Free Trade, A good thing?

One of the assumptions which seems to underpin a lot of the dicussions about the economic situation is that "Free Trade" is a Good Thing and it leads to increased properity for all concerned. It seem to be a common presumption in the press, but it is not universally agreed. As with a lot of economic assertions, when I thought about it I found I did not understand either the theory or the practice which supports the idea: it is often just a given. So I have been trying to make a start on getting to grips with it.

As I understand it the notion of the benefits of free trade were first expounded in the 18th century. At that time the prevailing wisdom about trade was something called "mercantilism", which is not a term I come across very often. That is perhaps not surprising, because the "free trade" theory seems to have superseded it. If economics is a "science" then a theory which is shown to be wrong would be discarded, as happens in the hard sciences. So called "social sciences" are not really sciences in the same sense, because we cannot really do controlled experiments in the same way: but it is defensible to consider we can look at outcomes in the real world and learn from what happens: in principle at least.

So, what did "mercantilism" mean? As I understand it it is a fairly simple idea on the face of it: it says that a body (let us say a nation state) should not buy more than it sells. While it does not seem to have been a very comprehensive theory, it did influence international trade for about 200 years, from Elizabethan times up to Adam Smith's challenge in "The Wealth of Nations". According the the Mercantilist view, a nation should utilise every bit of its land and labour to produce goods, and should be as self sufficient as possible. Surplus should be sold abroad, and imports should be avoided as far as possible. Where it was necessary to import, that should be limited to raw materials, and those should be converted to higher value finished goods which could then be sold. It is obvious that in order to implement such a theory there has to be a great deal of intervention in the form of taxes and tarrifs and regulations: most often imposed by the state, which also protected the merchants militarily. This system lends itself very well to imperial arrangements, and in the British empire the subject countries were prevented from making and selling finished goods and from trading with other powers or nations outside the empire.

One concomitant of that is the development of a "black market" and smuggling was widespread at the time. More importantly the theory cannot deal with failures in the ideal of self sufficiency. Tarriffs and restrictions on the import of corn are all very well when you grow enough food: but are disastrous in time of famine. There is also the obvious fact that this is economic war: effectively it conceives trade as a "zero sum game" and so the success of one nation in pursuing this policy is necessarily the loss of another, if they also subscribe to the ideal. And maybe even if they do not.

Mercantilism is not really a theory, as I understand it. It was rather an expression of the self interest of merchants. They had an interest in ensuring that the working people were kept to a subsistence level of existence, so that the finished goods were comparatively cheap. But that leads to another consequence: the "market" is largely fixed in that situation. A consumerist model cannot develop, or at least not as we know it today.

Although "mercantilism" is seldom mentioned it persists as an underlying policy, at least some of the time. For example the opium wars are sometimes characterised as arising from the fact that china had a lot of stuff which western people wanted to buy: but did not want any of the goods the west wished to sell. Under mercantilism that could not be allowed, and it wasn't. Although "free trade" was by that time the dominant economic theory it seems that it was not embraced when push came to shove: similarly, during the economic disaster which was the late 1920's and 1930's, free trade gave way and many nations introduce trade barriers and protectionist policies. It seems that this is an ongoing tension and it accounts for the anxiety about maintaining free trade in face of economic pressure, which is often rehearsed in the financial press today.

Adam Smith followed others who were finding flaws in the mercantilist theory. Most importantly he pointed out that wealth is not fixed: and it was charged that the mercantilists confused wealth with money. The money in question at the time was gold. The mercantilist aim was to maximise the holdings of gold within a country. But if you do that then the country with a lot of gold will find that gold depreciates in value: while the country which is losing gold will find that it appreciates. In the end there is no gain for the exporting country because the money they get for the sale of goods is not worth very much at home. So they will stop selling. The balance of trade will reverse, then. Mercantilism is thus a self defeating system, arguably.

Over the next century or so, classical economics replaced the mercantilist ideas and free trade was a big part of that. What that was about, so far as I can gather, was first the notion of "absolute advantage". This idea proposes that a focus on self sufficiency is misguided. Clearly growing tomatoes in Scotland is going to be a lot more expensive than growing them in the south of Spain. It folllows that it makes more sense for Scotland to abandon the production of tomatoes, and rather to buy them from Spain. Scotland should concentrate on producing those things which it has an absolute advantage in producing, and swap those things for spanish tomatoes. Everybody wins. Except that this does not work. Some countries have no absolute advantage in anything. This objection was met by someone called David Ricardo, who modified the theory to include the notion of "comparative advantage". As far as I understand it that involves a truly cooperative notion of trade. On this conception countries should produce whatever they can make most cheaply: even if that is still more costly than the same goods produced elsewhere. Let us imagine that Spain can produce tomatoes for profitable sale at 1p each. And can produce crabs for profitable sale at 5p each. Scotland can produce tomatoes at 10p each: and crabs at 6p each. The best outcome is said to be for Spain to stop producing crabs and switch resources into producing more tomatoes. Scotland switches resources into crab production. In Spain at the outset 10 folk are producing 100 tomatoes each and another 10 are producing 12 crabs. In Scotland 10 folk are producing 1 tomato each and another 10 are producing 10 crabs. Total income is therefore:

Spain: £10 for tomatoes and £6 for crabs
Scotland: £1 for tomatoes and £6 for crabs

After the switch we end up with:

Spain: £ 20 for tomatoes
Scotland: £12 for crabs

Win/Win.

It seems obvious that maintenance of free trade is absolutely crucial for this to work. Spain and Scotland MUST allow the free transfer of goods so everybody gets both crabs and tomatoes. And price is automatically set by the market: any interference with that will lead to some gains and some losses. But the losses will outweigh the gains

To illustrate that idea let us imagine that the world price of crabs is 4p each. Scotland cannot produce crabs at that price: they need 6p minimum. So Scotland has to stop producing crabs, in logic. But if it does that, the folk have no work and so they cannot have crabs at all. The people might well decide that is not acceptable. One answer is to impose a 2p tariff on imported crabs. Now crabs in Scotland cost 6p, not 4p. The supply of crabs is equal to the demand for crabs inside the country, when both domestic and imported crabs are counted. And local crabs will continue to be produced. Indeed domestic production might well increase if the industry was in decline before the tarriff was imposed.

So the imposition of this tariff gives a bonus to the producer, and also a bonus to the government which collects the tariff. The consumer has to pay more for crabs, so they lose out. Free marketeers argue that the loss to to the consumer is greater than the benefit to government and producer combined. So they say that this is a net loss to society. They might be right. But on the face of it I do not think they are. The analysis leaves out the fact that the loss of domestic production entails the loss of the jobs and the wages of the workers who produce (and buy) crabs. I do not see how that is accounted for in this model.

I also came across this article about the free market

http://ht.ly/6KmQl

It draws attention to the loss of capital which such switches necessarily entail. So the model does not account for the fall in demand, nor for the loss of capital. Any restructuring which would mitigate or eliminate those effects will not happen overnight: so the real world effects of those things must be factored in: yet they don't seem to be. As with the austerity measures so popular at the moment, the fact that "consumers" and "workers" are the same people seems to be overlooked.

