Globalization and free trade: wonders of a past era, now enemies of America?

Summary:  Something is wrong with America, rendering our society incapable of connecting effectively to reality.  Who can tell what has caused this social illness, a form of cultural Alzheimer’s?  The symptoms appear in many aspects of our national public policy, an inability to effectively take collective action in critical areas such as energy, geopolitics, and management of our economy.  This is chapter 2; the first chapter (6 December 2007) discussed our housing bubble.

A world under control

Contents

  1. Introduction
  2. A brief look at free trade
  3. Problem recognition is always the first step
  4. About those wages for highly trained professionals
  5. Ricardo probably would consider our trade policies insane
  6. Mockery of obsolete orthodoxy, an effective tool to encourage thought
  7. Other reports about free trade and globalization
  8. Afterword and where to go for more information

(1)  Introduction

Globalization — the free flow of capital, jobs, and trade — was a pillar of the post-WWII geopolitical regime.  Economists and the foreign policy establishment assure us that this globalization is an unqualified good thing — a “win-win” for all parties.  That is, of course, absurd.  Globalization in its current form has clearly become problematic for America.  It has weakened us in important ways during the past 3 decades.  Unless we start to think more clearly about trade, the ill effects will grow both during this downturn and in the following recovery.

Our inability to adjust to this change is another example of America’s broken thinking.  The late USAF Colonel John Boyd described the connection of individuals or groups to reality as a process:  Observe, Orient, Decide, and Act.  For a description of the OODA loop see this or Wikipedia.   All four phases of this process seem to work poorly in modern America, but we seem to have special difficulty with orientation.  To learn more about Orientation see this article by Chet Richards.

(2)  A brief look at free trade

Is free trade beneficial to the US?  David Ricardo stated that both sides benefited if the key factors of production were not mobile (On the Principles of Political Economy and Taxation, chapter 7).  That was true in 1817, but not so today.  Three of the key factors are mobile: knowledge, capital, and labor (both as migration and outsourcing).

The expansion of our exposure to third world competition was tolerable so long as limited to traditional “tradable goods.”  Now both sophisticated manufacturing can be done almost anywhere, exposing a large fraction of our workforce to global wage competition. Worse, globalization is expanding to services.  Another tranche of high paying jobs — this time white collar, professional jobs — are going overseas.

As a result, the political support for free trade is weakening.  The core of America’s middle class has become vulnerable.  By now everyone knows the “globalization” playbook, whether from jobs flowing overseas or immigrants (e.g.,  H-1B and H-2B visas) coming here to lower wages.  That is, the political basis for globalization is eroding even faster than our national balance sheet.  Will these folks passively watch their “class interests” (a Marxist education is becoming more useful these days) get eroded in order to maintain record high corp profit levels (as % GDP)?

Globalization is too vast and complex a subject for a brief post, so this will attempt hit the high points of the emerging opposition to globalization among economists.

(3)  Problem recognition is always the first step

(a)  “Offshoring: The Next Industrial Revolution?“, Alan S. Blinder, Foreign Affairs, March/April 2006.  Blinder is no anti-globalization nut, right-wing reactionary, or even just another economist.  He is Professor of Economics at Princeton, member of the White House Council of Economic Advisers (1993-1994), Vice Chairman of the Board of Governors of the Federal Reserve (1994-96).   Excerpt:

Although there are no reliable national data, fragmentary studies indicate that well under a million service-sector jobs in the United States have been lost to offshoring to date.  A million seems impressive, but in the gigantic and rapidly churning U.S. labor market, a million jobs is less than two weeks ‘ worth of normal gross job losses.) However, constant improvements in technology and global communications virtually guarantee that the future will bring much more offshoring of “impersonal services ”. That  is, services that can be delivered electronically over long distances with little or no degradation in quality.

That said, we should not view the coming wave of offshoring as an impending catastrophe. Nor should we try to stop it. The normal gains from trade mean that the world as a whole cannot lose from increases in productivity, and the United States and other industrial countries have not only weathered but also benefited from comparable changes in the past. But in order to do so again, the governments and societies of the developed world must face up to the massive, complex, and multifaceted challenges that offshoring will bring. National data systems, trade policies, educational systems, social welfare programs, and politics all must adapt to new realities. Unfortunately, none of this is happening now.

(b) Will the Middle Class Hold? Two Problems of American Labor“, Testimony of Alan S. Blinder to the Joint Economic Committee, 31 January 2007

 …the dividing line between jobs that are deliverable electronically (and thus are threatened by offshoring) and those that are not does not correspond to traditional distinctions between high-end and low-end work. …

First, we need to repair and extend the social safety net for displaced workers. This includes unemployment insurance, trade adjustment assistance, job retraining, the minimum wage, the EITC, universal health insurance, and pension portability — plus other, newer ideas like wage loss insurance.

… Second, we must take steps to ensure that our labor force and our businesses supply and demand the types of skills and jobs that are going to remain in America rather than move offshore. Among other things, that may require substantial changes in our educational system-all the way from kindergarten through college.

Blinder gives the standard remedies:  welfare, retraining, and more education.

