Posted on 11/20/2004 9:56:42 AM PST by curiosity
When the 1970 Nobel laureate Paul Samuelson was asked what it takes to win a Nobel Prize, he volunteered, "It doesn't hurt to have good students."
But even Samuelson's overachieving students -- he has taught economics at MIT for six decades -- sometimes need to be put in their place. At least that seems to be the subtext of a new Samuelson paper in the Journal of Economic Perspectives.
Samuelson argues that, far from representing an unmitigated boon, free trade may in some circumstances prove a net loser. Among countless globalists who stand duly corrected, not the least chastened are two of Samuelson's own former students: Jagdish Bhagwati and Gregory Mankiw. Noted for their ardent embrace of globalism, the pair are identified by name as purveyors of "polemical untruth" in Samuelson's opening paragraphs.
Samuelson's insight is that if a low-wage country like China suddenly makes a major productivity leap in an industry formerly led by the United States, the result can be a net negative for the American people. Although American consumers may benefit via low-low prices at Wal-Mart, their gains may be more than outweighed by large losses sustained by laid-off American workers.
This conclusion, coming as it does from the pope of economic orthodoxy, is already (even before its official publication) causing a sensation in the economics profession.
Mainly the reaction is positive. Certainly this sudden flash of the obvious has come not a moment too soon for many of Samuelson's fellow liberals.
According to Jeff Madrick, author of Why Economies Grow and editor of Challenge, the take-home message is that the United States needs to do much more to support workers thrown on the scrap heap by globalism.
"The Samuelson paper is a strong argument from the most illustrious of neoclassical economists for a much stronger safety net for American workers," Madrick says. "The price being paid for free trade is falling on many workers, and there's little empirical doubt of that anymore. Moreover, I think the bias among free-trade advocates has skewed the empirical research in the field. Claims of finding that gains from free trade are many magnitudes larger than the losses have been based on extraordinarily poor studies that have hardly been criticized. Maybe some serious sense -- I would ask only for balance -- will now return to trade economics."
For James Fallows, a liberal-leaning critic of Washington's blink-first style in trade diplomacy, Samuelson's analysis is a call to policy-makers to break free from utopian theories and, instead, take a hard look at the real world.
"The great problem in Western discussion of trade theory has been its simpleminded Panglossianism," he says. "The main thing that has supported globalism, apart from the self-interest of many powerful participants, has been the idea that economic theory was 100 percent on the side of Dr. Pangloss. To have the most esteemed of all modern economists say that things are not this simple is a very important step."
On the moderate right, Pat Choate sees Samuelson's paper as essentially defensive, less a confident breakthrough than the correction of an embarrassing mistake.
“At the age of 89, Samuelson is finally stepping onto the road to wisdom,” says Choate. “It is a road where uncertainty prevails over the certainty of the ‘laws’ of economics, which are not laws but ruminations by closeted academics. His article is important, for it effectively gives permission to his disciples to begin to think about the real world, rather than try to postulate assumptions and develop elegant models which ultimately are irrelevant.”
Paul Craig Roberts, a fiercely anti-globalist economist who served as President Ronald Reagan’s assistant treasury secretary, puts it even more pointedly. Samuelson’s rethink, he suggests, is merely an attempt to patch up a leaking, and ultimately doomed, vessel.
As he points out, the paper is in large part a reaction to arguments made by Ralph E. Gomory and William J. Baumol, who in Global Trade and Conflicting National Interests have mounted a powerful challenge to the orthodoxy's utopian take on international trade. Roberts adds, “Gomory and Baumol show that, in the relevant zones, free trade is characterized by conflicting interests -- not by mutual benefit, as economists unthinkingly assume."
In Roberts' view, though the Samuelson paper is an important modification of free-trade theory, Samuelson has chosen his assumptions carefully to avoid any frank discussion of the widespread damage being caused by outsourcing.
If Roberts is disappointed by the narrowness of the Samuelson modification, many on the globalist side of the trade argument are evidently worried. A leader of the damage-control effort is none other than Bhagwati, the former Samuelson student singled out for obloquy in the paper.
Already Bhagwati, a Columbia University professor, has collaborated with two allies in a hastily written response that will be published in the same journal.
Judging by a bad-tempered recent contribution to The Wall Street Journal, Bhagwati is clearly rattled. Describing John Kerry's trade policies as "voodoo economics," Bhagwati embarrased his cause by hurling juvenile personal abuse at the anti-globalist CNN presenter Lou Dobbs.
What is clear is that Bhagwati has plenty to be rattled about. As one of the earliest and most extreme globalists, he has offered several hostages to fortune over the years, most notably in his indecent embrace of the Japan trade lobby in the 1980s. Blaming "bullying" American policy-makers for most of the tension at the time in U.S.-Japanese relations, he exonerated Japan from charges of protectionism. Writing in Fortune magazine in 1989, for instance, he argued that the evidence was "slim" that nontariff barriers significantly reduced Japan's appetite for American exports.
In what must have been the ultimate bad hair day for Bhagwati, one of Japan's leading spokesmen has now admitted that Tokyo's 1980s denials of protectionism were poppycock. The admission came from Mitsubishi Corporation President Minoru Makihara, who told the Tokyo foreign correspondents' club that the Japanese market in the 1980s was "still closed and tightly protected.”
Bhagwati's demeanor cannot have been improved by the realization that Japan’s continuing trade surpluses (they never went away) are likely soon to re-emerge as a hot-button issue in Washington. The reason: Japan’s current account surplus is headed for a record $170 billion this year. By comparison, in 1989 -- which was both the last year before the Tokyo stock-market crash and the year of peak Washington lamentation about Japan’s “juggernaut” trade strategy -- Japan earned a current surplus of a mere $57 billion.