AS I said, I am trying to look at these big ideas from a very basic position: getting an explanation of what we actually mean and attempting to follow the logic of what is being argued. There are bound to be very basic mistakes in what I say: and I will welcome anyone who can point them out and discuss them with me. This process will help me to come to conclusions about whether they are logical, as is assumed; necessary, as is claimed; and worth the costs, as is largely ignored. I hope that some of you will find this worthwhile too

Edited by FionaK - 5/10/2011, 05:15

As I noted above, true "free trade" relies on an enormous level of trust between states, if the "comparative advantage" model is adopted. One of the things which is often parroted is that the neoliberals are more "pragmatic" than others: they claim to be working with the grain of human nature, and that is illustrated by the much repeated refrain that "communism is a lovely system but it just can't work" because of that same human nature. Such statements pass virtually unchallenged it seems.

But it is obvious that the free market, with comparative advantage, is at least as utopian as any alternative. So for this part of the complex of assumptions which we are asked to take on faith, there seems to me to be a problem. That problem arises from the fact that the propositon relies on a conception of "human nature" which is as false as any other. In this case the difficulty arises from reductionism, I think. "The invisible hand" depends on the idea that everyone pursues their own interest selfishly and rationally; and their interest is wholly economic. That is reasonably explicit in the theory as propounded by Adam Smith, I think.

That reasoning excludes the actions of groups, and pretends that each person is always and only an individual: the social effects are unintended and unconsidered. They arise from the sum of individual decisions each directed towards the interest of the people making them. A moment's reflection reveals that as inadequate: people do cooperate, and they do sacrifice their own economic interest for other values, at least some of the time. To sustain the notion they don't one has to recast the behaviour as something else: and so we get the denial of the possibility of altruism, for example. It is explained away, since it cannot be ignored: and that is necessary to the model.

More seriously it denies fear. In reality no group of people who identify as "us" is going to accede to a situation where their food supply is wholly under the control of "them", if they can possibly avoid it. Yet that is an inevitable outcome of this theory if it is applied in pure form.

Thus the notion of free trade is impractical, and this is what we see. The current conception of " free trade" is nothing of the sort. What we actually see in practice is not free trade: it is mercantilism. It is interesting to me that that word is out of fashion, at least in the press, and is seldom encountered. The impression is that it was an older theory which proved to be wrong and was discarded, in the same way as theories in the hard sciences are abandoned when they are proved wrong. But economics is not a hard science: it is not a science at all, or so I think.

One feature of mercantilism was that the conditions of trade were regulated by the state, very largely. It is for this reason that the neocons can legitimately say that it is not a part of their model: because state control is explicitly rejected in their world view. For them, the "invisible hand" produces the best outcomes and any attempt to interfere will necessarily produce less than optimal outcomes. That is the surface argument. Once again it is a cover for something quite different. As I have argued in other contexts this only works if the focus is on the activity of government and the state. A convenient, but ultimately misleading, dichotomy: for the issue is power and control: not fundamentally about which body wields it. Corporations and financial institutions can also wield that power, and can do so either directly, or covertly through usurping the power of the state. And this is what has happened, I suggest.

Free trade will not be achieved because of the level of interdependence it requires. In theory the nation state could wither away and we could all be citizens of the world happy to accept that the most basic needs will be met through efficient production of essential goods in lands far far away, of which we know nothing. Thus we would accept that the middle eastern countries produce all the oil, since their reserves make that economically rational, and will lead to the best outcome. In your dreams! I contend that that will neve be allowed to happen, because we cannot afford to be at the mercy of an outgroup for something so crucial to our lives. And so with food, and many other things. The idea is laughable if you lift your eyes above the economic parapet and face the facts of human interaction. That is not to say that a unified world is impossible: nor to say that it is undesirable and should not be pursued. Thus the idea of globalisation is attractive to many, including those on the left: only they call it internationalism, and they sing songs about it. The globalisation of the neocons is nothing like that internationalism. The cooperation which underpins that idea is foreign to their analysis, because it depends on accepting that our existence as social animals is at least as important as individualism. And that is at odds with their narrative. Once again ideas which have a surface congruity mean very different things and it is important to be clear about what we mean.

In practice the notion of "free trade" as outlined in the theory, has no part in what we are actually doing. It is, rather, mercantilism disguised as something altogether more noble. Indeed the need to disguise it tells us a great deal about the status of the theory of human nature as wholly selfish: few actually believe it, though many will display the faux realism they think it indicates. The lie is apparent in such notions as "trickle down": we have to pretend that in the end our selfish behaviour will lead to betterment for all: and that is essentially what Adam Smith and his successors did. Smith may be forgiven since there was little experience at the time: and we should remember that he explicitly warned against exchanging one master for another: he was opposed to excess profit and over-powerful corporations. But that is glossed over and I imagine he would be horrified by the use made of his theories today.

That what we have is not free trade, but rather mercantilism, is demonstrated in many ways, I think. As an example, the IMF and the WTO exist to promote and maintain the principles of "free trade", it is claimed. Yet there is an obvious problem. The IMF can only impose its prescriptions where a country requires its help: that is, needs loans from it. So when a country is in trouble it bounces in and demands austerity measures. It cannot do that if there is no lever in the form of financial assistance required. Thus there are enormous subsidies paid to rich farmers in the western world: but such subsidies must be abolished if IMF help is requested. "Dumping" and "quotas" and "subsidies" direct and indirect are a universal feature of the rich world. They gained their wealth through mercantilism, and they have not changed one iota. But poor countries (many who are poor precisely because of the history of mercantilism and the imperial past which underpinned it) are not allowed to do the same thing. They must accept "free trade" in terms we would never accept for ourselves: their food and water and power must be controlled or supplied by outsiders, and they are to have no objection to that because of the theory which masks the reality of what we are doing. This is rank hypocrisy, no matter how you slice it.

There is a further problem with free trade and comparative advantage. In the tomatoes/crabs example I gave above both parties were producing food. If we could foster trust and allow others to completely control the supply of staple foods, so that all food was produced in the most efficient place it is theoretically possible to envisage a situation where we maximise food production. It would need a world government perhaps, but that is not something which gives me nightmares inherently. But there is this problem. Leaving population growth out of the equation there is a limit to this: once we have ample food we really don't buy any more, even if it gets cheaper. I think this is called "inelastic demand". In the real world there is population growth, but it slows when prospertity arises, it is sometimes said. If it does not, then we are all pretty much doomed I would suppose, so the whole discussion is moot.

So let us now consider the implicatons of free trade and comparative advantage where one party is growing food and the other is making finished manufactured goods. This is the situation which the mercantilists sought to achieve, and I wondered why they wanted to ensure the imports were all raw materials and food: but the exports were not. Inelastic demand is the answer to that, I think. It is usually explained on some notion of added labour value, I think. But that does not make much sense to me. If I work in a field 12 hours a day to grow corn I cannot see why that labour does not add as much value as working 12 hours a day in a factory to make mobile phones. So I dont think it is the labour which makes the difference. What makes more sense to me is the demand. There really is an absolute limit on demand for food. There is no such limit on demand for inessentials.

