Thursday, January 17, 2008

Nonsense on Imported Stilts

Econ bloggers have really missed the point about Landsburg’s free trade screed. The estimable Dani notwithstanding, the issue isn’t ultimately ethics or even procedural fairness. The problem is that doctrinaire economists understand less about trade than the average person with no academic training in the subject.

Ordinary people in many parts of the world, and not just in the US, worry about trade because they are afraid that jobs lost to imports will not be counterbalanced by jobs gained through exports. They worry that there will be fewer economic opportunities for them and their children. They worry that their wages or working conditions will be pushed downward through competition with even more vulnerable, desperate workers in other countries. They are right to worry about these things. Such miseries are not destined to happen, but they cannot be ruled out either.

Except in standard economic models which begin with the assumption that increases in imports automatically call forth equally valued increases in exports. If trade balances on the margin we live in the happy world of comparative advantage, and it is indeed true, as Landsburg says, that “when American jobs are outsourced, Americans as a group are net winners.” But the assumption that trade balances at the margin is simply a modeling convenience, something that enables Landsburg to regale his students with blackboards full of elegant diagrams and equations. It is not grounded in real experience, and especially not the experience of the US economy since the 1970s.

You have to be very well trained in economics and have high-level skills to make such a brain-dead assumption and not even know you’ve made it. Then you don’t have to give serious consideration to counterarguments because, hey, why pay any attention to the fallacies of economic illiterates and mathphobes?

But let’s get specific. Here’s how Landsburg illustrates his claim that international trade makes us better off: “I doubt there’s a human being on earth who hasn’t benefited from the opportunity to trade freely with his neighbors. Imagine what your life would be like if you had to grow your own food, make your own clothes and rely on your grandmother’s home remedies for health care.”

Notice a problem here? Landsburg assumes that there is no difference between trade within an economy and international trade. (To be more precise, the only difference is that governments interfere more often with trade across national borders.) Worse, he accuses anyone who recognizes the difference of woolly thinking, based of course on his assumption that there is no difference.

This is why the French students complained about autistic economics.

For what it’s worth, my view is that we as a society ought to provide opportunities for as many of us as possible to have a satisfying livelihood. If a community is down and out we should step in and do what we can whether or not trade played a role in creating the problem. We should create rules for international trade that minimize downward pressure on wage, environmental and social standards and that limit dangerous imbalances. These ideas are fairly widespread among the general population, and if economists think really creatively they might just be able to rise to the same level.


YouNotSneaky! said...

Ay, no.

First, you're right, the assumption that trade is balanced is a modeling convenience. But it is just that. A convenience. I can relax the assumption that trade balances in each period, bring in some dynamics, perhaps impose some kind of transversality condition, re do the whole thing and get the same answer.

Second, that third paragraph doesn't have much to do with the first (the second and fourth just being some empty assertions; my view is that we as a society ought to provide opportunities for as many of us as possible to have a satisfying livelihood. - who disagrees with that? Certainly not free trade folks). Third paragraph is about whether there is a difference between trade within an economy and international trade.. But there really isn't except for the fact that you're talking about trade between two people named Bob, or two people named Bob and Zhou. Yes, yes, yes, there are differences between US and China in terms of things like environmental standards and labor regulations. But there are differences between environmental standards between Montana and California and the state set minimum wages of Nebraska and New York. While institutional details matter and should be included in the analysis, the same model DOES apply, generally, to whether you're talking about trade between countries or states. The difference being of course that the US Constitution prohibits the levying of tariffs and other protectionist measures (tariffs being a very small part of the story anyway) between states.

So if you want to bring specific institutional detail in the analysis, by all means do so. But this details should be specified out whatever kind of trade one is talking about. In that sense Landsburg is right.

Robert D Feinman said...

When your livelihood depends upon producing a continual stream of arguments as to why greed is good you leave rigor behind.

The idea is not to produce an unimpeachable argument, but just to keep up the barrage of misinformation so that the real facts get drowned out. It helps that those providing the funding for the libertarian pundits are among the wealthiest people in the world.

There are two sides every story, they say. Some say the earth is flat, while others say it's round. Let's discusss.

Why is it that small farmers, workers, and the average person in developing states fail to see the benefits of "free" trade, while the highly paid pundits find it so obvious? Follow the money.

YouNotSneaky! said...

I'm sorry Robert but... actually, what am I talking about, why am I sorry? I'm the one being insulted.

