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NOTE Free Trade: The Current Debate

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Well, good afternoon. It's time to start the session, and my job was supposed to be to introduce our main speaker, Paul Craig Roberts, who's not here right now. We think he's going to show up. Is this right, Jeff? We're pretty sure he's going to show up. But we do want to start the session on time. Dr. Roberts had written some controversial things on free trade, and the way we had planned to run the session was to have him give some remarks followed by some commentaries. But since he's

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If he's not here, we're going to start with the commentaries.

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That does seem fair, doesn't it?

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And I believe the first commentator is going to be Guido Hulsman.

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So thank you, Professor Roberts, for this excellent talk,

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which I enjoyed very much,

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Brought lots of new information, was not yet aware of.

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It's of course somewhat awkward to comment on these arguments that were rather devastating and smashing for the traditional case for free trade.

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Therefore let me just maybe make some general remarks on what I believe

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Meaningful Discourse on Free Trade

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could be about today. So the first fact that I would

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notice, and it's a fact, is that undoubtedly we wouldn't say that everything

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is well and perfect with international

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economic order. So certainly we could say there are large

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imbalances, and these imbalances express themselves in

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huge wage rate differentials. From wage theory we know well that

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Weigh-trade differentials are due, on the one hand, to differential physical productivity of the factors of production,

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but as we know from the theory of government interventionism, there are lots of other factors that also come into play,

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and these, as we know in the case of international trade, have contributed to creating the situation that we face today.

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So the reason why the wage rates are much lower in the former third world is that for a very long time government in these countries have derived their inspiration for the economic policies from Western universities, the University of Western Europe, but also the United States.

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and they have applied the top-notch knowledge that was taught there in the 1940s, 1950s, 1960s in their countries and well, we all know what top-notch in those days meant in terms of economic policy was Keynesianism and government interventionism, the full monty from price fixing to central planning, foreign exchange controls, hampering of trade and so on.

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and certainly a huge factor that has contributed to the imbalances that we face today.

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And since many of these governments came back on the decisions that they have taken previously,

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often we are not talking about the same persons, often we have kind of a new government being elected

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or there was a revolution going on and in any case they changed policies so they became much more free market friendly

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We're not talking here only about the tiger states, but about many other countries, both in Latin America and in Southeast Asia in particular, now even the Soviet Union or the former Soviet Union.

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So as a consequence, these places have become much more interesting for foreign investments.

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And as a consequence, Western capitalists, rather than bothering with labor unions in Germany, France or Detroit,

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and rather than bothering with their governments, who are not very sensitive to business questions, decide increasingly to invest their money in those countries.

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So huge investments in India, Malaysia, many other countries of southeastern Asia and this capital could have been invested or has been invested before in the western countries

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Western countries and as a consequence what we observe as an outflow of capital which goes in hand with a relative impoverishment of the population in the Western world and a relative enrichment of the population in the developed world.

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Now the question is, can we do anything about this? The second question is, should we do anything about this?

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Now, let's address the second question first. If we take a libertarian point of view, well, from a libertarian point of view, clearly, there's nothing wrong with this, and quite to the contrary, it's something that will in the long run certainly be approved beneficial for all members of the world population, and that in the short run might even also be beneficial both for the people who profit directly from it and for the Western population.

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In the libertarian point of view, there's nothing wrong with this and we should welcome such an event.

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The other question is can we prevent this if this were our aim for whatever reason?

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And I think the answer is plainly the negative.

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We in the West can add to the problems that we have right now.

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The problem that we confront is that after five or six decades of interventionist policies in the developing world,

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The Third World, the governments there increasingly change their policies. That's nothing that we can have an impact on, a direct impact.

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And so by preventing the outflow of capital, as I take it Professor Roberts is advocating it, we wouldn't change our situation.

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We could possibly prevent the accumulation of capital within our borders, but we could not prevent that capital would flow there, either in the form of money, of people, of consumer goods.

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Certainly not in the long run, we couldn't prevent it.

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Let me now maybe conclude with another observation on the pernicious nature of this debate, and the debate is pernicious because it shifts the attention from the field where there is a real problem, where the attention should be focused, to the field of trade policy, about which I've been talking so far.

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There is no problem whatever with trade per se, both on a practical level and on a theoretical level.

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You cannot make a case against free trade. I haven't seen any convincing argument so far.

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But we have a problem as far as monetary policy is concerned and as far as the international monetary order is concerned.

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Now just consider one fact that the present monetary regime that is freely fluctuating

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fiat paper moneys have contributed to the imbalances that we confront in the world economy.

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Think for example of the policy of the Bank of Japan, the Bank of China, who for some

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years now, in the case of the Bank of Japan for some decades, have accumulated dollar

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holdings or dollar assets in order to keep the exchange rate of their currencies low,

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to promote exports.

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Now, that's certainly not the ideal type of a situation

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that the advocates of the system of freely fluctuating paper

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monies had in mind when they promoted the system

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in the late 1960s and the 1970s.

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What they had in mind was that exchange rates

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would adjust to prevailing economic conditions.

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That is, if one country is exporting very much,

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The exchange rate would go up, so there would be incentives for capital exports and decrease of their commodity exports and so on.

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So in a way, it would be ideally, or it was conceived to be ideally, a very smoothly adjusting system, but that's not at all what we have experienced.

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What has happened is that, as I've said, the central banks, for whatever reasons, have counterbalanced the effects that would have resulted under the system that has been promoted in the 1960s and 70s by people like Fritz Machlob and Milton Friedman.

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And as a consequence, they have created even more. They have reinforced the imbalances that we've talked about.

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And the danger, the great danger therefore is, at the present hour, that just as in the early 1930s, we will repeat the same errors that we've committed in the early 1930s.

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When we think of the Great Depression, we think immediately of, well, the Black Friday of 1929, but that was not what created the year-long depression.

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Depression. That was just a currency crisis, a stock market crisis that has happened many

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times before and has been repaired in a fairly short time. The situation was turned into

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a Great Depression because of the government interventionism of the following years. And

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here we need to mention in the first place the trade policy. How should we date the beginning

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of the Great Depression? I would say it was June 1930 with the Smooth Holy Tariff Act,

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which brought the International Division of Labor to a standstill and incited the other governments to adopt similar measures

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and therefore cut off international trade and the International Division of Labor and really brought about the Great Depression.

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And that's the same situation that we face today.

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We have a very unsustainable international monetary order that has already created one bubble that has burst in 2001

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and that will, if we continue on its, well, maintaining the system, create several more bubbles and now in order to repair the imbalances that have, among other things, been created by the system, there are people, like Professor Roberts but many others too, who propose to repair the defects by trade policy and that would bring us exactly back to 1930. So, to conclude, the great danger that I see in the present debate is that it shifts away attention from

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to an area where there is no problem at all, neither practical nor theoretically, and thus promises to bring about the same mess that we experienced once.

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All of this would then give another illustration of Hegel's famous dictum that there is only one thing that we learn from history that we never learn from history.

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Thank you, Guido. We'll turn it over to Joe Salerno.

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I was asked to fill in at the last minute, and indeed I had done something or contributed to this debate.

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And I want to read part of what I had contributed, which does touch on the question raised by Professor Roberts, which I think is an important question, because I think international trade theory is subject to some serious misconceptions, beginning with what Ricardo intended when he set forth his theory of comparative advantage.

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Now, this theory was universalized, more or less, by Mises in a brilliant stroke, which applied it not just to countries, which had rigid borders at the time Ricardo was writing, but applied it to families and individuals.

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So what I think is happening is that the participants, or some of the participants in the debate, were talking at cross purposes.

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I think this has been hashed out on the Mises list and on the blog.

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But the earlier critics of Roberts, mainly supply-siders, fellow supply-siders, I think did misconstrue his original argument.

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So let me just write or read you some of the response that I had to that original argument.

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In his articles, and there were two of them, one appeared in the Washington Times, the other appeared in the New York Times.com,

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and that was in the early part of actually late 2003 and early 2004.

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In his articles attacking the application of the Ricardian argument in favor of free trade to the modern world, Paul Craig Roberts is half right.

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It seems to me his critics, such as Bruce Bartlett and others, others being other supply-siders that initially replied to him, have misconstrued his argument at least on one score.

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The Ricardian theory of comparative advantage does only apply under the assumption of absolutely rigid immobility between countries.

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Absolutely rigid factor immobility, that is the inability of labor to move because of immigration barriers or because of cultural attachments, and secondly the inability of capital to move because there wasn't really a well-developed international capital market while Ricardo was writing in the very early 19th century.

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However, Roberts is also half wrong. Even though an outflow of domestic capital, such as the so-called outsourcing, which everyone now has become a word that everyone cringes in fear of, it's like depression used to be.

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So even though an outflow of domestic capital, all other things equal, causes real wages in the capital exporting country, for example the U.S., to fall or not to reach levels they would have reached in the short run, there is an increase of labor productivity and therefore output in the capital importing countries, for example China and India.

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China therefore develops an increased real demand for U.S. exports, which raises real prices and real wages in these industries.

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In other words, China is now richer. It's a better market. They have more goods, more valuable goods, because of the American capital that is supplementing their labor force.

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As a result, they become a better market for our goods. The real price of our goods go up because now they're bidding for our exports with more real goods and services.

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So what is actually happening is it is true that prices and wages are falling in our import competing industries, but they're rising in our export industries, and Roberts misses this point.