So let us suppose that Spain is best for growing tomatoes, and so it puts all its effort into that, as we discussed above. But instead of crabs Scotland makes mobile phones, on the same terms as before.

At the outset we have 20 people in Spain producing 100 tomatoes each
And we have 20 people in Scotand producing 10 mobile phones each

If there are a total of 1000 people in each country they each get a tomato. But they do not each get a mobile phone. There are only 200 mobile phones, and so 100 people in Spain get one and 100 people in Scotland get one.

Both countries now improve their techniques, and they double their production. What happens?

Nobody wants any more tomatoes because one tomato each meets the demand for tomatoes.
But loads of people want a mobile phone.

It is at this point that converting that to money becomes confusing, and this is one of the objections Smith and his followers identified. In the earlier post I converted to currency and Spain was getting £20 of income and Scotland was getting £12. But this is trade, so that is not really what is happening. What is actually happening is that Spain is swopping 1000 tomatoes for 100 mobile phones.

Once production doubles Spain can still only swop 1000 tomatoes, because nobody wants any more than 1 tomato. But Scotland is not meeting internal demand for mobile phones: so there is no reason they should agree to swop more than 100 for 1000 tomatoes, as before.

Both countries have been equally innovative: but Spain is stuck with 2000 tomatoes nobody wants: and Scotland has its thousand tomatoes, its existing 100 mobile phones, and another 200 which people do want. So Scotland gets significantly richer, I would say.

You can still convert that idea to money: in which case Spain still gets £20, as before: and Scotland gets £24. But that is really the measure of value: it is not wealth, in itself. Spain is in exactly the same position as before, in absolute terms, as the money shows: but scotland is not twice as well off as before, which the money implies: it is three times as well off, because it has 3 times the number of mobile phones now. Or, at least, if you consider the situation of the individual citizen it is: and that seems to me to be as good a measure as any.

Eventually everybody in Scotland will have a mobile phone and a tomato. But not everyone in Spain will have a mobile phone, because they were only getting 100 a year and Scotland was getting 300. Still this looks good for spain, because you need a tomato every year: you only need one but you do need it. Spain will always swop 1000 tomatoes. It does not look so good for Scotland, because once you have a mobile phone you do not need another one....oh wait. That just isn't true is it? Because your grey mobile phone is no pigging use any more: you have to have a blue one!

Of course Spain might breed a yellow tomato and might persuade some people they need a yellow one: but they still only need one. They will take a yellow one or they will take a red one: but they will still only take one. But they will take a second mobile phone if it is blue: they will throw the grey one away. They might even donate it to a charitable foundation providing extra phones for spanish people who haven't got one yet.

Both countries will now invent advertising and marketing. Spain will invent recipes which use more tomaotes and will promote tomatoes as medicine, or something to put in the bath, or skin cream or shampoo, or aphrodisiacs. And that will work to some extent: but there really is an absolute limit on tomato consumption, so that is only going to take them so far. Mobile phones, on the other hand, can be all sorts of colours and sizes and shapes and all sorts of gadgets can be built in to them. We sort of know this. It is because a mobile phone is not a need: it is a want. And wants can be created, where needs just can't.

So if your comparative advantage is in a primary product such as food you are screwed in free trade environment, so far as I can tell. That is why the rich countries are not the countries which produce the food.

If at the start you had a global government which sought to make things good for all the people in a one-world set up, they would ensure that the price of mobile phones fell: that is when they doubled production they would give spain twice a many for the same number of tomatoes. That could work. But that is not what we mean by "free trade", is it ?

Edited by FionaK - 5/10/2011, 05:27

It has been drawn to my attention that the term "Free Trade" is in itself unclear. I had taken it to mean international trade, because that is how the term is normally used, and because Smith's book "Wealth of Nations" focussed on that. It seems to me to be true that it is not a necessary restriction, and that at least some of the same processes can be seen within nation states. However getting to grips with this as a theory of international trade is hard enough, and so I am sticking with that for the moment. It think it is fair to say that trade within a nation's borders does take place: but perhaps it may more usually be referred to as "commerce". Whatever the similarities and differences may be, the focus of the Free Trade proponents has always been on trade between countries and on the benefits of removing barriers to it ( in the forms of subsidies and tariffs and quotas and the like). Those things do exist in some sense within the state, where there are regional policies, for example. But the popularity of the Free Trade model has been applied within states which have purportedly embraced it as an ideal: and so the point is a bit moot anyway.

When Smith and Ricardo were promoting Free Trade as a source of increased prosperity they did not only talk about goods, which is what I have been thinking about till now. They also talked about the movements of capital and labour. If it is accepted that people make decisions rationally, and are motivated by their individual economic interest, then that applies no matter what they are doing. To produce goods for trade one has to have some combination of land, labour and capital. So what happens if we apply the notions of free trade and comparative advantage, taking those things into account? Let us think about labour.

Back to Spain and Scotland, right at the start.

Spain: 10 folk produce 1000 tomatoes. And another 10 produce 120 crabs
Scotland: 10 folk produce 10 tomatoes. And another 10 produce 100 crabs

Total 1010 tomatoes: 220 crabs

One solution is for Spain to move to only producing tomatoes, and Scotland only produces crabs. And that gives a good result, because we get 2000 tomatoes and 200 crabs

Another solution is for Scottish tomato producers to move to Spain, where they can get more for the same amount of work. And the Spanish crab producers will also move for the higher return The end result is the same. Specialisation, monoculture, and they will still swop.

But that won't happen. The Scottish tomato producers will move, for they gain 100-fold. But the Spanish crab producers won't move for the much smaller increase.

So after the switch we get:

Spain: 20 folk producing 2000 tomatoes: 10 folk producing 120 crabs
Scotland: 10 folk producing 100 crabs.

Total: 2000 tomatoes: 220 crabs.

We are 20 crabs better off if the workers move than we are through straight trade, overall: but Scotland has no tomatoes. It doesn't have the extra 20 crabs either, so it can't trade for tomatoes. If you only look at the utilitarian side, 20 people are in the same position as before,and they happen all to be spaniards. 10 people are 100 times better off than they were before and they are Scots: and 10 folk have lost a tomato: and they are Scots too. So what happens next ? Remittance happens, is what. The 10 Scots who are better off send tomatoes home. As they have 100 times as many tomatoes as they had before they can send more than one for the people they left behind, if they like.

Today on the radio I heard that the WTO reports that that the amount of money sent to poor countries in remittance is 3 times the amount spent in overseas aid world wide. "Analysis" considered whether in face of that we should stop direct aid and relax immigration rules instead.

www.bbc.co.uk/iplayer/episode/b015b...or_Immigration/

If you think of nothing but economics this is a rational solution. So why is this not happening? On the face of it it answers a lot of problems. It slows the "race to the bottom" which "outsourcing" entails: if the workers come to the rich world they may drive wages down a little: but they are not here to work for what counts as a poverty wage in their own country. So it does not seem likely it can go that low. which it might if outsourcing continues.

Arguably it means that the country which receives the remittance is stuck in dependency: because the money goes to individuals and cannot build either infrastructure or a welfare state: not everyone will have a relative abroad, so it is uneven. And it means families are broken up. It might be rather transitory if the immigrants assimilate and drift away from their family responsibilities over time.