So. Robert. I'm neither a libertarian, nor really a pundit (hey I haven't posted anything on my own blog in months!) and I certainly don't receive any funding from any of the wealthiest people in the world (you keep saying that so often that I'm thinking maybe you know how I could get some of this windfall?). Oh, and nice to see you actually address the argument being made.

And while small farmers, workers and the average person in the US may fail to see the benefits of free trade (following the logic of Stolper Samuelson) many workers, farmers and average persons in the developing world in fact DO see the benefits of 'free' trade (again, following the logic of Stolper Samuelson). In fact many of them depend on it.

Of course you always want free trade in the stuff you consume but protection in the stuff you produce. But then if you get your way, then your neighbor who consumes what you produce and produces what you consume will want to have his way as well. And then you get the standard crappy Prisoner Dilemma outcome.

(funny how some people spend lots of time extolling virtues of cooperation over competition only to forget all about that when it comes to the political economy of trade) said...

Hey, all of you are missing the boat here. See, we in the US are exploiting Third World workers. They work and work and work to produce all this stuff that we buy and consume and what do they get? A bunch of our national debt and other financial instruments, which one of these days we'll just default on like New York State did on its Erie Canal bonds to all those British bankers back in the 1840s! Hah, hah, hah!

Robert D Feinman said...

Sneaky, your paranoia is showing. I wasn't thinking of you when I mentioned those who make their living shilling for the wealthy.

I have no idea how you make your living.

But those who work for Heritage, Hoover, GMU and bunch of other think tanks have the Koch brothers, Scaife, the Bradley Foundation and a handful of others to thank for keeping food on the table. One would think that a philosophy which is so blindingly correct would be able to stand on its own merits and not need the continual life support of its backers.

In places where there is no such libertarian funding the ideas have no traction. Why is this?

Anonymous said...

I was wondering when the line about "the benefits of free trade for the little guys across the sea" was going to show up on this thread. Some how free trade always benefits the lowly working stiff in some impoverished nation rather than the guys who own the factories in those same nations. Neither is there any focus on the fact that most of those free trade "partners" have a significant tendency to exploit their production workers, all the better to compete in the free world of free trade.

YouNotSneaky! said...


It's not paranoia it's rather that we have had this exchange before.

And the idea does stand up where it's not financially supported. Academia for one. Including publically funded schools. By people who have to compete in research with people from all other the world no less.

Here's a crazy idea. Maybe the ability to export to the US market benefits both the factory owner and the worker in that factory? I mean, it's not necessarily All Class Struggle, All The Time you know. And quite simply, the same logic that tells you that unskilled workers in US may be hurt by imports, tells you that unskilled workers in other countries will benefit. Stolper Samuelson.

Anonymous said...

Read through the list of wonderful democracies that make up the bulk our free trade partners that get much of the business. Workers may actually get to vote in India, but that's the exception to the rule. Try reading up on the wonders of factory work in such worker friendly places like Pakistan, China, Guatamala, etc. What would be the result of our trade agreements requiring, for real,that employees are not exploited in regardss to wages and conditions?

Anonymous said...


That's an easy one. Rather than working (err, being exploited) in factories, workers (or if you prefer, Workers) in those countries go back to A) subsistence farming, or B) starving. said...

Joan Robinson once famously remarked that for a worker it is better to be exploited by an employer than not to be exploited by anybody at all (that is, to be unemployed).


Robert D Feinman said...

Sneaky, sorry I don't remember the last interchange, but your example of academia doesn't hold up.

I'll site a single example, there are others.
George Mason economics department got $23 million from Charles Koch. This allowed them to hire eight libertarian economists and create a school of thought. Their incomes are also enhanced by the Koch-funded Mercatus Center.

The department turns out more libertarians who then go on to find jobs elsewhere. All of these people stoutly deny that they are beholding to these sponsors and claim that they hold their ideas because of their validity.

But without a place to get their education and without the training that they get from companion places like Cato they would never have developed into libertarians. I'm not saying they wouldn't have had the same libertarian tendencies, but there is a need for institutional support if one is going to carry on a career as an oddball. This means letters of recommendation, hiring by fellow sympathizers, journals in which to publish, conferences to attend, etc.

Academia is the place that is most beholding to libertarian money. A little goes a long way. A single endowed chair for $100K per year can produce a steady supply of new believers.

Religious groups use the same techniques, its called proselytizing and has proven very successful, that's why there are Christians in Africa.

I put together a quick article showing the reach of Charles Koch's money at GMU as a single example:
How to "Buy" a University

I'm really not interested in trying to convince you that the libertarian movement exists only because of the largess of a handful of donors, but if they are so proud of their efforts why do they expend so much effort keeping their fingerprints off their projects?

