Economic history is so clean

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I’ve been reading a fair amount of economic history and political economy recent (e.g., A Concise Economic History of the World, The Moral Consequences of Economic Growth and Angus Maddison’s substantial body of work). I’ve read a few micro & macro texts so I come into this with some vague theoretical understanding of the framework which economists are marinated in, and of course I know about comparative advantage and am broadly sympathetic to globalization. The analytic sharpness that economics brings to broad historical questions is illuminating. That being said, on occasion there are comments which make me wonder about the excessive simplicity of the economic narrative.

Consider the case of two nations which trade with each other. One nation starts out far wealthier. Businesses in the wealthier nation relocate some factories to the poorer nation. This increases aggregate utility, consumers in the wealthy nation can now purchase cheaper products, while a substantial number of workers in the poorer nation are more well off than they otherwise would be. But, there’s an issue here, inequality is likely to increase within the nations. Overall inequality in the aggregate has decreased, the poorer nation is now far wealthier and so the income gap is not as stark across national boundaries. But a minority of those who had factory jobs in the wealthy nation now might have to shift to lower paying service sector employment. Additionally, income inequality might initially also increase in the poorer nation as some are left behind (though as economic development proceeds one might suppose that the lower orders would catch up).

As someone who lives in a relatively wealthy nation let’s just consider that case. I’m not sure if I’m particularly reassured that aggregate utility has increased across the world while a bunch of factory workers now go unemployed or are marginally employed. It’s not that I’m a particularly empathetic person, I’m not, but perhaps I’ll run into these people in the subway or at the shopping mall. It’s great that people in a far off country are now wealthier and also increase my own access to more baskets of goods; but I can’t but help be a little worried about idle hands and potential riots in the streets from the “victims” of the redistribution of economic activity. More immediately, what’s the point in my being able to purchase more bling if it only invites a mugging at hands of the victims of globalization?

I have Joseph Stiglitz’s Making Globalization Work on my “to read” list, so perhaps my qualms will be addressed at some point. So far I’m not reassured that economists truly internalize the structural biases in human psychology when talking about these macro-level issues. It seems that in universal suffrage democracies the political class always has to pretend as if comparative advantage doesn’t exist and mouth populist slogans, but they always favor globalization when it comes to implementing policy (at least over the long term). At this point most humans understand that the the earth is not at the center of the solar system; but it seems to me that that is an easier concept to grasp than the logic of economics, in part because human intuitions about social facts and dynamics are very strong and persistent in the face of intellectual persuasion.

Note: Feel free to recommend books on economic history in the comments. Douglass North is also on my “to read.”

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45 Comments

  1. I’m not sure the example you provide is strictly speaking comparative advantage – I think it’s more absolute advantage – or a case of labor-market arbitrage, the sense that entrepreneurs from industrial countries are actively setting up shop in non-industrial lands to take advantage of cheap labor, rather than the other nation’s economy naturally gravitating towards its most effective industry. I think of comparative advantage being a case where in the poorer country they manufacture snakeskin boots because that’s what they do best which they trade for, say, water pumps from the richer country. “Comparative advantage” is a great concept but does it actually ever happen the way Ricardo envisioned it? In this Wiki discussion, there are lots of hypothetical examples and propositions, but not a single historical example of CA at work. 
     
    Otherwise I agree with your ambivalence towards globalization. I’m more negative about free trade – I think it’s overall a bad thing (for the U.S., anyway), but I’m not sure there’s much that can be done to thwart it.

  2. You don’t need a concept of aggregate utility to see why there’s gains from trade. Trade increases efficiency. This means everyone’s individual utility can, maybe after income redistribution, be weakly increased, i.e. everyone’s can be made better off (at least, no worse off). 
     
    The typical economist answer to your concern about meeting displaced workers at the mall, etc is that we should be able to come up with a compromise to compensate the losers from trade. In fact, these compromises usually come in the form of retraining programs, etc. 
     
    Also, given trade increases efficiency, its not just that it allows people to buy cheaper products, it means more stuff is being produced. This is the same effect that technology improvements have. Actually, with this analogy, many economists wonder why trade is such a political hot potato whereas technological innovation is almost universally praised.

  3. The relevant economic concept is Pareto Efficiency. Trade is said to be Pareto improving.

  4. many economists wonder why trade is such a political hot potato whereas technological innovation is almost universally praised. 
     
