Donald Trump, conservatism and free trade

I realise we live in a world of economic solipsism, where virtually nothing of the past endures while the most superficial gloss passes for deep profundity. The reason I bring it up is that occasionally I am accused of misunderstanding conservative principles because I fail to condemn Donald Trump’s attempt to protect American workers from the open borders vandalism of others. Here I have an excerpt on free trade from a website called “The Imaginative Conservative” titled, The Economics of Prudence: Roepke, Ricardo, and Free Trade. That virtually no one today would have the slightest idea who Wilhelm Roëpke was is just how it happens to be. But he was in his time as important as Hayek, an important part of the conservative tradition from the 1930s through to the 1960s. The post is, however, by Ralph Ancil who is described as “the President and Economist for the Roepke Institute.” You are welcome to read his entire post, which was written in 2010, thus well before Donald Trump was even on the horizon. He is discussing free trade with this his central point:

Mainstream economic theory has traditionally relied on the principle first articulated by David Ricardo in the early 19th century England. Ricardo’s famous example to illustrate this was trade between two countries: Portugal producing wine and England producing linen. The free trade argument concludes that nations jointly maximize their levels of consumption to their mutual benefit when firms within the nations are allowed to engage in trade unhindered by arbitrary interventions by government especially those intended to shield some industries from foreign competition. Hindering such trade through the imposition of tariffs or quotas is called protectionism. His principle and approach have been the basis for subsequent expansion and development of the free trade idea, and are still taught in principles textbooks.

However, in the hands of politicians or economists with a certain axe to grind the discussion loses sight of the major prerequisite for the benefits of free trade to hold: it is assumed that capital and labor stay within each country. They are reallocated within a country, but not between them. That means that outsourcing of, say labor, is not an example illustrating free trade nor are those who object to outsourcing promoting protectionism. In short, maintaining the Ricardian prerequisite is not anti-free trade.

The key concept which drives this conclusion is the distinction between comparative and absolute cost advantages. A country may be able in absolute cost terms to produce something more cheaply than its trading partner (using fewer workers, for example). However, it still may find it advantageous to let its trading partner produce this good, if its own alternative uses of (labor) resources allows it to be still more productive. Subsequent trade between the two countries will be to their mutual benefit. The essence of the free trade principle then is comparative not absolute advantage. Yet when corporations scan the globe for the cheapest labor to move their factories to or hire their services from, they are looking for absolute not comparative advantage–a situation that goes beyond the bounds of the free trade principle. It is not a tenet of free market economics that losing one’s productive assets is beneficial for the nation, however much it may benefit a particular corporation. Current US experience makes the point very clear: the middle class continues to shrink while paupers and billionaires continue to grow. This is not the hallmark of a healthy economy.

Armed with this distinction we are liberated to adjust policy (within limits) without losing our economic integrity to free markets. We can, for instance, admit that there are situations where a complete free trade or laissez-faire approach is unwise. These are situations not considered in the Ricardian analysis but which subsequent work has shown complicate the picture of benefits and costs arising from international trade and which do call for prudent policy interventions.

Trump certainly understands all of this intuitively. Making free trade the touchstone of conservative means one has understood neither the nature of conservative philosophy nor the principles that underlie the operation of free markets. It also means the distinctions between conservative and libertarian perspectives remain completely invisible. And I might mention that the biography of Roepke provided above is by Russell Kirk, possibly the greatest conservative scholar produced by the United States during the whole of the twentieth century.

And let me add this about my collection of blog posts on the American election. The most astonishing part for me in reading them through was to discover how consistently conservative I am in the true sense of the word. If you are interested in what conservative means, you could try reading the book.

This entry was posted in American politics, Classical Economics, Philosophy. Bookmark the permalink.

75 Responses to Donald Trump, conservatism and free trade

  1. Malcolm

    You are a conservative because you say so in a your book? That’s a classical logical flaw.

    No Steve. You are no conservative. Donald Trump is no conservative. We are not talking about open borders for people movement. I never said so. We are talking about free trade of goods and services. That is classical liberal and conservative.

    You are a parody, following Robert Manne from being a conservative to being a radical. You used to be a conservative but have long since left that cause. Under no reasonable definition of ‘conservative’ could you lay claim to the title. Trying to destroy is the antithesis of conservative.

  2. Malcolm

    Protect from the open borders vandalism of others

    What a pathetic comment and that’s why Trump is a disaster from the United States. Steve Kates arguing for autarky. Adam Smith would be rolling in his grave.

    Businesses in the US shouldn’t be protected, they should be subject to the full competition of the world. They should be subject to creative destruction.

    Steve Kates has vacated the field of rational thought.

  3. candy

    Malcolm,

    I feel D. Trump was elected on the position of strengthening America from within. Now it’s fair to give him a chance to do that.

    If Ms Clinton did the same, would you applaud her or what you say she’s a disaster? would it then not matter if she’s Democrat and you would say her policy is a disaster? or would you says she’s terrific.

  4. Leo G

    Businesses in the US shouldn’t be protected, they should be subject to the full competition of the world. They should be subject to creative destruction.

    A natural right to be free of the possibility of government protection. What would Burke have thought of that?

  5. OneWorldGovernment

    Have any of you smart fwits actually studied the Trans Pacific Partnership?

    It would have set up a f*king bureaucracy greater than the UN!

    Fer fk sake.

    Get rid of the bloke that supports MaoDzeDung. And his son in law. And Rudd and his daughter.

    I warned JoNova some months ago.

  6. Malcolm

    candy – if Trump turns out well then I applaud him. I’m just highly skeptical given what he has said. Clinton would have been a disaster too.

    Why can’t a country of 350 million people not put up candidates better than Trump and Clinton? My dog would be better than either.