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In addition, the allocation of capital to more value-productive uses throughout the world intensifies the division of labor and allows the U.S. labor force to specialize in even more productive industries, raising real wages further in the U.S. and throughout the world.

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Thus, for example, if you were to cut off New Jersey from the rest of the country, somebody would like to do that, no thanks to the Sopranos,

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that would mean that the division of labor would become much less refined in New Jersey, it would still be a division of labor.

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Now, if you reverse that trend, you would suddenly find that, yes, the industries that were providing bananas and other things, in hothouses, when bananas would be $10 a banana or something like that, those industries would suffer tremendously, but elsewhere in the US economy, we would be now importing bananas at much lower prices.

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Now, in order to pay for these bananas, people would move out of those industries that were shrinking into industries that were much more value-productive, so real wages for all but the, all laborers in New Jersey, except those who were skilled in banana raising, in hot house banana raising, okay, they would fall, okay, unless they could learn another skill of equal value, okay, so there would be a few industries in which people maybe incurred permanent reductions in their real wages, but overall, because now

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Now, New Jersey is becoming integrated into the rest of the U.S. division of labor.

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Real wages would rise tremendously.

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And then I go on and say, thus, in the late 19th century, the enormous flow of capital from Great Britain and Germany to the industrializing U.S.

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made products more abundant and real wages higher for British and German workers, as well as for American workers.

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Because now American workers working with additional German and British capital were much more productive.

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So they had more real goods to bid for the products, the export products, of Germany and Great Britain.

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Now, there was a shift in labor towards those export industries. Some people did incur short-term losses and wages and so on.

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But for the most part integrating the U.S. into the division of labor and having capital flow from these countries to the U.S.

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making the labor more productive did benefit the entire world, including German and British workers.

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The same result occurred when capital and jobs flowed from the East Coast to the West Coast of the U.S. in the late 19th century and the first half of the 20th century.

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Somehow, Roberts misses this point. Three other empirical points that tell against Roberts' argument.

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First, since the mid-1980s, the U.S. has been a net importer, not exporter of capital, which is the mirror image of our huge current account deficits.

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So this argument is empirically inapplicable in any case. We're not exporting capital. We're importing tremendous amounts.

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We're a net importer of capital, which increases the amount of capital per worker in the U.S.

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Now a lot of this capital is eaten up by the huge deficits in the last year or two.

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But that's a separate problem. That's a problem of the second deficit, the federal budget deficit. That's the problem.

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Not our current account deficit. In other words, if people are investing in the US, they have to send real goods and services here, which means that we're going to have a current account deficit.

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We're going to purchase more from the rest of the world than we sell to the rest of the world. That is simply the mirror image of the fact that many people want to invest in the US.

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That's exactly what happened in late 19th, early 20th century when tremendous amounts of German and British capital flowed into the US.

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We grew tremendously due to these huge balance of payments deficits, because the only way we can import capital, the only way foreigners could get the dollars to invest in the US economy was to sell us more than we were selling to them.

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So there was a balance of dollars that they held that they could invest. And that's our situation today. Roberts is wrong to say that outsourcing somehow reflects an outflow of capital.

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It's a gross outflow of capital, but net, more capital is flowing in overall than is flowing out.

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Two is my second point. It appears that Roberts focuses on the loss of jobs in one manufacturing sector,

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in one sector, which is the manufacturing sector here in the U.S., and ignores the addition of jobs in U.S. export industries,

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such as aerospace equipment, agricultural products, and so on.

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But this redistribution of jobs is precisely what is to be expected from a worldwide intensification of the division of labor.

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Thirdly, it is the change in a nation's real wages and not the number of jobs gained or lost in selected industries that indicates the economic optimality of any change in the economy.

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It is curious that Roberts, a pretty good economist in other respects, does not address these obvious points in his articles.

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Since this goes back to Ludwig von Mises, more than 50 years ago, Ludwig von Mises recognized and carefully spelled out the limited applicability of Robert's law of comparative advantage or cost.

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In those conditions of free international movement of capital and labor in which the law does not apply, which is in the later 19th century when capital was flowing to and fro,

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to and fro, and when we did have immigration, so the law of comparative advantage, as Mises points out, did not apply under those conditions, at least not to nations, it still always and will always apply to individuals and to families.

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So, for example, in the U.S. in the early 19th century, the law of comparative advantage did not apply to the states.

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It did not apply to New Jersey and so on. Why? Because capital and labor was flowing in and out.

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However, the law of comparative advantage, now operating through value and prices and profits,

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did direct individuals into their most value-productive employments and their resources, their capital resources, into their most value-productive employments.

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That's how the U.S. grew. Now Mises calls that the law of association. This is what brings society together.

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This is what brings people into communication with one another. There's free trade and or there's trade and then people recognize the benefits of trade

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And as trade expands, they also recognize that they can increase their incomes by specializing and producing fewer and fewer things for themselves and more things for the market that's expanding.

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So in those conditions of free international movement of capital and labor in which the law does not apply, Mises reached precisely the opposite conclusion of Paul Craig Roberts.

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Mises believed that monetary calculation, in the form of differing rates of return on investment, would direct capital to its most value-productive uses, extending and intensifying the global division of labor and raising living standards for all participating nations, just as the unhampered movement of capital within the US had enormously increased the living standards over the past two centuries for the citizens residing in all the states of the US. And then there's a long quote, and you might want to look at this, I won't read it here, from Mises,

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from Human Action, it's on pages 161 to 163, in which he carefully spells out under what conditions the law of comparative advantage applies, Ricardo's law of comparative advantage applies in the modern world.

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And basically what he says is that only in those situations in which there's rigid barriers to the movement or mobility of factors of production does it apply.

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Now Roberts comes to that conclusion also, but Mises went further and says it always still does apply to the individuals and families and so on.

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It applies on an individual level. That is, everyone is directed into the comparatively most advantageous employments and so on.

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and so on. And for the reasons I specified before also, when it does not apply to nations, it doesn't mean somehow that capital flowing out hurts anyone, in a long run sense.

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Capital falling out of a nation to other areas where it's more productive, to the third world countries, enormously develops the productivity of labor in China and India,

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and increases the market for our goods and raises wages and prices and profits in the export industries.

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It looks like Mark is ready to speak.

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Mark Thornton.

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Yeah, I apologize for not being here just a little bit earlier.

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I was out looking for our speaker, Mr. Roberts.

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and we're still hopeful that he'll be here but and he apologizes but when he

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heard that Guido was speaking he got upset that his lecture was being

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outsourced to cheap foreign labor thank you Richard appreciate it until very

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Very recently, I have been disengaged, not really engaged in this debate at all.

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International trade really isn't my forte.

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Last week, however, I stepped in it.

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Some of you may have seen my article on lewrockwell.com.

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It was where I took a look at the unemployment rate in the United States.

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It's kind of puzzling.

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Why is there so much complaints?

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Why is there so much uneasiness? Why is there so much concern in our economy if we're out

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of a recession and our unemployment rate is 5.6 percent, which is pretty normal in the

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ballpark of neither an expansion nor a contraction. So why is there all the concern? Well, I went

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back and took a look at it and found out that if you considered all of the recently unemployed

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Unemployed, but not calculated unemployed, that the unemployment rate actually would

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go up from 5.6 to 7 percent, and at 7 percent basically you are in a recessionary scenario.

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Every time we've been at 7 percent unemployment in the United States in the last 50 years

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or 55 years, we've also been in a recession or a depression, and that's fine.

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Unfortunately, the article was titled, Is Lew Dobbs a Communist?

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Lew Dobbs is the host of the CNN Money Show, 6 o'clock, and he's been talking about broken

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borders and outsourcing and all that business quite extensively.

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So rather than people not reading an article about the unemployment rate, apparently many

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people did.

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I got a lot of positive responses, but I did get a large number of negative responses and even some things that would be considered hate mail.

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A couple people called me a communist, while several others called me a shill of the giant corporations.

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I thought that was kind of a good mix.

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Several several readers said that I was insensitive and a couple of others

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thought I was too thinned skinned. Several readers told me that my work as an

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economist was unproductive and useless while several others thought it was

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important enough to suggest that I should be outsourced or replaced by cheap

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And of course I was reminded several times that if economists know so much about money and the economy, how come they're not all millionaires?

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So I knew I had stepped into it and so I'm working on my response in terms of addressing the reader's concerns as well as some of those of Mr. Dobbs on CNN.

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I would like to point out, however, that I didn't call him a communist. I just associated him complaining about labor markets and labor conditions and the plight of the working poor with what we traditionally hear out of socialist, communist, democrats, liberals, whatever.

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And actually Mr. Dobbs comes off a little bit better than that group.

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Now, I do want to try to address the issues here. One is that, is there a problem with free trade? Or the other side of that coin is, what is the problem in labor markets? Some of which has been touched on here today.

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Now, one of my biggest concerns with Lew Dobbs, Paul Craig Roberts and a lot of the other people concerned about outsourcing of jobs, broken borders and that sort of thing, is that there really haven't been any major developments in terms of free trade.

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We haven't seen any major policy shifts where the United States and other foreign countries have, where there's been a sort of a paradigm shift where we've gone from high protectionism to free trade.

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That really hasn't happened to any significant extent in recent years.

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We have seen a general lowering of transactions cost between countries with better transportation systems, the internet, lower telephone rates and so on.