But if everyone is an individual acting in their own economic interest in a rational way; and if the Free Trade model is correct in saying that the invisible hand works to produce good societal outcomes from the operation of all those individual decisions then it would seem to follow that we should forget trade and do it this way instead. Course you would have to dry the tomatoes else they would go off in transit. But hey ho, nothing is perfect and dried tomatoes are quite nice

Edited by FionaK - 5/10/2011, 05:35

Adam Smith thought there should be no barriers to movement of labour, or capital, or goods. He was basing his ideas on "absolute advantage" and that bears some thinking about. As I noted above, there is no reason why 12 hours working in a field should have less value than 12 hours working in a factory. So absolute advantage does not inhere in labour. Capital is capital the world over: a printing press in Madrid will print the same number of newspapers there as it will in Edinburgh. So absolute advantage does not rest in the means of production (capital). A tomato is a tomato is a tomato. So absolute advantage is not located in the goods. If it is to arise at all I think this means that it is in the land: or more properly in such things as climate and other non-human givens.

As has already been observed, some countries (places) have no absolute advantages at all: and the problem is that because the source of advantage is not of human origin there is nothing that can be done about that. Some folk just can't play this game and they are going to remain poor. There is nothing they can produce more cheaply than anyone else and so they have nothing to trade profitably. They are out of the Free Trade game.

The adoption of the comparative advantage model changed all that: because it shifted the focus to relative costs etc, not absolute ones. And we have seen how that works, in theory. But this entails some rather large assumptions. What you have to ask yourself is, where does the comparative advantage come from? And the more I thought about this the more mysterious it became. The same considerations as I have just outlined with regard to labour, goods and capital still hold, presumably: at least at a the level of theory. The absolute differences which are related to land and climate are still there, and so that absolute part is still in play. If we are to account for the fact that there are differences we can exploit over and above those absolute advantages, it follows that there is some aspect of the other factors of production which are not equal, despite appearances. And in the real world which Ricardo faced that was true. It was true because he did not come along when humanity had just arrived out of the trees or wherever we are supposed to have come from. We had in fact been around for a long time, and we had been producing and trading and thieving all that time.

As noted, the world which Smith and Ricardo contemplated had been shaped by centuries of Mercantilism. Not the whole world, probably, but all the bits of it they could recognise and model. And Mercantilism had served the imperialist countries very well, on the whole. They had followed their system and concentrated the measure of wealth (gold) in their own hands: they had determinedly pursued a positive balance of trade for themselves: they had ensured that subject peoples produced raw materials and they themselves made finished goods: and they had controlled all this through law and tax and tariffs and war. So when Ricardo realised that absolute advantage was not enough he was able to see that the other factors of production were not equal at all. There was a comparative difference between working in a field and working in a factory. Well actually there wasn't, if you consider the worker, because it was an intrinsic part of mercantilism that the workers were to be kept at subsistence levels, no matter what they prodcuced: it kept the prices down. Rather there was a comparative difference between the profits to be made from agriculture and from finished goods. And this was always going to be true, because it is what they had set out to ensure in the fiirst place. But so far as I can tell Ricardo mistook this for a natural law.

So on his model the comparative advantage comes from differences between things which are under human control, in reality. Which brings me to capital. Ricardo recognised that it would reasonable to expect that capital would go to wherever it gave the biggest return. Profit is what this is all about, after all. He saw that labour does not make the difference: there are people everywhere, and because of the mercantilist system which preceded Smith, they were pretty much all poor. For raw materials and for agriculture there is the absolute advantage: but for finished goods there is really no reason at all for a comparative difference to exist, or to sustain. In fact the opposite should happen.

In the example I have been using, Spain was producing tomatoes and Scotland was producing mobile phones. What happened was that Spain got stuck and Scotland didn't. So Scotland got richer, in that it ended up with enough tomatoes and could never get too many mobile phones. So far so good, and this was all based on comparative advantage. The real wealth was couched in terms of the goods to keep it simple; and money was left out of the account as it is only the measure of wealth. But however you count wealth, it is a relative concept. And the point of profit is wealth. So there comes a point when all the Scots have a mobile phone but not all the Spaniards have one. Curiously this means that nobody in Scotland is rich: but there are rich people in Spain. The way this whole system of the free market is supposed to work is through competition. And competition depends on incentive. Incentive means that I can get more than my neighbour, if I am smart and work hard and all of that. So I cannot be content with equality, even if I am better off than I used to be. That is why we are told that inequality is a good thing, a mantra we hear often. Free Market capitalists don't object to a general rise in prosperity: but they do object to equalisation of wealth, because that leads to stagnation and complacency and a whole lot of bad things which never happen if there is the prospect of "more for me". So in these terms Scotland is a disaster now. So how can the Scottish individual get rich?

Well one way is he can move to Spain: because his mobile phone is a measure of wealth in Spain. His possession of it makes him a rich person even if he doesn't do anything else. More than that, if he waits until there is more than one mobile phone per person in Scotland he can gather up all the grey ones people threw away, and instead of giving them as charity to spaniards he can get some of the spaniards who can't sell their tomatoes and put them to cleaning them up, or even painting them blue. He got them for nothing so he can swop them for less than the 1000: 100 ratio previously established. Say he is willing to accept 500 tomatoes for 100 of these phones. Now Spain has the same number of phones as before, but at a cost of only half the tomatoes. The phones are not as good, arguably, but your man has a proper new scottish one every year if he wants one, because he has 500 tomatoes, and a new one does not cost that much. So he is even richer.

20 people who were producing tomatoes nobody wanted are now cleaning and painting phones instead. Spain is back to producing the 2000 tomatoes, which represent the world wide demand for tomatoes. It is still getting 100 phones (though maybe not of the first quality) But our enterprising scot has 500 of the tomatoes and Scotland is short 500.

Scotland is still producing 400 mobile phones: but it is no longer swapping 100 of them with spain for 1000 tomatoes. So it is richer in mobile phones: but there is a tomato crisis. It has to have tomatoes. So Spain puts the price up. Let us say it doubles the price (that likely won't work because at some point the price will cross a threshold and Scotland will go back to producing its own tomatoes: but in the figures I happened to adopt at the outset Scotland is actually incapable of meeting its internal demand unless absolutely everybody grows a tomato: so for this example it will. The idea is the same whatever numbers you use anyway: and, as ever, I am rubbish at numbers or I would have made them more realistic in the beginning: but hey ho). Now Scotland can get 1000 tomatoes for 200 mobile phones. So it has got poorer, because the stock of mobile phones has dropped, and they still only have one tomato each. But spain has got richer: It has got a tomato each and 190 mobile phones now. Our enterprising scot has got a tomato and 100 mobile phones: because half the tomatoes sent to Scotland were his. Spain has gained, but not as much as he has in the scheme of things. And Scotland has lost. ground.

Ricardo thought that this would not happen because he said that captial is immobile: and he thought that for some of the same reasons as labour is not all that mobile in practice. He said


But he was writing in 1824, when travel was a very different prospect to what it is now. The more important thing he said was this though:


In other words, in a situation when capital can travel there is no such thing as comparative advantage. And that seems to be the case.

