Posted on 11/06/2004 2:45:55 PM PST by Willie Green
For education and discussion only. Not for commercial use.
A battle royale has just been initiated in the rarefied world of economic theory, although the rumblings have not yet reached these shores. The first salvo has been fired by no less a person than Paul Samuelson, and the targets he has chosen include some of his most prominent acolytes and disciples.
The MIT professor, winner of the Nobel Prize in 1970 and research mentor of countless economists, who later became major scholars in their own right, has re-assessed his entire stand on globalisation and the benefits that accrue from the process. In doing so, Samuelson has been scathing in his critique of some of his students, including Jagdish Bhagwati, once a member of his innermost circle.
In an article in the Journal of Economic Perspectives, Samuelson has postulated that free trade, far from being an unqualified blessing, may prove to be a major drawback under certain circumstances. The major cult figures who are sought to be chastised by the guru on this issue are Gregory Mankiw, Bhagwati and countless other `globalists'. The first two have been mentioned by name in the article's opening paragraphs as purveyors of `polemical untruth'. In the corridors of theoretical economics, you cannot get more direct than this.
The thrust of Samuelson's analysis is that a country like China, basically a low-wage economy, will create a net negative impact on the American people, when it manages a substantial rise in productivity in an industry in which the United States was earlier a leader. Initially, American consumers may benefit from low-priced goods in their supermarket chains, but their gains may be more than neutralised by large losses sustained by American workers who lose their jobs. This thesis, from the erstwhile mastermind of the neoclassical school of economic thought, has led to tumult in the profession even before its official publication.
Among Samuelson's fellow liberals, this revisionism has been a welcome development and could not have come a day sooner. Many American commentators are saying this is a clarion call for the US to launch serious programmes for supporting workers displaced by globalisation. American workers need a much stronger and a viable safety net, on the lines of their European counterparts or even those in Canada, the immediate northern neighbour. Some American economists are even saying empirical research on the subject in the past was skewed, because of the in-built biases of the free-trade proponents.
Claims of substantial gains from free-trade were based on `extraordinarily poor studies', according to one commentator, Jeff Madrick, who goes on to add there is now hope for a more balanced perspective in future research in international trade theory. Policymakers in Washington are now being urged to move away from their high perches and to take a hard look at ground realities. When one of the most respected contemporary economists has stepped out of the shadows and said things are not as simple as they were earlier made out to be, it is a development that cannot be ignored. Another observer, Pat Choate, feels this paper is the correction of `an embarrassing mistake'.
Samuelson, at the age of 89, is signalling to his disciples that they should think about the real world rather than `postulate assumptions and develop elegant models which ultimately are irrelevant'. More critical economists, like Paul Roberts, feel the maestro's attempt to patch a leaking vessel that is ultimately doomed will just not work. Roberts suggests the paper responds to an insightful critique by Ralph Gomory and William Baumol, another economist familiar to all Indian students of economics.
In their publication, Global Trade and Conflicting National Interests, Gomory and Baumol launched a powerful attack on orthodox international trade theory. They showed free trade is characterised by conflicting interests and not by mutual benefit, as neoclassical economists assume. Roberts, in fact, lambasts Samuelson for not taking on the issue of outsourcing in any depth.
While the friendly fire in this debate is clearly sympathetic to the overall theme, the globalists are clearly worried. The damage-control effort of this brigade is led by none other than Jagdish Bhagwati, the former Samuelson disciple, singled out in the paper for reprobation. The Columbia don has reportedly prepared a response to Samuelson, which will be published in the same journal.
Bhagwati, of course, got a lot of media attention recently when he described John Kerry's trade policies as `voodoo economics'. He has been one of the most committed globalists for many years and was a defender in the 1980s for the Japanese trade lobby, which he exonerated from charges of protectionism, while reserving his blame for `bullying' American policy-makers. He dismissed the argument that non-tariff barriers significantly reduced Japan's appetite for imports from America. There is now sufficient evidence (and semi-official admission) that Japan was a major protectionist country throughout its period of growth in the 1960s and much later on.
Most of us who have worked in this country's corporate sector and interacted with Japanese companies will vouchsafe for the enormous clout of these organisations and the seamless interlinking between the much-vaunted MITI and Japan's private business. In any case, Japan's continuing trade surpluses are likely, once again, to become a controversial issue in Washington very soon.Bhagwati will have his work cut out, as he takes on his former guru in a no-holds-barred fight to defend orthodox economics.
In these shores, North Block and Raisina Hill would do well to ask their think-tanks to introspect on the complex subject. Else, they can be taken to task for swallowing the globalisation mantra a tad too uncritically.
The writer is a financial-corporate analyst and a member of the Delhi Stock Exchange.
"Wal-Mart buys everything from China to give American consumers the lowest prices until every American is unemployed and can't even buy a hot dog. Everything at Wal-Mart eventually costs a nickel and no American has a nickel to spend."
You summed it up in a nutshell. Why is it that many of the same people who challenge higher education's embrace of political correctness in history & the humanities (multiculturalism) at the same time embrace its advocacy of political correctness in economics (free trade)?