    Well that’s typical of the profession. If the price air conditioners drops by 50% because of advances in the radical improvements in the design of compressors, you don’t think it’s logical for people to feel a little better about that than if the price drops in half because the people making them in China are now being paid 1/10th the wage workers in the U.S. are paid? One represents progress, the other represents perhaps even a step back as firms find they do not need to innovate to save money, they only need find cheaper and cheaper workers. 
     
    Now one message I got from A Farewell to Arms is that this process is tempered somewhat by the fact that workers in third world countries tend to be so unproductive that it’s not even worth the pittance of a wage they’re paid. But this is apparently not true of China (where as we know the measured IQ’s are high) and some other countries such as Mexico. But in China alone, of course, there are enough people to take on every manufacturing job in the U.S. and Mexico, so that’s little consolation.

  5. Books: I like your list, but you should add Landes’ Wealth and Poverty of Nations. Kindleberger was a great historian and entertaining writer. I liked his Manias, Panics and Crashes. 
     
    Clark’s book was in some ways a response to Pomeranz’ Great Divergence.  
     
    I’ve heard Mokyr’s Lever of Riches is good, but its still on my too-read pile. 
     
    Also, while its not economic history, Turchin’s Historical Dynamics might suit your fancy for more rigorous treatments.

  6. Robert William Fogel’s The Escape from Hunger and Premature Death. You might also appreciate this.

  7. Will – retraining programs? You mean like the guys laid off from their manufacturing jobs and then trained to become programmers? I don’t mean to be flip, and I’m not saying we can or should put an end to free trade, but the disappearance of whole industries and loss of occupations one after another deserve better than retraining-program type bromides.

  8. ziel, in both cases, the economy is more efficient. People that are better, in relative terms, at making A/C’s are specializing in making them and people that are better at other things specialize at making those. As you’d suspect when people specialize, the net result is that more can be produced than before. 
     
    In the immediate aftermath of the removal of trade barriers, American A/C workers are worse off. But the same is true in the immediate aftermath of the invention of computers and their impact on secretaries. I suspect all the wagon wheel manufacturers didn’t care that it was the invention of the car that made them redundant rather than the “shipping of their jobs overseas”.

  9. will, tx for he recs. have read landes. own ‘great divergence.’ 
     
    I’m not sure the example you provide is strictly speaking comparative advantage  
     
    sure. i only brought that up to indicate that i wasn’t an innocent babe before i read econ recently.

  10. In the immediate aftermath of the removal of trade barriers, American A/C workers are worse off. But the same is true in the immediate aftermath of the invention of computers and their impact on secretaries. I suspect all the wagon wheel manufacturers didn’t care that it was the invention of the car that made them redundant rather than the “shipping of their jobs overseas”. 
     
    sure. i guess the main skepticism that i have is that many of these factory workers can be retooled for the demands of the modern economy. when i was in college at a temp agency i happened to be taking a computer competency test to show i knew how do to stuff like pivot tables in excel, and i saw several blue-collar men in their forties come in trying to figure out what they could do now that the plant closed, and it was really fucking depressing. many of them had never used a computer. that being said, perhaps it just my human psychology at work, and didn’t see them land on their feet later. we’ll see….

  11. Technological advance is not innocent of making whole industries disappear. Look only at the medium on which we write. Music distributors and newspapers, to name just two industries, were much happier before the internet.

  12. Music distributors and newspapers, to name just two industries, were much happier before the internet. 
     
    yes, but i would argue most people in these two industries have a generalized enough skillset or high enough socioeconomic background that they can do something else. i guess i’m pointing to the issue of constraints in human capital.

  13. At this point most humans understand that the the earth is not at the center of the solar system; but it seems to me that that is an easier concept to grasp than the logic of economics, in part because human intuitions about social facts and dynamics are very strong and persistent in the face of intellectual persuasion. 
     
    The reason people don’t understand economics is the same as the reason people don’t understand evolution: People don’t understand feedback – it is hard to think more than one step ahead. (This is true for me too, even if I am better at it than most.) 
     
    This brings me to an observation that I’ve had recently. Economics and Population Genetics share a LOT of theoretical territory, and one of the things that they have in common is that everything is clean and well understood when talking about equilibrium states, and how individual shocks to the system will bring about a new equilibrium. But the thing is, the system is NEVER in equilibrium, and this is much less well understood.