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But no major shift.

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So my first inclination is that whatever is going on here isn't related to free trade.

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It's related to something else that's going on in the economy.

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in the Economy. But before I get to that, those other things, well what is, what would be the impact of free trade in the sense of going from protectionism to free trade?

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Okay, well you basically have to start reallocating resources. Capital does have to be reallocated. Labor does have to be reallocated. We know that all too well right here.

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I'm from Auburn, I've worked in this area, Montgomery, Columbus, Auburn, and so on.

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And we know the impact of this kind of dramatic policy shift, probably as well as any place in the country.

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With the NAFTA, North American Free Trade Organization, one of the biggest impacts that that had on was the American textile industry.

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And ladies and gentlemen, whether you know it or not, you are in what used to be the region of the American textile industry.

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And since NAFTA, basically one plant after another has been closing.

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Okay, so we've seen the types of resource reallocation going on in this very area for the last 10 years.

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in the last ten years. And we've seen plant closings, we've seen layoffs, we've seen companies moving overseas. It's one of those dramatic policy shifts that makes the results of free trade so readily apparent.

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So what happened? Well there was a lot of complaining, a lot of bitching, a lot of moaning, and a lot of pain involved in all that as we eliminated the protectionism and got into free trade.

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The city of Columbus, Georgia, which is about 35 miles to the east of here, is a very good example of that.

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Columbus, Georgia is an old mill town where they produced a lot of fabrics, a lot of textiles, they also had iron foundries, and they have a military base.

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Prior to NAFTA, Columbus, Georgia was one very sorry looking town.

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Low wage jobs, a very old capital base in terms of the housing, building structures.

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Everything was basically old. Capital was worn out. Housing is old. The workforce was low-paid and not uneducated but low levels of education.

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That's what Columbus, Georgia was with protectionism. With free trade, most of those textile factories closed.

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is a much better city today than it was ten years ago.

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Instead of textile mills and iron foundries,

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Columbus, Georgia now is characterized by a little bit of high-tech industry

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and financial services industries.

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They have two of the top 100 corporations in America,

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Aflac, the duck, and Total Systems,

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which is a credit card information processing company as well as banks, financials, all

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the rest tied up into that company and basically they've been expanding output, increasing

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the number of jobs and the types of jobs which are for high skilled, high paying jobs.

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The city has revitalized itself, a lot of things have been renovated.

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It's educational basis or institutions have improved a great deal and it's a much improved

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city just visually, you can tell, a great deal of improvement over a relatively short

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period of time.

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So that type of paradigm shift when you see the results of going from a protectionist

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scenario into a free trade scenario, once you get through the process of reorientation,

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the results are, from what we've seen in a lot of places around this area, have been

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very favorable.

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All warmed up.

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And now it's my great pleasure to introduce Paul Craig Roberts.

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Probably most people know him as one of the most prominent and influential proponents of

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supply-side economics.

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He also has done some work that has some affinity with the Austrian School.

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I think probably outside of this room, the Austrian School would probably be best known

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for its critics of socialism and central planning, especially back in the days when the standard

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thinking in mainstream economics was that central planning was really a better way to

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to Allocate Resources and Markets, and we can think of the arguments of Mises and Rothbard

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and Hayek along those lines, but Paul Craig Roberts also falls in that group. He wrote

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a couple of books in the early 1970s, Alienation and the Soviet Economy, which was published

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in 1971, Marx's Theory of Exchange, Alienation and Crisis, which was published in 1973. So

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So along with Mises and Hayek and Rothbard was arguing against that conventional wisdom

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of the efficiency of central planning.

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His resume, his academic resume would be the envy of most academic economists.

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In addition to those two books, he's also written at least a half dozen other books.

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He's had his academic articles appear in the Journal of Political Economy, the Journal

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Journal of Law and Economics, Public Choice, The Independent Review, and many more.

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He's also written quite a bit for the popular press.

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His work has appeared in the New York Times, the Washington Post, the Los Angeles Times,

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the London Times, the Wall Street Journal, where he was an editor, and Business Week,

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among other publications.

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Dr. Roberts received his Ph.D. from the University of Virginia.

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He was a distinguished fellow of the Cato Institute from 1993 to 1996.

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He held the William E. Simon Chair in Political Economy at the Center for Strategic and International

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Studies from 1982 to 1993.

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He was Assistant Secretary of Treasury for Economic Policy in 1981 and 1982, and he played

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made a major role in designing the Economic Recovery Act of 1981.

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Before that he was on the congressional staff and drafted the Kemp-Roth bill.

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Currently he is a senior fellow at the Hoover Institution, John M. Olin fellow at the Institute

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for Political Economy and a research fellow at the Independent Institute.

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So it gives me great pleasure to introduce to you Paul Craig Roberts.

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Well thank you very much for that introduction and for reminding them that I'm a friend.

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They may feel differently in a few minutes.

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When Lew gave me the opportunity to speak to this conference, of course there are other

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topics I could speak about that I would be much more comfortable speaking about and which

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would bind us emotionally and we would all be on the same wavelength.

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But I think Lew kind of wanted me to stir you up and get your blood running hot so it

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puts the conference off to a good start on the first day.

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And I continue to hope that I can help you get your mind around this problem so that

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you can participate in the policy that will be forthcoming.

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If people with the biggest commitment to freedom don't participate in shaping public policy,

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then you end up with a lot less freedom instead of just a little less freedom and it's always

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is better to have a little less than a lot less.

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So keep in mind that I'm just a messenger,

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and I haven't any agenda other than to put something before you

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that I think you need to be aware of.

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You need to get your mind around.

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And I haven't any solution, assuming I can convince you

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that it's a problem.

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What I want to do is to go through with you what the classic case for free trade is and

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explain to you why the conditions on which that rests have been vitiated by new developments.

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And then I want to try to take you through the latest work in trade theory which impugns

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And that was even the original classic case for free trade that I would have defended at

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least prior to being confronted with that work.

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So to begin, you know, Ricardo, David Ricardo addressed the question, how can a country

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that is a low-cost producer in all goods trade with a country that's a high-cost producer

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in all goods?

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And the other side of that is on what basis could a high-cost producer of all goods trade

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with a low-cost producer?

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And this was not obvious to economists at the time.

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And Ricardo came up with this principle of comparative advantage.

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Now, for comparative advantage to operate, two conditions are necessary.

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One is that factors of production have to be domestically mobile so that they can flow

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to where they have comparative advantage.

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And the other is that they must not be internationally mobile or not very mobile internationally

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Because if they are, then they will be able to flow away from comparative advantage at home

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to where absolute advantage is greatest abroad or to where their productivity is highest

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and maximize profits by avoiding comparative advantage at home.

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So, the second condition is that countries have different opportunity costs of producing different goods.

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So, in other words, the internal cost ratios of producing one good in terms of another good must vary among countries.

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If that's the case, then both low-cost producers and high-cost producers can benefit from trade, because even if you are the low-cost producer, your opportunity cost of producing one good in terms of another may be worse than the opportunity cost of a high-cost producer, and these are the four magic numbers, as Samuelson called them, and comparative advantage became Samuelson's answer

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to the distinguished mathematician who was pressing him for just one economic theorem

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that wasn't trivial and what he could come up with was comparative advantage.

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Now these conditions, varying relative costs, internal cost ratios differing and immobility,

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International Immobility of Factors. These conditions are one of them held until recently.

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Factor immobility has been vitiated in recent years by the collapse of world socialism and

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by the rise of the high speed internet. These two developments have made factors of production

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As for the relative cost differences that are the second key to the workings of comparative

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advantage, they've given way to modern production functions which are based on acquired knowledge

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in place of the inherent differences that were based in climate aptitudes, resource endowments.

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Modern production functions operate the same everywhere.

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So there's no longer any necessary relative cost differences, only absolute cost differences.

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So these two developments bring it in to the conditions on which the case for free trade

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rests in the literature.

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Now true, there are still bits and pieces of the principle left in climate-based crops,

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in natural resources, and in historically gained advantages that countries have been

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I'm able to retain, but there are no longer necessary reasons for these relative cost

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differences in producing modern outputs.

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Now there's no real point in telling me that free trade is not based on comparative advantage

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or the comparative advantage doesn't depend on international factor immobility.

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This is Kindleberger's text from which everyone in my generation and the generation after

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learned about international trade and Kindleberger, if I can find it, I meant to get here earlier,

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this didn't work out.

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Kindleberger says, quote, the basis for trade is found in differences in comparative cost.

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Here I have a recent peer-reviewed article, The History of Political Economy, by trade

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theorist Roy Ruffin, who is also an expert on Ricardo, and he's addressing himself to

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To a controversy, who actually deserves credit for comparative advantage?

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There is some controversy.

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Now, many of you may know Alchin and Allen in their famous textbook.

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They give credit to Robert Torrance.

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You may know that the historian of thought, Blaug, Mark Blaug, gives credit to the Mills.

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And, Ruffin is now, this is a recent article, 2002, David Ricardo's discovery of comparative advantage and he says that the hard part of the discovery was coming up with the key assumption of factor immobility.

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When he contrasts torrents with Ricardo, here's what he has to say, that the key assumption of trade theory,

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the inability of factors to move from a country where productivity is low to another where productivity is higher.

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He takes the credit away from Torrens on the ground.