  7. Malcolm

    I just get annoyed that Kates et al think Trump is some genius and high point for classical liberalism. He isn’t. Trump is just a grifter. Pure and simple: the man is a fraud. Kates has been conned.

  8. Sinclair Davidson

    This is not a good argument – so we have a theory of trade that suggests free trade between counties is a good idea. One of the assumptions of the model at an international level is strict capital and labour controls. So you want the real world to look like an idealised model? That’s very neoclassical of you Steve.

  9. A H

    The labour force displacement is due to money printing by the USA, which they require to finance their fiscal and current account deficits. They need to balance their books. Forcing corporations not to outsource is really not the answer.

  10. NewChum

    Ultimately Ricardian comparative advantage is a static model.

    Taken to extremes it suggest that young women should become prostiutes and young men mercenaries. They should then outsource the easing of their young to foreigners while they fornicate and fight to riches. That is comparative advantage – maximising income based on what can make the most right now. It doesn’t have anything to say about how sustainable that is over time.

    All of the countries which have become net exporters with healthy trade balances in the last 50 years have used some level of industry support and protection to get there. Everyone else has become net importers.

    50 years ago South Korea was a backward third world economy wrecked by war. They now make everything from supertankers to phones to TVs and lots else. In the same time Auatralia has lost much manufacturing and is still farming and mining.

    Does anyone stop and think what happened to Portugal v England? Portugal stayed poor, still making wine, no innovation, no spin off, no accumulation of capital. England mechanised, spun off other industries, accumulated capital. It’s all very well to open up your trade after you have an industry, but the track record of open economies developing value added exports is grim indeed, add to that the loss of skills, capital and manufacturing base.

    Now we have the lunacy of open borders to add to the mess.

    I once was a Ricardian disciple like so many people reading this article.

    Then I realised I was in thrall to a dead economist with a simple model. The same type of simplistic reasoning that gives us Keynesian policies, germinated climate change idiocy and many others besides. Ricardo is a good analysis tool but not a great policy prescription in the real world,

    Thank god TPP is dead. May Nafta and the EU follow in its death.

  11. OneWorldGovernment

    Sinclair Davidson
    #2327510, posted on March 15, 2017 at 11:30 pm

    This is not a good argument

    Sinclair

    I was one of the youngest persons to ever be employed by one of the top 4 accounting firms in Australia.

    They stopped it after me because they wanted dick head Uni type folk.

    Did it by night school and walked away.

  12. OneWorldGovernment

    And pardon me,

    I know a tad about JB Were and Son and the slime to Maolcolm Turdbull and the rest.

    How about the scum of Adlar with Turdbull?

  13. Fisky

    None of the economic models actually work. Their assumptions are all wrong and not based on reality. We must abandon economics entirely and invent a new discipline in its place. Have no choice!

  14. Joe

    Sinclair:

    This is not a good argument

    Yes because all the current economic arguments have worked so well for their countries of implementation.

    If you look around the world, the ONLY countries with powerhouse economies are those that protect their vital industries and cannibalise industries via unfair advantage. China is currently levering it’s artificially cheap raw materials to eat high tech. industries. High tech. that needs those materials must setup factories in China or be denied cheap access. Once there, espionage does the rest.

    The fatal flaw in economics is the assumption that actors are rational and take rational actions. Whereas in reality actors engage in activities to increase their advantage and damage competitors at the same time. This is not a rational response to competition in a moral world. However the world is not moral and until economics or whatever replaces it uses that observation it can only create models that are unrelated to reality.

    Protection of property does not extend beyond the boundary of your borders. To expect that it does is irrational, unrealistic and flat out wrong.

  15. JC

    The essence of the free trade principle then is comparative not absolute advantage. Yet when corporations scan the globe for the cheapest labor to move their factories to or hire their services from, they are looking for absolute not comparative advantage–a situation that goes beyond the bounds of the free trade principle. It is not a tenet of free market economics that losing one’s productive assets is beneficial for the nation, however much it may benefit a particular corporation.

    Pardon? That’s never how I understood as the meaning of absolute advantage. Absolute advantage means having a resource like coal that another party doesn’t possess …and/or having an overwhelming ability to produce a good or resource at a material cost difference. Having cheaper labor rates than another country may be a comparative advantage or it may not. There’s also more to it than cheap labor rates. If you’re looking for the cheapest labor rates in the world, you couldn’t go past someplace like Mali. Bit I haven’t seen Intel, IBM or Google racing to set up shop there.

  16. So let us say a US company invents a widget that the rest of the World wants. Now the US is making lots of money and employing people paying taxes etc.
    There are laws that say China can’t steal the intellectual property of this company, if it does, it breaks the law.
    But the US company can pack up, tell its workers to fuck off and set up shop in China as if it was a Chinese company, all good? Nah, fuck that because that company could NOT HAVE developed that widget without the benefits of the US economy and infrastructure (skilled workforce etc).

    It’s all about the math. If making an American widget in China is 20% cheaper, but you lose 30% in input costs (wages, transportation, raw materials etc) then the US has lost 10%.
    I’m happy for anyone to debunk that math and explain why it’s better for the US to have the widget made in China..

  17. bg

    It’s amazing to see professors of economics talking about the economics of trade as though analysis had stopped with Ricardo. Newsflash: there are plenty of models of trade with internationally mobile factors.

  18. HGS

    If it is good for trade within a country to be unrestrained, why is it not also good between countries?

    I think form any historical perspective, Trump has sold himself to his electorate as a true blue old fashioned Republican, which means part conservative, part free trader, part isolationist.

  19. King Koala

    Making free trade the touchstone of conservative means one has understood neither the nature of conservative philosophy nor the principles that underlie the operation of free markets.