Three things remain: there is the absolute advantage conferred by productive land, and wealth in natural resources. There are the differences which were manipulated into being in the mercantile era, and which persist. The latter are largely differences in accumulated capital: we have rich states and poor states. And there is the much larger wage differential between states than existed under mercantilism. That is attributed to the requirement for the free market to ensure ever rising demand, if you follow the free market narrative: and we are to be grateful for the benefits we enjoy through that mechanism. But if you think about that and read some history I think it is not plausible. The hey day of the Free Market was in the 19th century. That was not a period of prosperity for most of the people in the richest countries in the world at the time. The Free market seemed to get along just fine without mass consumerism, and the conditions of the people were not much different than they were under mercantilism: which was actually trying to keep them poor. It is my contention that the differential is due to quite different factors: like trades unions, and regulation of the corporations and financiers, and universal suffrage which gave the people some direct means of defending their interests. The prosperity was achieved in the teeth of the opposition of the free marketeers. And we see the same lack of concern for mass prosperity and consumption right now. Despite what they say there is no apparent reluctance to impose austerity measures which will put people back to the place they were in in Victorian times. Some voices talk in terms of the adverse effects of killing "demand" and this is what Keynes addressed. But they are not powerful voices in the scheme of things: and they are not Free marketeers.

We have already seen the impact of mobility of capital, to some limited extent: the corporations which persuaded us that trades unions must be curbed because they were "holding the country to ransom" now say quite openly that if things don't suit them they will take their money elsewhere. Where is the outrage at that form of "holding the country to ransom"? The effects of the wage differentials are also plain to see: labour in India is cheaper, because of the history of empire and mercantilism and because of Keynes and his heirs after WW2: And with no regulation on the movement of capital there is indeed the effect Ricardo identified. Capital goes where it gets the best return, and wages are driven down to the lowest common denominator as a result. What Ricardo relied on to combat that trend is mere sentiment: and sentiment underpinned by practical constraints which no longer exist. I don't think that is going to be good enough, personally

I am sorry it is confusing: but I do not think it is wrong to separate our Scot from the Spanish and from the rest of Scotland. In fact that is part of the story. In most of the dicussions of this fhat I see in the press there is a focus on the relative positions of the countries concerned. We talk about Greek debt and Spanish housing problems and the UK fiscal deficit. We do not talk about the inidividuals (including private corporations who are legally defined as individuals, at least for some purposes), and how their position changes in amongst all this. But they are there and they are central to the tale.

I think the numbers I have used are right enough for purposes of illustration: and I think it is legitimate to try to simplify in this way because that is what the economists have done from the beginning. I did use the same examples as in the earlier posts because I thought that was useful: but it obviously isn't. And the assumptions I made were the same as before, or at least I think they were. The doubling of production came from efficiency in this instance: the number of people required to produce the goods did not change.

The starting point for that last post is the end point of the previous one. At that point Spain and Scotland had both doubled their production.

Before the increase in production Spain produced 2000 tomatoes in total and Scotland produced 200 mobile phones
Spain did not produce any phones
Scotland did not produce any tomatoes
Spain swopped 1000 tomatoes for 100 mobile phones. Scotland swopped 100 mobile phones for 1000 tomatoes
Everybody in Spain got a tomato: and every body in Scotland got a tomato
100 people in Spain got a phone
100 people in Scotland got a phone.

10% of the population of Scotland have a phone at the start of the year. ( they made 200 and they swapped 100 for tomatoes, leaving 100 for scots)
10% of the population of Spain have a phone at the start of the year ( they produced 2000 tomatoes and swapped 1000 of them for 100 phones)
Nobody has any tomatoes at the start of the tomato harvest, because they ate them over the course of the year.

In year 2 production doubled in both countries

Spain produced 4000 tomatoes
Scotland produced 400 phones
Everybody needs one and only one tomato
Everybody wants at least one mobile phone
There is no reason why Scotland should take any more tomatoes.
Spain will not eat any more tomatoes either
There are 2000 useless tomatoes that nobody wants.

But only 10% of the people have a mobile phone.

There is no reason why the Scots should swap more than 100 phones for 1000 tomatoes. Spain has no leverage because it has too many tomatoes: it has to take what it can get and what it can get is 100 phones.

Scotland has 300 phones to give to scots after it has secured its 1000 tomatoes.

At the end of year 2 everybody has a tomato, as before
200 Spanish people have a phone (100 they got in year 1 and 100 they got in year 2)
400 Scottish people have a phone (100 they got in year 1 and 300 they got in year 2).
So Scotland is richer than Spain

The same thing happens in year 3.
That year everybody gets a tomato: and at the end of the year 300 Spaniards have a phone, while 700 Scots have a phone.

Year 4, everybody has a tomato again: 400 Spaniards have a phone and all the scots have a phone.

Both countries are getting richer, but Scotland is getting richer faster. And everybody in Scotland is equal now: but there are still poor Spaniards with no phone and rich Spaniards with a phone.

Because the phones can be "improved", the same thing happens in year 5.

In year 5 Scotland produces 400 blue phones. For simplicity I have not assumed that the blue phones cost more tomatoes, though that probably should be built in: but I am presuming the enhanced value of blue phones is intangible for now: it is a matter of status, let us say.

At the end of year 5:
100 Spaniards have a high class blue phone ( but only one)
400 spaniards have a less desirable grey phone (but only one)
500 Spaniards do not have a phone at all.

300 Scots have a high class blue phone as well as a grey phone.
700 Scots have one grey phone

And everybody still has a tomato.

300 scots have two phones: Most of them retain the two phones and put the grey one in a drawer in case they lose the blue one, or for some other reason. My notion of equality is not quite right. Functionally there is not much in it, but there is a real increase in wealth, since in this model phones=wealth, as do tomatoes. But it is not sigficant gap, and it is closing.

Some scots don't like clutter: so when those people get a blue phone they throw the grey one away. For this purpose let us say 100 of those with two phones feel that way.

Mr McLive is in Scotland and he is not happy with being more or less equal to everybody else. He has two phones, and so he moves to spain and he is now the richest man in that country. But again, not by much. He is richer than those who have no phone at all: and he is richer than the other Spanish people, too, for they have only one phone at best. But he has seen that there are 100 grey phones in Scotland which are of no use there: because everybody already has a grey phone and what they now want is a blue one. Those are the phones which got thrown away.

In year 6 Mclive persuades the 20 Spanish tomato growers to stop producing 2000 useless tomatoes: and to put the time into refurbishing his 100 redundant phones, instead. 20 people can only produce 400 brand new phones in Scotland: but 20 people can produce 2000 tomatoes in spain, and still have time to refurbish 100 existing phones.

At the end of the year 6 Spain has produced 2000 tomatoes and, as ever, that is enough to meet the world wide demand for tomatoes. It has also produced 100 refurbished phones. But the phones belong to McLive. The reason the Spanish people agree to do this work on McLive's behalf is because he is prepared to swap his 100 phones for 500 tomatoes, and that is half the price of a scottish phone.

