James C. Ahiakpor wrote:
>
>I earlier tried to direct Medaille to the
>history of the comparative cost advantage theory
>of trade with my request for him to show where
>in Ricardo's writings the latter had assumed (a)
>full employment and (b) balance of trade in
>arguing the benefits of free trade. I was
>hoping that if he failed to find those
>conditions in Ricardo's works, which I don't
>think exist, he would then be inclined to think
>differently about the benefits of
>NAFTA. Instead, he responded with threats of
>debating me on free trade, as if such threats
>were a legitimate substitute for the textual
>evidence I requested. (If I needed any
>clarifications on the benefits of free trade, I
>would rather consult the writings of Adam Smith
>or David Ricardo than John Medaille's.) Now he
>writes as if it is those who argue the benefits
>of the comparative cost advantage theory of
>trade that lack the historical context or are oblivious of reality.
>Not so. Indeed, Smith's and Ricardo's views
>were very much informed by reality.
They were indeed informed by reality, which is
why they had contingencies, as reality always
does; only abstract theorists loosen their
propositions from the foreseeable contingencies
of the market. And I would certainly agree that
one ought to consult the original text, and would
insist even more that one ought to consult it in
preference to any text of mine. And the
contingencies in Ricardo's text are as I outlined
them. I had thought the source was known to all,
chapter 7 of "On the Principles of Political
Economy and Taxation." In that text, Ricardo states.
"This exchange might even take place,
notwithstanding that the commodity imported by
Portugal could be produced there with less labour
than in England. Though she could make the cloth
with the labour of 90 men, she would import it
from a country where it required the labour of
100 men to produce it, because it would be
advantageous to her rather to employ her capital
in the production of wine, for which she would
obtain more cloth from England, than she could
produce by diverting a portion of her capital
from the cultivation of vines to the manufacture of cloth. "
Now clearly, the only reason the question comes
up is because Portugal has to make a choice: She
can employ her capital in increased wine
production *or* increased cloth production, but
not both. In other words, she is at full
employment and must make a choice. If there was
slack in the economy, and she had absolute
advantage in both commodities, then the question
of a comparative advantage would not arise. It is
only because resources are scarce that one has to
make a choice, that one has to "economize." With
an absolute advantage in both commodities, and
the capacity to increase production in both, she
would do so rather then seek the lesser good of a
comparative advantage. It is only full employment
that makes a choice necessary. If you attempt to
redraw the examples so that Portugal can increase
production of both commodities, then there is no
comparative advantage in deserting one for the other.
All the examples in chapter 7, without exception,
are of balanced trade, and would not work if they
were of unbalanced trade. You can do the exercise
for yourself; Change the examples so that England
has to borrow money from Portugal so that she can
buy Portuguese wine, and the whole thing becomes
nonsense. Ricardo notes that if there was such an
imbalance, then trade would cease: "If then this
premium for a bill on England should be equal to
the profit on importing cloth, the importation
would of course cease; but if the premium on the
bill were only 2 per cent, if to be enabled to
pay a debt in England of �100, �102 should be
paid in Portugal, whilst cloth which cost �45
would sell for �50, cloth would be imported,
bills would be bought, and money would be
exported, till the diminution of money in
Portugal, and its accumulation in England, had
produced such a state of prices as would make it
no longer profitable to continue these
transactions. " It is obvious that Ricardo didn't
take into account the idea of a currency becoming
an international currency, where one country
could simply print up piles of the stuff on the
supposition that it will be used in settling
accounts between other countries and never come
home to settle your own hash. Ricardo didn't
believe that such imbalances could long continue
without exchange rates simply wiping out the
problem or wiping out the trade. The current
practice of borrowing $2 B/day from the Chinese
to buy Chinese goods would undoubtedly have
struck him not so much as a form of trade as a
form of insanity. With all due respect the Prof.
Foldvary, the manufacture of "bonds" cannot be
considered real trade, but merely what is: borrowing.
Finally, one can infer that Ricardo assumes the
fixity of national capital in his examples
because he says so, explicitly: "but if in
consequence of the diminished rate of production
in the lands of England, from the increase of
capital and population, wages should rise, and
profits fall, it would not follow that capital
and population would necessarily move from
England to Holland, or Spain, or Russia, where profits might be higher. "
Ricardo did believe that England could benefit by
outsourcing all of the cloth and wine to a
country with an absolute advantage, but he still had his doubts:
"Experience, however, shews, that the fancied or
real insecurity of capital, when not under the
immediate control of its owner, together with the
natural disinclination which every man has to
quit the country of his birth and connexions, and
intrust himself with all his habits fixed, to a
strange government and new laws, check the
emigration of capital. These feelings, which I
should be sorry to see weakened, induce most men
of property to be satisfied with a low rate of
profits in their own country, rather than seek a
more advantageous employment for their wealth in foreign nations. "
In other words, he is assuming throughout all the
examples that the capital doesn't simply relocate.
And finally, we need to consider the source of an
absolute advantage, something Ricardo did not
consider. In the American South, it was slavery;
in Australia, it was convict labor; in many
places in the world today, it is child labor and
exploitation. Are you really willing to divorce
the theory from its social context? Is this the
way to bring stability and prosperity to the
world? I think there is room for doubt.
>And on the assessment of the actual turnout of
>events in regards to migration after NAFTA, I
>had in mind J.S. Mill's advice on the evaluation
>of theories in one of his Essays on Some
>Unsettled Questions of Political
>Economy. Before one declares a certain
>hypothesis to have been falsified, one needs to
>be sure that all possible countervailing forces
>or events have been taken account of. That way,
>hasty judgments would be avoided.
Well, judgements certainly have been avoided, and
responsibility as well. The irresolvable game of
what-if provides infinite cover for every failure
of the abstract theorist to see his predictions
fulfilled. Yet, it would seem that intellectual
curiosity, at least, would impel one to question
a theory that failed to produce the promised
results. The real question is whether one values theory more than reality.
>I think historians of economic thought would
>illustrate the usefulness of their subject by
>drawing on the original sources of theories when
>these come into question in modern debate. In
>particular, "full employment" as a condition for
>arguing the validity of any classical
>proposition is just ill-advised. I am yet to
>find any classical proposition that depends on it.
While I can't think of one that doesn't. Indeed,
the employment of all resources, both capital and
labor, would seem to be the whole purpose of all
the theories, for without that, the theories
couldn't promise very much. The idea that an
economy existed to employ the people and their
funds was basic to all theories. Indeed, the
inexplicable failure of the market economy to do
this was the central political question of the
19th century and occasioned the Speenhamland
system and the Poor Law of 1834. It was the
failure of these systems that finally led labor
to winning some bargaining rights in the 1870's.
Are we reading the same history?
Finally, you have responded with some heat, for
reasons that I cannot fathom. Perhaps it is the
use of the term "flat-earthers." But I do not
invent that term; rather it was chosen by
advocates of unrestricted free trade for
themselves, and one can do a group no further
compliment than call them by the name they have
freely chosen. If it sounds like an insult, if it
conjures up an image of a pre-scientific and
discredited theory, it is no use to complain to me. Take it up with Friedman.
John C. Medaille
|