  14. Don´t worry Razib. I study economics and I can assure you that everything will be alright. You can support liberalism without fear of being mugged. 
     
    I don´t recommend any books of economics to anyone . They are boring as hell unless you are really into it, but I recommend you to read this wikipedia article. 
     
    http://en.wikipedia.org/wiki/Balassa-Samuelson_effect 
     
    “The effect in more detail 
     
    A typical discussion of this argument (e.g. by Paul Krugman) would include the following features: 
     
    * Workers in some countries have higher productivity than in others. This is the ultimate source of the income differential. (Also expressed as productivity growth.) 
    * Certain labour-intensive jobs are less responsive to productivity innovations than others. For instance, a highly skilled Zurich burger flipper is no more productive than his Moscow counterpart (in burger/hour) but these jobs are services which must be performed locally. 
    * To equalize local wage levels with the (highly productive) Zurich engineers, McDonalds Zurich employees must be paid more than McDonalds Moscow employees, even though the burger production rate per employee is an international constant. 
    * The fixed-productivity sectors are also the ones producing non-transportable goods (for instance haircuts) – this must be the case or the labour intensive work would have been off-shored. 
    * The CPI is made up of: 
    o local goods (which are expensive relative to tradables in rich countries) 
    o Tradables, which have the same price everywhere 
    * The (real) exchange rate is pegged (by the law of one price) so that tradable goods follow PPP. The assumption that PPP holds only for tradable goods is testable. 
    * Since money exchange rates will vary fully with tradable goods productivity, but average productivity varies to a lesser extent, the (real goods) productivity differential is less than the productivity differential in money terms. 
    * Productivity becomes income, so the real income varies less than the money income does. 
    * This is equivalent to saying that the money exchange rate exaggerates the real income, or that the price level is higher in more productive, richer, economies.” 
     
    So when the productivity of export sector rises, consumption of non-tradables (services), and the income and employment of the people producing non-tradable good rises also. Services tend to be superior goods, which are consumed proportionately more heavily at higher incomes. 
     
    There will of course still be negative effects on some people in the short run, but that´s the price of economic development. No one here in Finland misses our decades ago prominent textile industry anymore. We are far better of with Nokia and high-tech industries. Eventhough they employ less.  
    Unemployed industrial workers have gone to larger services sector. 
     
    Of course you have to keep productivity of the export sector rising to keep economy growing, but that won´t be the problem in liberal (economically) and dynamic country like USA. Even half-socialistic countries, like Finland, have manage to do that. 
     
    The most probable threat to productivity growth in the future is the possible lack of cheap energy, but that´s another story.

  15. For anyone with intersecting interests in Economics and GNXP-type topics, a book called “Keynes on Population” by John Toye (Oxford University Press) can be interesting. 
     
    It revises Keynes’ (but also Marshall’s) recorded views on population, eugenics, race, and similar issues. If I remember correctly, Keynes was not very enthusiastic on eugenics in the UK, but typically viewed most of the world’s population with the standard stereotypes of the time, with logical implications in terms of policy. 
     
    Another book that I’d like to recommend is an “insider view” to how Economics as a science progresses. This is “Conversations with Leading Economists” by B. Snowdon and H. Vane. It consists of 14 interviews of top-notch macroeconomists, who tell how their careers and thinking have developed. I think many macroeconomics courses would benefit a lot by having this book as a parallel text. 
     
    Both of the books are fairly easy on the readers, and can be read in several bits.

  16. i guess i’m pointing to the issue of constraints in human capital. 
     
    Razib, Pekka (above) is correct. I suspect that competition from low-expectation immigrants is depressing wages at the low end far more than international competition. 
     
    A much bigger problem with trade barriers (one out of many): Their presence insulates the country from international developments, and when they inevitably fall, the economic transition is exceedingly painful – cf the New World circa 1492. You don’t want to do that to your country if you care about it.

  17. “I study economics and I can assure you that everything will be alright. You can support liberalism without fear of being mugged” 
     
    yes Pekka, but you live in Finland right?  
    Here, liberals of conviction have been known to throw themelves on the funeral pyres of convicted killers. Liberals like us are conflicted.

  18. Nations with a lot of oil and gas reserves have a high value-per-unit-labor resource they can exploit and sell to other nations. And use to prop up redistributions of wealth. 
     
    Whenever money changes hands without an equal or greater exchange of utility, the value of money drops. The effect is the same as printing more money and getting people to accept it as valid.