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Torrens did not mention this requirement at all.

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This observation was Ricardo's home run.

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That Ricardo had emphasized the four magic numbers, to use Samuelson's later words,

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And went on to state that in his example, you know, Portugal has the absolute advantage

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in production of cloth and wine, and in this case, Ricardo states, it would undoubtedly

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be advantageous to the capitalists of England and to the consumers of both countries that

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under such circumstances, the wine and cloth should both be made in Portugal and therefore

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Both the capital and labor of England employed in making cloth should be removed to Portugal for that purpose.

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Accordingly, Ricardo realized it was necessary to dispose fact of immobility between countries.

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So that is the case for free trade as we know it.

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is Comparative Advantage and those are the conditions for Comparative Advantage.

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And there's not much point either in arguing that the case for free trade is merely the willingness of people to make deals.

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Because this is not the case. The case for free trade has always been that it brings advantages to the countries as a whole.

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And that is the result of the workings of comparative advantage because countries get more output for less input.

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And it's very interesting that both Ricardo and Adam Smith explain fact immobility in terms of national interests.

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Experience, however, shows that the fancied or real insecurity of capital were not under

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the immediate control of its owner, together with the natural disinclination which every

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Every man has to quit his country of his birth and connections and entrust himself with all

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his habits fixed to a strain to government new laws.

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Check the immigration of capital.

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These feelings, which I should be sorry to see weakened, induce most men of property

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to be satisfied with a low rate of profits in their own country rather than seek a more

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advantageous employment for their wealth and foreign nations.

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Now you all know Adam Smith in Invisible Hand. I want to give you the context of the Invisible Hand passage. This is Smith.

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By preferring the support of domestic to that of foreign industry, he intends only his own security, and by directing that industry in such a manner

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Industry, and such a matter, as its produce, may be of the greatest value he intends merely

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his own gain.

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And he is in this, as in many other cases, led by an invisible hand to promote an end,

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which was no part of his intentions.

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So for Smith it's very clear that the capitalist is first and foremost a member of the national

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community, and in fact the capitalist in Adam Smith is so thoroughly British that his identity

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is completely defined by the internal relations of community with, quote,

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the country of his birth and connections.

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Now, having got through that reasonably quick,

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I haven't tried to draw diagrams in so long.

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So long, I hope I can still do it.

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This is the latest work in trade theory.

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Global trade and conflicting national interests.

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Notice that conflicting.

374
00:51:45.640 --> 00:51:50.760
It's a very great challenge to the economics profession.

375
00:51:50.760 --> 00:51:54.360
It comes from two of the most distinguished members.

376
00:51:54.360 --> 00:52:04.360
It was a Lionel Robbins Lectures and it's published by MIT Press.

377
00:52:04.360 --> 00:52:12.360
Now, in the classic case that I ran through briefly, there is a case for free trade always,

378
00:52:12.360 --> 00:52:20.360
if there is sufficient fact immobility and different relative costs, different opportunity costs within a country.

379
00:52:20.360 --> 00:52:37.360
and this latest work, there may be no case for free trade at all and all I can hope to do is to give you a general outline, a basic concept and if you want to really engage your work, you'll have to turn to the book itself.

380
00:52:37.360 --> 00:52:56.360
Now, as I understand it, the Garmery and Bellman book differs from the classical world. Production functions are based on acquired knowledge, not on inherent attributes.

381
00:52:56.360 --> 00:53:13.360
In their simplest case, there are two countries and ten products and the result is 1,022 equilibria in which one country is a sole producer in a particular industry.

382
00:53:13.360 --> 00:53:20.360
So each one of those equilibria has one country as a sole producer.

383
00:53:20.360 --> 00:53:26.360
Now, I want to try to grab this thing, if I can.

384
00:53:37.360 --> 00:53:38.360
Oh, I see.

385
00:53:50.360 --> 00:54:15.360
." Can you see that? Yeah, if only. I understand that.

386
00:54:15.360 --> 00:54:43.360
Okay, here, they're measuring world income, and here, they're measuring the share of

387
00:54:43.360 --> 00:55:04.360
We've got two countries. We've got France and we've got the U.K. So this is, if we measure the U.K. share or the percent.

388
00:55:04.360 --> 00:55:26.360
So, if you're measuring the U.K. share this way, you're going from near zero to 100, then you're measuring France's share this way, so whatever the U.K. doesn't get, France is.

389
00:55:26.360 --> 00:55:33.760
So, if the UK has 80 percent, then France has got 20.

390
00:55:33.760 --> 00:55:49.760
And let's see, I think I need to tell you the reason for this distribution of these 1,022 points.

391
00:55:49.760 --> 00:56:08.760
Okay, trouble is, I don't have enough hands, wrong list.

392
00:56:08.760 --> 00:56:33.760
All right, the reason for that dome shape is basically if England tries to produce everything itself it fragments its workforce,

393
00:56:33.760 --> 00:56:39.760
Of course, this productive capacity cannot take advantage of increasing returns to scale.

394
00:56:39.760 --> 00:56:49.760
And the authors are insistent that the most important modern production functions for high-tech manufacturing

395
00:56:49.760 --> 00:56:58.760
are increasing returns to scale, not the constant returns or linear production of a classical model.

396
00:56:58.760 --> 00:57:07.600
So, that then gives you the reason for the dome shape.

397
00:57:07.600 --> 00:57:11.640
It's basically, if you try to produce everything,

398
00:57:11.640 --> 00:57:14.520
you lose the, you become fragmented

399
00:57:14.520 --> 00:57:16.000
and you lose the productive capability.

400
00:57:16.000 --> 00:57:19.640
Now what is, this is an upper boundary

401
00:57:19.640 --> 00:57:21.040
and this is a lower boundary.

402
00:57:22.800 --> 00:57:26.920
And obviously, this swirling comes crazed here.

403
00:57:26.920 --> 00:57:32.920
And what's the difference between these points, assuming that's the high point, I haven't got it drawn right.

404
00:57:32.920 --> 00:57:45.920
The movement from here to here, assuming you were here, so you can be anywhere, you can be anywhere in this, anywhere, anywhere.

405
00:57:45.920 --> 00:57:47.920
Any of these are stable equilibria.

406
00:57:47.920 --> 00:58:00.920
There's nothing that produces the maximum best outcome by virtue of the model like in the classical world. Any of these are stable.

407
00:58:00.920 --> 00:58:25.920
Now, this movement up here, or the movement anywhere from bottom to top, this is achieved by countries achieving the best combination of industries, given their strong points, so you get a bit of the comparative advantage left in some sense.

408
00:58:25.920 --> 00:58:32.240
Inventors, though basically they're talking about supply chains, synergies, there's some

409
00:58:32.240 --> 00:58:38.040
things you can't produce without other things or you can't do it very well, and of course

410
00:58:38.040 --> 00:58:42.240
any remaining natural advantages.

411
00:58:42.240 --> 00:58:51.260
Now this is the simplest case, which is about all I can handle.

412
00:58:51.260 --> 00:59:10.140
What they then do is they derive the individual country curves from this curve.

413
00:59:10.140 --> 00:59:34.600
So this will become UK, UK national income and this is still the UK share of world income.

414
00:59:34.600 --> 00:59:39.780
Now this curve looks a little bit different, it's not dome shaped, it's kind of like a

415
00:59:39.780 --> 01:00:02.780
A Hill shape. Blackboards used to be higher. I didn't quite get it right, but...

416
01:00:09.780 --> 01:00:32.780
Now, why does it look like that? That graph is taken from the other one, but what you do is you multiply the world income in the first graph by the UK share at each point, see, and so that gives you this shape.

417
01:00:32.780 --> 01:00:37.780
Now why is it sort of a hill shape skewed to the right rather than the dome shape?

418
01:00:37.780 --> 01:00:43.780
Well, the initial rise is due to the fact that both world income and the UK share are rising.

419
01:00:43.780 --> 01:00:51.780
See, both here, world income and UK share are rising. I carried on a little bit too far.

420
01:00:51.780 --> 01:00:59.780
Then, what happens? World income starts turning down, but UK share keeps rising.

421
01:00:59.780 --> 01:01:18.780
So, the slope changes. You can see that the slope of the rise changes. It was steeper, and then when you get over here, the decline in world income more than all sets the rise in the UK share, and so there it goes.

422
01:01:18.780 --> 01:01:29.740
Now, if we do this for France, we get the mirror image, we would get the mirror image

423
01:01:29.740 --> 01:01:34.740
of this thing, assuming I could, I should have found a black boy and practiced drawing

424
01:01:34.740 --> 01:01:54.420
Well, I could have done better.

425
01:01:54.420 --> 01:02:05.740
What do we get now?

426
01:02:05.740 --> 01:02:30.740
Well, we get three zones. We get two zones of mutual gain and one zone of conflict.

427
01:02:35.740 --> 01:02:45.740
First of all, this is the U.K.'s optimal point, and if I had this right, this is France's.

428
01:02:45.740 --> 01:03:12.980
So, if England's got too much of world production and France doesn't have enough, they can

429
01:03:12.980 --> 01:03:22.580
And gain by movement in this direction.

430
01:03:22.580 --> 01:03:26.900
Over here, France has got too much and England doesn't have enough.

431
01:03:26.900 --> 01:03:30.900
Their gains from trade, they can move in this direction.

