Question 1: Let’s start, like any good economist, with an assumption. Assume that you have managed to pass this class and upon completion of other requirements you have graduated from school and found a job at an international financial institution that promotes free trade. You are given the task of writing a short piece that demonstrates the benefits of free trade to be used in convincing a developing country government to promote trade liberalization. Use the theoretical frameworks and models we have discussed in the class to demonstrate the benefits of free trade and how their country would gain from trade. Feel free to use graphs where needed. Make sure your arguments are clear, concise, and convincing.
Question 2: Let’s also assume that college took a toll on you and in the process you have developed a severe multiple-personality disorder problem. Hence, although by day you work at an international financial institution that promotes trade liberalization, at nights you turn into a blogger that writes critiques of free trade policies. Now, based on our lecture notes, textbook and other reading material you had, write a thorough critique of the theoretical arguments you have developed in your answer to the previous question. In your critique, make sure you discuss the potential problems with the model, its assumptions and its implications for developing countries. Again, make sure your arguments are clear, concise, and convincing.
Question 1: Memo from the IMF
To: Salva Kiir Mayardit, President, South Sudan.
Mister President, let me tell you about the wonders of free trade. Absolute free trade is the path that will lead your people to the edge of greatness and develop your country in the best manner.
When we talk about economics, one of the best things to do is make a model. The world is an incredibly complicated organism, with billions of people making thousands of decisions every day, and a good many of those operate in the economic sphere, as workers or as investors or as consumers or savers. “The Economy” writ large is all around us. One could argue that most of our decisions are economics decisions in some way. So instead of talking about this highly complex organization, we can instead look at once person in isolation as a model of how all people work.
The model that many economists use in looking at a society in isolation is Robinson Crusoe. What they will focus on the fact that we have a man who is trapped on an island who is looking to recreate society as he knew it on an island in isolation. All he has is his wits and the flotsam and jetsam from the ship he was sailing on that wrecked. He lives his life in isolation, making shelter and procuring his own food. He lives in a state of complete self-reliance. He might not be the best shelter builder in the world, but he is the best shelter builder available. This goes with every act he does. Might not be the best fisherman or farmer or bookkeeper (He’s English so of course he keeps dedicated records of everything), but he is the best of all these that he has access too.
We could leave Mister Crusoe there, and alone in that state of self-reliance if that was the end of the story. We wouldn’t be mentioning him here if that was the end of the story. What happens is that Crusoe finds someone else on the island. Where he thought he was all alone he was solely responsible for his own upkeep, this was a situation we could define as autarchy, which the national equivalent of Crusoe in our first case. But if there is someone else on the island, they do not have to work independently. Instead, they can focus on the things that they are better at. Let us say that there are only two things to eat on the island. There are fish in the cove and coconuts on the trees. In our example, the new person on the island is better at getting coconuts and Crusoe is better at fishing. If this is the case, then both people could work independently, spending their time alone and not maximizing their output. There are other options now.
The first option is that one of the men could sneak into the other’s camp and kill them. Or they could just rob them and leave them alive, but it would involve some sort of expropriation that is fundamentally gross to those of us who strongly believe in the idea of private property. Not only is this not a sustainable long term strategy if one of them kills the other, but even petty theft would mean that the people would have to turn from productive industry to spending limited time and resources on some sort of guards for the resources they made; building secure storage and crafting weapons, losing sleep making sure that they and they property were safe. This sort of mutual distrust is a sure way to make sure that neither party is happy, and that the optimum amount of goods goes unproduced.
So, what then, you may ask, is the solution? I am glad you asked, because the only answer is trade liberalization. In our model, we do not want Crusoe and his new neighbor working separately. They benefit if they instead use their unique talents. We imagined that Crusoe was better at fishing and the other person was better at obtaining coconuts. Instead of them working separately, what they can do instead is specialize. If Crusoe specializes in only fishing and the other person just collects coconuts, then the overall effect is that the island has both more coconuts and fish to consume than if everyone worked by themselves. What is needed is some arrangement between the two parties so that they can easily see this mutually beneficial solution to their problem of underconsumption through lack of production.