    Making free trade the touchstone of conservative is how cucks who have surrended on everything else can still call themselves conservative. Invaded by muslims, men in girl’s bathrooms, a disarmed population, all trivial because muh free trade.

  20. Ray

    There is nothing inconsistent between firms seeking cost minimisation by shifting production offshore and comparative advantage. By definition, comparative advantage involves concentrating home production on those goods with the lowest unit input costs, that means sourcing other production offshore. It does not matter if it is your companies shifting production offshore.

    The whole point about comparative advantage is that products are sources from offshore, raising the overall output of the home country and the foreign country simultaneously.

    That countries fail to benefit from trade, or comparative advantage, has nothing to do with trade or comparative advantage and everything to do with the fact that governments distort markets in such a way that economies cannot benefit. The prime way in which this happens is via the twin deficit problem. Shortfalls in national savings combined with a chronic budget deficit leads to current account deficits and so loss of jobs and output. This is the prime cause for the loss of manufacturing jobs both here and in the United States. Understand this and you may just comprehend that Trump’s trade policies will not help create jobs in the US.

    Protection does not change the number of jobs, it changes the output those jobs produce.

  21. Guy

    South Australia will be proud with this specious reasoning.

  22. Driftforge

    The other Steve, making the same basic point:

    The theory ignores the reality that, when foreign competition undercuts the profitability of a domestic industry, the capital in it can’t be “transformed” into an equal amount of capital in another industry. Sometimes it’s sold at a fire-sale price, often to overseas buyers. Most of the time, as ex-steel-mill workers throughout the Midwest know, it simply turns to rust.

    Vox Day speaking on the topic:

    And you mentioned David Ricardo. One of the interesting things about Ricardo is if you actually go back and read his original book in which he enunciated for the first time the theory of comparative advantage, you discover that he says things like well, I have this theory, and one of the provisos to this theory is that if you have international mobility of capital, then my theory that free trade is always your best move ceases to be true.

  23. Elizabeth (Lizzie) B.

    That countries fail to benefit from trade, or comparative advantage, has nothing to do with trade or comparative advantage and everything to do with the fact that governments distort markets in such a way that economies cannot benefit.

    So, economists work in the perfect world, where playing fields are level. The ‘fine in theory’ approach.

    Having cheaper labor rates than another country may be a comparative advantage or it may not. There’s also more to it than cheap labor rates.

    True. Get thee to Bangalore instead of Mali. Still cheaper than Australia for IT. English spoken too.

    The fatal flaw in economics is the assumption that actors are rational and take rational actions. Whereas in reality actors engage in activities to increase their advantage and damage competitors at the same time. This is not a rational response to competition in a moral world. However the world is not moral and until economics or whatever replaces it uses that observation it can only create models that are unrelated to reality.

    Economics is not exactly unrelated to reality but only telling a partial tale. The world stage is a jumble; economies everywhere in different stages of technological and social development, and with governments intervening in a range of ways, including theft from their own people and theft from the intellectual property of other nations. Governments all seem to engage to a lesser or greater extent in financial finangling that doesn’t hit the economics texts, because in economic theory people everywhere (and their governments) seem have only a few fairly dismissable ‘human factors’ that don’t upset the apple-cart.

    Those who live by theory alone also die by it.

    *Disclaimer: I am not and never will be an economist*

  24. Elizabeth (Lizzie) B.

    ps. I think the real world still needs economists, in spite of their ‘partial’ understanding of things. This is a genuine belief that addressing the issue of economic activity in an abstract manner can be useful if you are attacking Keynesian hegemony, not just a suck up to Sinc, owner and Doomlord of Australia’s best blog. 🙂

  25. Ray

    Lizzie

    How wackie do you have to be to claim that economic theory doesn’t work because it isn’t followed. Of course it won’t work if it isn’t followed. Perhaps if it is followed then it will work.

  26. Yohan

    The Ricardian comparative advantage model of international trade presumes that eventually there will be an equalization of capital and living standards over time.

    Does anyone seriously think 3rd world countries, with all their cultural problems, will eventually equalize and become just like Australia or Norway over time? This is truly the hubris of the egalitarian white man to think so.

    Not even 3rd world ethnic groups within western countries are equalizing. With the lure of the welfare state we are creating an underclass of racial minorities. Only delusional neocalssicists think every culture is a blank slate capable of the same economic achievement. So if anyone here is a neoclassicist, it is Sinclair Davidson, not Steve Kates.

  27. Leo G

    I think the real world still needs economists, in spite of their ‘partial’ understanding of things.

    They should make suitable taxi drivers- someone else could service the vehicle.

  28. Ray

    Yohan

    Ricardo was a classical economist, not neoclassical. Yes the classical economists considered that societies would converge to a steady state growth rate. However, neoclassical economics does not make the same mistake. Neoclassical economics gives us the notion of poverty traps and S-curves which explain why convergence does not occur.

    Rather than irrationally denouncing neoclassical economists as delusional, it would be better if you were to understand what neoclassical economics is and then you could perhaps grasp its advantages and disadvantages.

  29. Yohan

    Ray I know far more about classical, neo-classical and austrian economics that most, I have about 500 books on the subject, including about 250 books pre the year 1920, over 30% of which I have read (i’m getting through the rest, and hopefully all if we achieve immortality technology).

    My quip is, neo-classical economics makes no account for cultural, racial or social differences between countries. Each person is a blank slate economic unit for their formal models. This leads them to think having an open border between Norway and Nigeria is no different than an open border between Norway and Latvia.

  30. Yohan

    Of course none of them really believe that, but they have to morally signal they do, like Sinc and the rest of the open borders zealots at the IPA.