  1. The first is likely both insufficient unsustainable as “outsourcing” grows from the manufacturing sector to the larger service sector, and effects higher-wage jobs.
  2. Re-training just pushes more workers into the ever-smaller boat of jobs not exposed to foreign competition.
  3. The last is nuts.  Consider the plight of middle-aged workers with advanced professional degrees.  Do they return to school to get a 2nd masters, or a PhD — competing for the tiny pool of jobs for which these are required?

Blinder is not alone in questioning this orthodoxy, but others take the analysis a few steps further.

(c) Is Off-shoring Really Just Good Old Free Trade?“, Herman Daly and James Socas, presented to a Senate Democratic Policy Committee Hearing, 5 March 2004.  Daly is a Professor at U Maryland, was a Senior Economist at the World Bank.  Summary:

Many academic economists argue that off-shoring is simply the next chapter in “free trade” theory – a “good thing.” However, some politicians of both parties are beginning to question whether off-shoring represents a fundamental break from the past. To them it appears that off-shoring is not free trade, as most think of it, but the systematic substitution in the production process of higher cost U.S. workers by lower priced foreign workers, due to an increasingly integrated global economy. The result is rising corporate profits, but falling U.S. jobs, stagnating wages, and enormous pressure on the country’s middle class.

The authors contend that what is happening in today’s globally integrated economy is not the classical operation of “free trade,” and, they point out, that argument can be found in the original writings on which free trade theory is based.

(4)   About those wages for highly trained professionals

The Minimum Wage and Doctors’ Pay“, Dean Baker (Dean Baker is an economist and co-director of the Center for Economic and Policy Research), Beat the Press, 24 June 2006 — Excerpt (emphasis added):

To me, the main economic story of the last 3 decades has been that those in high paying professions (e.g. doctors, lawyers, dentists, accountants, economists etc.) have managed to drive up their wages by sustaining and increasing barriers against competition (both foreign and domestic), while less-skilled workers, like autoworkers, textile workers, dishwashers, and custodians have been deliberately placed in direct competition with low-paid workers in the developing world.

The wages in these latter categories have generally been flat or declined over this period, while workers in most of the high-paid professions have seen substantial pay increases (e.g. the OECD reports that the real wages of doctors in the United States increased by 55 percent from 1964-1995 [sorry, it’s not free data, so I can’t link to it]). If this pattern is to be reversed, then the wage increases for workers at the middle and bottom will have to come at least partly at the expense of the real wages of high-end workers, just as the wage gains of high-end workers have come partly at the expense of those at the middle and bottom over the last three decades.

This is all accounting; one can debate the merits of specific policies to reverse the upward redistribution of income, but there really is not much room to debate the accounting. My favored policy is free trade in professional services, so that doctors, lawyers, accountants and economists can enjoy international competition in the same way as autoworkers, textile workers and dishwashers, see chapter 1 of The Conservative Nanny State.)

(5)  Ricardo probably would consider our trade policies insane

Roy J. Ruffin’s article in History of Political Economy (Winter 2002) is highlights the re-thinking of free trade theory:  “David Ricardo’s Discovery of Comparative Advantage“.

These observations are Ricardo’s “home runs.” Ricardo emphasized the “four magic numbers” as well as stating that because Portugal has an absolute advantage in the production of both cloth and wine:

“it would undoubtedly be advantageous to the capitalists of England, and to the consumers of both countries, that under such circumstances, the wine and the cloth should both be made in Portugal, and therefore that the capital and labour of England employed in making cloth, should be removed to Portugal for that purpose.”  (Ricardo, I, p. 136)

Accordingly, Ricardo realized it was necessary to suppose factor immobility between countries. Indeed, of the 973 words Ricardo devoted to explaining the law of comparative advantage, 485 emphasized the importance of factor immobility!

Here’s a link to Ricardo’s discussion of mobile/immobile factors of production.  Discussions of “free trade” usually cite Ricardo — but ignore his specific statement that this assumes the major factors of production are immobile.  They were immobile when in 1817, but today communication and cheap transportation have made land the only immobile factor — and land matters not at all.

(6)  Mockery of obsolete orthodoxy, an effective tool to encourage thought

It’s not just right-wing nationalists, like Patrick Buchanan, questioning free trade.   Here are comments from the site of Brad DeLong (Prof Economics, Berkeley).  His readers tend to tilt leftward but remain conventional with respect to economic policies. But trend over past few years is clearly against “free trade.” The right in America has always been suspicious of free trade; labor unions and domestic manufacturers have been opposed. With the left turning against it, the only interest group remaining in favor are exporters.

By Ponzi Q. Globalization, 22 February 2007, link — about Blinder’s recommendations:

“{T}his is what happens when a super smart man honestly analyzes and concludes that the following of his beliefs will lead to horrors but just can’t let go. Many economists must be starting to feel like the Communists felt when it became clear that it just wasn’t working out like they thought it would.

By Ponzi Q. Globalization, 27 February 2007, link:

Why the conflict, dudes? You guys seem stuck in some zero sum downer. You have to realize that there’s no problem. Everybody wins with Free Trade!

The Chinese will get all our boring old jobs researching, developing, and making stuff that people around the world need and want and Americans will do all the new and wonderful work that the Chinese will be too stupid to do.  See, the Chinese *AND* the Americans win!