  19. I suspect that globalization of trade cannot work properly withour globalization of people. 
     
    In other words, people need to move around the globe to where their best ‘comparative advantage’ lies.  
     
    For example, semi-skilled unemployed ex-factory workers in the US rustbelt might well be able to have a much better life in another country – if cultural and langauge barriers could be overcome.

  20. Since you’re concerned about the distributional consequences of trade, not just econ history, you might want to read Russ Roberts’ The Choice. It’s a didactic novel/parable about the benefits of free trade. Although unabashedly pro-globalization, Roberts goes over many of the problematic issues you discuss — especially with regards to distribution. 
     
    But as others have noted, it is impossible to tell the difference between the dislocations due to trade or to technology. 
     
    The example I heard is the following: I open a factory and tell you that I have a wonder machine that produces cars for 40% less than US made cars without requiring US labor. Does it really matter for the competing US workers if that machine really exists or if I’m bringing in the cars at night on special submarines from Asia? Either way, they lose their jobs or have to retool.

  21. mc, since he lives in Finland, he thinks that a liberal is a conservative (without the values).

  22. The problem with economic theory is that it is based on abstract reasoning instead of the case metho–Business and law students look at actual reality–case studies–and avoid abstract unproven assumptions–until proven worthy. A new book “Common Genius” (at Amazon.com) takes this approach with economic history and develops a whole new theory for the rise and fall of nations–and refutes Pomerantz and Diamond’s theories that it was caused by climate, luck or geography. Re globalization, the same actual “observable 
    results” approach would dictate as follows: Since WWII, for two generations of American workers, we have seen millions of jobs shipped oversea while the workforce and population here grew substabtially–AND YET — unemployment in America has ranged closely between 3-7% throughout the period. Must be all those new jobs in new industries. A 1960′s job seeker would not comprehend the help wanted ads in today’s newspapers, but his kids would = such changes occur gradually and that reduces the impact on individuals– Newspapers haven’t died suddenly, it is gradual, as they downsize, people retire, employment declines, workers get displaced and move on. There are still a few people somewhere making buggywhips! Some individuals get hurt, sure, life isn’t perfect, but unemployment has stayed constant! And the alternative–of subsidizing their job– only delays the inevitable and burdens all of the taxpayer-consumers who must do the subsidizing!

  23. gosh, but “bourgeois economics” is as cultish as marxism.  
     
    All i am hearing here is appeals to crendentialism (pareto) and jargon which varies from the undecipherable to the ludicrous( services are “superior goods” etc.) 
     
    Clearly globalisation is empirically bad for workers in richer countries: contrast workers wages in the U.S. from 1945 to 1975 with the growth in wages from 1975 to now, and abandon the textbooks. 
     
    And it is also bad for the relative economic position of the once richer powers, although I suppose that when China is the foremost industrial, and software power in the world – and with the associated global reach this hard economic power will translate into military prowess – the West can be proud of it’s superior haircuts, burgers, and massage parlors.

  24. Check out the latest paper on income inequality, trade, immigration and other factors at the website of Robert Gordon of Northwestern University. Gordon is the best synthesizer of new and traditional economic theories, sifting the wheat from the chaff very cleanly with generally persuasive statistics.

  25. The problem is, people cannot be globalized and maintain -any- quality of life. People are territorial. Moving is -traumatic-. If you’re working six months in Germany and then have to spend a month and a half in Bangladesh, while your wife is spending 2 years in Darfur, what the hell kind of life is that? 
     
    It’s one of the great failings of modern society is that it is chipping away at being able to settle down in one place, put down roots, and raise a family.

  26. Neziha said “It’s one of the great failings of modern society is that it is chipping away at being able to settle down in one place, put down roots, and raise a family.” 
     
    Certainly, mobility is very stressful and disruptive. Although less so in the age of the internet.  
     
    But maybe once or twice a lifetime mobility is not too much to expect?  
     
    In many parts of the world, people are where they are because of work – their parents or grandparents re-located. When the economy changes and the work disappears they should move, just as their parents or grandparents did.

  27. “The problem with economic theory is that it is based on abstract reasoning instead of the case metho–Business and law students look at actual reality–case studies–and avoid abstract unproven assumptions–until proven worthy.” 
     
    Science is abstract reasoning and systematical thinking, not case studies. Case studies are mere applications of acquired theoretical understanding. 
     