YouNotSneaky! said...

Yeah but GM is a very 'special' department. There aren't many like it. And hey, I got an example too, where libertarian money doesn't play a role. University of California, San Diego. Want another one? University of California, Davis. Another one? University of California, San Francisco. After I get done with all (well, almost all) state school, I'll move on to the next state. And so on.

Peter Dorman said...

In reply to YNS:

Very broadly, in-country and between-country (international) trade differ because of differences in currencies and in regulatory frameworks. The first of these can be modeled fairly directly in theoretical economics, although no one (repeat, no one) has put forward a monetary model of international trade at the micro level in which trade does not balance at the margin. If you disagree, cite such a model. I’ve given it some thought, and it’s not easy to incorporate the Keynesian dimension in a disaggregated framework. (It is also worth reading Joan Robinson on this topic.) The second depends more on institutional detail and is less susceptible to all-purpose modeling, but I have spilled a little ink (wrong metaphor in the digital age) on how the first problem (currency zones) affects the second.

As a side point, it is worth noting that the framers of the US Constitution, eager to create a single economy from Maine to the Carolinas, specifically granted to the federal level power over the mint and interstate commerce. They showed they had a clear understanding of the difference between international and within-country trade.

To say, as you do, that international trade is the same as any other is, from my point of view, to say that you do not recognize the difference – but absence of theory is not the same as theory of absence.

What irritates me about economists like Landsburg is not their intellectual lacunae, which we all have in abundance. (I often work with natural scientists and feel like I am grossly undereducated.) It’s the lack of humility. He writes as if he knows that the general view of international trade is simply illogical, yet he lacks a theory that, building on plausible assumptions, justifies his own conclusions.

Anonymous said...

Gentlemen, and Ms Robinson where ever you are, that the alternatives to exploitation are not always advantageous to the workers does not justify one economy utilizing the fruits of that exploitation in order to gain some advantage within its own economy. That is, the fact that Nike or WalMart can get away with taking advantage of dirt cheap labor abroad does not justify their being permitted to dump the product of that exploitation on our economy. I can well remember when our own "captains" of industry were crying fowl when the Japanese were producing cheaper cars without exploiting their workers. Fair competition from abroad was denounced because the products were wholly produced by manufacturers who had no American or other "global" partners. In effect US financiers were not enjoying the fruits of those imported products. Suddenly the cheaper product was accused of being dumped on our shores.

Peter H said...


It's interesting you cite Joan Robinson, because there's probably no economist who was more critical of the applicability of comparative advantage in a less-than-full-employment economy than her. She would have completely eviscerated Landsburg.

If anybody's interested, Robert Blecker of American University has a chapter in Joan Robinson's Economics on Robinson's views of international economics. The whole book is available online, with the Blecker's essay starting on page 327. Quite a long file to download, but very enlightening.

Myrtle Blackwood said...

YouNotSneaky said: "Here's a crazy idea. Maybe the ability to export to the US market benefits both the factory owner and the worker in that factory?"

Here's Naomi Kleins observations relating to the North American Free Trade Agreement. Canada having lost hundreds of thousands of jobs and poverty having increased dramatically in Mexico.

[Canada’s former prime minister Brian Mulraney] “thinks the numbers are his friends. He proudly points to the percentage of Canada’s GDP now made up by exports to the United States – 40 percent! The number of jobs created by trade – 4 in 5! And Mexico’s status as an important US trading partner – second only to Canada! These numbers are a vindication, our former prime minister believes, for the free trade deals negotiated first with the United States, then with Mexico. He still doesn’t get it…private wealth has soared without a translating into anything that can be clearly identified as the public good…the trickle down effect…a cleaner environment, higher wages, better working conditions, less poverty – have either been pitifully incremental or non-existent…Today, 75 percent of Mexico’s population lives in poverty, up from 49 percent in 1981. Trade may be creating jobs in Canada but not enough of them to keep up with the number of jobs that have been eliminated – by 1997, there had been a net loss of 276,000 jobs, according to the Canadian Centre for Policy Alternatives. Total pollution from manufacturing has doubled in Mexico since NAFTA was introduced according to Tufts University study. And the United States has become a climate change renegade, chucking out its Kyotos commitments wholesale….thanks to free trade, 87 percent of our exports go to the US, and almost half of our economy is now directly dependent on an open border..”

Naomi Klein’s ‘Fences and Windows’, 2002 p64-71

Not to mention the enormous amount of forest and jungle loss in Mexico.

Peter H said...

