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Free "Trade"
The Agonist ^ | April 7, 2007 | Ian Welsh

Posted on 04/07/2007 12:37:39 PM PDT by A. Pole

The doctrine of comparative advantage is perhaps the only settled doctrine in the discipline of Economics. It makes sense - if a country can produce something with less inputs relative to another country (note that comaparative advantage is relative, you can be better at producing everything, and it still works), if it specializes in producing that good or service, and other countries specialize in producing their goods or services, then they trade them back and forth, everyone's better off.

But economists seem incapable of reading Ricardo's actual essay. Ricardo notes that because capital was relatively immobile in his time, relative advantages mattered - you can't just take the capital and send it to the other country. This is why relative advantage matters in the theory, not absolute. If Britain has a 2/1 advantage in machine parts; and a 3/2 advantage in brewing lager over Norway, then it makes sense for Norway to brew the lager, and Britain to make the machine parts, even though Britain is better than both, because the capital needs to be doing something.

But if capital is mobile, then why not do it all in Britain? Oh sure, that means that Norway will start running down its stores of value (ie. selling assets and borrowing in order to pay for machine parts and lager), but in the short to medium run, there's no reason why capital shouldn't go to the location with the highest absolute (not relative) advantage.

The doctrine of comparative advantage, to work, requires that capital and labor be relatively immobile. Or rather, that capital and labor be equally mobile. If people could just move wherever they wanted it might also work. Note that the last "free trade and capital flow" era - the late nineteenth and early twentieth century, also had massive immigration flows.

Now all of this assumes you have free trade anyway. People act as if the only things that matter are tariffs and subsidies, and that if you have neither, you have free trade. It is to laugh.

Manipulating your currency is the modern form of trade subsidization. China spends hundreds of billions of dollars a year keeping their currency lower comapared to the dollar than it would be normally. Japan likewise engages in massive intervention (through interest rates, primarily). The US, meantime, used monetary policy to try and push the dollar down - which worked against countries who weren't willing to massively intervene.

After NAFTA went into force, the Canadian government effectively stealth devaluated the Canadian dollar by about 25%. You didn't think that dollar crash happened because the Bank of Canada didn't want it to happen, did you? Funnily enough, that made trade between the US and Canada increase a great deal. Imagine that. Funny how a deal like NAFTA works when you make it work.

Now I support free trade. One day, during my life, I hope to see some of it.

But I don't confuse what we have right now with free trade; nor am I incapable of reading Ricardo and understanding that the conditions under which he considered free trade to work do not exist right now; nor do I think that free capital flows for speculation have anything to do with TRADE.

The economics profession has a very bad track record of giving advice in the real world. You can ask, say, Russia about that or you can compare and contrast Spain and New Zealand.

Trade isn't a panacea and "everyone believes it" isn't an argument and the fact that the vast majority of economists believe in comparative advantage means nothing - heck, I believe in the theory of comparative advantage, just like I believe in the laws of geometry. But I don't believe that comparative advantage works when you have massive free capital flows and massive currency manipulation and that's the regime "free trade" is used to justify.

Free trade has been hijacked by people who want free movement of money so that they can speculate wildly. Trading currencies is not "trade", it's speculation - gambling, and it undermines the utility of currencies as feedback mechanisms and has lead to financial panics, contagion, and increased income inequality in the core economies.


TOPICS: Business/Economy; Foreign Affairs; Philosophy
KEYWORDS: blog; economics; freetrade; market; theory; trade
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1 posted on 04/07/2007 12:37:40 PM PDT by A. Pole
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To: Willie Green; Wolfie; ex-snook; Jhoffa_; FITZ; arete; FreedomPoster; Red Jones; Pyro7480; ...
“The doctrine of comparative advantage . . . requires that capital and labor be relatively immobile. Or rather, that capital and labor be equally mobile. If people could just move wherever they wanted it might also work. Note that the last “free trade and capital flow” era - the late nineteenth and early twentieth century, also had massive immigration flows.”

“Now all of this assumes you have free trade anyway. People act as if the only things that matter are tariffs and subsidies, and that if you have neither, you have free trade.”

“Manipulating your currency is the modern form of trade subsidization. China spends hundreds of billions of dollars a year keeping their currency lower comapared to the dollar than it would be normally. Japan likewise engages in massive intervention”

Bump

2 posted on 04/07/2007 12:39:34 PM PDT by A. Pole (The Law of Comparative Advantage: "Americans should not have children and should not go to college")
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To: A. Pole

There is no such thing, nor will there ever be “free trade”.


3 posted on 04/07/2007 12:41:31 PM PDT by raybbr (You think it's bad now - wait till the anchor babies start to vote.)
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To: raybbr

In light of the season, there is no such thing, nor will there ever be an Easter Bunny.


4 posted on 04/07/2007 12:43:47 PM PDT by 1rudeboy
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To: 1rudeboy

I guess we are both right. Unless you would like to present me with an example of free trade.


5 posted on 04/07/2007 12:46:47 PM PDT by raybbr (You think it's bad now - wait till the anchor babies start to vote.)
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To: A. Pole
Free trade has been hijacked by people who want free movement of money so that they can speculate wildly. Trading currencies is not "trade", it's speculation - gambling, and it undermines the utility of currencies as feedback mechanisms and has lead to financial panics, contagion, and increased income inequality in the core economies.

Period. Dot. Bingo!

6 posted on 04/07/2007 12:51:56 PM PDT by operation clinton cleanup
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To: A. Pole

In the United States, Free Trade is not free, but comes at a high price for the average American.