    Economical theory as an abstract thinking is always right, if you can do it right. If your theory doesn´t fit to reality there is something wrong with your assumptions or you didn´t include every relevant factor in it. Yes, sometimes they are not included and things just don´t work out as they should. But don´t blame abstract reasoning. It´s because our ability to understand and predict the world and human behaviour is irremediably limited, and hence there is possiblity to make false assumptions. 
     
    I don´t want to live in the country where the abstract reasoning is not integral part of economics and economical decision making.  
     
    Statistical empirical research and case studies are indeed common practice in economics to validate theoretical assumptions and see if they fit to actual reality. Believe or not economists are really trying to create models that explains real world as accurately as possible. 
     
    Of course there will be a lot of non-economists who doesn´t need any theory to explain everything about the economy, and a lot of people who take them seriously. That´s a bit scary. 
     
    “Clearly globalisation is empirically bad for workers in richer countries: contrast workers wages in the U.S. from 1945 to 1975 with the growth in wages from 1975 to now, and abandon the textbooks.” 
     
    Economic growth in developed world was faster back then because the starting point was lower. The same reason why economic growth is now much higher in developing countries. It´s not because they are more protectionistic. That´s why the wages rose faster back then. Wages is correlated with economic growth. If you increase wages without growth you will only get inflation.  
     
    Trade is not the cause of the slower growth. Instead you will be richer when you export highly refined products to foreign countries and your purchasing power increase when you use that money to buy cheaper foreign goods. 
     
    “And it is also bad for the relative economic position of the once richer powers,”  
     
    That´s right. Developing countries are growing faster than developed countries. We are losing our relative economic position. But we are not getting poorer in absolute sense. 
     
    “although I suppose that when China is the foremost industrial, and software power in the world – and with the associated global reach this hard economic power will translate into military prowess – the West can be proud of it’s superior haircuts, burgers, and massage parlors.” 
     
    So you want to keep poor countries poor just to feel more safe. I get it.

  28. “ 
    Economic growth in developed world was faster back then because the starting point was lower. The same reason why economic growth is now much higher in developing countries. It´s not because they are more protectionistic. That´s why the wages rose faster back then. Wages is correlated with economic growth. If you increase wages without growth you will only get inflation. “ 
     
    You are not answering the stagnation point. Growth has not stagnated, but wages – or median wages – have in real terms. Which contradicts the statement “Wages is[sic] correlated with economic growth”. 
     
    Clearly not always. New textbook needed.  
     
    “So you want to keep poor countries poor just to feel more safe. I get it.” 
     
    Economists get all moral on this form of relative poverty only. The lack of understanding of real politic is exactly why economists should not be listened to. All sane countries protect intellectual capital. That is why the US is blowing up a satellite rather than exporting the technology to the highest bidder, surely that is what the free market would demand.  
     
    I am pretty sure that when China gets to be the pre-eminent world power it will protect it’s industry and technical development like a tigress it’s cubs. It is, in fact, not participating in the free market now as it’s currency tracks the dollar – to the cost of American exports to China. This is real-politics. Free market ideologies tend to be rampent in the largest economic powers of the day: take the British Empire. The result is relative economic decline into insignificance.

  29. Neziha: “The problem is, people cannot be globalized and maintain -any- quality of life. People are territorial. Moving is -traumatic-.” 
     
    That shouldn’t be the case. Hunter-Gatherers moved all the time. We should be “genetically used to it”.

  30. “That shouldn’t be the case. Hunter-Gatherers moved all the time. We should be “genetically used to it”.” 
     
    Hunter Gatherers moved within their own tribe and probably within a few miles, except when times were bad. If the game was good, you stayed. 
     
    I don’t think moving is all that traumatic for some people ( but it is for others); I have lived in three countries and many cities, but there is always the option of home. The idea that an entire town is going to upsticks because the local factory closed down is nonsensical. The fact that economists never deal with humans as social creatures allied to communitarian ideas of locality, ethnicity, cultural identity, sectarianism, parochialism, family, and nation (these things, good or bad of course) but as individual economic actors whose only link to the earth is what they consume, or produce, and everything else – what everybody else calls being alive or being human ( warts and all) – as mere externalities is another reason to dismiss it as a science. It is a lowly social science, even, since it is not even social.