  31. Joe

    Rather than irrationally denouncing neoclassical economists as delusional, it would be better if you were to understand what neoclassical economics is and then you could perhaps grasp its advantages and disadvantages.

    The point is that you do not need economics to set economic policy. Where in economics is the theory that using natural and artificial advantages to leverage primary production to steal the IP of foreign companies so that you force them to relocate from their original countries to your own country for survival? I have never heard that espoused? China and originally Japan undercut everyone and took losses to wipeout industries in first world countries and have them relocated to their countries. It did not matter to them that they were making losses, they were building local industry and providing jobs for their countrymen.

  32. danger mouse

    Are we saying that structural unemployment becomes permanent? And that government is better than prices in efficiently ordering production?

    Let me re-read Free Market Economics..

  33. Joe

    Are we saying that structural unemployment becomes permanent?

    YES.

    And that government is better than prices in efficiently ordering production?

    NO. Governments are responsible for the level playing field. Tariffs are the blunt force used to create it.

  34. closeapproximation

    it is assumed that capital and labor stay within each country

    That’s one big caveat to your “free marketism”.

  35. NewChum

    That countries fail to benefit from trade, or comparative advantage, has nothing to do with trade or comparative advantage and everything to do with the fact that governments distort markets in such a way that economies cannot benefit.

    This is the same point as ‘communism would work if treid properly’ – if a framework cannot be implemented properly because of inequal incentives, then it is useless as a framework.

    Are we saying that structural unemployment becomes permanent? And that government is better than prices in efficiently ordering production?

    Let me re-read Free Market Economics..

    Yes, structural unemployment has proven to be permanent in the real world.

    There is a difference between organising the means of production and distribution and working with industry to develop comparative advantage over time. The successful export countries didn’t just fall into it, they were deliberately designed as national projects. There is no way that comparative advantage explains how Ireland developed a strong IT and health sector based on some latent comparative advantage.

    The various textbooks look at the situation in improving efficiencies in a nation with well developed industries, It doesn’t provide a path to developing those industries – except as a manual on ‘what not to do’.

  36. .

    This is the same point as ‘communism would work if treid properly’ – if a framework cannot be implemented properly because of inequal incentives, then it is useless as a framework.

    No sorry, this is garbage. No countries “do not” benefit from comparative advantage. This is like saying a lawyer and a doctor “do not benefit” from specialisation.

    Yes, structural unemployment has proven to be permanent in the real world.

    Where? Why?

    There is no way that comparative advantage explains how Ireland developed a strong IT and health sector based on some latent comparative advantage.

    Got any proof of that? No, you don’t.

  37. .

    it is assumed that capital and labor (sic) stay within each country.

    So bloody what? Are people seriously going to argue that foreign direct investment made Australia poorer or made the benefits from trade go away for Australians? Paul Craig Robert’s argument is idiotic. FDI is another form of trade and it is complimentary to arms-length trade. It allows endowments to be traded somewhat and alters comparative advantage. It does not ameliorate them out of existence. Look at the investment development path. Another thing to note is that endowments give rise to comparative and absolute advantages, but endowments are not actually the same thing as comparative/absolute advantage.

    A nation can inflict enough harm on itself to lessen the comparative advantages it has. Perhaps we are lessening our absolute advantage in black coal (we have the best reserves of actual black coking and thermal coal, Chinese “coal” looks like mud).

    The bases of trade may look non-complimentary but they are not deleterious to each other. You only really need a difference of any kind and economies of scale. If income levels rise in a poorer country, the market for a wealthier country it has traded with (or not) increases. The actual basis of trade may alter, but it doesn’t mean you’re automatically better off choosing protectionism and industry policy. Furthermore the poorer country is likely to start engaging in FDI in the wealthier nation’s domestic market.

  38. Yohan

    btw, ignore Ralph Ancil and his Roepke Institute. For years his project has been to wrest Roepke’s legacy away from those evil Austrians and Libertarians. His entire site is dedicated to framing Roepke as a social democrat dedicated to social justice. He selectively quotes passages from Roepke to present him as someone generally opposed to free markets and lassaiz faire individualism.

  39. Yohan

    Are people seriously going to argue that foreign direct investment made Australia poorer or made the benefits from trade go away for Australians? Paul Craig Robert’s argument is idiotic.

    But they do Dot. They think we can ‘do it ourselves’ and magic up investment and savings from nowhere.

    The truth is Australia suffers from a capital shortage. An example is the entire undeveloped north. We could do with a few trillions in investment.

  40. Odumbo

    “the major prerequisite for the benefits of free trade to hold: it is assumed that capital and labor stay within each country.”

    False.

  41. Elizabeth (Lizzie) B.

    Lizzie
    How wackie do you have to be to claim that economic theory doesn’t work because it isn’t followed. Of course it won’t work if it isn’t followed. Perhaps if it is followed then it will work.

    You miss the point, Ray. I was claiming that in many instances it can’t be followed. But unlike some, I do give leeway for trying.

    Are people seriously going to argue that foreign direct investment made Australia poorer or made the benefits from trade go away for Australians?

    For instance, I would never argue this. But I’d not the advantages over some that Australia started from the beginning. Rule of law and property rights for one. English language for another. Capital markets for a third. Universal literacy for a fourth.

    Read Matt Ridley for the view from the longue duree. Of course foreign investment and trade are drivers of economic development, the efficacy of which is seen in the third world since communist ideology was challenged or back-burnered. Only a fool would argue against that. However, down at the nitty-gritty things get harder to cheer about. Ask any rust-bucket job loser in the US, or any talk to any IT worker in Australia about Bangalore.

    The Ricardian comparative advantage model of international trade presumes that eventually there will be an equalization of capital and living standards over time.