At some point even free traders have to see what is happenning in the lives of people they know.
As a professor, he probably heard that all of a sudden nobody is majoring in computer science anymore. Gee, I wonder why ?
Once a while I visit computer sections in various bookstores. This is depressing - these sections are reduced in size two or three times, parts of shelves are empty. The worst is that books on the subjects interesting to me are at least TWO years old! (I already have them).
Are the new software technologies/languages being developed in China or India? I do not hear anything about.
28 - "USA is also being drained by the high wage economies which shifted their taxation to the Value Added Tax. This tax works like a tarrif on the imports from America and like a subsidy on exports. The impact of VAT might be higher than labor cost difference or cost of regulations. "
Bingo - and maybe some people are starting to figure it out.
Good find. GW will be pushing a POS known as the Free Trade of the Americas treaty
It could also be because the breakneck pace of PC technological change has slowed considerably. Java and XML are the hot things now and they were the hot new things four years ago. What new has come out in the last four years ? Is Microsoft coming out with VB.Net 2.0 ? Solaris 10 has been pending all year.
As for PC's they have plateaued at 3.0 gig. Who needs a faster one ?
Kerry dropped the ball completely on this issue. Had he done a more convincing job of presenting himself as an economic nationalist he might have won. But by letting the NAFTA types control him he was unable to persuade Americans that he had any real ideas about the economy or could do a better job. The only way for the Democrats to beat cultural populism is with economic populism.
I am also amused at the free traders who preach career jumping as a way of life. If you are constantly having to start again at the bottom you will never be able to amass a retirement nest egg. And as gcruse honestly pointed out nobody wants a 45+ junior assistant intern trainee.
It's the same thing I have been saying all along. The "free trade" theory is just that; a theory that has never been tried or proven.
I always liked Milton Friedman from the Chicago school of economics better. When Clinton signed NAFTA into law, I knew free trade sucked.
And you will never become really good at any advanced skill. Advanced economy and prosperity cannot be based on low wage, menial laborers.
You can have Latin American style oligarchy with the "service" economy serving corrupt "elite" and shantytowns.
NAFTA actually made some sense - because it took into account the geographic realities with having a third world nation on an open border with the US. using Mexico as a source of labor for US low skill manufacturing made sense, giving them a chance to build an economy with jobs for their citizens - in Mexico.
It is free trade with China that essentially killed NAFTA. All investment in low skilled manufauring, goes to china now. what do you see that's "Made in Mexico" when you shop? not much. and china also has an educated workforce, so tech industries like semiconductors, can go their too.
in the meantime, the globalists shifted gears and now Mexico is the source of low wage labor for US service jobs - but since they have to be physically present in the US to hold those jobs, the border is wide open.
It is being tried and we are the guinea pigs.
It reminds me a Polish joke from the Communist times:
A Commie propagandist gives a compulsory talk to the peasants about Marxist theory.
One peasant asks, "and who invented this theory, the workers or the scientists?"
The Commie, thinks for a while to decide which answer will be more edifying and says, "why? Of course workers invented it".
And peasant says - "It must be true, the scientists would test this theory on the mice before trying it on the people".
As I've said time and time again, you are who you agree with, and you Willie, now agree with the guy who agrees with his "fellow liberals" on the issue of free trade.
Samuelson has come around to the liberal stance and they're ecstatic...you are happy as well.
You've always been against free trade, haven't you Willie?
Which is why I've always said that you're a liberal.
No insult there, just a fact.
See, the author knew you guys would be happy.
Good point. Every liberal college in the country spends much more time on Samuelson then on Friedman. I conclude they fear Freidman and free market capitalism. Europe has a fine safety net for their industries. An American farmer can plant, grow, harvest, and ship his crop to France and under sell the French farmer. So this is good for who? The French pay more for almost everything. The French pay higher taxes. the French think we should be like them?
I am sorry that the world keeps changing, G-d knows I tried to stop progress in my foolish youth. Now I advise the young to get a broad based education and look for new opportunities when the world gives them lemons. I would give the same advice to those who have been outsourced. (How many percent are they anyway? Maybe some workers could get unemployment insurance? (Oh they already do!) Much smarter than to listen to an 89 year old economist who now wants to have government control over supply and demand.
I do it every week. I am in the military, I work 50 hours a week. I am getting my Master's degree. I have an 11th month child. I will succeed, and care little for those who do not. I thought this was a conservative website, but maybe I was wrong.
You know I almost took you as a serious person tille you responded to me with Bush caused the Hurricanes bit.
I am sorry Luis, but you are ignorant of some basic facts.
The word "liberal/liberalism" means something else. In America is it being colloquially used to designate social-democrats, while in the other countries the traditional classic meaning is being used.
It is Indian publication and the word "liberalism" stands for laissez-faire ideology - of free market and limited government.
True, I am for governemnt uninvolvement more than anyone. But, if we are going to tout how the hurricanes created jobs, then we should also mention the jobs that the hurricanes lost.
Both my grandfathers dies working on the job...manual labor jobs. I am not saying it is easy, but we have to try, isn't that what being American is all about.
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