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.
True.
even if you assume that a SMALL number of workers lose in the SHORT-run.
If this was as clear-cut as you paint it Samuelson wouldn't have written his mea culpa and we wouldn't be having this discussion.
displaced workers in outdated industries do not become permanently unemployed: they find other jobs.
Here also you muddy the waters. The industries in question are not outdated. Rather the same products can be made abroad using cheaper labor. Thus high-priced American labor is either forced to accept much lower wages, forced into unemployment, or able to find a similar or better paying job in a new industry. What's at issue are the proportions or each.
Does that hurt American workers?
If it lowers their wages, yes. How would you feel if your employer told you he could replace you with someone earning only half your salary? I know plenty of people in IT who've faced this.
One can easily say that the present, lower wages are normal
It's you who fall into the trap by creating false categories. In a market system there's no such thing as normal. However, when it comes to received monies more is better and less is worse...and decades of experience have taught fiscal planners that falling wages are very bad psychologically.
Also investors have no trouble going to Congress and the Courts to ask for protection from unfair competition - meaning tariffs to equalize a cost advantage gained by employing cheaper foreign labor (or time to move their own companies abroad). But, somehow, the definition of unfair becomes incredibly difficult to pin down when labor asks for the same protections.
The "equalization" occurs in a dynamical system only if it is closed...The process of globalization has been in place forever
We're not speaking about idealizations in physics. We're making crude models of economic reality. For nearly a century there's been a national market in the United States that could've been considered closed for many purposes. Thus unions could be formed and the environment protected.
No longer.
But in the future world markets will approach some sort of - relatively - stable equilibrium where it will no longer be worthwhile to move whole industries out of a country to take advantage of cheap labor elsewhere...or the whole system will collapse into revolution and chaos.
Don't feel bad: Lenin too fell for the same error.
I don't feel bad and I don't make the typically partisan error of assuming that mistakes are made only by those who disagree with me.
What does a liberal --- and, judging by your remarks, VERY liberal Larry is doing on a conservative forum?
Testing my ideas, of course. Is there any other reason to indulge in political discourse?
Amazon.com: What do you like to read?Fingleton: I spend much of my time keeping up with my own field of global economics, which I find completely engrossing. I am an admirer of J.K. Galbraith and recently began rereading his great early work American Capitalism. Among the younger generation of economic commentators, I particularly like the work of James Fallows, Robert Kuttner, Jeff Madrick, Lester Thurow, George Soros, and the British management commentator Robert Heller.
I aked you to test my understanding of Adam Smith. I'm still waiting. I beginning to think you pulled the comment about Wealth of Nations out of your arse.
Check out my #42. A veritable collection of All-Stars!
Colonization of lagging countries led, via forced (or through WTO, IMF, WORLD BANK) integration, to the loss of manufactures, a shrinking comparative advantage in primary production, and the displacement of indigenous capital, skills and enterprises.
This is the issue which separates social and economic systems.
In a purely market system you're worth whatever you can get by playing by the rules (more or less). If you have talents or products or possessions which people wish to own or rent then the price which they're willing to pay determines your worth.
Well, what of those - and they are numerous - who have neither talents or possessions? The answer is that - in most situations - they're worth subsistance wages...or nothing.
That's why a strictly market system - laissez faire capitalism - has been consistantly and repeatedly rejected.
Nope, doesn't sound like Smith to me. Unless you are claming that the "colonizing" countries in your example are monopolizing the "colony's" product, thereby holding the "colony" back?
News flash: every mainstream economist today, including Bush's cheif economic advisor, accepts the Keynesian theory as the best explanation of short economic fluctuations. Samuelson is no exception. The empirical evidence in favor of it is overwhelming. You need to study.
And Keynes was not a socialist.
Not that anyone will understand or agree with me, I post these reiterations "on the record" mainly for my own entertainment so no one in the "aftertimes" will accuse me of "Monday Morning Quarterback Syndrome"
Best regards,
Bill Clinton and John Kerry's economic plans were endorsed by umpity-ump Nobel prizewinning economists. Wunnerful.
And no, we are not all Keynsians now. Orthodox economics was upheld by the Austrians throughout the Keynesian episode, and most Keynsians themselves accepted the monetarist criticisms of their position formulated in the 1970s. (When Keynsian prediction was so systematically wrong for so long, only religious ardor could keep anyone believing in it). Monetarism is a half way house - it upholds a few of the theorems of orthodox economics. Keynsians who do not accept even those are so obviously just wrong that no one takes them seriously anymore (nobody believes in government spending "multipliers", for example). Only those on the left still believe a word of it. As a theoretical position, it was demolished long ago. Empirical econometrics, on the other hand, these days pays as little attention as possible to economic theory.
So, if no one cleaned your toilets, picked and cooked your food, removed your garbage, swept your streets, shoveled your snow, trimmed your lawns, dug your ditches, mopped hospital floors, cleaned your clothes--that's no matter because that work is not important, but sitting behind a desk is indispensable.
Of course, if the people behind the desks could plan a world wherein all people who work hard can live a decent life, then maybe sitting behind a desk would indeed be an important job.
Unemployment is a natural result of outsourcing. What did the Yokels in Washington think would happen with NAFTA and GAT? Professor Samuelson makes perfect sense.
NAFTA is also the cause of the massive jump in illegal immigration from Mexico over the past ten-years.
NAFTA has put Mexican farmers out of work, so it's either invade the U.S. for work or starve.
Or perhaps . . . rather . . . underemployment?
We're not all literal Keynsians. We're short run Keynsians. Everyone recognizes that Keyensian theory does not work in the long run since prices are flexible in the long run.
Orthodox economics was upheld by the Austrians throughout the Keynesian episode, and most Keynsians themselves accepted the monetarist criticisms of their position formulated in the 1970s.
LOL. "Orthodox" economics. And you accuse the Keyensians of being religious about their theories.
When Keynsian prediction was so systematically wrong for so long, only religious ardor could keep anyone believing in it). Monetarism is a half way house - it upholds a few of the theorems of orthodox economics.
Keynsian predictions are actually right in the short run. The evidence is overwhelming.
Keynsians who do not accept even those are so obviously just wrong that no one takes them seriously anymore (nobody believes in government spending "multipliers", for example).
That's true. Keynes theories have been expanded upon and microfounded. We don't use multipliers any more. We use the IS-LM model (actually more sophisticated, micro-founded models that are based on the concepts behind the IS-LM model).
Only those on the left still believe a word of it.
Is Mankiw "on the left?" Is Barrow?
As a theoretical position, it was demolished long ago. Empirical econometrics, on the other hand, these days pays as little attention as possible to economic theory.
You're obviosuly not an economist.
So you're saying that NAFTA was good for American farmers? How can that be?
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.