432
01:03:30.900 --> 01:03:38.100
But notice, this isn't supposed to be this wide, I've got the best thing drawn.

433
01:03:38.100 --> 01:03:52.420
Once you get here, there's only conflict because for the English to get better from trade,

434
01:03:52.420 --> 01:04:04.420
France is going down, or if they're here, for the French to increase, the Brits are

435
01:04:04.420 --> 01:04:26.900
There's a couple other things to note.

436
01:04:26.900 --> 01:04:34.340
If the UK has got 100% and that's like having no trading partner at all, that's autarky.

437
01:04:34.340 --> 01:04:46.140
and so if they had a hundred percent and you had this and it's over here this

438
01:04:46.140 --> 01:04:57.100
entire range is worse than free trade is worse for Britain than no trade. Same for France.

439
01:04:57.100 --> 01:05:18.940
This seems to be partly a feature of increasing returns, because if you have increasing returns,

440
01:05:18.940 --> 01:05:29.980
Companies who get a jump or a start can keep out the others.

441
01:05:29.980 --> 01:05:35.420
Entry cost, you know, in the classic model there's really no entry cost, it's linear

442
01:05:35.420 --> 01:05:37.860
production.

443
01:05:37.860 --> 01:05:47.580
But if there are increasing returns, whoever gets there is hard to dislodge.

444
01:05:47.580 --> 01:06:02.580
Since production is based on acquired knowledge and not inherent attributes, you get these results.

445
01:06:02.580 --> 01:06:09.580
And what can you make of them all? Well, you know, you could say, oh, I don't really know what they make of them all.

446
01:06:09.580 --> 01:06:34.580
But some things are obvious. One, you've got an explanation of Japanese industrial policy, you've got a more thoroughgoing statement of the infant industry argument.

447
01:06:39.580 --> 01:06:48.580
But if you think about this and you start contrasting it with classical model, you can see why these properties are there.

448
01:06:48.580 --> 01:06:56.580
Increasing returns, not constant or even decreasing as in agriculture.

449
01:06:56.580 --> 01:07:06.580
and a situation where it doesn't, you know, location no longer has any impact on, an industry can be located anywhere.

450
01:07:13.580 --> 01:07:24.580
So what, you know, I don't know what to say to this, but I thought that you should see briefly the nature of this development.

451
01:07:26.580 --> 01:07:41.580
Now, since we've run out of time, let me turn to the third.

452
01:07:41.580 --> 01:07:50.580
I've watched through the argument for free trade, the classical argument, and I've shown what's happened to the two conditions in which it rests.

453
01:07:50.580 --> 01:07:55.580
is simply not there, or they're not there in force, like they used to be.

454
01:07:59.580 --> 01:08:06.580
I've given you a brief sense or notion of this approach by Gomry and Baumer.

455
01:08:08.580 --> 01:08:16.580
And now let's ask the question, is outsourcing, is offshore production trade?

456
01:08:20.580 --> 01:08:28.580
Or is it labor arbitrage?

457
01:08:28.580 --> 01:08:34.340
What is being traded?

458
01:08:34.340 --> 01:08:45.500
Trade always meant that England was producing something, France was producing something,

459
01:08:45.500 --> 01:08:48.340
they were engaging in trade.

460
01:08:48.340 --> 01:08:55.260
If one had the advantage over the other and they would win and the loser then would reallocate

461
01:08:55.260 --> 01:09:03.380
to some other domestic function, the capital had to be mobile internally to move, labor

462
01:09:03.380 --> 01:09:10.540
would be re-employed in a new venture, and this would continue to work and continue to

463
01:09:10.540 --> 01:09:22.660
to produce good results, but when a firm moves a plant offshore, what is it trading?

464
01:09:22.660 --> 01:09:30.760
We often speak as if the loss of jobs is due to trade competition, but in these types of

465
01:09:30.760 --> 01:09:38.760
In these cases, no one is losing to a foreign firm. They're just moving offshore.

466
01:09:44.760 --> 01:09:47.760
So I think it would be better to call it labor arbitrage.

467
01:09:48.760 --> 01:09:59.760
You simply move to where the cost of labor is cheaper because the capital and technology work the same anywhere.

468
01:10:00.760 --> 01:10:04.760
So if it's labor arbitrage, isn't trade to start with?

469
01:10:04.760 --> 01:10:12.760
So the fact that the free trade model is running into trouble on the terms that I offer you,

470
01:10:12.760 --> 01:10:22.760
on the terms that Montgomery and Baum will offer you, may be beside the point if it's not trade.

471
01:10:22.760 --> 01:10:45.760
Now, you have to keep in mind, too, that when plants move offshore, it's not just domestic jobs, but the capital technology goes, too.

472
01:10:45.760 --> 01:10:54.760
So if the capital technology goes, it's not here domestically to look for comparative advantage and re-employ the labor.

473
01:10:54.760 --> 01:11:00.760
It's not like it lost a competitive game in a product.

474
01:11:00.760 --> 01:11:06.760
And so what happens if you lose capital and technology? And that's the opposite of economic development.

475
01:11:06.760 --> 01:11:12.760
You know, when economic development teaches you the way you develop fitness, you gain capital and technology.

476
01:11:12.760 --> 01:11:22.760
So it's very hard to say you benefit from the loss of capital and technology, and jobs,

477
01:11:22.760 --> 01:11:28.760
because then you have to square that with the theory of economic development.

478
01:11:28.760 --> 01:11:35.760
If offshoring is good for the country, then it's good to lose capital and technology?

479
01:11:35.760 --> 01:11:41.760
Well, what does that do to development theory?

480
01:11:41.760 --> 01:11:46.760
How does economic theory deal with the loss of capital?

481
01:11:46.760 --> 01:12:05.760
Well, it depends. It either means unemployment or it means the remaining capital is spread less thinly over the existing workforce, so productivity goes down, wages go down.

482
01:12:05.760 --> 01:12:12.160
Either way, you've got something to contend with.

483
01:12:12.160 --> 01:12:19.360
You've either got unemployment or you've got a decline in productivity in nearby wages.

484
01:12:19.360 --> 01:12:24.800
Now we can say, oh well, factor price equalization will fix it all.

485
01:12:24.800 --> 01:12:34.220
But it depends on your definition of time periods because, you know, what is the compelling

486
01:12:34.220 --> 01:12:47.220
Feature about Asian labor, about Chinese and Indian labor, they are present in massive excess supplies.

487
01:12:47.220 --> 01:12:54.220
Massive excess supplies. They overhang on Chinese labor markets larger than the American population.

488
01:12:54.220 --> 01:13:03.220
So, factor price equalization will be a long time in coming.

489
01:13:03.220 --> 01:13:16.220
and First World Wages will fall a lot further than agent wages will rise because there are massive excess supplies of labor.

490
01:13:16.220 --> 01:13:23.220
This is also a factor.

491
01:13:23.220 --> 01:13:27.220
It's very hard to get rid of all of these things.

492
01:13:27.220 --> 01:13:43.220
You know, even when you sit down with the, with the theorists that just like the theory and you theorize and you say come on give me some more assumptions, give me another, give me an assumption to fix this, give me one to fix that.

493
01:13:43.220 --> 01:13:50.220
It's hard. And then when you look at the result and you say what's this got to do with the world?

494
01:13:50.220 --> 01:14:16.220
See, I can remember, one of my professors was Ronald Coase, and he used to tell us from time to time that economists should look out the window and see what's going on, because he meant that we tended to get lost in our theory and get disconnected from what's going on, and so that was one of his favorite things.

495
01:14:16.220 --> 01:14:20.220
Time to time, people look out the window.

496
01:14:20.220 --> 01:14:27.220
Now, let's see.

497
01:14:27.220 --> 01:14:34.220
Just two more points.

498
01:14:34.220 --> 01:14:37.220
Something is going on.

499
01:14:37.220 --> 01:14:40.220
If we think, you know, how we assume there's knowledge in markets

500
01:14:40.220 --> 01:15:03.660
in the United States is a move in university enrollments away from outsourcible professions.

501
01:15:03.660 --> 01:15:08.100
So the young know something.

502
01:15:08.100 --> 01:15:14.420
The situation seems to be most severe in computer engineering.

503
01:15:14.420 --> 01:15:20.300
In the last year, there's been a 23% drop in enrollments in computer engineering.

504
01:15:20.300 --> 01:15:27.980
MIT has experienced a 33% drop in enrollments in electrical engineering and computer science

505
01:15:27.980 --> 01:15:32.020
in the last two years.

506
01:15:32.020 --> 01:15:37.260
It also turns out, if news reports correct, that their best engineering graduates are

507
01:15:37.260 --> 01:15:45.100
going into investment banking.

508
01:15:45.100 --> 01:15:55.020
If you look at the BLS monthly job numbers, you'll see it's been three years before there

509
01:15:55.020 --> 01:16:01.740
have been any, it's been at least three years, there have been no net jobs created in what

510
01:16:01.740 --> 01:16:19.400
What are called, you know, knowledge skills, the knowledge skills that were supposed to take over from the lost industrial economy. None.

511
01:16:19.400 --> 01:16:28.300
The economy has lost about three million jobs in the last three years and almost a million of those during two years and a quarter of economic recovery.

512
01:16:28.300 --> 01:16:41.300
The only place jobs are being created or they're gross are in low-paid, menial, non-tradable services.