Here is where we want to pull back from the earlier example and look at nations instead of an isolated island. The concept that we saw on the island holds- there is a mutual benefit to all who are included in an open trade agreement. This result is especially true now, as we see some of the most powerful countries in the world make a case against free trade, led mostly by the misguided ideas that all the countries of the world are stealing the wealth of the United States. For someone who like to brag about the size of his brain and the quality of his education at Penn, he is making an elementary error about free world trade? The mistake the president is making is one that is opposed by the vast majority of economists. Up to 97% of economists support free trade (Prasch 37), which is as close to a consensus as you can get in scientific discourse, especially one as prone to tribalism and disagreements as economics. As a continued example of how self-evident the idea of gains from free trade is, all you need to do is go to the nearest economics textbook you might have at hand and there will be a whole chapter that walks through something similar to the example I just walked through. That chapter will be right up front because of how foundational the results of the idea of the gain from trade are.
We economists put so much stock in the idea that there are gains from trade that we see Adam Smith as the father of the discipline because he wrote the Wealth of Nations, where he made the argument that where previous people saw the development of the economy in terms of growing a pile of stuff. That’s a crude description, but what he wrote against is called “mercantilism,” a theory of economic growth that emphasizes imports and devalues exports so that the treasury can build up reserves to fight wars. Smith saw that the titular wealth was not in the hoard but in the capacity. This capacity was grown through trade. This trade is a voluntary exchange that like what we saw on the island, leaves everyone better off (Gerber 41). The mercantilist ideal, one that has been adopted by Mister Trump, is that we should not trade and accumulate, like dragons on our pile of gold. This is a zero-sum world where there are clear winners and losers. In the world of the economists, in the world of free trade, there do not have to be winners and losers. As we saw on the island, through cooperation and specialization, we all can win in the game of the economy.
I am writing to ask you to join in the economy in a world of free trade not entirely through some sense of benevolence, I must confess. We at the IMF do want to see all developing countries meet their goals and grow and to take the yoke of underdevelopment and throw it off and enjoy the promise of capitalism in that it can grow your economy and your people will not have to suffer from want and deprivation as you join the world as producers and consumers. However, welcoming South Sudan into the world economy isn’t just about what is good for South Sudan. What we at the IMF know is that aside from overall mutual gains from trade, one of Smith’s other major insights is that everyone benefits the larger the market is. That way, everyone can become more and more specialized and the economy on a global scale can benefit the most – but this specialization is bounded by the size of the market (Gerber 41). By entering in free trade with the world not only does South Sudan win, but everyone else in the world market benefits through the growth of the world market. It is a win win win all around no matter what some officeholders say.
At this point, it is common to start having some doubts. There is no way that free trade is that much of a magical bullet. My country has unique situations that may eliminate them from consideration like riots or revolutions or different political systems. There is even a chance that there is nothing in which my country is the best at doing. The good news is that these things do not matter. If overall gains from trade is chapter one in the elementary book of trade, then two related concepts are in chapter two. The first of these concepts is the idea of opportunity costs. An opportunity cost in economics is the price of the next best thing you give up doing something else. Let’s say for example that our native in the island example instead of being the best at coconut gathering and Crusoe was the best at fishing, is instead the best at both tasks. On any one day, the island native and gather two fish or two coconuts. In this framework, to gather up coconuts, the native must give up the opportunity of catching two fish. In this example, Crusoe can only gather half a coconut or catch one fish a day. Though the native is better at both tasks, the larger island economy is better off if Crusoe specializes in the gathering of fish because his opportunity cost of catching one fish is only half a coconut – fish are relatively cheaper in coconut terms for Crusoe than for the native. This arrangement is known as comparative advantage, the second important concept (Gerber 51).
Under comparative advantage, we can see that if the two economic actors split their day we would have a production of one fish and one coconut from the native and half a fish and a quarter of a coconut from Crusoe, totaling 1.5 fish and 1.25 coconuts for 2.75 food units, where under specialization for the comparative advantage the economy has 2 coconuts and 1 fish, for 3.0 food units. By specialization, we have winners on the island economy as we do in the larger global economy.
I do hope, Mister President, that I have laid out the case for integration into the larger world economy in an environment of free trade. By specializing on your country’s comparative advantage and focusing on that good in trade, you will be able to receive the goods of the world at your doorstep. Otherwise, if you don’t open your borders you will go it alone. You do not need to listen to me though. Joining the world economy and embracing the liberal ideal is not some new idea. You can ask over a billion Indians who have seen the repudiation of the so-called “Hindu Rate of Growth” as economic liberalization in India was initiated in 1991 by Prime Minister P. V. Narasimha Rao and Finance Minister Dr. Manmohan Singh, or the billion of Chinese who have benefited from the removal of the “Iron Rice Bowl” and saw their country embrace free markets through becoming a workshop to the world. That can be you in South Sudan, as your people reap the rewards of joining the world economy under the umbrella of capitalistic free trade.