I'm not defending NAFTA, but Naomi Klein's figures don't seem correct. Ive never seen any statistics showing Mexico with a 71% poverty rate.

Still, it's a fact that wage inequality has increased in Mexico and in other LDC's that have liberalized trade, contrary to the predictions of Stolper-Samuelson. I'm curious to know how international economists account for this.

YouNotSneaky! said...

"no one (repeat, no one) has put forward a monetary model of international trade at the micro level in which trade does not balance at the margin"

Ummmm... if you mean a model with money in it where trade does not have to be balanced in each period (though there is usually some restriction on how much a country can borrow) than this is simply false. I can write down a two period, n period, or an infinite period model where trade is not balanced. If you mean something else then you have to make it clearer. Elhanan Helpman is one person that had a fairly well known paper with such a model.

To maybe make the same point in a different way; yes there are many differences between international trade and intranational trade. But they basically fall into category:
1) man made barriers, such as different currencies, regulations and tariffs
2) the fact that when you evaluate welfare folks usually consider the welfare of domestics.

I don't think Landsburg thinks that the theory of international trade is illogical. And in fact, it isn't. Wrong empirically perhaps but not illogical.

"It's interesting you cite Joan Robinson"

The same Joan Robinson who compared imposing tariffs to throwing rocks in one's harbor?

"Here's Naomi Kleins observations relating to the North American Free Trade Agreement. "

Well in that case there's only two possibilities here. Either NK is making crap up or her sources are. Poverty rate for Mexico (% of people living at less than 2$ per day in PPP terms):
1984 -- 40%
1992 -- 22%
1996 -- 28%
2000 -- 27%
2002 -- 21%
2004 -- 12%

At national poverty line
2000 -- 24 %
2004 -- 18%

So basically Naomi Klein is crazy or fos.

"Still, it's a fact that wage inequality has increased in Mexico and in other LDC's that have liberalized trade, contrary to the predictions of Stolper-Samuelson. I'm curious to know how international economists account for this."

is it a fact?

Gini coefficient for Mexico:

1984 - 46
1992 - 51
1996 - 49
1998 - 49
2000 - 52
2002 - 50
2004 - 46

so 1984 to 2004 there has been no change in income inequality but some upward fluctuation in between. But even these are pretty small so you can't even say that it's not do to sampling randomness.

China? Well, honestly no one really knows. But inequality probably increased since the 1970's. And poverty has fallen super dramatically.

And a lot of the increase in inequality in developing countries as they get richer on average has to do with other factors - standard Kuznets curve effects - rather than with trade.

Finally, if you don't think that Stolper-Samuelson applies to developing countries, why bring it up in the context of the US? Either it does or it doesn't.

Anonymous said...

In reply to YNS at 5.48:
What, so there are libertarian economists (presumably with tenure) at taxpayer-funded state universities?


YouNotSneaky! said...

Yes. And they even drive on taxpayer funded roads! And you know what else? There are socialist economists who actually buy their groceries at capitalist owned super markets! The horror! The horror!

You have a point here somewhere? Like, an interesting one?

ProGrowthLiberal said...

I'll concede this. Stopler and Samuelson were assuming that full employment would be maintained even in the face of changes in relative prices. Of course, Keynes might have said something about the short-run transitional problems and in the long-run, we are all dead.

Peter H said...


Thanks for your response. Just to clarify, I wasn't bashing economists or Stolper-Samuelson (it was PGL who brought up Stolper-Samuelson in the last post). I was just curious about how the S-S model can be revised to explain growing wage inequality in Mexico.

I was partially incorrect about Mexico. Wage inequality did increase from 1984-1994, after the first stages of liberalization, but declined after 1994, as the macroeconomic crisis impacted the well-educated (See Jim Airola & Chinhui Juhn, "Wage Inequality in Post-Reform Mexico", January 2005). I’ll discuss this issue in more detail when I have the time.

In regards to Joan Robinson, you can look at the Robert Blecher chapter I posted above for discussion of her analysis of international economics. One of her key points was that, in the absence of international policy coordination to maintain full employment, it can be rational for individual countries to adopt beggar-thy-neighbor and mercantilist policies (even if it's objectionable from an internationalist perspective). Since you mention China, I’ll quote from Blecher:

“In her Essays on Employment , Robinson used the analogy of a card game, and referred to the four types of “beggar-thy neighbour policies” (currency undervaluation, cheap labor, export subsidies, and import protection) as the four “suits” in a deck of cards. She wrote that “a trick can be taken by playing a higher card out of any suit,” and that “the decision as to which suit it is wisest to play must be taken in the light of all the considerations set out above.” (Robinson, 1947, pp. 157, 170).