513
01:16:41.300 --> 01:16:49.300
If you look at the BLS job projections for the next 10 years in the United States,

514
01:16:49.300 --> 01:17:01.820
For the next 10 years, they say job growth in the United States is heavily concentrated

515
01:17:01.820 --> 01:17:10.820
in menial non-tradable services, hospital orderlies, waitresses, retail sales clerks,

516
01:17:10.820 --> 01:17:11.820
this type of thing.

517
01:17:11.820 --> 01:17:15.740
I've got the list here somewhere you can find it if you want me to read it.

518
01:17:15.740 --> 01:17:24.980
Only three, and so we hear education is the answer, but the BLS points out that of the

519
01:17:24.980 --> 01:17:31.340
ten areas where they expect the most job growth, only three of them require any kind of university

520
01:17:31.340 --> 01:17:41.660
training, rates to nurses require an associate's degree, managers of various things, a bachelor's

521
01:17:41.660 --> 01:17:51.460
Post-Degree and Post-Secondary Education, some form of graduate degree.

522
01:17:51.460 --> 01:18:03.660
So none of the ten projected areas of maximum job growth are in tradeable goods and services.

523
01:18:03.660 --> 01:18:07.340
Now they may be wrong.

524
01:18:07.340 --> 01:18:08.340
Everybody may be wrong.

525
01:18:08.340 --> 01:18:35.340
Well, if this is the case, and we can't grow, at least employment-wise, the areas of tradeable goods and services, how do we balance trade deficits?

526
01:18:35.340 --> 01:18:47.340
The way we're handling it now is we are simply handing over the ownership of our assets and the future income stream that the assets produce.

527
01:18:47.340 --> 01:19:03.340
That's how we're handling it. We're just shoveling out the change in ownership of the assets from our hands to foreign hands.

528
01:19:03.340 --> 01:19:05.940
Is there a limit to that?

529
01:19:05.940 --> 01:19:11.060
Well, obviously, when they get them all.

530
01:19:11.060 --> 01:19:13.900
But before that, it's probably a limit.

531
01:19:13.900 --> 01:19:18.100
See, right now, it's a, you know, I don't know if you're aware of this or not, but my

532
01:19:18.100 --> 01:19:27.260
understanding is the foreigners own 50% of U.S. government debt, trademarks, they own

533
01:19:27.260 --> 01:19:34.260
on a quarter of the corporate bonds and almost a quarter of equities.

534
01:19:34.260 --> 01:19:39.260
I don't know the percentage of real estate, but it's significant.

535
01:19:39.260 --> 01:19:45.260
So at what point do they get over-invested in dollars?

536
01:19:45.260 --> 01:19:48.260
You know, this is an investment problem for anybody.

537
01:19:48.260 --> 01:19:52.260
You know, when you put all your eggs in one basket when you make investments, no you don't.

538
01:19:52.260 --> 01:19:55.260
At what point do they get over-invested?

539
01:19:55.260 --> 01:20:19.260
Now, how long can the Chinese keep the peg where they have it, on the dollar, until the currency markets decide that they can't?

540
01:20:19.260 --> 01:20:38.260
That could be any time. What happens to all those cheap Walmart goods that we're getting when the dollar tanks? So then, where are the gains?

541
01:20:38.260 --> 01:20:48.260
Real question, gains from trade.

542
01:20:48.260 --> 01:21:01.260
They're not there if the conditions on which they're based aren't there, which is my main message.

543
01:21:01.260 --> 01:21:14.980
What I very much reason that I've taken this up is, first of all, there are young people

544
01:21:14.980 --> 01:21:20.020
in my family and I'm interested in them.

545
01:21:20.020 --> 01:21:32.820
First of all, I'm a patriot since I like my country, if not the government.

546
01:21:32.820 --> 01:21:43.020
And third, from my experience in public affairs, I know they're going to do something that's

547
01:21:43.020 --> 01:21:45.700
even worse.

548
01:21:45.700 --> 01:21:50.700
And what I expect the government's solution is going to be if people don't get involved

549
01:21:50.700 --> 01:21:54.380
and find some way to deal with this, because they're going to deal with it, doesn't matter

550
01:21:54.380 --> 01:21:57.460
what you think.

551
01:21:57.460 --> 01:22:02.820
But if you don't get involved, get your mind around this and get out of denial and find

552
01:22:02.820 --> 01:22:08.040
some way to deal with this, my prediction is what they're going to do is just like these

553
01:22:08.040 --> 01:22:11.180
so-called free trade agreements, which as far as I can tell, they're not free trade

554
01:22:11.180 --> 01:22:16.140
Agreements, there's so special deals for the politically connected.

555
01:22:16.140 --> 01:22:20.380
And that's what they're going to do with this on the import side.

556
01:22:20.380 --> 01:22:24.580
People are going to get import licenses who are politically connected and that's going

557
01:22:24.580 --> 01:22:30.420
to be, for example, what we think of as our high tech firms which are basically assemblers

558
01:22:30.420 --> 01:22:33.580
of Japanese inputs.

559
01:22:33.580 --> 01:22:40.300
They're going to get licenses to import the inputs they need from Japan to make their

560
01:22:40.300 --> 01:22:47.300
Everybody who's managed to get offshore is going to get their licenses to bring back their production.

561
01:22:47.300 --> 01:22:53.300
But no real importer is going to be able to get it.

562
01:22:53.300 --> 01:22:59.300
An importer just wants to bring in a farmer who is going to be hard pressed to get a license.

563
01:22:59.300 --> 01:23:05.300
Because trade deficit is so big, so you're going to have special deals for the politically connected firms

564
01:23:05.300 --> 01:23:15.300
who's inputs are outsourced or whose production is offshored and you know people say this is free trade

565
01:23:17.300 --> 01:23:19.300
and that's the way it's headed

566
01:23:21.300 --> 01:23:29.300
because you know one of the things we've learned about the budget deficit is it seems to be fairly sustainable

567
01:23:29.300 --> 01:23:59.300
and we now have bigger deficits than ever and bigger projections of deficits than ever if you look at the projections I mean they're really extraordinary and the interest rates are pretty much zero so the old argument that they're gonna crowd out investment and drive up interest rates and kill the economy was no sign of that hasn't been for years and years so the budget deficit is probably it can turn along

568
01:23:59.300 --> 01:24:25.300
The trade deficit is different. If the dollar starts going in a big way, I mean it's gone in a big way, if you look at the change to the euro and the yen, but if it starts going in general, then there's a crisis, because how many people are going to continue to hold dollar assets while they're going like that?

569
01:24:25.300 --> 01:24:34.300
And so, if they start trying to unload those things, you can see the financial panic. I mean, it'd be horrendous.

570
01:24:34.300 --> 01:24:52.300
And they'd do something. Most likely, they'd try to jack up the interest rates real quick to pay a high interest rate to retain the foreign holdings of our assets.

571
01:24:52.300 --> 01:25:09.300
And then you have to ask yourself, well, if the economy doesn't create jobs with zero interest rates and a very stimulative fiscal policy, how have you measured by tax cuts or by deficits, you know, supply sideways, change in the way you want to measure.

572
01:25:09.300 --> 01:25:15.300
It's tremendous stimulation from any normal concept.

573
01:25:15.300 --> 01:25:27.300
An economy can't produce any jobs with two years and a quarter into recovery, and we lost another three-quarter to a million jobs.

574
01:25:27.300 --> 01:25:33.300
What happens to the industry?

575
01:25:33.300 --> 01:25:41.300
Now you can see the more, I mean you can see the possibility of all kinds of crises and problems,

576
01:25:41.300 --> 01:25:47.500
and when you have to and you know better than I do that the minute those happen that's bait

577
01:25:47.500 --> 01:25:48.500
for the government, right?

578
01:25:48.500 --> 01:25:50.180
I mean the government is going to move, right?

579
01:25:50.180 --> 01:25:57.820
There's going to be this control and that control and this policy.

580
01:25:57.820 --> 01:26:04.740
And I got into public policy a quarter of a century or more ago because of the worsening

581
01:26:04.740 --> 01:26:11.700
Worsening Phillips Curve trade-offs, stagflation, because it was apparent to me that they were

582
01:26:11.700 --> 01:26:17.300
going to use these Worsening Phillips Curve trade-offs, you know, more inflation, more

583
01:26:17.300 --> 01:26:26.460
unemployment, to slap on wage and price controls, because it was the only solution that they

584
01:26:26.460 --> 01:26:29.860
knew what they had.

585
01:26:29.860 --> 01:26:36.540
And that's why I got into public policy, that's why we gened up the supply side thing, because

586
01:26:36.540 --> 01:26:44.060
we were able to convince them they had the mix wrong, that you cannot take an economy

587
01:26:44.060 --> 01:26:50.900
and try to pump it up with easy money and then try to restrain inflation with high tax

588
01:26:50.900 --> 01:26:51.900
rates.

589
01:26:51.900 --> 01:26:57.020
Because that's what the change in the management policy was, you pumped it up with easy money

590
01:26:57.020 --> 01:26:59.820
and then you tried to restrain inflation on high tax rates.

591
01:26:59.820 --> 01:27:06.140
And all that did, of course, was suppress output.

592
01:27:06.140 --> 01:27:13.100
So up went inflation more, up went unemployment more.

593
01:27:13.100 --> 01:27:16.940
Well, I think now what we face is even a worse situation

594
01:27:16.940 --> 01:27:22.060
for Mischief than we faced then.