It’s like Brave New World where the Alphas (Americans) do the really really hard intellectual work and the Betas, Gammas, etc. (non-Americans) do the easier — but no less important — routine intellectual and manual work.  Thank heavens that geography is destiny when it comes to ability {& that knowledge cannot cross borders}, otherwise there would be a lot of unhappy Americans competing for work with people making a fraction of what it takes to get by in America.

The really cool thing is that it all is happening naturally, with no human intervention.  Just the inevitable workings of the natural unfettered market. So there’s really no point arguing whether it’s good or not. It just the way it is and the way it has to be.

By dissent, 29 March 2007, link:

“The free trade economists on globalization remind me of the hard core neo-cons on Iraq. They are incapable of a critique of their own ideology, because they don’t recognize it as such. They think globalization is reality (and truth and beauty and history). So there are no choices but to more heavily commit ourselves to a policy that is proving to be a failure.”

By Fred, 29 March 2007, link:

“Economists, like everybody else, have failed to predict the impact of the digital revolution. What we have left is “Faith” in the free market. You must admit that faith in God is more emotionally satisfying. Indeed, insecurity may foster religiosity.”

By Ponzi Q. Globalization, 29 March 2007, link:

Blinder is an intelligent man and so he sees that the majority of Americans will be screwed by globalization. He sees that globalization, technology, and differences in living standards have combined in a very ugly way. Blinder realizes that with this ugly combination there’s really no good reason to produce much of anything domestically.

Blinder is an orthodox member of the economics community and so he will not propose anything substantial to get us off the destructive globalizationized path we are currently on. That is, he would rather let the majority of Americans suffer than enter a state of sin by proposing heterodox solutions.

Blinder and his ilk are not bad or stupid. They just can’t think out of the box in which their orthodox training has imprisoned them.

(7)  Other reports about free trade and globalization

  1. Fear of Offshoring“, Alan Blinder, December 2005 (31 pages)
  2. Pain From Free Trade Spurs Second Thoughts Mr. Blinder’s Shift Spotlights Warnings Of Deeper Downside, Wall Street Journal, 28 March 2007
  3. Globalization, Worker Insecurity, and Policy Approaches“, Congressional Research Service, 31 July 2008 (18 pages)

(8)  For more information

If you liked this post, like us on Facebook and follow us on Twitter. See all posts about Obama, his administration & policies, and these posts describing how the world is changing:

  1. Power shifts from West to East: the end of the post-WWII regime in the news, 20 December 2007 — We are seeing another western industry ceding dominance to eastern competitors, one more step in a larger process.
  2. Let us light a candle while we walk, lest we fear what lies ahead, 10 February 2008 – Putting the end of the post-WWII regime in a larger historical context.
  3. “The changing balance of global financial power”, by Brad Setser, 22 August 2008
  4. German Finance Minister Peer Steinbrück explains how the world is changing, 30 September 2008
  5. America has changed. Why do so many foreigners see this, but so few Americans?, 1 October 2008
  6. America is changing. Read some chilling words from a liberal economist, 2 October 2008

69 thoughts on “Globalization and free trade: wonders of a past era, now enemies of America?”

  1. A fine essay. One other point I’d mention is that, notwithstanding the pros and cons of free trade, we don’t have free trade now. We have a setup where other countries engage in mercantillism, and America encourages them to do so. Our trade relationship with China is the most notable example of this. A great deal of what goes on under the rubic of “free trade” is anything but.

  2. “Stepping away from freedom of trade, is a step away from freedom.”

    Fine slogans, with little application to the world we live in. And what we now call classical liberalism never adapted the principles you are espousing.

  3. “I’m not sure how our own trade barriers wouldn’t set off retaliatory tariffs across the globe. In a vacuum, protectionism sounds OK, but I’m not sure it works in a world where other actors can respond.”

    The amusing thing about this is that those other actors are already engaging in protectionism on a massive scale. China’s setting the exchange rate for its currency, so as to make its goods cheaper and other countries exports to it more expensive, is just the most striking example of a widespread practice.

  4. It is fascinating that the contingent nature of history comes up now and again, and it is worth noting that historical analysis based on contingent effects for contrapositive outcomes at the first order is something that we like to do. Yet, when examined in a light of contingent effects, societal theory breaks down as there are no pre-ordained outcomes due to contingent effects. A successful Shaysite rebellion would have severely changed the run-up to the Constitutional debate and that depended on one individual being found out in a snow storm. That is contingent effect historical analysis, and first order analysis from that is an examination of those outcomes at the highest, grossest scale of things.