China has played all four suits in a coordinated fashion, so as to build up a powerful export-oriented industrial complex that is out-competing most of its foreign rivals while inducing their MNCs to invest in the further development of that complex. As part of this strategy, China has perfected the use of “cheap labor” in Robinson’s sense: not low wages per se, but rather, wages that lag behind productivity growth by enough to create sustained absolute advantages in unit labor costs. The high saving rate is not (yet) a problem for China as it currently is for Japan, because China can still rely on robust exports to make up for suppressed domestic demand, while the high level of domestic saving frees China from the dependency on foreign capital inflows that has led to chronic debt problems in so many developing countries.

Such a strategy makes perfect sense for China, whose per capita income still ranks it among the lower-income nations of the world, but is poised to develop into a major economic power if it continues on its present growth trajectory with average annual growth rates of about 10 percent for the past two decades. Nevertheless, China’s export-led strategy is still a “beggar-thy-neighbour” approach to stimulating employment and growth. The losers include not only US, Japanese, and European industrial workers, but also workers in other developing countries whose own efforts at export-led growth are held back by Chinese competition. Meanwhile, MNCs (including American, European, Japanese and even Korean firms) profit immensely from their ability to produce or source in China at low costs while selling at higher prices in industrial country markets. …Thus, the point of this discussion is not to engage in China-bashing (or multinational-bashing), but simply to make it clear that the specter of the new mercantilism and beggar-thy-neighbor employment policies still looms large in the global economy."

Anonymous said...

The cooperation between MNC' and the Chinese government leadership, which has morfed into their ownership class, might be viewed as a form of collusion with the express purpose of holding down worker income. Of course this sounds better when it's described as holding down the labor cost of production. The semantic aspect of the issue of trade is not generally looked at because of its subjective character. On the other hand, so many of the measures thrown out at us are little more objective, generally being calculated with so many provisions for error as to make those numbers little better than a "good guess."

But this is not a scientific debate. This is just that subjective ideological argument. The gross measures of growth as a result of trade never take into account where those measured dollars go to. We can BS all day and night about free trade and the good it does all economies without even giving a second thought to the ever increasing skewed and bi-polar character of our economy's income and wealth distribution. Maybe the impending recession, if that's what it is, would have been forestalled or a nonexistent phenomenon if more people had more money to spend rather than to need to borrow.

Anonymous said...

Megan McCardle responds to your post.

Peter Dorman said...

This has been an interesting and productive discussion.

One more reply to YNS: Please pay attention; I am asking for a model in which trade does not balance at the margin. If Helpman or anyone else has done this at a micro level, please give a cite. If you find it simple to do this, I would urge you to do it and get it published. (Open economy macro, of course, is replete with such models, but they don't reduce to commodity-specific formulations, and they don't test comparative advantage properties. You can't even say if Stolper-Samuelson, for instance, works in such a world. And these models, IMO, do not take political economy factors sufficiently into account.)

Anonymous said...

What is it that makes you think that Megan McCardle's contribution to the discussion has any greater validity than any other? Still lots of suppositions thrown together with a few insulting innuendos. Very professional, to say nothing of its scientific certainty.

Bruce Webb said...

Either it means something to be an American or it doesn't. Montana may have different regulations that California, that doesn't mean a Montanan is for economic justice purposes to be placed in the same position as Mr. Zhou.

I find it interesting that National Borders are unifying when it comes to such things as national defense or immigration, on those issues we have clear lines of mutual interests. We don't distribute the protective benefits of the military unequally, it is in this case understood that equal protection is in the national interest, the same for policing (though God knows response times can vary). These are widely seen as public goods.

But while the wealthy are content enough to allow the poor and the middle class to risk their lives serving in the military or the police keeping them from bodily harm, when it comes to such things as distributing the benefits of trade in a similarly equitable fashion they freeze up.

Why as a nation do we freely subsidize such things as Public Health Agencies which give such things as low cost vaccinations and inspect kitchens but avoid paying for other routine preventive health care. And the cynic in me says the reason is pretty simple. Rich people are at risk from infectious poor people or infectious restaurant workers. Jose's Type 2 Diabetes becoming his problem, while Jose's Type B Hepatitis becoming a social problem to be addressed with tax money.

I see this as being pervasive and perhaps invisible to those within the bubble: social goods which benefit them are natural functions of government, social goods which don't are not. They dress it all up a lot but it really ends up looking that way.