    How long a time though? And at what cost, and to whom, in the meantime? I’d hate to revisit Keynes regarding “in the long term we’ll all be dead”, but its heartlessness and head-in-the-sand nature applies to refusing to see that neo-classical theory too is not always practical to apply in its full beauty and truthfulness. Real situations and circumstances and policies and effects and people, all get in the way.

  42. Elizabeth (Lizzie) B.

    Arrggh. Blockquote fail there. Dot’s comment was “Are people seriously going to argue that foreign direct investment made Australia poorer or made the benefits from trade go away for Australians?” In spite of the italics, for the rest of the commenting it is pretty clear what belongs to another and what is mine.

  43. Ray

    Endowments give rise to absolute advantage but not comparative advantage. A comparative advantage emerges only relative to production efficiencies in other industry segments in your own country. Comparative advantage does not have any relationship with relative efficiency between countries.

    It means that a country can and should maximize production in those products where it has greater productivity such as more output per unit of labour. In a free market, inter country relativities are then equalized via the exchange rate mechanism.

    As a result, protection provides no advantage, it merely shifts protects one industry in your own country relative to other, more efficient industries. The end result being that overall output will fall and national welfare will decline. In other words, protection does not protect jobs, it only protects jobs in the protected industry at the cost of jobs which could have been gained in those industries where we may hold a comparative advantage. You are always worse off with protection.

    The reason jobs are lost through trade can be explained by one thing and one thing only, the exchange rate mechanism is not allowed to adjust freely. This happens because governments distort markets through chronic budget deficits.

    So if you want to maximize the gains from trade, then eliminate the budget deficit.

  44. danger mouse

    Let’s see what happens, but I suspect Trump’s opening positions on trade are about increasing his leverage in negotiations.

    Moreover, withdrawing from the TPP could be considered as pro free trade, to the extent that the TPP enforces restrictive rules around IP.

    And jaw boning companies to keep jobs in the US could be pro market if Trump delivers on reforms (tax, labour market, etc.) that tilt the economics of production.

  45. struth

    Just a layman here…….
    I am not an economist.
    So I may have more of an idea.
    If cheap labour was all that a company was looking for, the United States would never have become a superpower.
    Taxation levels, infrastructure and support/supply business accessibility, regulation and corruption levels, stability, skill and education levels are as much factors in business decisions to offshore, and put together, much more of a consideration than just wages.
    The United States became a powerhouse of manufacturing and industry with the highest wages and living standards in the world.
    Why didn’t those businesses, for many years, not offshore?
    When did they begin and why?
    My guess is that you could graph the deterioration of American business and companies offshoring with the growth of regulation, taxation and bureaucracy in the US to find the real cause for offshoring.
    Leftism has grown in the states.
    Leftism has weakened in other counties.
    The study of history seems to be unattractive to many economists, unless it is in regards to something an economist said in the past.
    You only have to look at wages and living conditions on 1950’s America to know wages aren’t the boogieman.
    Leftism is.

  46. JC

    The reason jobs are lost through trade can be explained by one thing and one thing only, the exchange rate mechanism is not allowed to adjust freely.

    Really?

    The Japanese yen went from 78ish to 115 over the past 8 odd years. What discernible trade flows did that impact that you can show?

    I’d argue the opposite. Exchange rates have little impact on trade flows. Monetary policy certainly though.

    Moreover you can’t artificially manipulate the exchange rate against market forces, as it won’t last unless it’s done through permanent changes in monetary policy.

  47. Snoopy

    The Japanese yen went from 78ish to 115 over the past 8 odd years. What discernible trade flows did that impact that you can show?

    Japanese pick up trucks sold in Australia are now made in Thailand?

  48. Boambee John

    Re the first two posts on this thread, no wonder the country is in such trouble if the prime minister spends all his time trolling blogs!

  49. JC

    Snoopy
    #2327826, posted on March 16, 2017 at 11:40 am

    The Japanese yen went from 78ish to 115 over the past 8 odd years. What discernible trade flows did that impact that you can show?

    Japanese pick up trucks sold in Australia are now made in Thailand?

    They would be recorded as a Thai Baht import from Thailand. Nothing to do with what I said.

  50. JC

    Snoopy

    It’s a really bad example to be using carmakers in arguments about exchange rate movements .. advantages vs disadvantages. The reason is that the global carmakers wouldn’t think of hedging exchange rate exposure and if they do it’s wrong headed. The more exposure they have across the world’s currency system the less risk they have. Yes…:-) Think about why.

  51. NewChum

    No sorry, this is garbage. No countries “do not” benefit from comparative advantage. This is like saying a lawyer and a doctor “do not benefit” from specialisation.

    This illustrates the static nature of comparative advantage.

    Yes, every benefits from the doctor having specialisation, his productivity results in better health care for everyone.

    The point is, that the doctor spends 10 years or more learning and developing that specialisation. The industry is structured to produce doctors.

    Comparative advantage says that a young woman should not train to be a doctor, because some other person is already a doctor and all health care should be done by the existing doctor. The young woman should instead be a prostitute because she has comparative advantage of natural endowments of youth and being female.

    Everyone knows that is absurd because you need doctors and prostitution is a bad industry to be in. So we provide industry policy (training programs) and protection (student loans, student discounts, etc) so that young woman can become a doctor over time.

    Absolutism in free trade insists that no such protection and industry policy must ever be tolerated, because it might shave a couple of points off this years GDP. It does not have an answer for how you get your daughters to be doctors instead of prostitutes, especially when the family down the road is carefully raising their daughter to be a doctor, and protecting and enriching their family legacy by nurturing and protecting, and yes, sacrificing.

    Substitute daughters for industry and you have the fatal flaw with ‘comparative advantage is everything’. It is correct in the way of explaining differences, but is incorrect as a plan on how to nurture your future. Many countries have done the opposite and reaped the rewards. Countries which have slavishly stick to the principle of ‘free trade makes everything better’ have traded their future for momentary benefits right now.