    If the repetition of the immobility of production is repeated later, it is only due to the pre-industrial outlook of Adam Smith with regards to agriculture. As so much of free trade thought devolves to Smith, the examination of what he got wrong from his pre-industrial viewpoint is one that is necessary to adjust our modern examination of production and mobility of wealth and capital. That said Smith, himself, recognized that the Wealth of Nations must be under the more general Law of Nations, and that National self-protection for certain goods necessary to society are a vital concern. While trade can help in many venues, putting National survival at risk for commodities that are only contingent on trade agreements and international stability requires that a Nation must look out for those venues as a vital part of existing. In that case Wealth of Nations, or personal wealth, must be set aside to the Law of Nations and the survival of a given society that creates a Nation via the organs of society called government. While trade is a general ‘good’ for interacting with other Nations (and thus societies) putting the necessary fundamentals to sustain internal trade in the hands of external trade is something fraught with danger unless there is a pre-existing high degree of accord between Nations prior to any treaty arrangements. Even then Nation-level government has and must have final say over that: production concerns that are vital to survival that fall outside of direct citizen control in a Nation then become a weakness for a Nation, not a strength.

    During OIF, as an example, the Swiss threatened to not allow export of electronic components that were key parts of multiple avionics equipment for fighter and air interdiction craft. Without it, those components could not be made and they were so specialized that finding an alternate supplier would take years to ramp up skills and knowledge of production. Even going as far back as 1832, President Jackson recognized that over-seas investment in interior trade via the monetary systems left the US at peril should those external actors wish to harm the Nation. Fast forward to the extensive investment of Russia and China into the corrupt US mortgage system and the payoffs to those government allowed organs are to keep them solvent for those majority foreign holders to convince them not to withdraw their funds from those institutions. Mind you that would be a suicide pill for either Nation, but the distaste they are getting from current conditions are slowly shifting them to decide which is worse off for them, not for the US.

    This does not mean a knee-jerk protectionist schema for trade. I have always put forth that the long term friends and allies of the US deserve and should have free trade: they support society controlled by individuals via representative democratic means, support us in our National goals, and seek no ill will towards us and have demonstrated that for decades if not longer. That should create a self-sustaining set of shared interests amongst Nations to further those common goals. Those who don’t support liberty and freedom for their citizens… why should they get free trade? It requires honesty of government to divest itself of power over society and adhering to society before advances elsewhere can be seen as more than authoritarian outlook. Free trade with despotic or authoritarian regimes doesn’t help our goals and, instead, serves as ready bribery to those under the yoke of tyranny to stay there as they get such pleasing baubles from free people who should know better.

  5. Nowhere in your article do you discuss job creation. Technology and development will drive job creation and we still have 13 of the top 20 universities in this country (we use to have something like 17-18 of the top 20). The main thing that needs to be done to insure the continued success of the US is for the government to get out of the way of innovation (possibly repeal or lessen SOX), and for the government to create real change in the education system in this country. We are losing jobs to the third world, but we have been for a long time. The difference is we are losing our ability to innovate.
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    Fabius Maximus replies: It is a 2600 word long article on a complex subject; it does not mention many other important subjects. Innovation is important, but it is not the only factor (let alone the “main thing”). For example, the dollar needs to be at a competitive level and we need a reasonable level of wages — otherwise we can innovate all day and gain little from it.

  6. “In what sense did Confucian theory provide a means for the peasants to “thrive”? How about feudal Japan and Europe? Did Roman poltical theory consider it important that “all levels” thrive? What about the slaves on the farms, gladiators in the arena, those in the mines?”

    The goal of Confucian society was not based around individual ‘rights’ or the ‘pursuit of happiness’ but rather harmony, defined classically as ‘joining heaven and earth’. So it emphasised correct relationships between parent and child, ruler and ruled within the context of a daoist-derived philosophical and method-based system featuring both pithy and detailed elements. The fact that it worked so well explains why there are 1.4 billion Chinese since if it hadn’t worked, that population would not have ‘thrived’. Clearly it did!

    Japan was very similar to China in many ways albeit always a much more tightly knit society. Island culture not unlike Great Britain’s. It also has ‘thrived’ which the most people per sq mile of any nation in the world despite such a relatively small geographical footprint.

    As to feudal Europe, hard to generalise. I suspect many arrangements worked very well for many centuries but we wouldn’t hear much about them in the history books since nothing much happened. Certainly when I lived in rural France in the 1970’s at a small chateau, the immediately peasantry retained a feudal relationship with the Comte and Comtesse even though legally such things had been long since banished. No doubt terrible abuse happened there. But it happens everywhere all the time throughout history and I am not sure the evidence is in that any particular system has dibs on being the best. For example, one of the most well-run, peaceful, stable structures was that of the Great Khan. An Arab observer, after the conquest of Persia etc. remarked that for the first time in human history a young attractive virgin could walk unaccompanied from Beirut to Beijing without the slightest fear of molestation. I doubt we could say that today.
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    Fabius Maximus replies: This convinces me not to invite you to the revolution! In my book thrive means a bit more than allowed to live. Those societies — esp China, feudal Japan and Europe — brutally oppresed the lower classes. Your adultation for those societies clearly labels you as one of the bourgeois enemies of the working class!

    FYI — China’s massive increase in population to a billion + follows contact with the West, resulting in multiple social revolutions. Hardly a result of its lower classes “thriving” under Confucian rule.

    The “virgin could walk … with gold on her head” is a commonplace self-congradulation of tyrannies in the ancient world. I suggest some scepticism, unless you have evidence that anyone actually tried such a thing. Do you believe all the advertisements on TV, also?