Question 2: “Free Trade, Chains Included” by Edgar Mihelic on his Blog
Good afternoon everyone. I know it has been a while since I posted and I said that it would be something of a weekly thing, but you know how things go. Work gets hectic and life gets in the way. What made me need to write was coming across this memo from the IMF to the President of South Sudan. I don’t know how much you know about South Sudan. It is the “newest” country in the world, only gaining full recognition in 2011 but preceding and post-ceding (don’t think that’s really a word) that the country has been in turmoil since colonial times, fighting against the northern more Muslim-dominated north, a government that also committed the genocides in Darfur that briefly held the west’s attention. I went to that fine source of information Wikipedia to make sure I wasn’t leading my readers astray, and much of what I remembered was right. It’s a land-locked country, it does sit on a branch of the Nile which would be helpful if the river was navigable to the Mediterranean but there are big dams blocking the way because of that fun development goal of damming the world’s great rivers for hydroelectric and irrigation reasons while closing the rivers to trade and drowning villages and towns that relied on the river to give life to them. Anyways, I was looking at the wiki site and I saw this sentence: “This region has been negatively affected by war for all but 10 of the years since 1956, resulting in serious neglect, lack of infrastructure development, and major destruction and displacement. More than 2 million people have died, and more than 4 million are internally displaced persons or became refugees as a result of the civil war and its impact.” (“South Sudan”). I don’t know if there is a technical term for what’s going on down there, but I would not want to live there.
I knew enough about South Sudan to know that there are issues with that place. What the IMF memo I read (linked above if you want context for what I’m talking about) really hits on are some of the most elementary arguments for free trade. Not only does it just have this blanket argument for free trade, it seems ignorant of some of the larger issues. One of the things I joke about is you often hear people talking about how a specific policy “is not a golden bullet” or this intervention is good “but no panacea” is that you never hear the flip side – nothing is just called a panacea on its own, and it if was you would have a bit of pause. But this memo comes right to the border of calling Free Trade some sort of panacea. I suppose they didn’t because it sounds weird to just use that word alone with the negative.
And here’s the thing – I come to praise Free Trade and not to bury it. If you’ve read my work, you know how much I love Marx. You know how much the last page of the Manifesto means to me. The phrase I focus is proletarians of all lands, or workers of the world depending on your translation. (Proletarier aller Länder vereinigt Euch! If you go with the original German.) You can’t have worldwide proletarian revolution without moving towards a generalized capitalist world (a position endorsed by the man himself in his own speech on free trade “In a word, the free trade system hastens the social revolution. It is in this revolutionary sense alone, gentlemen, that I vote in favor of free trade” (“On the Question of Free Trade”). Add to that you really can’t keep down forever, though lord knows we westerns have tried both through colonialism and the neo-colonialism thing in terms of our institutions and the rules we set that are at the benefit of the us at the expense of the them.
I am also in favor because the points the author of the IMF memo makes are true. Yes, Smith was right in pointing out that there are gains from trade. Yes, both comparative and absolute advantage are real things (I’m less certain about opportunity costs in the real world though, they only make sense to me in these toy models with simplistic assumptions, but that is a discussion for another day. The problem the author has is that he stops there. “Look, Mister President, there are gains from trade and if you join the world economy you can reap those gains and by so entering the economy under free trade you make the whole world better!” Reading something like that makes my eyes roll a bit because they are true, but they are incomplete. A lot of people believe in these fairy tales that are based off toy models from the first couple of econ classes in part because that is all the economics they had and in part because they want it to be true. These are the same people who will point to a graph of the labor market and versus wages in a partial equilibrium analysis and draw a horizontal line at some minimum wage point and pretend that this model represents the labor market and if the line is above the equilibrium wage then the minimum wage leads to job losses and if it is below the clearing point then the minimum wage is not needed because the market is already taking care of the people in the labor market. So yes, the story is true, but there is more. As I like to say, “It’s more complicated than that.” I mean, if these people didn’t believe their own words, you might think that all their output is some sort of straw man set up so that others can come around and poke holes in their argument.