  52. mh

    Sinclair Davidson:

    This is not a good argument – so we have a theory of trade that suggests free trade between counties is a good idea

    Sinclair, I know that the UK let their counties trade freely with each other. I hear it is quite successful.

  53. Barry 1963

    So Apple, Nike etc products should be assembled in the US. I can’t really see how they would’ve succeeded if that was done. And

  54. Tezza

    I share Steve’s view that Trump understands intuitively something about trade and the US that many US ‘liberals’ (including economists) don’t. But I don’t think the immobility or otherwise of labour or capital across national boundaries is the issue.

    David Autor and Russ Roberts had an excellent discussion recently about comparative advantage and US -China trade relations.
    http://www.econtalk.org/archives/2016/03/david_autor_on_1.html
    Autor argues that a point traditional trade theory has always acknowledged as a possibility – that there may be absolute losers created (before national structural adjustments) within one or both countries when trade expands according to comparative advantage – used to be regarded as a second order issue, as it usually was in most countries at most times. But the unique example of China’s emergence from the Cultural Revolution (and, I would add, India’s emergence from the licence Raj) has added 1-2 billion disciplined workers to the global supply of labour to the tradeable goods sector. What is usually an issue that could be ignored is now a major issue for the US, as Chinese exports have basically wiped out US manufacturing that employed some low skill, low education, low mobility workers with very poor prospects for reemployment. Low quality manufactured furniture is an example Autor makes much of.

    All this has taken place within US – China trade growth that has been good for the world, great for China, and good for the US overall. (Im not sure if Trump understands this last point.) Its just that the gains to the US have accrued mostly in the east and west coast metropolises, and not where the furniture factories used to be.

    For more interesting stuff on Autor’s research, see
    https://www.brookings.edu/blog/social-mobility-memos/2017/03/10/are-chinese-factories-really-killing-marriage-in-america/

  55. Fisky

    Here’s Nobel Prize winning economist Paul Krugman on Trumponomics –

    Trump Is Right on Economics

  56. Ray

    JC.

    I did not suggest that exchange rates could be manipulated, only distorted by government policies.

    If the government borrows from foreign creditors to fund its budget deficit then there will be an increase in demand for the Australian dollar. It is this increase demand for the Australian dollar which results in an appreciation of the currency which, in turn, makes our exports more expensive and imports cheaper. Thus net exports fall and we lose jobs.

    This problem is known as the twin deficits theory. A budget deficit will result in a current account deficit and hence a fall in jobs where a country has a chronic savings shortfall.

    Japan is of course an exception to this rule as it has a net savings surplus and so can fund their large fiscal deficits via domestic savings. As a result, the Japanese do not need to borrow from offshore investors and so their deficit funding does not have the same effect on the exchange rate.

    As for your comments on the money supply, an increase in the quantity of money will result in domestic inflation and so a corresponding devaluation of the currency. This concept is known as purchasing power parity pricing. Apart from the significant uncertainty this might cause, you would not anticipate a trade flow impact directly from such an exchange rate adjustment. All else being equal, the value of imports and exports would fall proportionately such that the underlying goods market would be unchanged and so no impact on jobs.

  57. NewChum

    All this has taken place within US – China trade growth that has been good for the world, great for China, and good for the US overall. (Im not sure if Trump understands this last point.) Its just that the gains to the US have accrued mostly in the east and west coast metropolises, and not where the furniture factories used to be.

    If gains to the U.S. are very uneven, you can’t argue it has been good for the U.S. overall. The very large negatives in the areas in decline are not offset by the smaller nature of the gains in the areas that gain.

    The gains for China – in comparison – are massive. As the trade deficit would predict just by looking at the imbalances.

    China is building a strong future (central planning issues notwithstanding) while the U.S. is coasting on the victories and gains of the past. Even a lot of the wealth in the large cities is underpinned by foreign capital buying out domestic capital. That’s not a problem per se, but it is indicative that the U.S. is selling off not only its current income but it’s accumulated past income as well. Worse still, many (most?) of the imported goods a re bought on credit, which is selling out the future income.

    The issue here is the academics argue the more efficient outcome is being reached. But is that the civilisational optimum? How does that gel with quality of life for future Americans? What does it say for the future of the country? Do they have to send their families off to far flung States or foreign lands to gain decent work? That is a massive negative externality for most people, but doesn’t show up anywhere in an economists model – which breezily asserts that capital and labour are mobile and flexible. It says nothing about tradition, and family and place. These are the things that people vote on, and that have real value to people.

  58. NewChum

    Thanks for the link- who doesn’t like to reminisce about hapless old Jeb! – the establishment economist answer to the question of how to win elections!

    Even the blind squirrel Krugman finds a nut and recognises it:

    But Mr. Trump, who is self-financing, didn’t need to genuflect to the big money, and it turns out that the base doesn’t mind his heresies. This is a real revelation, which may have a lasting impact on our politics.

    To say the least. Battered conservative syndrome is a real thing.

  59. .

    struth
    #2327818, posted on March 16, 2017 at 11:32 am

    You’ve got it in one.

    This illustrates the static nature of comparative advantage.

    It can be as static or dynamic as you want it to be. The models implicitly note that comparative advantage alters over time vis a vis income equalisation and so on. This is no better than saying “the static nature of reputation”, “the static nature of interest rates” or so on.

    Comparative advantage says that a young woman should not train to be a doctor, because some other person is already a doctor and all health care should be done by the existing doctor.

    No it doesn’t. It doesn’t say anything at all. Do you even know what comparative advantage even is?

    The price mechanism tells you that medicine is still a hell of an idea.