So in year 6 spain gets 100 phones in exchange for 500 tomatoes. It needs 1000 tomatoes for home consumption. It has 500 tomatoes left, and it has a market for them: because Scotland still needs 1000 tomatoes and it cannot do without them. But now Spain does not need Scottish phones, although it wants them. It is increasing its phone ownership at the same rate as before. So now it has leverage.

Mclive now has 500 tomatoes too. And he has a market as well, because Scotland has to have his tomatoes also. The Scots have no choice this year. Both Spain and McLive double their price and now 1000 tomatoes is swapped for 200 blue phones.

At the end of year 6:

200 Spaniards have a blue phone (100 from last year and the 100 they got from Scotland for their 500 tomatoes this year)
500 spaniards have a grey phone (400 from the earlier years and 100 from McLive)
300 Spaniards do not have a phone.

In Scotland at the end of year 6

400 Scots have two mobile phones ( 200 who had them last year, and 200 new phones retained for home consumption this year) ]
100 scots have one blue phone (those who had two last year and threw the grey one away)
500 scots have one grey phone

At the end of year 6 Mclive has 100 new blue phones (swopped for his 500 tomatoes).

1000 tomatoes is now worth 200 phones, not 100 as before. And now Spain has a choice of supplier.

In year seven we can assume that the Scots stop throwing grey phones away in places McLive can get at them.

Spain produces 2000 tomatoes as before. They still have time to refurbish 100 phones, as before. So this time McLive agrees with the Spanish that they will paint the phones pink, and he will exchange them for 600 tomatoes. It is a price increase, but then they arepink: and it is still a better price than they used to pay for ordinary grey ones they got from the Scots.

Scotland produces 400 blue phones, as before. Their production is relatively large and slow to innovate, it seems

Spain needs 300 phones this year for everyone in Spain to get one. They swop 600 tomatoes for for McLive's 100 pink phones. And now they can only supply scotland with 400 tomatoes. So they demand 100 phones for 400 tomatoes: and scotland again has no choice. The still have to have tomatoes.

Scotland is 600 tomatoes short, and the only place it can get them from is McLive. But now McLive has a commanding position because he has more than half of the tradeable tomatoes in the world. So he increases the price again and he gets 200 phones for 600 tomatoes.

At the end of year 7 the position is:

100 Spaniard's have a pink phone
300 Spaniards have a blue phone
500 Spaniards have a grey phone
100 Spaniards have no phone

In Scotland

500 Scots have two mobile phones
100 scots have one blue mobile phone
400 scots have one grey moble phone

At the end of year 7 Mclive has 200 blue mobile phones.

And everybody gets a tomato.

The tomato cost of phones has fallen again.

So far as I can see Scotland is steadily losing ground: Spain is gaining: but because McLive is now a big player in the tomato market some of the wealth which might naturally accrue to Spain is actually going to him . He has twice as much capital (phones) as he had last year. And it does seem to me to be a zero sum game.

Scotland has few good choices now. The price of phones is falling and the country is getting relatively poorer. But there is no obvious way to defend their income, and so this means that their standard of living is falling and will eventually equalise with that of Spain: not the other way about. A phone will buy one tomato. It seems to me that this is levelling down: and the reason for it is the insertion of McLive. His mobile capital, which in this case came in the form of the original "free" mobile phones, has destroyed the comparative advantage on which trade depends.

It is obvious that my last couple of posts were not easy to follow and generally I am inclined to believe that if I cannot convey my thought it is because I do not know what I am talking about. That is even more likely to be true on this subject because I am only beginning to learn. But it does seem important to me, and so I have been doing a wee bit more reading and thinking. Part of the problem was in trying to stick with one example and too few elements, I think.

What I was trying to think about was Ricardo's assertion that mobile capital would destroy comparitive advantage. I now think that can't be illustrated in the way I tried to do it. I have come to that conclusion partly from reading examples and explanation which are put forward by those in support of Free Trade: they do it much as Ricardo did, and I tried to do: and that has helped me to clarify my thinking: at least I hope it has.

Rather than use the same example I will adopt one from one of the things I read today: it is not much different but it has the advantage of using two countries which are both producing finished goods: and I think removing primary products from the scenario will help if we are focussing on capital.

So in this instance the products are cars and computers. I will use Spain and Scotland just because I have been doing so.

Before there is any trade Spain can produce 100 cars using 2 units of production: and 1000 computers using 3
Scotland can produce 100 cars using 4 units of production and 1000 computers, also using 4.

Once again Spain has an absolute advantage in both products. Once again, on the theory of comparative advantage, both will benefit from specialisation and trade. Thus far the situation is as already outlined in previous posts.

The comparative advantage arises from the fact that the "opportunity costs" are different for the two countries: and it is argued in some places that all costs are in fact opportunity costs. I do not think that is true, but let us accept it for the moment.

So the comparative advantage comes this way: if Spain produces computers the cost is the cars it does NOT produce with the same resources. 3 units of production will produce 1000 computers: but what is foregone is 150 cars. If Scotland produces computers 4 units of production will make 1000: and what is foregone is 100 cars. Effectively it is cheaper for Scotland to produce computers than it is for Spain to do so. So they both specialise and everybody wins

The confusion arises because in this kind of modelling the unit of production is collapsed. As I said, this seems to me to treat the unit of production as if it was a natural advantage like climate or land: a given, in fact.

The units of production are normally described as land, labour and capital. If you presume those all behave in the same way then there is no problem. But they don't. And that is what I was trying unsuccessfully to convey.

In the model the costs of production are static, and there is a difference between the countries in those costs. But the land is irrelevant because we are talking about finished goods: land can be used for anything, and if the factories are the same size there is no difference in the contribution that makes to the cost.

So the difference must come from labour and capital in some combination. The contribution of labour is the same: in each country each worker is working 12 hours a day. But the production is higher in Spain than it is in Scotland. So why is that? Many of the neocons will argue that such differences arise from lazy or pampered workers: they argue that they do not work a 12 hour day or that they do not work hard. I have yet to see much evidence for that, but since this is a model I am going to stipulate that that is not true: the management are great at their jobs in both places and so they always get maximum output for the full 12 hours in both Spain and Scotland.

It follows that the difference comes from capital: Spain has better machinery, and so it produces more stuff for the same input of land and labour.

So the two countries specialise in line with the theory of comparative advantage, and all is well.

Enter McLive and his Spanish counterpart El Clivo. They have capital (that was probably not clear in my earlier attempt but his 100 free phones represented capital in that example). He is a scot and he has employed his capital making computers in Scotland. He has improved his return and so has his counterpart in Spain: but they have not improved it equally.

Let us say that at the outset both countries have a total of 100 units of production: Spain devotes 60 to cars and 40 to computers and ends up with 3000 cars and 13,300 computers. Scotland devotes 60 to cars and 40 to computers and ends up with 1500 cars and 10,000 computers.

Total output is 4500 cars and 23,300 computers

They then switch so that Spain only produces cars and Scotland only produces computers: now Spain makes 5000 cars and scotland makes 25000 computers.