Why aren't civil court litigants required to pick up 100% of the cost of having contracts enforced. Easy you just redefine 'government' to mean 'national defense and private property rights'. Well sorry while defense is relatively organic to government, a particular style of political economy is not.

The United States is a representative democracy where within constitutional limits the people can and occasionally do adopt policies of self-interest. A good reason for the beneficiaries of free trade to push for better distribution is that in the end we can structure a tax system in any number of ways.

Over the last 28 years the Economic Right has successfully sold a message to the democratic majority, that message is 'equity', whether expressed as 'trickle down' or 'rising tides' fair outcomes were supposed to be the natural outcomes. Well to a disturbing degree people are now coming out of the shadows and claiming they never meant a bit of it, they earned everything they have and they have no intention of honoring the implicit compact they made. They were lying, but what of it? That's just the way it is.

Well that is just the way it was. If the vast majority draws material benefits from higher levels of taxation at the cost of the wealthy minority we have the power to tax. Lets rewrite Landsburg a little bit:

"For four decades economic bullying has been a profitable occupation. All across America capitalist bullies have built up skills so they can take advantage of that opportunity. If we tough the bules to make bullying unprofitable, must we compensate the bullies?"

Well 'bullying' is a pretty good description of the tactics of the economic right in recent decades. You could sum up Landsburg whole piece as "Fuck you you hosing loser, what can you do about it" Well for starts we could tax capital at Reagan era rates. If they want to play rough we have legal political means to put them in their place. This simple 'I've got mine' dismissal might just backfire.

Anonymous said...


Looking through "Wage Inequality in Post-Reform Mexico", the authors' dependence upon INEGI data strikes me. That institution is very highly politicized with data series that are, lets say, not exactly comparable.

So far as changes in poverty in Mexico, I would put more faith in Tellez, Rinderman and Cruz, LA ECONOMÍA MEXICANA DESPUÉS DE 10 AÑOS DEL TLCAN Y REFLEXIONES SOBRE LA AGRICULTURA: Lecciones de la Experiencia
del Consenso de Washington y del TLCA


Boltvinik y Damián, La pobreza ignorada. Evolución y características, Universidad Autónoma del Estado de México, Centro de Investigación y Estudios avanzados de la Población, 2001,

The portion of Mexicans in poverty fell 1968-1981 but has risen dramatically since. If the Boltvinik paper included 2001-2002, numbers would be higher still, would be similar to my own observations of what transpired in the State of Chihuahua and other areas.

While you may not be advancing ideas that wage inequality stabilized because of the severe 1994-5 crisis, those who do may find basis in INEGI data but, given the extreme impact said crisis had upon tens of thousands of small businesses, are being just as fanciful as a Ministry of Finance conference call which I listened to in 1995.


How does Stolper-Samuelson apply to transnational networks and intracorp 'trade', i.e. internal transfers which cross borders.

Would anyone care to list its primary assumptions?

Myrtle Blackwood said...

Landsburg says: "Imagine what it would be like to trade freely with your neighbours". Without any form of restriction or regulation.

Well I've been struggling to find an example of this 'free trade' in existence today. Fellow citizens in Tasmania can't hawk their wares in the main shopping centres or street to street. We can't bid for forest resources alongside the multinationals here. We can't grow certain crops and we're not allowed to build more than one house on our land titles (if we can build a house at all).

However I must qualify this by saying I have indeed found a truly excellent example of 'free trade' at work. In the world's financial markets. We can observe this wonderful mechanism in the credit-default-swap markets. Here's the summary I've compiled on this form of trade:

· Present accounting allows for the creation of imaginary capital on the global consolidated account (?) by derivative contracts.

· Present standard accounting practice and the regulatory methods of the Office of the Comptroller of the Currency (OCC) provide a shield of opacity allowing the problems to lie unrevealed for an extended period.

· Derivatives trade ‘over the counter’ (OTC).

· There exists the possibility to add more derivatives when cash flows prove a problem. Thus delaying the day of financial reckoning.

· There has been explosive growth in the market for derivatives.
In the most recent report of the OCC as of Q2 of 2007, the derivatives market was shown to have increased to more than $160 Trillion notional from less than $152 Trillion in the prior quarter for the top 25 US Holding Companies alone.

· Derivative contracts represent a stream of cash flows usually over a period of years.

· Derivative contracts are dependent for their valuations on the same sort of credit rating apparatus that has been called into question in the instance first of subprime mortgage securities, then of asset backed commercial paper, next of CDO's and other structured credit products.

· There is good reason to suspect that the creditworthiness of many counterparties to these transactions has been artificially raised in a way that will not withstand the actual sort of unfolding financial stress , which could be characterized simply as financial reality.