What I want to do is go back to that island. Economists love that island. Here’s the very first thing you should know about Crusoe was that he was a slave trader and was the owner of a slave plantation. The reason he was on the ship that crashed was that he was going to get more slaves. So, he was not a good guy from modern standards. The tale is told through his eyes and he is the hero, so that when “Friday” is rescued – not as a native but as an escaped prisoner. Crusoe brings civilization onto this man. Joyce called Defoe’s creation of Crusoe “the true prototype of the British colonist. ... The whole Anglo-Saxon spirit in Crusoe: the manly independence, the unconscious cruelty, the persistence, the slow yet efficient intelligence, the sexual apathy, the calculating taciturnity” (“Crusoe”). I’ll give Joyce more credit for a turn of phrase than I can muster, that unconscious cruelty that is the history of the developed world over the developing world. As Crusoe is to Friday is the English and the Americans to the rest of the world, oppression even when we think we’re doing the best for the natives of any sort.
I want to come back to the idea that the story is told by Crusoe through his eyes. Friday does not get to tell his story, or if he does it is through the tongue of Defoe in his language. I’m sure if I googled, I could find Friday’s story in a post-colonial context written by some West Indian author. If I’m wrong, I hope that this sentence wills that work of art into existence. But the whole thing makes me think of the colonial aspect of the profession of economics. If you look at the winners of the biggest prize in the profession, they are almost all western-educated, white men. It’s kind of appalling because it becomes a self-replicating cycle. You lose out on the voices of people doing economics from countries that are not the Crusoe countries but instead are Fridays, telling their stories in the colonial tongue.
I mention this because I want to weave together a couple of threads now. The first is the assumptions behind the free trade absolutists, then questions of time and power, and then look at other voices.
The first part is that the assumptions behind the simple Ricardian view of absolute and comparative advantage work with a very constrained set of assumptions. For example, the only real input is labor, and if the economy changes, then the workers in one industry will just easily move to the other industry. (Oddly, there is no assumption that the workers will themselves move to the other countries.). Once you start to relax these assumptions and start to move towards the real world in your approximations you start to see the beginnings of inequalities and power dynamics. This has not been ignored by mainstream trade economists, as we have a working model called the Heckscher-Ohlin model that allows for different factor endowments, different skill levels of labor, and it shows that there can be some internal strife in terms of adjustments between industries (Gerber 68), and Paul Samuelson extended this to show how trade balances power within countries, as the abundant factor of labor or capital sees a gain in wealth with trade (Gerber 70). These results that show that things are more complicated in a free trade environment than their cheerleaders will admit to are in the same elementary 101 textbook that is spoken of in the IMF memo, but perhaps they are more near the back of the book, in those chapters added because the publisher wanted to say they covered those topics but in real life are never fully reached in the course of an ordinary sixteen week semester. I think if we look at the survey that claims 97% of economists support free trade, and dug deeper, we would find many caveats in there, those “Yes, but…” statements that litter the discourse within the science but for some reason are less common in public-facing statements by the policymakers who adopt economic reasoning for their claims and policies.
The second part is that like in the story of the Crusoe, like that of the actual world, there are complexities that are ignored in the simplistic model. Crusoe had the items of the ship that were left behind when it wrecked, so he has some factor endowment in terms of capital goods (the tools) that set him up. It is typical a white guy who ends up somewhere where he has a lot of power and then assumes it was through his own goodness that he has that power and not the accumulation of skills built up by all the ghosts preceding them. Then there is the question of time and power. Friday came after Crusoe had made his set-up, and by then he was well established while Friday was an escaped prisoner. Crusoe not only shapes Friday in his language and his way of life but converts him to Christianity – finding Jesus somehow on a sunburned rock. And this is where Joyce comes in above and it makes me think of Ha-Joon Chang’s work on kicking away the ladder. Like developed countries that have already developed and thus want the rest of the world to join in their system with their rules, Crusoe does the same for Friday. He doesn’t ask, as far as I know, for the opinion of Friday or what he wants. He doesn’t seek out his expertise. Instead all his actions toward the man are to aid in his own reproduction. In the IMF memo there is a sense of selfishness in terms of a bigger market allowing greater specialization following Smith, but the IMF or other global institutions are not selfless bodies. They exist to enforce the rules of Washington or Robinson Crusoe as they see fit. If they do happen to benefit the country that is the focus of the free trade policy that is good, but the question is if they do. We can look at the work of people who have studied the idea of convergence, like Lant Pritchett. They study the historical evidence and see that once a country has grown, they continue to grow. There is an idea that the developing countries will someday catch up to the developed world, but if the developing world continues in their absolute growth, the absolute and relative differences between the developing countries will continue to grow. So, if you look at the IMF memo and the loudly proclaim large countries like China or India benefiting from the world system, you have to remember that in absolute monetary terms of output, India is between Germany and the UK, both with many fewer people. And even China, with decades of substantial growth has only recently approached parity with the US, the largest country in terms of absolute output. That sounds good until you see that China has four times the number of people of the United States so that their per capita GDP is only going to be about a quarter of that in the US, and that is after more than a quarter century of “Miracle” growth rates (“GDP”). Then if you compare the two countries side by side, China is five times the size of India, bringing to the front unresolved questions like “Is democracy bad for development?”.