When they trade Spain swaps 1750 cars for 14000 computers. It now has 250 more cars and 900 more computers than before: and Scotland has 250 more cars and 1000 more computers than before. Not such a big difference really. But it still means that Spain has 3250 cars and Scotland has 1750: and Spain has 14000 computers and Scoland has 11,000. And those absolute numbers represent the wealth of the two countries.

The computer factory in Scotland uses as much land and labour as the car factory in Spain. But it produces less wealth. However that wealth is distributed, it is less than it is in Spain. It follows that at least one of the factors of production must be cheaper.

El Clivo has used 50 cars to buy plant for his spanish factory: and 50 cars for the land it stands on: and he pays his 100 workers 20 cars each: leaving him with 1150 cars after he has traded 1750 with Scotland.

A car is worth 8 computers at the existing rate of trade.

Scotland produces 25000 computers and nets 11000 after trade. If the costs were equal then McLive uses 400 computers for plant: and 400 computers for land: and pays his 100 workers 160 computers each: leaving him with a net loss of 5800 computers. But McLive does not make a loss: the internal prices are necessarily lower.

If we say that the cost of the plant and the land is a one off cost then El Clivo actually nets 1250 cars per year on turnover of 5000. So he gets 25% return. Assuming McLive gets the same return then he must net 6250 computers. on a turnover of 25000. This means that he pays his workers 47.5 computers: a little less than 6 cars.

El Clivo will close his Spanish factory and open one in Scotland. It will be as productive as the existing one because he will put in the same plant and machinery: and the land doesn't matter. There may be a little delay in fully realising his profit while he retrains his workers: but he will pay them maybe 6 cars, rather than 20.

Spain's comparative advantage disappeared.

In this closed system Spain no longer exists as a market, however: but it really doesn't matter to Scotland. For a while at least it has more cars and more computers. And if that results in land and labour and plant gettng more expensive, what does that matter to McLive and El Clivo? They have made their pile.

So far as I can see this is something which we see in real life: with the "offshoring" of industry to places where the costs of production are lower.

It is argued that this is "adjustment" and that Spain can find a different comparative advantage: and maybe that is true in the long run. But I don't see how: because comparative advantage does not seem to exist in any permanent form, if capital is mobile: and that is what Ricardo said.

It does not happen all in one go like that: but that is what is meant by the race to the bottom: because in order to persuade El Clivo to stay in Spain the costs of production have to move to greater equality. Not to level up to spanish rates: rather to level down to Scottish ones.

Edited by FionaK - 9/10/2011, 12:43

It is interesting to see you trying to make sense out of economic theory. I'm not sure if you factor in economies of scale?

To me economics is a complex system with emergent properties, a chaotic mathematical system. People observe patterns and give them names, and try to assign meaning to them. But the meaning may not be really there. Economic theories are an approximation to how the system behaves, but never quite seem to match in the details. They often seem to have surprising effects, which suggests that economists do not really understand them.

One thing that fascinates me is that we can translate real things into abstractions, manipulate the abstractions, and turn the abstraction back into reality with a useful result. This is the essence of applied science, without maths it would not be effective. It is notable that maths includes all the things that are physically possible, but also many things that are physically impossible. Physicists take care to develop a physical theory, which explains what maths is used and the exact limitations for its use.

In a bartered economy it is clear what happens when a craftsmen makes a table and exchanges it for some chickens. It is also clear that a person with more chickens or tables is more wealthy than a person with less. However, as soon as you introduce money as a medium exchange (an abstraction), certain things become possible that weren't before. For example, a person can become wealthy merely by shuffling money around, and never actually making anything real. Money can inflate, or deflate. All these features emerge as a consequence of being in the abstract space. Economists give names to the emergent properties, without really understanding the underlying system.

However, the abstract properties have a real effect when they are translated back into real life. Credit bubbles happen in a virtual realm, but during the bubble perceive increasing real wealth. When the bubble collapses, the real wealth seems to disappear.

No one ever sat down and intentionally designed an economic framework, economic policies develop in an ad hoc way. While people make money the system is left to its own devices. When it goes wrong, people step in to try to "fix" the system.

Like many things, economic theories get used as a political tool. Free trade is one of those. In principle and reasonable practice it may be a good thing. But it is also used to justify the exploitation of foreign resources.

What I am trying to do is to look at one iparticular economic mantra in as rounded a way as I can, bobc. I intend to do the same thing with some of the other "theories" in other threads over time. This is mainly for my own education because these things are shaping our world and they are presented in the media as "given" without much justification or explanation most of the time. I do not believe that is an accident and I do not believe it is neutral in its effects, either.

I started with the "free market" because it is central to the claims of the neocons. It is obviously NOT an economic theory: it is a political position. That is true of most of economics whether academics are aware of it or not. But a political position is not necessarily bad in it aims or in its outcomes. It might be.

I have tried to tease out what is claimed as the justification for this particular part of the economic landscape: to learn what the underlying theory is and to see how that is supposed to work if all went according to plan. As with most human endeavour all does not go according to plan: but since it is a political position I think it is legitimate to judge it as I do other political stances: that is to try to see what the world would look like if those who espouse them could achieve their ideals. In doing that it is important to understand those things they choose to include as relevant: and to think about what they leave out. Because that is always the essence of such judgements in the end.

Economies of scale are relevant: I just haven't got around to that part yet. I am not sure they warrant a post of their own because I am not yet convinced that such economies are central to the idea of Free Trade. They are certainly one of the arguments put forward in favour of Free Trade: but they are not generally the biggest plank in the stuff I have read so far.

The more I have read the more I think that economics is not just partially political: it is nothing else at all. It wears the clothes of science but it does not quack like science: not in any way.

I disagree that there is no design to the economic framework: I think that it has definitely been designed and that the world has been chopped and stretched to fit the procrustean bed. And that has real effects, as you say. It is a convenient fiction that this "just happens" as if it was a law of nature like gravity. It doesn't. It is not true to say that the system is left to its own devices while people make money: people made money before the system was altered to fit the neocon agenda: but they most certainy did not leave it alone. In fact your characterisation is an illusration of the penetration of the political agenda they have promoted: you appear to accept that what they do is not an attempt to "fix" the system, while interventions in other directions is. That is mere propaganda, so far as I can see

Free Trade might be a good thing: so far I cannot see that it IS a good thing: because it does not exist. Everybody is agreed about that. There are those who argue that all our ills arise from that fact: and those who argue the opposite. There are those who believe that it really doesn't matter whether lack of Free Trade accounts for our woes or no: because they take the view that Free Trade CANNOT exist in theory or in practice: other who think it can exist but SHOULD not.

I have chosen to take one topic at at time because I think it is part of the dust in our eyes to conflate the big words as if they have a necesary and beneficial relationshp: often I see elision such that free trade is equated with freedom itself; or with democracy; or with economic growth: a host of hurrah words, all tied together in a neat and unsanswerable package; unanswerable because I do not have proper handle on the territory covered by each concept and its relation to the others. So that is what I am trying to develop.