595
01:27:22.060 --> 01:27:24.980
And I haven't any idea how to deal with this

596
01:27:24.980 --> 01:27:46.980
or what to suggest, but it's real. It's there. It's gone too far, unattended. Denial doesn't do us any good. This is not religion.

597
01:27:46.980 --> 01:27:54.980
And so, I encourage you to give it a real serious thought. Just remember all this. Go at it one point at a time.

598
01:27:54.980 --> 01:28:05.980
Have a look at Ralph Gomer and William Baumel.

599
01:28:05.980 --> 01:28:32.980
And I really don't know how to tell you that there's any worse economic problem we could have because there's so much blind sort of confidence or, you know, we're America, we're the best at not thinking.

600
01:28:35.980 --> 01:28:49.980
Well, I've gone on about all I can do it. My voice has run out. I'm sorry to have been late, and I hope I've given you some idea of what the problems are, and I'm not sure I can answer any questions, but I can try.

601
01:29:05.980 --> 01:29:26.100
and I'm not happy about any of it okay and in that case that's what we'll do if

602
01:29:26.100 --> 01:29:31.100
If anybody has any questions, would you be willing to take questions?

603
01:29:31.100 --> 01:29:32.100
I can try.

604
01:29:32.100 --> 01:29:33.100
Okay.

605
01:29:33.100 --> 01:29:34.100
Here's a question.

606
01:29:34.100 --> 01:29:35.100
Yes.

607
01:29:35.100 --> 01:29:40.100
Going back to your document, your respective document, you have drawn in a lower function

608
01:29:40.100 --> 01:29:41.100
in each case.

609
01:29:41.100 --> 01:29:46.100
And I suppose I'm not quite clear on what the lower function does.

610
01:29:46.100 --> 01:29:49.100
The lower boundaries?

611
01:29:49.100 --> 01:29:50.100
Okay.

612
01:29:50.100 --> 01:30:13.100
Well, as I understand the argument of the law, the equilibriums fit within these boundaries and the difference between the upper and the lower is that the upper represents for any particular share of world output for the countries the best combination of industries.

613
01:30:13.100 --> 01:30:24.100
The interactions between supply chains, the synergies and things that go together, any remaining natural advantages, any...

614
01:30:24.100 --> 01:30:30.100
So that, you know, but there's nothing that guarantees that you'll be here on this.

615
01:30:30.100 --> 01:30:34.100
Well, so now, does that represent transitional situations?

616
01:30:34.100 --> 01:30:41.100
No, every one of these equilibria is stable according to them, including this one down here.

617
01:30:41.100 --> 01:31:02.100
In other words, in the way I understand their work, it's not like the classical model that gives you the best outcome, the most efficient outcome because of people specializing in the comparative advantage and working out the best ratio of trade and all that.

618
01:31:02.100 --> 01:31:12.100
There's nothing. So, obviously, a country that's determined or has some kind of strategy and can succeed.

619
01:31:12.100 --> 01:31:20.100
See, when I first read this, I said, now I know what, what was that guy's name?

620
01:31:20.100 --> 01:31:26.100
Eamon Fingleton was talking about Japanese industrial policy. At the time, it didn't make sense to me.

621
01:31:26.100 --> 01:31:35.100
but you can see how somebody might say we're going to capture all the really

622
01:31:35.100 --> 01:31:41.960
important high-tech manufacturing processes and we will do whatever it

623
01:31:41.960 --> 01:31:46.200
takes you know we will have forced saving we'll let the Ministry of Finance

624
01:31:46.200 --> 01:31:51.600
run the country we'll do whatever we're going to capture them because once you do

625
01:31:51.600 --> 01:32:02.520
So much work in the classical model, so much works because there's no entry cost, because

626
01:32:02.520 --> 01:32:03.520
there's linear production.

627
01:32:03.520 --> 01:32:31.520
Jim? Yeah, Greg, good to see you again. Hi, Jim. From the supply side of the past wars together. I wish I was seeing you better. It seems to me, as I think about your very interesting analysis here, that you have entirely too much emphasis on the equilibrium and too little on the market as a process.

628
01:32:31.520 --> 01:32:42.520
And also tend to ignore the importance of, as it relates particularly to the production cost and the issue, differences in institutional arrangements across countries.

629
01:32:42.520 --> 01:32:50.520
The institutions make a big difference in terms of how those productions, what output you get from the respective inputs.

630
01:32:50.520 --> 01:33:00.520
And those are not the kind of things where you can simply, you know, quickly improve your institutions as the result it affects this capital flow quickly and that sort of thing.

631
01:33:00.520 --> 01:33:28.520
And with regard to the sort of equilibrium analysis, I mean, to a large, in fact, as I was sort of reflecting a little, my thought kind of was the kind of argument that Bob has previously presented with regard to perfect competition, talk about, hey, there's violations of the assumptions, because there's violations of the assumptions, we don't get these market results that these free market guys talk about, and as a result, markets don't work.

632
01:33:28.520 --> 01:33:47.520
Well, I know you didn't buy into that particular argument, that we recognize that markets as a process play a very important role in revealing various things about cost and various things in terms of giving them the proper kind of incentive structure to produce efficiently and all of those kinds of things.

633
01:33:47.520 --> 01:34:02.520
And I think to a large degree that you've got the same thing operating here. This analysis is basically based upon production functions being similar across countries and equilibrium analysis. And that's what's wrong with it.

634
01:34:02.520 --> 01:34:12.520
Essentially, what markets do is they reveal whether you can acquire something cheaper by producing it yourself or by trade.

635
01:34:12.520 --> 01:34:18.520
If you can acquire it cheaper by trade, it makes sense for you to acquire it by trade.

636
01:34:18.520 --> 01:34:26.520
I know it probably comes as a surprise to you, but I outsource, for example, all the maintenance services of my car, all my plumbing services.

637
01:34:26.520 --> 01:34:35.520
I answer all the lawn care service. I don't spend my time focusing on those kinds of things because I'm not very good at those things.

638
01:34:35.520 --> 01:34:43.520
I agree with everything you said, except your outsourcing, because there you have comparative advantage operating.

639
01:34:43.520 --> 01:34:46.520
You can't transfer your skills to the mechanic.

640
01:34:46.520 --> 01:35:15.520
The issue of whether you can acquire it cheaper, even with regard to the issue of Ricardo's presentation of comparative advantage, you make certain kinds of assumptions, and you talk about it, but just because the assumptions are not met, are violated in some respect, it does not mean that the general principle is if you can acquire it cheaper by trade, rather than producing it yourself, it makes sense for you to acquire it.

641
01:35:15.520 --> 01:35:21.840
but I guess and I do think if we look at the current situation that it does have

642
01:35:21.840 --> 01:35:25.360
some puzzling results but it also certainly has some puzzling results too

643
01:35:25.360 --> 01:35:30.440
with regard to your theoretical analysis. Your theoretical analysis should be

644
01:35:30.440 --> 01:35:35.380
going down but it's not going down. Productivity is actually rising more

645
01:35:35.380 --> 01:35:40.780
rapidly in the last six to eight years or so than it has at any time since back

646
01:35:40.780 --> 01:36:10.780
before the Supply Side Revolution. And that as we find this sort of movement of some capital abroad, and that's essentially what outsourcing amounts to, that as essentially the exchange rate is going to bring into equality the amount of things that we buy from foreigners with the amount of things we sell to foreigners, you have that outsourcing or greater investment of capital abroad, there will be an off the outflow of capital

647
01:36:10.780 --> 01:36:40.780
and Capital, if you like. There will be offsets in terms of exports and capital inflows, and that the markets may not adjust instantaneously, and that sort of thing, but two years when we're talking about, and I'm a little surprised that you're throwing around sort of the Democrats' favorite numbers with regard to the 3 million jobs law, because I would presume that most everybody knows that that figure is largely fictitious. It reflects the establishment figures, which always, in terms of employment,

648
01:36:40.780 --> 01:37:00.780
always lag during the recession, and if you look at the household figures, what we've got is something like a stable employment pattern, probably a creation of a couple hundred thousand jobs, which is not impressive, over a two-year period, but that's what happens during the recessions and recoveries from the recession.

649
01:37:00.780 --> 01:37:13.780
So, I guess my view is that your analysis places too much emphasis on equilibrium, too little on margins as a concept, and too little on institutions you need to come to.

650
01:37:13.780 --> 01:37:28.780
Now, I know that you're a big fan of our economic work and economic freedom, and tomorrow we will show you in terms of ______ about how many productivity ______ are influenced by the quality of these institutional ______.

651
01:37:28.780 --> 01:37:53.780
Jim, I appreciate your remarks and I agree with many of them, but let me say, first of all, the reason diagrams are static is that you can't draw dynamic.

652
01:37:53.780 --> 01:38:05.780
And so it's not the question of the analysis being static because the analysis isn't, but the diagram is.

653
01:38:05.780 --> 01:38:19.780
And as far as I understand it, the various kinds of institutional differences can account for where you are here or here, from the lower boundary to the upper boundary.

654
01:38:19.780 --> 01:38:25.780
So if you had all the right institutional things, you could be up here.

655
01:38:25.780 --> 01:38:28.780
If you had them only half right, you'd be somewhere in here.