  7. PS. The 70’s France ‘feudal’ relationship was, on the part of all involved, totally voluntary, and featuring a charming, indeed inspiring, blend of mutual respect, affection, formality and pride.
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    Fabius Maximus replies: You call this a “feudal relationship”? Did the overlord exercise his right to the droit de seigneur?

  8. Re comments #20 and #23 from Seneca:

    your questions deserved more considered reply which I shall try to offer later within 250 word limit (an excellent discipline I abused 2 posts above I suspect!).

    First: Without class distinctions organisation of any sort is impossible. Root meaning is differences in role hierarchically, which includes both horizontal and vertical differences. We mainly discuss it in the social context only viz. the vertical, or ‘power’ axis.

    But a team of firefighters has both vertical and horizontal class. The chief (who has those above him) who is ‘at the top, but then also the laddermen, the hose men, the mechanics, the ones who enter with axes etc, most of whom are on the same level hierarchically, but have different roles.

    The role of the chief hear does not have to be based on abuse of power of those below, the different roles of the various team members do not have to be ‘Darwinian’ or adversarial in any way, but without them, an efficient firefighting team (i.e. all ‘equal’ all the time) would be impossible, just as a ‘cohesive’ group structure of any size without good leadership would not function well as such. This is why I say concentration of power at the top is inevitable and good in any human organisation/society.

    Abuse/corruption is another issue.
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    Fabius Maximus replies: the hierarchy of a team (e.g. firefighters) is not a class difference in America. It is a matter of organizational rank. The two are very different concepts.

  9. “Did Roman poltical theory consider it important that “all levels” thrive? What about the slaves on the farms, gladiators in the arena, those in the mines?””

    I am not familiar with Roman political theory, but having watched the Rome series twice, feel I have an excellent handle on it. (That’s a joke, FM..)

    My sense is that the slave classes were not ‘citizens’ and therefore outside the system and therefore not classified as real human beings. It is not dissimilar to how wealthy people in the US regard inner-city ghetto dwellers, something which perhaps explains why the US has by far the highest per capital prison population in the world, and also why a humongous swindler like Madoff was allowed to stay in his own apartment with his own security people and his wife rather than being immediately locked up. Maybe the Romans were a little more honest about these things!
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    Fabius Maximus replies: In the ancient world slaves were considered people, not amimals, of a specific social class. They were not outside the system in any meaningful sense; they were an important part of the system. I suggest reading any of the many fine books about the social order of the classical world. My favorites are Michael Grant’s “A Social History of Greece and Rome” and (longer, better) “A History of Private Life (from Pagan Rome to Byzantium)”, Edited by Paul Veyne.

    Their oppression was considered fit and proper, unlike that of the ante bellum South (which the South justifed only with great effort, never quite convincing either side).

    While conflating ancient world slavery with inner city America is provocative, I consider this it absurd.

  10. I helped start a high-tech company more than a decade ago. Our experience with offshoring has not been positive.

    Once upon a time, we outsourced the writing of patent applications to India. Yes, we got more words per dollar. We got grammatically correct paragraphs which appeared (to a layman) appropriate. We did not, in the end, get more quality patents per dollar. We now outsource patent applications to Chicago and Dallas.

    Later, we outsourced manufacturing to India. The price-per-unit advantage appeared to be compelling. We soon found that our costs in quality control, RMA processing, service calls, and so forth had soared far beyond our previous experience. Our reputation suffered among our customers, who could not afford downtime. Simple ECOs took months, and complex ECOs were almost impossible.

    It took years to extricate ourselves from that mess. Now our manufacturing is done in a plant I can drive to on my lunch break, our engineers are happy, quality is way up, service calls are way down, our reputation is improving, and profits were increasing (until the recession hit).

    We won’t go back.

  11. Humans are social; we live and thrive in groups. We have hierarchy. The establishment of human dignity and individual rights, essentially freedom, is I think the most productive and interesting way to examine our app. 100,000 year history. Freedom is not equality as we all know. Projects to equate them usually end in mass murder. Until 250 years ago (app.) 95% (app.) of the human population were beasts of burden, a large percentage slaves. Many are still and slavery (the formal kind) could still make a comeback. The American, French and Chinese revolutions are among the most important events in extending the possibility of human dignity and personal freedom in this ancient struggle which I believe began the minute the first hunter-gathering groups settled gradually into agricultural communities in south central Anatolia about 10,000 B.C. The invention of the Sabbath by the Israelites, when 2/3 of all humans were slaves, marks a major step in asserting human worth. Agree with FM that the Reformation/Enlightenment unleashed great possibilities in the western world, in addition to Hitler and Stalin. The great challenge we face today is to sustain our commitment to human dignity and freedom, to stop confusing its enactment with consumerism, sharpen our swords and sheathe them, while replacing the BigStick with intelligence and modesty. Will we? Can we?

  12. FM: “Problem recognition is always the first step”

    There’s nothing more agreeable. More often problem cannot be solved when people cannot even accept that there is a problem, do not recognize a problem.

  13. “This is why I say concentration of power at the top is inevitable and good in any human organisation/society.”