· It isn't clear how securities laws on fraud and insider trading would apply to credit-default swaps, because it's not clear in what way they are even securities; they are private contracts.

· Lack of jurisdiction. Of all the regulatory concerns, fraud and insider trading are low on the list. And the idea that the SEC and banking regulators had no reach is spurious. Had they taken a dislike to this market, they could have curtailed it by requiring imposing high regulatory capital be held, which would have rendered the business uneconomic. Similarly, there is a case to be made (and I am surprised no one has argued it) that this is an unregulated insurance market, but going down that avenue might have created massive turf wars between Federal banking and securities regulators versus state insurance authorities. The biggest problem with the lack of jurisdiction is that it isn't at all clear who if anybody has the authority to address any problems that occur.

· Modest revaluations – much more modest than those witnessed in the traded debt markets in July-November 2007 – may result in major losses of capital and real questions of solvency. This is due to the size of the market and the degree of leverage at all levels of business and government.

· Chain reaction defaults are on the cards, with untested consequences.

See what can be achieved when people with money to trade can do what they like!

Myrtle Blackwood said...

Note: the wording of some of these paragraphs comes from various articles on the topic. For example Naked Capitalism, Financial Times, commenters on the Roubini blog and other sources.

Myrtle Blackwood said...

By the way. I note that Landsburg does not define what 'free trade' is. One sure way to identify ideology over genuine intellectual thought is to challenge these folk to define their terms.

According to Wikipedia Landsburg is " a self-described "hardcore libertarian" who received his PhD at the University of Chicago in 1979. The University of Chicago is a private university founded by John D Rockefeller and is particularly reknown for its right-wing 'free market libertarian' ideologies promulgated by Milton Friedman. Half-thoughts put into effect by Paul Volcker in the early 1980s and in Chile in the early 1970s with disastrous effects.

The Wikipedia definition of 'free market' says: "A free market is a market in which prices of goods and services are arranged completely by the mutual consent of sellers and buyers. By definition, in a free market environment buyers and sellers do not coerce or mislead each other nor are they coerced by a third party.[1]"

All sounds well and good but one needs easy and unfettered access to the law courts to ensure a lack of coercion. The Chicago school of economics liked to pretend that that was the sort of world we actually have. Ideology all the way.

The Rockefeller funding of institutions doesn't tend to be free of pressure to come up with the 'right' theories, after all.

YouNotSneaky! said...


the first link doesn't seem to work. And unfortunately because I am traveling this weekend I can't open pdf files so I can't read the second one. However, the numbers I posted above on poverty rates in Mexico are about as good as you're gonna get so if your numbers disagree the problem is with them. Poverty in Mexico has been going down since the mid 80's or at the very least early 90's.


I suspected you wanted something more. I gotta say I'm not sure what it means for trade to balance at the margin, as opposed to just balance, as in Value of Imports = Value of Exports. It sounds like you want a multi good, multi factor general eq. model of trade. Well, you're right there, that is hard and can go anywhere.

Also on Joan Robinson and the possibility of welfare improving, output raising, beggar thy neighbor tariffs in a situation where there is no full employment; ok fine. But then "now" - meaning essentially the past 15 years - is the wrong time to bring it up. During the Great Depression sure, during the 70's just maybe. But in the time of 4.5% unemployment?

I'm not sure if this comment's gonna be signed automatically so...


Unknown said...


These statistics on Mexico you cite what exactly are they the best measure of? Poverty rates or the percentage of people living below $2 a day (PPP adjusted)? If as a suspect it is the latter, what exactly does living on this income mean? What if you look at people earning $5 or less? Do these numbers take into account cost of living disparities between urban and rural areas? How is inflation, especially in foodstuffs, factored in? I ask because you don't cite your figures so I can't really check myself.

YouNotSneaky! said...

The figures are from WDI. They're PPP adjusted and yes they control for inflation. They do not adjust for cost of living differences between rural and urban areas but you could maybe find rural and urban price indices out there somewhere and adjust them.

And yes it would be interesting to consider various other poverty thresholds but for that you pretty much need data for an entire income distribution, or at least quintiles, which is harder to obtain (at least right off the bat). I doubt however that this would affect the NEGATIVE TREND in poverty rates in Mexico since mid 80's.

You can look at Sala i Martin's Kernel estimates of world, including Mexican, income distribution (derived from quintile data) by clicking the "Evolution of the World Distribution of Income" applet on his home page (
These numbers have been critizied but it's not clear which direction the estimates might be off in.