    Absolutism in free trade insists that no such protection and industry policy must ever be tolerated, because it might shave a couple of points off this years GDP.

    That’s right. We’re talking about standards of living and ultimately things like downshifting, early retirement, cures for childhood cancer and shorter working hours.

    It does not have an answer for how you get your daughters to be doctors instead of prostitutes, especially when the family down the road is carefully raising their daughter to be a doctor, and protecting and enriching their family legacy by nurturing and protecting, and yes, sacrificing.

    Likewise, capital asset pricing models don’t teach our boys how not to fritter away their savings at the TAB or brothel. What is your point?

    t is correct in the way of explaining differences, but is incorrect as a plan on how to nurture your future. Many countries have done the opposite and reaped the rewards. Countries which have slavishly stick to the principle of ‘free trade makes everything better’ have traded their future for momentary benefits right now.

    The theory explains why free trade is better. It is up to you to get the most out of life. No one is mortgaging their future by not having industry policy and tariffs. The exact opposite is actually true.

  60. .

    My quip is, neo-classical economics makes no account for cultural, racial or social differences between countries.

    Actually it can and does.

  61. Pingback: Trade is good (with very few exceptions) | Catallaxy Files

  62. .

    Autor argues that a point traditional trade theory has always acknowledged as a possibility – that there may be absolute losers created (before national structural adjustments) within one or both countries when trade expands according to comparative advantage – used to be regarded as a second order issue, as it usually was in most countries at most times.

    So what? It is called competition! Do we want to ban competition?

    What is usually an issue that could be ignored is now a major issue for the US, as Chinese exports have basically wiped out US manufacturing that employed some low skill, low education, low mobility workers with very poor prospects for reemployment. Low quality manufactured furniture is an example Autor makes much of.

    This isn’t true at all. The US lost manufacturing to many other countries than China, and the market that China exported to outside the US grew more than enough to accommodate US workers. This is also conflating the GFC with “CHINA”. Another thing these workers did was…migrate back to Mexico. The US isn’t dependent on trade like we are so if they are out of work, it is because their economy has its own problems, many of them policy based – a look at the decay in Detroit is a case in point.

  63. .

    The issue here is the academics argue the more efficient outcome is being reached. But is that the civilisational optimum? How does that gel with quality of life for future Americans? What does it say for the future of the country? Do they have to send their families off to far flung States or foreign lands to gain decent work? That is a massive negative externality for most people, but doesn’t show up anywhere in an economists model – which breezily asserts that capital and labour are mobile and flexible. It says nothing about tradition, and family and place. These are the things that people vote on, and that have real value to people.

    Oh come off it. How can you call yourself a conservative if you are saying people are OWED A JOB BY THE WORLD and SHOULDN’T HAVE TO MOVE TO PROVIDE FOR THEIR WIFE AND CHILDREN?

    Ridiculous, entitled, unionist nonsense.

  64. NewChum

    Ridiculous, entitled, unionist nonsense

    Ha, maybe so. But effective rhetoric, right? Most readers will detect a set of academic panties twisted into A RAGING KNOT.

    How very dare one question the high priest of free trade under all circumstances, every time, everywhere!

    ARE YOU A FREE TRADE DENIER!?!

    ..they thundered from the comments section.

    Meanwhile the other people who observe the results of the last 30 years think…hmm maybe I was wrong on this one, maybe I better look into it more deeply. Maybe comparative advantage is the c02 of trade.

  65. .

    Ha, maybe so. But effective rhetoric, right? Most readers will detect a set of academic panties twisted into A RAGING KNOT.

    No, it is still garbage.

    You are arguing that you are entitled to a job for life.

    You’re not a conservative at all.

    Meanwhile the other people who observe the results of the last 30 years think…hmm maybe I was wrong on this one, maybe I better look into it more deeply. Maybe comparative advantage is the c02 of trade.

    This is just homespun gibberish that makes as little sense as pseudo-intellectuals like Naomi Klein.

    The last 30 or so years are evidence to free trade being a superior policy.

  66. iampeter

    Sorry Steve but what you are trying to argue is a justification for big government regulations. It’s just all wrong.

    the major prerequisite for the benefits of free trade to hold: it is assumed that capital and labor stay within each country.

    No, that’s not a prerequisite for the benefits of free trade. Free trade is what happens when people are not coerced. That’s it. The fact that it is beneficial is a consequence of the absence of coercion.

    The essence of the free trade principle then is comparative not absolute advantage.

    No it’s not. The essence of the free trade principle is the absence of force. Free trade is what happens when men are free. That’s it.

    It is not a tenet of free market economics that losing one’s productive assets is beneficial for the nation, however much it may benefit a particular corporation.

    No it’s not. Free markets are not about the benefits to the nation. Free markets are how free men deal with each other in the absence of force. That’s it.

    This in turn results in benefits to individuals, the country they live in and any other free countries that trade with them. Free markets are about win/win relationships.

    With all due respect, the issue isn’t that you are not a Conservative Steve, or Trump is not a Conservative, the issue is: Conservatism is NOT an alternative to the left. You are all big government, welfare and regulatory statists to one degree or another.

    THAT’s what those of us on the right, the individualists, capitalists and advocates of limited government need to be fighting. Whether you are a Trump supporter, Hillary supporter, Labor supporter, Nationals supporter, Liberal supporter, One Nation, supporters, it doesn’t matter. These are all big government, left wing movements.

    Arguing about Trump vs Conservatives is simply missing the point of what’s going on in the world right now.

    Meanwhile the other people who observe the results of the last 30 years think…hmm maybe I was wrong on this one,

    This is a good example of that as well. The last 30 years has seen a huge growth of the welfare and regulatory state, which is the cause of all issues in society. If you are looking back over the last 30 years and blaming free markets or free trade or free anything, as opposed to growing regulations, welfare and cronyism, then you have totally got the wrong end of the stick on what’s going on.