    The healthiest societies have been those shich localized virtually all power. Think early America, or the Greek city states, or even 18th century Germany. Concentration of power at the top leads to tyranny and stagnation.
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    Fabius Maximus replies: A common view is that the Roman Republic collapse following the expansion of Roman rule — and that the growth of the US might do the same. Note the number of citizens per member of the House and Senate in 1850 vs. today!

  14. I was dissappointed to read your response to comment 2. The commenter stated that the current status of certain factions of American labor that are suffering some dislocation due to free trade is the result of a state of disequilibrium. That is to say, with regard to a growing array of products the marginal productivity of foreign workers surpasses that of American workers. The price of American labor with regard to some products-services is above the equilibrium point. The substance of your post and its links confirms that proposition.

    Commenter 2 reaffirms the proposition that in a state of competition, the price of labor must adjust to the market. You mischaracterize this as a lament that only mystical agency (the Blue Fairy) can save the American worker from the ability of a foreign source of labor to produce the same product-service at a lower cost.

    Your mild ridicule is ironic indeed. You “love analysis of the form ‘there are no good solutions; we need the Blue Fairy.'” This is apparently directed at his statement that there “are not good solutions to an oversupply of overpriced houses–nor of….American workers.” Yet you end your response with an affirmation of the same propostion, (“There are no easy or painless solutions. Just like at the dentist.”

    The irony continues. The commenter’s point was not that there are no good solutions to the “problem.” He merely points out that you misunderstand the nature of the problem. You believe that your own Blue Fairies (“lower US dollar [less US income and wealth vs our trading partners], less immigration, and very selective trade barriers”) will stave off the price adjustment certain American labor sellers must deal with. The commenter, like me, probably believes that markets work imperfectly, but that engineered solutions fail miserably. It is beyond governmments’ capabilities to fine tune trade relationships. (You have a point that artificial manipulation of foreign exchange rates (“lower US dollar”) does have a deliterious effect. But here the argument is against governmment interference (mostly by Asian nations) with the setting of exchange rates by market paricipants.)

    You apparently recognize that failure to adjust overpriced American labor will come at a cost. One of your “solutions” stated in your response seems to be “less US income and wealth vs our trading partners.” You are a little vague on the nature and value of such a trade-off. Yours are indeed magical fairies if there is some sort of net gain in exchanging American income and wealth in return for subsidizing the well-being of those American workers who are the benficiaries of labor price disequilibrium (despite the fact that lower income consumers obtain the higher proportion of the benefits of free trade). I believe Commenter 2 is not lamenting that nothing can be done — merely criticizing your assumption that the need of some to adjust to differntials in marginal productivity can be avoided at an acceptable cost to the other citizens by means of policy. That policy will be developed and implemented by government. Government is not, and never will be up to the task. Envision special interest hell.

    You are also vague in your post on the implications of your discovery that the factors of production are more mobile today. At the link you cited, Ricardo acknowldged that if factors of production are freely mobile among countries, then the same analysis that applies to the flow of resources within a single country would apply. This hardly leads to the conclusion that trade management is in order. I expect you agree that the factors of production are best left to be allocated by market forces within sovereign boundaries. Therefore, your argument is not aided by the fact that factors of production are mobile across boarders.

    The US has, and will continue to have considerable “comparative advantage.” There is plenty of market oriented policy we can pursue. We should avoid seeing international competition as a problem. We should focus on making our human resource as productive as possible. That would be a better expenditure of energy than attempting to subdue inexorable market forces.
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    Fabius Maximus replies: Thank you for this interesing and subtle comment! An adequate response would require another 2600 word post, but I’ll sketch a brief reply.

    (1) Much of your reply assumes an inabillty of government action to produce effective solutions. We disagree on this fundamental issue, which is unfortunately far beyond the scope of discussion in comments like this. Unfortunately neither history nor economic theory gives a definitive answer to this vital question.

    (2) There is a large body of evidence that changes in currency levels have long and powerful effects. As Brad Setser has shown (at RGE Monitor and now at the Council on Foreign Relations), there is a long-standing tendency to underestimate the impact of fx changes — for good or ill.

    (3) “We should avoid seeing international competition as a problem.” Most of US history suggests that the opposite is true, as does the history of other successful nations (who have almost without exception given great attention to managing trade flows).

    (4) “The US has, and will continue to have considerable “comparative advantage.”
    Agreed. But that is not sufficient by itself to maintain our prosperity.

  15. “The healthiest societies have been those which localized virtually all power. Think early America, or the Greek city states, or even 18th century Germany. Concentration of power at the top leads to tyranny and stagnation.”

    Agree with last sentence wholeheartedly which is why I too am a great fan of federalism in which the participant members are each mainly autonomous. This dynamic is the reason why in sophisticated imperial systems the monarchs retained overall control of systemic power but were not allowed to interfere in management of any particular sector or locale each of which had their own leadership. The Monarch’s role was to harmonise the many different elements at play, helping to reduce those which became excessive and nurture those which were overly constrained.

    Your comment leads into issues involving balance of powers. In America we presumably have these famous ‘checks and balances’ but if the same elites are running all of them, obviously that doesn’t work. The best would be to return to far smaller central government whose role is mainly to set rules and guidelines, and leave actual management and community governance in local hands.