7 posted on 04/07/2007 12:58:22 PM PDT by Clintonfatigued (If the GOP were to stop worshiping Free Trade as if it were a religion, they'd win every election)
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To: raybbr
Basically, any transaction that occurs in the underground economy or black market is an example of "free trade." Say you take your kid to have her wisdom teeth removed, and you compensate the oral surgeon with a German Shepherd puppy from a recent litter at the ranch. Q.E.D.

Before you go galloping-off in search of strawmen to knock down, I am simply observing that "free trade" exists, and that you are unaware of it.

8 posted on 04/07/2007 1:04:44 PM PDT by 1rudeboy
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To: Clintonfatigued

The price has been terrible: low unemployment, record wealth, high standard-of-living . . . .


9 posted on 04/07/2007 1:06:07 PM PDT by 1rudeboy
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To: 1rudeboy

I have yet to have any dentist or orthodontist accept anything other than money. Your argument is idiotic(I know longer words but they don’t convey the meaning as well)in regards to free trade which is not define as bartering, which is what you are suggesting. The idea that NAFTA is really a free trade agreement is simply that: Idiotic.


10 posted on 04/07/2007 1:08:11 PM PDT by calex59
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To: calex59
Anything you haven't seen or experienced yourself is "idiotic." Who says FReepers aren't open-minded? LOL

Care to take a guess at how many billions of dollars (est.) change hands yearly in the U.S. in transactions that are not regulated by any legal authority? And I'm not talking contraband, either.

11 posted on 04/07/2007 1:12:01 PM PDT by 1rudeboy
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To: A. Pole

Who should decide what you can buy when you can go to the store?

A) You?

B) Some unaccountable government bureaucrat who has just received NFL luxury box tickets from a corporation competing against lower priced products?


12 posted on 04/07/2007 1:24:16 PM PDT by Utahrd
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To: A. Pole
Free trade has been hijacked by people who want free movement of money so that they can speculate wildly.

Now can look forward to the meltdown of our currency just like the stock market meltdown of 2000, when the "free traders" decide its time to cash out of the dollar.
13 posted on 04/07/2007 1:25:59 PM PDT by hedgetrimmer (I'm a billionaire! Thanks WTO and the "free trade" system!--Hu Jintao top 10 worst dictators)
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To: raybbr

LOL


14 posted on 04/07/2007 1:26:32 PM PDT by hedgetrimmer (I'm a billionaire! Thanks WTO and the "free trade" system!--Hu Jintao top 10 worst dictators)
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To: 1rudeboy
Basically, any transaction that occurs in the underground economy or black market is an example of "free trade." Say you take your kid to have her wisdom teeth removed, and you compensate the oral surgeon with a German Shepherd puppy from a recent litter at the ranch. Q.E.D.

Does the orthodontist pay income tax? Do I pay property tax on the "ranch". Is the orthodontist governed by the regulations of the local health official? Does he pay taxes on his office? Is he buying electricity from a provider controlled by regulations? Assuming the puppy has seen a vet and I paid the vet money the same questions apply to the vet.

There is no such thing as free trade. This author has it right. The term free trade applies to paper transactions, which are completely controlled by the various governments involved and always will be. It's the lobbyist who get the laws bent to his favor that benefit not people like me, or, even you.

Before you go galloping-off in search of strawmen to knock down, I am simply observing that "free trade" exists, and that you are unaware of it.

If I trade a tomato that I grew on my land for an onion that you grew on your land it would still not be free trade. Property taxes obviate that claim.

15 posted on 04/07/2007 1:27:51 PM PDT by raybbr (You think it's bad now - wait till the anchor babies start to vote.)
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To: 1rudeboy; raybbr
Basically, any transaction that occurs in the underground economy or black market is an example of "free trade."

LOL so "free trade" only exists as a criminal enterprise. LOLOL
16 posted on 04/07/2007 1:29:52 PM PDT by hedgetrimmer (I'm a billionaire! Thanks WTO and the "free trade" system!--Hu Jintao top 10 worst dictators)
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To: hedgetrimmer

The assertion, oh dim one, was that “free trade” does not exist. I proved that it does. I wasn’t making a value judgement, nor should you . . . as far as your rhetorical point . . . worthless as usual.


17 posted on 04/07/2007 1:35:09 PM PDT by 1rudeboy
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To: Toddsterpatriot; Mase; expat_panama; nopardons

Check this thread out. All one has to do is find a blog, title the result “Free Trade,” and people flock to it in order to trumpet their economic ignorance, and engage in parlor-room sophistry.


18 posted on 04/07/2007 1:38:01 PM PDT by 1rudeboy
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To: raybbr
There is no such thing as free trade. This author has it right. The term free trade applies to paper transactions, which are completely controlled by the various governments involved and always will be. It's the lobbyist who get the laws bent to his favor that benefit not people like me, or, even you.

Actually free trade includes trading in goods and services as well as in paper. In fact, when the so-called "trade deficit" is condemned, it's because the deficit is in goods and services, not in total. In total by definition there cannot be a deficit, since in any trade there is an exchange.

19 posted on 04/07/2007 1:54:53 PM PDT by You Dirty Rats (I Love Free Republic!)
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To: hedgetrimmer
LOL so "free trade" only exists as a criminal enterprise.

Even that after reaching significant size becomes regulated, by the organized crime. Human beings are social by nature and always get organized, one way or another.

Free Marketeers dream about seizing the highest form of social organization - the state to serve their group interests. In the theory by limiting state to protect wealth from domestic threats (courts, police and jails) and from foreign ones (the army). In practice they try to use state to suppress competition and to keep workers down.

20 posted on 04/07/2007 1:56:11 PM PDT by A. Pole (Russian proverb: "All are not cooks that walk with long knives")
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