, recently took me to task for suggesting that a way for citizens to gain some countervailing power over large global corporations is for governments to threaten denial of market access unless corporations act responsibly.

He argues that the benefits to consumers of global corporations are so large that denial of market access would hurt citizens more than it would help them. The “value to U.S. consumers of Apple is they can buy Apple products,” Worstall writes. “Why would you want to punish U.S. consumers, by banning them from buying Apple products, just because Apple obeys the current tax laws?”



Wortstall thereby begs the central question. If global corporations obeyed all national laws — the spirit of the laws as well as the letter of them – and didn’t use their inordinate power to dictate the laws in the first place by otherwise threatening to take their jobs and investments elsewhere, there’d be no issue.

 

It’s the fact of their power to manipulate laws by playing nations off against one another – determining how much they pay in taxes, as well as how much they get in corporate welfare subsidies, how much regulation they’re subject to, and so on – that raises the question of how citizens can countermand this power.

Beware Capitalist Tools
Robert Reich | Chancellor’s Professor of Public Policy at the University of California at Berkeley and Secretary of Labor in the Clinton administration