  16. Seneca re AIG & power query. Trying to be succinct about rather vast and broad topic. Any group (family or nation) has an energy that differs from that of the individuals within it alone.

    ‘Power’ is how this raw collective energy is channeled – where the leadership principle comes in, which principle involves the relationship between ‘leaders’ and ‘followers’. Such power can be channeled in good or bad ways, or as I would prefer to put it: with wisdom or confusion.

    There is no particular system that can guarantee wisdom or confusion just as no gun can aim itself and pull its own trigger.

  17. Seerak:

    A tarriff does not prevent the misnomered “free trade”. It simply imposes a cost upon foreign trade in the form of a tax. However, nobody is prohibited from doing business with anyone else because of a tarriff. So its hardly socialism.

    The alternative to taxing foreign exporters is to tax domestic producers (corporate income tax), workers (earned income taxation), consumers (domestic sales and excise taxes), property owners (real and personal property taxation), and investors (capital gains tax, unearned income taxation).

    A question to “free traders” – why is it so much more advantageous to American citizens to tax our domestic industry and our own incomes and property when we could provide alternate government financial sources by means of taxing foreign exporters?

    “Free trade” should really be called “tax free importation” or “foreign exporters tax subsidy”. That would be more honest.

    Consider this. A 20% tarriff would theoretically raise about $340+ billion per year, enough to do away with the domestic corporate income tax and several excise taxes. What is better for economic freedom and growth in the United States – a 20% tarriff on imported goods, or the corporate income tax? In fact, given that an end to corporate taxation would probably lead to an enormous growth in dividend payments and stock values, the Treasury would recognize a large increase in unearned income tax receipts, allowing the abolition of other taxes like the liquor tax and phone fees as well.

  18. Jonathan Rubenstein: “The American, French and Chinese revolutions are among the most important events in extending the possibility of human dignity and personal freedom in this ancient struggle”

    How did the French Revolutiuon extend the possibility of human dignity to its victims in the Vendee or under the blade of the guillotine or the revolutionary Army’s boots? Lopping off the head of Marie Antoinette was an exercise in the extension of human dignity?

    And the Chinese Revolution? Are you serious? You have heard of the bloodbath called “The Great Leap Forward” haven’t you? Why not simply compare Hong Kong, Singapore, and Taiwan, all Chinese countries, to Red China and note the obvious contrasts of human dignity and personal freedom?

  19. President Obama has been groomed and is controlled by globalists who want to destroy the national sovereignty of the USA and establish a new world order/global government. The video “The Obama Deception” below explains this in detail.
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    Fabius Maximus replies: I don’t watch vids (at least, not this kind), but if you provide a link to an article I’ll read it. Until then I will file this in the “reports from the Gamma Quardrent” file.

  20. I think the basis on which globalization could be resisted in any way was destroyed by the cheap fax machine and any residuals were utterly destroyed by the net. Just how does anyone propose to tax, add tariffs or otherwise restrict trade in software?

    Even many physical goods nowadays incorporate embedded software. This can be loaded just before delivery to the end user. Globalization is the end result of better, cheaper and faster transport and communication links. Utterly irresistable.
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    Fabius Maximus replies: I believe this exaggerates. Trade of intellectual property is still a small fraction of total trade. And flow of people — such as software engineers — is an important aspect of globalization, as discussed in this post.

  21. Andrew B {snip}.

    Revolutions are not tea parties. Nasty shit happens. The American revolution produced a huge emigre population whose property was confiscated and led to the War of 1812 as many American “patriots” wanted to go after the emigres in Canada. Yes, Mao was a madman at times and caused huge suffering, but is there any doubt that this revolution is precious to Chinese for restoring their independence and dignity and finally, after he died, creating the possibility of freedom in China. I believe the Chinese people who have suffered terribly over the last few centuries welcome it, despite the revolutionary guards. Robespierre killed a lot of very decent and innocent people, this does not compromise the revolution and the possibilities it created to free people from bondage. If these changes could have been made peacefully, certainly it would have been best. Just as it would have been best if we freed the slaves without killing 600,000 Americans. But…

  22. Jonathan B:

    As revolutions go, there have a been a number of rather bloodless ones, mostly because they were lacking in a bloodlust for killing domestic “enemies”. Among these the Swiss Rebellion of 1291, British “Glorious Revolution” of 1688, and the American Revolution of 1776. The Communist inspired Revolutions of France in 1789, Russia and Hungary in 1917-1919, Spain 1931-1939, China post 1949, Cambodia 1975, etc. were most noteworthy for mass indiscriminate killing.

    Those of us who are religiously minded recognize instantly the work of the Evil One in such objectively demoic activity. “Revolutions are not tea parties. Nasty shit happens.”??? That is not an excuse, but evidence of what these events really are – an outpouring of evil.

    How were the Chinese not free after the Wuchang uprising and prior to their Communist enslavement? They were free to think, worship, and speak as they pleased, move abroad if they so desired, read what they wanted, own property, and to conduct business. I don’t see Mao’s Communists having improved this.

  23. FM: “The US trade problem requires a mixture of a lower US dollar (less US income and wealth vs. our trading partners), less immigration, and very selective trade barriers.”