656
01:38:28.780 --> 01:38:31.780
If you didn't have any of them right, you'd be at the bottom.

657
01:38:31.780 --> 01:38:37.780
So it could well be the institutional things were there.

658
01:38:37.780 --> 01:38:46.780
And I think the question that if you can get something cheaper, you take it,

659
01:38:46.780 --> 01:38:55.580
is, I think, the question that they are refuting in their work,

660
01:38:55.580 --> 01:39:04.980
particularly if there are industries that have increasing returns

661
01:39:04.980 --> 01:39:08.580
and somebody decides to capture them and pay the price to do it.

662
01:39:08.580 --> 01:39:14.580
And it can be cheaper for you while they capture it.

663
01:39:14.580 --> 01:39:29.580
It's cheaper for you while they capture it, but, so the whole question of what is your time period, your time frame, right now, right now today, yes, cheaper for us, right now, ten years from now.

664
01:39:29.580 --> 01:39:37.580
So that's missing from the notion that it's always to get something cheaper.

665
01:39:37.580 --> 01:40:02.580
This is just to give you a notion. I'd have to try to give a course. It would be an awful lot of work. You wouldn't want to listen that long. Anything else?

666
01:40:02.580 --> 01:40:13.580
The point of clarification about the role of increasing returns in this model, is this assuming increasing returns in all industries?

667
01:40:13.580 --> 01:40:24.580
Because earlier you mentioned, in actuality we've got increasing returns mostly in high-tech industries, but is this model assuming it for all forms of production?

668
01:40:32.580 --> 01:40:46.500
know that each of these points, there's at least one industry completely provided by

669
01:40:46.500 --> 01:40:50.740
one of the countries with increasing returns.

670
01:40:50.740 --> 01:40:55.020
It may be all of them, but I'm sorry, I can't.

671
01:40:55.020 --> 01:41:01.260
They go through it with, see, what really upset me when I read it is they end up showing

672
01:41:01.260 --> 01:41:31.180
Professor Rogers, thanks for your articles and your very lengthy defense on the media.

673
01:41:31.180 --> 01:41:51.180
My question is, do you believe that outsourcing is going on on a scale based on the Bureau of Labor Statistics or whatever, on a scale that is going to have a very significant effect on real wage rates in the U.S.?

674
01:41:51.180 --> 01:41:56.180
Do you believe that's happening now, will happen soon, and to what extent?

675
01:41:56.180 --> 01:42:14.180
Well, I just know what I see in reports and I also know what I see as a, I'm on the board of a global manufacturer and all of the other board members, except for me, are chief executives of global manufacturers.

676
01:42:14.180 --> 01:42:36.180
So I know a good deal about what they're doing and why and when I listen to them, a form of inside knowledge, they lament their merger and acquisitions during the 90s because it used up their cash and they said if they had any sense, they would close down every one of the American plants and move abroad.

677
01:42:36.180 --> 01:42:44.580
So that is the mentality of global manufacturers.

678
01:42:44.580 --> 01:42:49.540
So it happens we retain them because it takes huge sums of money to close a plant and then

679
01:42:49.540 --> 01:42:53.020
you got it.

680
01:42:53.020 --> 01:43:02.260
Now on the wages, I saw recently a Business Week report that a guy in Boston got a software

681
01:43:02.260 --> 01:43:11.900
Contract, I think Family Connections or something, and he was going to outsource it to India,

682
01:43:11.900 --> 01:43:20.820
and he got the idea, I wonder what I can hire all these unemployed computer engineers for.

683
01:43:20.820 --> 01:43:29.860
So he ran an ad offering them Indian wages and managed to hire them in Boston.

684
01:43:29.860 --> 01:43:34.060
So that's in business week.

685
01:43:34.060 --> 01:43:39.460
So that does show, you know, a lot of downward pressure on wages.

686
01:43:39.460 --> 01:43:43.920
And if you look at the, like I said, if you look at the enrollments, what's happening

687
01:43:43.920 --> 01:43:51.320
enrollments in engineering, I happen to know that presidents of engineering colleges like

688
01:43:51.320 --> 01:43:57.860
Georgia Tech, which has got to be the second or third top engineering school in the country,

689
01:43:57.860 --> 01:44:01.980
The President is extremely worried about the future of engineering education in America.

690
01:44:01.980 --> 01:44:09.460
They keep getting people turning down acceptances because there's no future as they see it.

691
01:44:09.460 --> 01:44:16.860
So if we think knowledge is in the market, then it's in the market for education.

692
01:44:16.860 --> 01:44:22.460
When you see MIT have a 33% drop in enrollments in two years, it tells you something.

693
01:44:22.460 --> 01:44:31.360
Just the other day, Siemens announced that they were closing 15,000 software jobs in

694
01:44:31.360 --> 01:44:37.540
the United States and Europe, moving them to India, China and Eastern Europe.

695
01:44:37.540 --> 01:44:41.900
And you see these announcements continually.

696
01:44:41.900 --> 01:44:49.340
Every high-tech firm that you know of has announced thousands of engineering jobs, research

697
01:44:49.340 --> 01:44:53.100
jobs, even development jobs.

698
01:44:53.100 --> 01:44:59.980
So if, you know, we were creating huge numbers of jobs so fast that we can't, we don't have

699
01:44:59.980 --> 01:45:05.500
enough university graduates to fill them, it would be one thing, but that's not what's

700
01:45:05.500 --> 01:45:06.500
happening.

701
01:45:06.500 --> 01:45:12.220
They're not moving them off because they can't fill them.

702
01:45:12.220 --> 01:45:16.580
So I, you know, I don't know, but you see, what you have to understand is until world

703
01:45:16.580 --> 01:45:28.580
Socialism collapsed, which is recent. Indian and Chinese labor was not available. It was not available.

704
01:45:28.580 --> 01:45:34.580
These were socialist countries. They wouldn't have you, and if you had any sense, you didn't want to go.

705
01:45:34.580 --> 01:45:40.580
So when it starts, it starts as a trickle. A few people say, look at the changes, all this, blah, blah, blah.

706
01:45:40.580 --> 01:45:48.580
Somebody tries it, it works out, the word spreads, somebody tries it, then it catches on.

707
01:45:50.580 --> 01:45:58.580
And, you know, the way Ricardo would analyze this, he'd say, well, this is a movement of factors of production to absolute advantage.

708
01:45:58.580 --> 01:46:03.580
See, where is the productivity of capital highest? Where labor is most plentiful?

709
01:46:03.580 --> 01:46:15.580
All of a sudden there are these massive supplies of labor. They weren't there. They're there. Just like that. They appeared because of institutional changes. Institutional changes.

710
01:46:15.580 --> 01:46:25.580
You can say there were all great improvements for China and India. Bad implications for high paid workers in the West.

711
01:47:25.580 --> 01:47:42.580
I'm not complaining about it. There are normal workings of profit maximization, but the implications for first world employment or wages are extreme.

712
01:47:42.580 --> 01:47:46.580
As I said, these excess supplies are large.

713
01:47:46.580 --> 01:47:57.580
You're not going to see Indian-Chinese wages bid up, you know, the factor price equalization isn't going to work tomorrow and bid up the wages and everything's going to be smooth.

714
01:47:57.580 --> 01:48:04.580
I mean, you know, decades, maybe half a century, who knows? I mean, just think of the political instability.

715
01:48:04.580 --> 01:48:14.580
Also, you know, when you lose jobs, high-value jobs, high-value added jobs are the ones that are at risk if they're tradable.

716
01:48:14.580 --> 01:48:19.580
High-value-added, tradeable jobs are at risk in the first world.

717
01:48:19.580 --> 01:48:24.580
When you lose the jobs, you lose the capital, you lose tax base.

718
01:48:24.580 --> 01:48:29.580
We have all kinds of commitments.

719
01:48:29.580 --> 01:48:34.580
All of you know how underfunded is Medicare.

720
01:48:34.580 --> 01:48:39.580
I mean, it's trillions underfunded before this last boondoggle, right?

721
01:48:39.580 --> 01:48:48.080
And this last boondoggle, right? And so, and you're going to lose tax base. All these

722
01:48:48.080 --> 01:48:56.340
commitments are there, and you're going to lose tax base. This is not trade. This is

723
01:48:56.340 --> 01:49:03.340
labor arbitrage. It's definite, serious implications. You can say, oh, I'm going to get it cheaper.

724
01:49:03.340 --> 01:49:18.340
And then think about it, too. What happens if people can't get good jobs, they've got to take low-paying menial jobs and then all the cheap Chinese goods and Walmart double in price?

725
01:49:18.340 --> 01:49:23.340
I mean, you know, you look at the hits in store for real income.

726
01:49:23.340 --> 01:49:29.340
You know, a country that is a reserve currency can get away with murder for a long time.

727
01:49:29.340 --> 01:49:34.340
The United States is a reserve currency, just like Britain got away with murder for a long time.

728
01:49:34.340 --> 01:49:39.340
We can get away with murder for a long time, but at some point it just doesn't go on any further.

729
01:49:39.340 --> 01:49:44.340
And that's particularly true as these others develop.

730
01:49:44.340 --> 01:49:55.340
So I think that all of a sudden when you have a huge supply of practically free labor, people are going to take advantage of it.

731
01:49:55.340 --> 01:49:58.340
That's what you're in for.

732
01:49:58.340 --> 01:50:00.340
We have a little over time.