One of the bits of progress I have made in this so far is to learn the difference between Free Trade and Mercantilism: And that is directly relevant to your last point. Where is the border between Free Trade and politics such that you locate the exploitation of foreign resources in the political realm and not in the economic realm itself? To me that is another illustration of how far the hegemony has influenced our thinking: because it seems to suggest that the economics is not to be associated with the bad stuff: that is politics. So how are you drawing your lines to get to that conclusion?

I have been reading "23 Things They Don't Tell You About Capitalism" by Ha-Joon Chang. It is a populist book which gallops over some of the justifications put forward in support of the neoliberal nostrums and deconstructs them. Not a lot of depth but an easy read.

I mention this because of what he has to say about Africa. It is not a unique tale, we have seen the same things elsewhere: but the situation in Africa is very stark and I am frankly outraged by what he has to say

My picture of Africa was hazy, to say the least. But Chang outlines the conventional story presented:and I confess I had accepted at least some of it. According to him the explanation for the dire poverty in Africa is manifold. The continent is said to suffer from a disease burden arising from its geographical location. That is said to impact on the population so that they are less productive than others. Many of the countries are land locked, and so they have problems trading. Unrest of various kinds causes lack of production directly; or lack of trade opportunities indirectly, and that again prevents economic growth: as does the fact that all the near neighbours are also poor and therefore have little to trade. These and other things are put forward as the explanation for the dire situation in that continent and I had unthinkingly assumed they were in play

What Chang points out, and I was utterly unaware of this, was that economic growth in Africa was positive throughout the 1960's and 1970's. It was not high in comparison with Asia, for example: but it was comparable with rates of growth seen in the developed countries when they were achieving their rich status. That all changed in 1980 and thereafter. Growth stopped, and then it actually reversed for about 20 years: it took a little fillip from about 2000, when commodity prices boomed: but the fact remains that an average increase in GDP of about 1.6% turned into a decrease of about 0.7% after 1980: and the improvement since 2000 has raised it to about 0.2%. African's are back at about where they were in 1980, and it is unlikely even that will continue because it is based on the commodities market boom which we have discussed elsewhere: it is unlike that boom will go on indefinitely, because booms don't, generally

What changed in 1980, according to Chang, was the imposition of Free Market policies on African nations. This was done through something called the Structural Adjustment Programme led by the World Bank and the IMF. It is the root cause of increasing poverty in that continent, and the other justifications are proffered because the free marketeers NEVER admit evidence which contradicts their dogma.

But it seems that we now have great deal of evidence from many parts of the world that these policies are actually extremely harmful: in the long run they are impoverishing us all. And so one is led to wonder why they continue to hold sway. It cannot be that no-one has noticed: because Chang is not alone in his analysis. I return to the conclusion that this is political. But it seems to me that it is not even economic war between states, as was openly admitted in the Mercantilist period: nor is it really comparable to the colonialist period, if you happen to believe that the exploitation of the colonies led to increased prosperity for the whole population of the colonising contries (though I would dispute that): because the poor are getting poorer in developing countries, but they are also getting poorer in the rich world. And that wealth is giong somewhere. It is going to multinational corporations and to the very wealthy.

Increasingly the question for me is this: Is this a zero sum game or is it not? We are assured it is not. But so far I am not seeing any evidence which would tend to support that conclusion.

Mercantilists said that the aim was to make sure that the economic unit (say a country) did not import more than it exported. If you were doing it right you sold more than you bought: and at the very least you should try to achieve an equality between imports and exports. That sounds very simple and very obvious. But it isn't really, so far as I can tell.

We have to assume that what is traded is goods: it might be food or phones or anything else. But in some way what is traded has to be produce. That is because the means of production are capital: you need them to make stuff to sell. If you do not maintain the capital, you are selling the seed corn if it is food: or the machinery if it is manufacturing; or the country if it is land: or the workforce if it is labour. Then next year you don't have enough capital to make so much and your income will fall. Perhaps it won't. Maybe if you make less the price will go up? For a while perhaps: but eventually you have no seed or no machines or no country or no people. So really you have to sell stuff you have made: not stuff you made it with.

If a country buys more than it sells how can it pay for the excess? It can do one of two things, so far as I can see: it can sell something other than produce, to add to its income. Or it can go into debt.

The "something other than produce" has to be capital in some form, I think. You might discover some new raw material like gold or oil: but mostly you won't. If you sell capital you can't keep it up for reasons already explained. If you take on debt then in the end the creditor trading partner will want paid: and you will lose capital anyway. I cannot presently see any third option. This is presumably the thinking which underlies the demand for balanced budgets. If you take a mercantilist stance you have no problem: you make laws, or impose tariffs, or whatever, to make sure that you stay in surplus. That is what they were all about.

But a free marketeer cannot support that solution: it is the antithesis of the free market theory. Under comparative advantage it is not a problem, of course. It is not a zero sum game. and so everything will naturally come into balance if we just leave the market free. Well that does not seem to be happening. Many countries are running budget deficits, and I cannot see how the free marketeer can ignore that fact. I presume that the idea is that it will eventually balance out. Comparative advantage means that each country will make whatever costs least for it in terms of opportunity: and will buy in other stuff to let it do that. Each transaction benefits both parties: and price ensures that the swop is equally good for both. That is what price is for, I think.

But price is blind to the distinction between stuff and capital. And that seems to me to be a big problem. If the market is free each agent pursues his own advantage as he sees it. In theory that will result in increased stuff for everyone and all is rosy. But without some overview I don't see how that happens. It appears to be predicated on the idea that the stuff which is sold abroad is surplus: that is, each country meets the needs of the population for whatever the goods are, and sells the excess abroad. It is obvious that does not happen: there are countries which are exporting food while their people are hungry. The free market does not care: the people have no money so they do not generate "demand": there is "demand" abroad, and so the person who has the stuff will sell it there. That is what he is expected to do, and the free marketeer sees nothing wrong with that.

But if the person with the stuff sees an opportunity to make a lot of money by selling the seed corn, he will do that too. In order to argue he won't, you have to presume he wants to grow a crop next year. But what if he doesn't? What if he can get more money from the sale of his assets? When thinking about the small scale farmer that sounds silly: but it seems to me that is what has happened in industrialised countries. Big corporations have realised that they make more money from financial transactions than from making stuff. In order to make financial transactions you need a lot of money to start with: and so they have sold the seed corn. In some cases that means they have not invested in machines or in labour or in technology: Instead they have used their money to "financialise" their businesses. The most famous example is General Motors in America. It was once the biggest company in America and its revenue was based on making cars. It went bankrupt in 2009, and by that time it was really a financial company:in 2004 80% of its income came from financial transactions. Huge profits were certainly made and huge bonuses were certainly paid: but workers were laid off and the taxpayer spent a reported $57 billion dollars bailing it out. Seems it was too big to fail. To me, that failure to invest in the capital assets of the company is no different to selling the seed corn. And there is absolutely nothing wrong with it, in free market terms.

Perhaps there isn't: but there is something curious about bailing out such a company if that is what you truly believe. On the free market view it does not matter who makes the cars: and America should have moved into something else where they had a comparative advantage: that is the nature of the theory. Given that is what both government and financiers have been promoting for decades I am increasingly puzzled by these socialised losses. I have the impression that they do not think that selling the seed corn is an awfully good idea