    Squinting in the fog of thought: This is the “good” of free trade and globalization? Was this a selling point? I don’t remember it? Somebody tell me why worldwide labor costs don’t rise. Tell me why, in a global free trade system labor cost should be set by the state?

    Is the velocity of money disrupted by the trajectory of money in a nation running a severe trade deficit as opposed to having no or a small deficit? Aren’t wages a function of velocity?

    Is the response of FM in comment #36 a.k.a. merchantilism? And how is that compatible with free trade? And how did we get hoodwinked into playing that game? Can we get a do over for false advertising?

    Yes, I see what is being said. Two things are paramount to free, free trade. All the factors of production must be mobile. To say another way, free to choose. Labor has to be included. Then, the money of account must be “hard”. If that were to exist there would be a return to the influence of comparative advantage. The cost of good or service delivery would become a paramount factor.
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    Fabius Maximus replies: None of this makes much sense to me.

    * We are experiencing an arbitrage of labor costs. Third world rates rise; our fall. Good for them; not so good for us. Pkease excuse us if we attempt to resist.

    * Frequently on this thread people said this is not “pure free trade.” A true but sophomoric observation. There are few pure systems in the real world. No pure democracies. No pure free market systems. No pure free trade. Welcome to Earth.

    The rest seems confused. When you are in Heaven everything will be free, as free as one finds in an absolute perpetual monarchy.

  24. FM: comment #54 is a great tribute to you I feel, the quality of thinking you are eliciting is recognition of your intention.

    Now comment #62: 1776 was hardly bloodless and it followed on the Seven Years War which prepared the colonists for Independence. 1688 may have been glorious but it was not a revolution. I cannot comment on the nature of Evil and its supernatural roots according to your views because this is not our blog. I am a deeply observant Atheist who shares your belief in the existence of evil but expect we differ as to its sources.
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    Fabius Maximus replies: Why was the Glorious Revolution of 1688 not a revolution? They obviously thought it was. Looks like one to me, albeit a small one (revolutions, like earthquakes, come in various sizes).

  25. Do not think 1688 was trivial in any way, remarkable that England went from Regicide to Compromise in one generation is most impressive. The term G.R. was contemporary, possibly intended as a commentary on Cromwell, but it makes the use of the word revolution lose context when applied to what followed. Now the term is empty of all meaning, applied to marketing “revolutionary developments in underwear…..” This is the bane of political commentary….words, words,words, what do they all mean. Will leave it at that.

  26. The phrase was coined by John Hampden, grandson of John who was a parliamentary leader in the 1640s. John went into exile after Restoration, returned and was imprisoned several times, tried for treason and condemned, but not executed. A lifetime devoted to politics, one son became a Privy Counsellor, do not doubt the sincerity of his observations, still believe we are using a word to describe profoundly different phenomena.

  27. In #63 you said I seemed confused. Indeed! Did you notice eight question marks? Those are the marks of an inquiring and confused mind.
    I’m questioning a bill of goods that didn’t deliver, as well as asking why has it not delivered as promised, did the seller really believe in it, and can you get me out. First, you see, I would like to determine if the promoters were stupid, outflanked by unforseen or changed circumstances, or cunning in some malicious way. I tend to believe the latter. Somebody prove me wrong.
    My sophomoric remarks regarding the purity or lack thereof in the free trade system weren’t intented to be trite. As I recall NAFTA, GATT, WTO rules, CAFTA, and Davos talks all pretty much expressed a plan to trade globally and freely in sophomoric terms. They never told us that consequences such as we are discussing were going to cause these problems. Now however, the emperor stands naked before us. When we are astonished and point you call it sophomoric. As though we should have known.
    IN other words I’m trying to flush out the stinky in the whole scheme.

  28. Let me rephrase the question to clarify what I asked in comment #36 in light of the response.

    The Washington Consensus system remains a major factor in the world economy and is what many instances of the word “globalization” refer to, especially regarding Latin America, and especially since free-trade liberalization and privatization was one of its major features. Acknowledging that side of globalization, what the original post must have been referring to with the language “Globalization – the free flow of capital, jobs, and trade” as the economic form of imperialism it ended up being, and perhaps was always intended to be, lends the perspective that what is unfolding now is also a form of economic imperialism with the tables turned on America. How, then, if at all, do the prescriptions change?
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    Fabius Maximus replies: I don’t share most of the assumptions you have built into your comment. I used “Washington Consensus in the narrow sense, as the trade system following collapse of Bretton Woods I in 1971 and the early 1990’s evolution to what’s called Bretton Woods II. This suggested that emerging nations run trade deficits supported by external loans, concentrating on internal development. It never worked very well, as was replaced in well-run emerging nations by BWII: export-led economies, high savings rates, underpriced currencies, and trade surpluses. That worked very well, but was (as everyone realized) unsustainable on a global level.

  29. Free trade has devestated other nations, not just America

    Why doesn’t Britain make things any more?“, Aditya Chakrabortty, op-ed in The Guardian, 16 November 2011 — Well worth reading! Summary:

    “In the past 30 years, the UK’s manufacturing sector has shrunk by two-thirds, the greatest de-industrialisation of any major nation. It was done in the name of economic modernisation – but what has replaced it?”

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