  31. “Clearly globalisation is empirically bad for workers in richer countries: contrast workers wages in the U.S. from 1945 to 1975 with the growth in wages from 1975 to now, and abandon the textbooks.” 
     
    any discussion of wages without what these wages aree able to purchase is inadequate. The CPI was designed to try and address this question, but is inadequate to the task in the 21st century because it measures things that were important in the 50′s and 60′s. Look around you a little. the kind of ” stuff” people with even incomes below 50,000 have in their homes today…. the baubles, computers cell phones cell phones for teenage kids, cameras videa cameras, cars, microwaves, dishwashers, gadgets, wardrobes, ….I mean you just name it are just exponenetially more than a generation ago. The overall standard of living in american homes is UNPRECEDENTED in human history. There was anice op ed piece in the NYT about this sometime in the last week or so… for those interested. 
     
    As regards all manufacturing moving to China. Yes it has. However, has anyone paid attention to some salient points about the chinese economy in relation to the US.  
    1. The chinese business model, like most SE asian business models is based partly on cheap and almost infinite credit available to manufacturers via state controlled finacial institutions and the goal being market share not profit. 
    2. Wal mart likely makes a bigger profit on chinese goods than the manufacturer does. ie a major chunk of the profit stays in the west. 
    3. a big chunk of the revenue generated by the chinese is then in one way or the other invested in western institutions, basnks or just kept in dollars or euros. 
    4. so we are purchasing goods from the chinese in a manner that completely commodities them ( very low margins, to at times selling at a loss), whatever revenue is generated is then esentially given back to us to keep safely for them. 
     
    sounds like a good scheme to me! all these people are working for me, at unrealistically cheap rates and then giving the money i give themfor their labor, back to me. Bring it on !! 
     
    Please try to remember fellas that economic imperialism didnt die with the british empire. just the form it takes changed and is constantly changing. 
     
    also remember- unemplyement rates havent gone up; in fact we are importing labor at ungodly rates to perform work that our so called unemployed out of work population is unwilling to do. 
     
    the american underclass on welfare has a higher standard of living than middle class people in most parts of the world. The fact of the matter is that even the american welfare queen is being subsidized by the labor of the chinese factory worker.  
     
    why the commotion???

  32. “the baubles, computers cell phones cell phones for teenage kids, cameras videa cameras, cars, microwaves, dishwashers, gadgets, wardrobes, “ 
     
    Well innovation will move on. Firstly only some of this is true – microwaves, dishwashers, white goods in general and certainly available a generation ago to income earners of 50K, or the then equivalent. Secondly the period from 1945 -1980(‘s) saw the greatest addition of baubles, labour saving devices, and cars to the average middleclass house and not the intevening period; along with the increase in acutal real wages, which increased disposable income. If real wages are static, then these houses can buy as much baubles as the previous generation, better stuff maybe, but not more stuff. I think it is clear that the MiddleClass in the Sixties was much richer than the MiddleClass in the Depression, and the middle classes in the Ninties better off, but nowhere near the same order of magnitude, to an equivalent household in the sixites.  
     
    Defenders of the Soviet Union could presumably have said the same argument as you from 1970-1990 when incomes stagnated, or reduced, but there were some technological improvments. 
     
    The lowering cost of computers and mobile phones is included in the cost of living index, it is just not enough to compensate for much else. 
     
    Anyway except for mobile phones, and computers, not much else has really changed. I grew up a household with more than one colour TV, a VCR, radios, a home computer ( of the primitive non-PC type), and a video game console. This was in the eighties, early nineties. My parents grew up with nothing, no real white goods even. No TV. Primitive radio, at best. No phone. Their parents had no car. Frankly my younger self would have expected more by now, a colony on the moon at least. Talking robots. Space tourism, perhaps. 
     
    ( I suspect that globalisation may reduce the need for innovation on capital expenditure, and robotics since it is cheaper to just use cheap labour). 
     
    “Please try to remember fellas that economic imperialism didnt die with the british empire. just the form it takes changed and is constantly changing. 
    “ 
     
    Please remember fellas that military, and political power follows economic power, and I it follows industrial economic power, not services. The US became the military power of the world as it became the manufacturing power of the world. Britain lost that throne, both to the US and Germany at the tail end of Victoria’s reign. Now it’s once mighty Navy, once feared across the globe, would probably not now win a war with Argentina, were such to happen again.