  67. NewChum

    example of that as well. The last 30 years has seen a huge growth of the welfare and regulatory state, which is the cause of all issues in society. If you are looking back over the last 30 years and blaming free markets or free trade or free anything, as opposed to growing regulations, welfare and cronyism, then you have totally got the wrong end of the stick on what’s going on.

    Maybe so, I don’t necessarily disagree. But the way forward is not possible if the plan is to dismantle the welfare state and endure some more industry closure and further deterioration in the trade balance. That is never going to happen in a trillion Sundays.

    Therefore the plan must be a different path. The East Asian economies that started being Australia and overtook us might be a clue where we might want to start looking. Leading by opening our markets to them without getting the same in return seems like as bad a policy as closing down all our power stations in the hope the Chinese might take our lead and clean up one or two of their fleet.

    Most of us can see the benefits of rational actors freely trading goods and services. The nation and the world is clearly not made up of rational actors. Therefore the policy approach must be something different. The current trajectory is not working. Asking for dismantling of the regulatory and welfare state is a losing hand to play, unless you get made dictator for life.

  68. Joe

    …unless you get made dictator for life.

    Even then it’s an iffy proposition. Take away peoples goodies and they’ll get you.

  69. John of Mel

    The last 30 years has seen a huge growth of the welfare and regulatory state, which is the cause of all issues in society. If you are looking back over the last 30 years and blaming free markets or free trade or free anything, as opposed to growing regulations, welfare and cronyism, then you have totally got the wrong end of the stick on what’s going on.

    Could it be that this is caused in part by industries moving offshore and government trying to balance growing unemployment by more welfare?

  70. JC

    I did not suggest that exchange rates could be manipulated, only distorted by government policies.

    You need to be very, very specific by what you mean by government manipulation, because every fucking government policy sends tremors through the financial system.

    If the government borrows from foreign creditors to fund its budget deficit then there will be an increase in demand for the Australian dollar. It is this increase demand for the Australian dollar which results in an appreciation of the currency which, in turn, makes our exports more expensive and imports cheaper.

    Not necessarily, as the foreign currency may never cross through to domestic currency. The funds, in the example you gave, could be used to bolster reserves or pay down maturing debt.

    Thus net exports fall and we lose jobs.

    Bullshit.

    This problem is known as the twin deficits theory. A budget deficit will result in a current account deficit and hence a fall in jobs where a country has a chronic savings shortfall.

    Total 100% bullshit. There are numerous examples and evidence that this monster from the 80’s is a total and complete crock of shit.

    Japan is of course an exception to this rule

    So if there’s exception, it’s not a rule!

    as it has a net savings surplus and so can fund their large fiscal deficits via domestic savings. As a result, the Japanese do not need to borrow from offshore investors and so their deficit funding does not have the same effect on the exchange rate.

    And ?

    As for your comments on the money supply, an increase in the quantity of money will result in domestic inflation and so a corresponding devaluation of the currency.

    Nonsense again. QE in the US and no QE in Australia has seen the Australian Dollar fall against the US Dollar. Moreover, there’s been no inflation uptick in the US or anywhere else where QE was performed.

    This concept is known as purchasing power parity pricing. Apart from the significant uncertainty this might cause, you would not anticipate a trade flow impact directly from such an exchange rate adjustment.

    Thereby contradicting your previous comments.

    All else being equal, the value of imports and exports would fall proportionately such that the underlying goods market would be unchanged and so no impact on jobs.

    Huh huh.

  71. iampeter

    Could it be that this is caused in part by industries moving offshore and government trying to balance growing unemployment by more welfare?

    Well yes that’s absolutely part of it.

    First government regulations start driving businesses off shore, government instead of repealing those regulations, adds even more in the form of welfare. This then drives even more businesses off shore so now conservative populists are calling for more government regulations in the form of protectionism.

    The correct thing to call for would be to abolish the regulatory state that caused all the problems to begin with, but no one seems to be suggesting this, so we end up in a death spiral of problems caused by regulations, resulting more regulations which cause even more problems in turn.

    The end state of this will be something like Venezuela.

  72. Joe

    …but no one seems to be suggesting this…

    This has not only been suggested. Political parties have been formed to implement these ideas. THEY ALL FAIL! – the parties that is.

    No normal person appears to want this solution, even though it may benefit them in the long run.
    Democracy ALWAYS is the worst option.

  73. .

    This problem is known as the twin deficits theory. A budget deficit will result in a current account deficit and hence a fall in jobs where a country has a chronic savings shortfall.

    This isn’t even right, strictly.

    The budget deficit causes everything else. A budget deficit, hence a loss in jobs (crowding out or capital misollacation otherwise), a savings shortfall and a current account deficit. More likely, the BOP deficit is caused by running loose monetary policy relative to trading partners.

    The savings shortfall causes lower growth, somewhat ameliorated by the capital account surplus, but the initial loss of employment and output is nothing to be welcomed. A higher interest rate reflects the shortage of savings, in that the rates need to be higher to attract savings otherwise.

    Unless we can have costless taxes, spending and deficit spending which beats market returns.

  74. Irreversible

    Now it is clear. Kates is not an economist. Not a conservative. Not a libertarian. Not a free trader. Kates is a xenophobe. To wit:

    “I fail to condemn Donald Trump’s attempt to protect American workers from the open borders vandalism of others”

    Explains much.

  75. .

    “I fail to condemn Donald Trump’s attempt to protect American workers from the open borders vandalism of others”

    That is pretty risible. Moreso considering his good work for the ACCI and his published record.

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