What we have then is this superstructure of power and history that have created some sort of spectrum of the world, with different identifying criteria between the First and Third world, or developing and developed country, or colonizer and colonized that map onto the world some sort of established class structure. This class structure exists because of how time has played out. Capitalism started in England and then it spread but those guys had their first mover advantage and did what they could to spread their way of life across the globe, acting as a sort of self-imposed high-level aristocracy / parasite over countries on five continents. And then the rest of Europe got in the game and we are still living through the process of untangling from that burden the English imposed on themselves and over the resto of the world. Strife in South Sudan is partly there because the colonial powers drew borders on a map and did not care about how those borders were drawn or what ethnic groups or language families were contained in there or about the whole scope of prior history. The English, like Robinson Crusoe, seemed to think of themselves as coming across some sort of Tabula Rasa each time they discovered some place new that didn’t speak their tongue. It became an assumption that the newly subordinated countries would follow the ways of capitalism. And the crazy thing is that they did! There’s a line in the first chapter of the manifesto where capitalism once introduced throws away all other forms of production. I’ve likened that movement to something like a virus or cancer, but capitalism and free trade are not things of themselves, but really ideas of how to order production so capitalism needs to be in the minds of people to spread. Lenin talks about this imperialism being rooted in the development of monopolies, and the need to export capital to grow the market for the consumption of commodities. The question then is where does it stop?
There is a finite limit to the world now. You can bring in most every country into the sphere of the WTO, have them work at their best advantage in the global division of labor, and then what? Are we seeing now in the populist movement what happens when capitalism hits the ceiling? Capitalism needs growth, and perhaps this is something the end of history theorists missed. Without extensive growth there would need to have intensive growth, and instead of seeing that in the countries where people still live lives of struggle, we see that in the already developed countries where there are now any number of examples of conspicuous consumption even from the middle classes that would have made Keynes blanch when we was writing 80 years ago that we has pretty much met our material means so we would be moving towards 15-hour work weeks.
Where does that leave us then? The Marxist critics point towards economic reasons for the power imbalances, but in a way the first world institutions replicate them, and the man Friday countries in the developing countries are either set to join with the world or suffer through exclusion because the powerful countries set the rules. One thing we have been seeing is the subjugation of the state. Dani Rodrik, who might be as far left as allowed in terms of still being a mainstream economist, writes of this trilemma we face in that we cannot have deep economic integration, democratic politics, and the nation state as we know it. He points towards some looser federalism at the highest level of organization, but I feel that reality is surpassing theory in that the corporate form is bypassing the state in terms of an organizing principle of economic power. You don’t just have to look at how successful corporations are at avoiding corporate taxes in both subverting the rules of the state and in helping shape the drawing of the rules, but you can look at the work of someone like Milberg who points to the changing shape of value chains in their international structure that points to a twenty-first century model of how power will be structured as the vertically integrated monopoly in terms of production has gone away in favor of multiple arms-length relationships that keep each value creation step separate, creating the need for a Lenin of this century too to analyze the power relationships present in both the corporate and state forms and how they interact.
Anyways, I know I kind of took us all for a journey here, but I will sum it all up here. Free trade is good, overall, but we need to take into consideration the fact that the world did not come into being yesterday and today we are trying to set up the rules of the game between sets of peers of equal power. The weight of history is carried heavily upon us, and we need to be cognizant of those difficulties and humble in our approaches because in the real world, everything is more complicated than our models, and in our reality there is no such thing as “Happily Ever After”.
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