Under the circumstances, Bhagwati seems a weak candidate to lead what will obviously be a hard fight to defend academic orthodoxy. Certainly only the first casualty will be Henry Kissinger's cruel witticism about academic life: that the fights are so bitter because the stakes are so low. This is one dispute where the stakes justify the bitterness.
Ping for later reading.
A good parallel article is: "Benedict Arnold?(Outsourcing U.S. Jobs)"
I would also suggest "The National System of Political Economy " by Friedrich List, there is an English version at this URL, very good:
http://socserv2.socsci.mcmaster.ca/~econ/ugcm/3ll3/list/national.html
If I own a business in the tax hell of California, should I be free to take it to a lower-tax state? If so, am I not depriving the workers of CA of their livelihoods just for my own profit?
Have you done a compare and contrast between Smith's The Theory of Moral Sentiments and The Wealth of Nations? Some think there's a perplexing contradiction between the two, with Sentiments offering better insights.
But then, some might say mercantilism has more to teach about the modern world economy than laissez-faire capitalism.
Placemarker *Bump*
I am familiar with it . . . but I always saw it as more of a treatise on sociology instead of economics.
Of course not. The government of California should place punitive taxes on the products of other states in order to save all those high-paying jobs you provide. [chuckle]
Firstly, the benefits accrue not only to investors (who are incidentally, oftentimes foreign) but also to consumers. Both are numerous categories: the vast majority of Americans are investors, and all are consumers. Most Americans benefit thus, even if you assume that a SMALL number of workers lose in the SHORT-run.
Secondly, you take workers as an immutable entity. They are not: displaced workers in outdated industries do not become permanently unemployed: they find other jobs.
Thirdly, the very criterion you employ to compute benefits is faulty. Consider, for instance, the IT sector. The decades-long shortage of labor in that are translated into premium paid to programmer over what they would get in the absence of shortage. Now the internet has enabled employers to outsource some of that work, and programmers' wages well. Does that hurt American workers?
YOu answer in the positive: wages fell, hence workers are hurt. But that includes the tacit assumption that the previous wages were somehow justified. One can easily say that the present, lower wages are normal, and the previous ones were unreasonably high (due to shortage). It was AMERICAN consumers and AMERICAN investors (pretty much everybody who has any savings at all) who subsidized --- and for decades were held hostage by --- programmers and other IT specialist.
In sum, you make a rather popular error of only looking that the LATEST change to assess the situation. That is a fallacy. If you confiscate from me $1M, that is not necessarily a robbery: I may have previously robbed the bank and was not entitled to that money. You will not be able to deduced that, however, if you only look at the latest change.
However, the process of globalization is unstoppable and it's utopian to think that much can be done to help either the American worker or the environment until the process of worldwide equalization of standards, living conditions, and legal structures progresses much further than at present.
This is another popular misconception, rather popular in the socialist (morern-day liberal circles). The "equalization" occurs in a dynamical system only if it is closed. Neither the humankind nor America is a closed system, and no equalization is mandatory. The process of globalization has been in place forever, and we have never been anywhere close to what may be viewed as equality of living standard and even less similarity of social institution.
Don't feel bad: Lenin too fell for the same error.
What does a liberal --- and, judging by your remarks, VERY liberal Larry is doing on a conservative forum?
Prior to free trade the textile industry migrated from New England to the Piedmont.
Marx was for free trade for wrong reasons.
and a nation's economy dependent on DEBT, Walmart, McDonald's , Sam's Club is unsustainable. Where do you see "dependence" of a trillion dollar economy on these companies?
For how long we will keep consuming and will keep sending our manufacturing overseas.
This is like asking, for how long will we be breathing air and still continuing to eat?
Where goes the manufacturing, there goes the RESEARCH & DEVELOPMENT.
Could you please show the empirical evidence for that statement?
The many now-bankrupt American workers who lost their jobs and their homes can attest to this fact as they're struggling to pay their bills.
How many, Janet? The unemployment is at 5.3%, which until a few years ago was considered MINIMAL possible even theoretically. It was 5.4% when Clinton was elected the second time --- and everybody feels great about the economy of the nineties. I don't hear much concern for American workers in Washington,
This very much may be true --- are you deaf? Bush repeatedly talked about it education, training and other programs. You don't hear it because you don't want to hear: education presupposed that the workers will do the learning instead of Saturday trips to the mall. Apparently, that is what you want: the government protecting the jobs, as they are. You've missed your opportunity for happiness: the Soviet Union, where that was implemented full, has collapsed.
We simply send the half of America having IQ's under 100, to MIT to become tech workers, and problem solved?
See my post above, number 34.
"I think your should read THE WEALTH OF THE NATIONS by ADAM SMITH."
Nah, that would ruin the poor boys day. Too much reality would humble them and a leftist is anything but humble.
Unless we set out to develop a new energy source other than oil, there will be war over oil in the next few years.
We have sewn the seeds of our destruction...China now has our technology to send missiles accurratley to our shores due to the Clinton administration.
We will pay for our stupidity.
We simply send the half of America having IQ's under 100, to MIT to become tech workers, and problem solved?
Obviously, they would not be admitted to the M.I.T. That, of course, is obvious. WHat perhaps is not obvious to you is that workers with low IQs do not produce enough to justify the high standard of living.
Like a typical socialist, you leave the issue of who produces wealth aside: people simply MUST live well.
I was not arguing for all displaced to go to school: it's a free country, and they don't have to if they don't want to. Buy they --- and you --- should then stop b----ng that their standard of living has declined.
I don't know your Age, but I certainly have not seen Reason in your post.
Agreed.
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