  33. reply to pekker — You should not equate hard physical science with soft social science- the former deals with mathematical absolutes of the physical world and I admit the value of Einstein’s abstract musings–but in social,sciences, dealing with totally variable human nature, it is harmful to start with abstractions–better to observe reality and draw hypotheses and see if they can be proven as useful generalities. Even Newton presumably noted the apple landing on his head, measured the rate of fall and developed therefrom his mathematical models. Certainly in economics it is better to look at what worked over and over again as compared to what failed over and over again–the difference between free markets and planned central economies has in preactyice obliterated any need for theories–Communism and socialism FAILED the test! And still you–and no one else–has addressed the overwhelming fact regarding globalization that over the last sixty years unemployment has remained virtually a constant at 3-7% inspite of a doubling of the workforce and a constant shippment of jobs oversea. That inescapable fact should lead one to question any theory that says shipping jobs overseas creates unemployment. Available jobs have grown to make up for the loss of foreign operations and a huge increase in population–The actual case study of American employment over this period trumps any theory.

  34. Read Schumpeter. He is central to an understanding of capitalism as a dynamic instead of a static phenomenon.

  35. Three words: Zero-sum thinking

  36. The last few comments are either appeals to crendtialism or strawman bacause nobody has said that shipping jobs overseas creates unemployment but that it reduces real incomes. Nor is anyone suggesting a command economy. Is the argument on lower real wages now accepted, I assume so because I see nobody challenging it.

  37. If obstructing free trade makes you richer, you should have let the Confederacy alone. That would have made both countries richer.

  38. Regarding loss of manufacturing jobs to China: 
     
    http://www.fas.org/sgp/crs/row/RL32165.pdf 
     
    “The decline in manufacturing employment is not unique to the United States. 
    According to a study by Alliance Capital Management, employment 
    manufacturing among the world?s 20 largest economies declined by 22 million jobs 
    between 1995 and 2002. At the same time, the study estimated that total 
    manufacturing production among these economies increased by more than 30% (due 
    largely to increases in productivity). As indicated in Table 7, while the number 
    manufacturing jobs in the United States declined by 1.9 million (or 11.3%) during 
    this period, they declined in many other industrial countries as well, including Japan 
    (2.3 million or 16.1%), Germany (476,000 or 10.1%), the United Kingdom (446,000 
    or 10.3%), and South Korea (555,000 or 11.6%). The study further estimated 
    employment in manufacturing in China during this period declined by 15 million 
    workers (from 96 million workers in 1995 to 83 million in 2002), a 15.3% 
    reduction.61 In the United States and United Kingdom, the employment decline 
    began in 1999; in the other countries in Table 6, the decline began earlier. In 2004, 
    the industrialized countries experienced a loss of 865,000 more manufacturing jobs, 
    and a cumulative 6.3 million manufacturing job losses over the previous five years. 
     
    [see table on page 32] 
     
    “The sharp increases in U.S. imports of manufactured products from China over 
    the past several years do not necessarily correlate with subsequent production and job 
    losses in the manufacturing sector. Alan Greenspan, former Chairman of the Federal 
    Reserve, testified in 2005 that ?I am aware of no credible evidence that … a marked 
    increase in the exchange value of the Chinese renminbi relative to the dollar would 
    significantly increase manufacturing activity and jobs in the United States.?63 A 
    study by the Federal Reserve Bank of Chicago estimated that import penetration by 
    Chinese manufactured products (i.e., the ratio of imported manufactured Chinese 
    goods to total manufactured goods consumed domestically) was only 2.7% in 2001.64 
    The study acknowledged that, while China on average is a small-to-moderate player 
    in most manufacturing sector markets in the United States, it has shown a high 
    growth in import penetration over the past few years, growing by nearly 60% 
    between 1997-2001 (from 1.7% to 2.7%). However, the study concluded that ?the 
    bulk of the current U.S. manufacturing weakness cannot be attributed to rising 
    imports and outsourcing,? but rather is largely the result of the economic slowdown 
    in the United States and among several major U.S. export markets.65″

  39. Extending the eoin analysis to its logical ( and perhaps ridiculous) conclusion, when all manufacturing becomes completely robotic -there would be no jobs!! 
     
    I guess what i am trying to say is that eoin is tending to be too simplistic and populist.

  40. Swapping low-skill jobs for high-skill jobs doesn’t help with people with few skills. 
     
    When labor is no longer valuable, people can no longer exchange their labor for goods. What will the people who only have their labor to offer do when it becomes worthless?

