Comments on: Economic history is so clean

By: Joe6Pak

Joe6Pak — Sun, 24 Feb 2008 06:39:47 +0000

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.

By: Pekka

Pekka — Sun, 24 Feb 2008 00:54:29 +0000

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.

By: mike_from_nc

mike_from_nc — Sat, 23 Feb 2008 22:43:16 +0000

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.

By: mike_from_nc

mike_from_nc — Sat, 23 Feb 2008 20:46:53 +0000

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.

By: mike_from_nc

mike_from_nc — Sat, 23 Feb 2008 20:29:11 +0000

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).

By: Caledonian

Caledonian — Sat, 23 Feb 2008 19:05:09 +0000

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?

By: vicneo

vicneo — Sat, 23 Feb 2008 17:18:56 +0000

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.

By: TG

TG — Sat, 23 Feb 2008 14:47:57 +0000

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"

By: bioIgnoramus

bioIgnoramus — Sat, 23 Feb 2008 14:05:26 +0000

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

By: eoin

eoin — Sat, 23 Feb 2008 12:41:48 +0000

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.

By: MensaRefugee

MensaRefugee — Sat, 23 Feb 2008 09:41:00 +0000

Three words: Zero-sum thinking

By: nordsieck

nordsieck — Fri, 22 Feb 2008 19:43:36 +0000

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

By: Joe6Pak

Joe6Pak — Fri, 22 Feb 2008 17:48:26 +0000

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.

By: eoin

eoin — Fri, 22 Feb 2008 06:34:45 +0000

"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.

By: vicneo

vicneo — Fri, 22 Feb 2008 05:58:15 +0000

"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???

By: eoin

eoin — Fri, 22 Feb 2008 04:12:56 +0000

"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.

By: UK-Econ

UK-Econ — Fri, 22 Feb 2008 03:15:29 +0000

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”.

By: eoin

eoin — Fri, 22 Feb 2008 02:31:41 +0000

"
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.

By: Pekka

Pekka — Fri, 22 Feb 2008 00:47:17 +0000

"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.

By: BGC

BGC — Thu, 21 Feb 2008 22:09:24 +0000

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.