  41. I would view with some caution the idea that economic history is all that clean. Although it is exciting to see a compelling analytical explanation for some historical event, a little digging usually shows conflicting explanations. What was the reason for the US economic recovery under Kennedy? The Keynesians credit it to ‘pump-priming’ from the ’62 – 63 deficit. Freidman pointed out that the fed’s interest rates resulted in a significant increase of the money supply. And, of course, the supply-siders claim it as a recent example of the power of lowering marginal tax rates… So was fiscal, monetary , or taxation policy change the answer?  
     
    I’m personally inclined to think it’s another case of the blind men and the elephant – all are partly in the right (but all are in the wrong).

  42. The case given by Razib is quite accurate. I don’t believe it is even a case of Pareto optimality, as there is no guarantee that the losing workers are compensated in any way. All CA says is that each *country* will be better off and that the whole world will be net better off. Individuals in either country may well be worse off. 
     
    I agree with the commentators here that this is what has happened to the low-wage workers in the US.  
     
    So, how bad is that? 
     
    Well, it sucks if you happen to be a low-wage US worker. On the other hand it is fantastic if you’re a Chinese or Indian programmer or a US financial services CEO, pretty good if you’re an Indian foundry worker or Chinese factory worker, pretty darn good if you’re middle-income-or-up US consumer. 
     
    Overall, the fact that the *whole world* is going to benefit from the economic and scientific activity of billions of people in Asia and millions in Latin America seems well worth a temporary slowing of growth in wages in the most comfortable nations in the world.

  43. Thomas Sowell and Mark Skousen have written some good non-technical books on the basics applied to some cases of interest. 
     
    For ‘big idea’ books, I like 
    Smith, Ricardo, Bastiat, Hayek, and above all von Mises. Haven’t read Keynes. 
     
    The Way the World Works by Jude Wanniski is an interesting introduction to supply-side theory and the Laffer curve. Although I sympathize with his desire for an apolitical measure of monetary value, I’m not sure gold will do it anymore. 
     
    Veblen’s Theory of the Liesure Class has something of the truth in it, but takes a lot of words to say, in effect, “People like to show off their wealth by buying things that are useless and wasteful.” 
     
    Specifically on free-trade and globalization, Martin Wolf’s Why Globalization Works is quite good.

  44. To Joe6pak: 
     
    “Certainly in economics it is better to look at what worked over and over again” 
     
    Mercantilism worked well in the 18th century. All the most powerful nations had more or less mercantilist policies. With your logic it would have been best to stick with it. 
     
    Too bad some cranks misused their abstract reasoning ability by applying it to soft sciences, and thus created the theoretical background for classical liberalism. 
     
    It is certainly true that economic policies that have failed constantly shouldn´t be supported. There is no need for arguments. 
     
    Socialism has failed constantly in practice but also in theory, just like mercantilism and protectionism. In economics there IS a connection between theory and reality. That´s why it´s usually leftist who don´t like economics as a discipline. 
     
    I wonder why those people who believes that protectionism is good for a country don´t insist USA to quit embargo against Cuba. At least those protectionists who dislike Castro. Well, I don´t know if there exist any.

  45. to mike from nc: 
    I agree that when you look at short points in economic time–like the recovery during JFK’s brief Presidency–it is impossible to identify what caused what to happen. There are too many variables to account for. The free market somehow prevails and balances the conflicting pulls and pushes of millions of actors–but no one can track the process–if they could comprehend and duplicate the process, a command economy under, say, Hillary Clinton, could attain the same efficiencies as under the past few centuries of relatively free markets. But, fortunately, there are only 2 people in the world who would argue for that possibility! Consequently, instead of trying to manipulate the economy, or micro-manage it, it might be better to remove impediments to the free market so it can function better. Mercantilism failed because it was just such an attempt at micro-management, based on the mistaken idea that a nation could maximize its gains by such controls. It may have seemed to work well for a while–as compared to nations that permitted zero economic freedom to its people–but eventually it collapsed because smugglers and illegals proved to offer more variety at lower prices than the government monopolies could offer. For a detailed review of how the law breakers were smarter than the law makers and toppled 18th C mercantilism read “Common Genius” chapter 9. The example of Mercantilism and its rise and fall provides a revealing case study on why the realities of economic activity must be examined over a long period of time to determine what worked and what didn’t. This is because abstract theoretical analyses have always totally failed to explain short-term fluctuations.

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