Anyway taking those estimates at face value, for Mexico, you see the following:

early 1970's - Income distribution is triple peaked. That is there are actually 3 very distinct income classes. The poor, the middle class and the rich and these do not blend into each other.

mid 70's to 1980 - Left end of the income distribution moves right as the 'poor' catch up with the middle class. This is pre-liberalization. Poverty rate drops during this period.

early 80's to 90's - the entire income distribution stays in its place and just get higher (reflecting population growth). But the "top poor" keep moving left and merging with the "lower middle class" turning the distribution into more of a bi modal one. You also see some right ward movement at the left end of the distribution during the second half of the decade. This is the 'first wave of liberalization'

90's to 2000 - The left tail, and to some extent the middle class start moving right again, increasing their incomes, though not as fast as in the 70's. This period includes NAFTA and the second wave of liberalization.

Anonymous said...


Both links are PDFs, not just the second, and, having spent enough time in different parts of Mexico among different social classes from 1970s on, I put some trust not only in data but in 'my lying eyes' - neoliberalism has been a disaster and not only there. Why continue trying to justify evident failures or is a 'save the theory' sort of thing.

Anonymous said...

However, the numbers I posted above on poverty rates in Mexico are about as good as you're gonna get so if your numbers disagree the problem is with them.

No problems then with an income rather than basic needs approach? No problem using PPP which aggregates prices of all commodities?
No problem with reliance on limited often questionable national data sets?
No problem relying on data series (WDI) provided by an institution which has been in neoliberalism's vanguard?

Gee, next I'll hear that tens of millions in Lat Am have been anti-IMF, anti-WB because these institutions have helped them so much.

Does X. Sala i Martin still believe that world poverty has been essentially eliminated or has he come to some senses beyond the ideological?

Peter Dorman said...

The comment trail seems to have led to Mexico and its NAFTA experience. That's certainly worth debating, but all sides should be aware that this is not fundamentally about "free trade". NAFTA differs from pure trade liberalization in many respects, and Mexico's policy shifts are about more than just trade.

And one more reply to YNS: by trade balancing at the margin, I mean that a perturbation that, say, increases exports by a certain amount would also increase imports by the same amount. The use of marginal analysis here is the same as in economics generally -- changes in some magnitude rather than the magnitude itself. Hence, in calling for models in which trade does not balance at the margin, I am looking past models in which the aggregate trade balance is fixed (for instance by global portfolio preferences), and only the composition changes in response to micro factors. There would be no Keynesian feedback in such a world from trade to the volume of employment or national income.

I apologize for using economic jargon. It's easier for me to write but perhaps harder for many of you to read.

Myrtle Blackwood said...

NAFTA is not 'free trade' in that it represents a set of international and domestic trading relationships - enforced by law - that protect the strong over the weak. Take away all the subsidies and protections for multi-national corporations and what do we have?

Free trade cannot be found where there is:

(i) heavy agricultural subsidies in the US that put downward pressure on Mexican (and other) farm prices.

(ii) Lack of recognition of humanity's 'ownership' the environment that sustains them. Pollution occurs because governments collude with big business and allow the latter to poison the environment of other people - without charge. without recognition that there has been no ownership rights to the biosphere given or traded away and therefore no right has been given to pollute or degrade it.

(iii) Free trade cannot exist where different participants in trade are taxed at differing rates.

And so on.

As for YNS' definition of 'poverty'. Hey! The loss of 3 million hectares of native forest and jungle per year in Mexico is not just Mexico's loss. It's our loss.

It's poverty. No fraudulent accounting system can cover that up.

If you want to live on $2/day 'younotsneaky' go ahead. Your commitment to such a level of income must surely also see you advocating the complete openness of the border between the United States and Mexico. After all, if $2/day is good for those down South it must surely be good for everyone!

"“the most serious consequence of NAFTA has been its failure to protect the rights of workers as promised by its supporters. To attract investment to the maquiladoras, Mexican government authorities cooperated with investors and compliant official unions in maintaining low wages, reinforced with a system of labor control. According to Martha Ojeda, director of the Coalition for Justice in the Maquiladoras, the government-mandated minimum wage for workers on the border is about $4.20 a day, the same as 10 years ago. Ojeda estimates that a majority of maquiladora workers earn close to this wage. A study by the Center for Reflection, Education and Action, a religious research group, found that at the minimum wage, it took a maquiladora worker in Juarez almost an hour to earn enough money to buy a kilo (2.2 pounds) of rice. A gallon of milk, which costs $3 in a Tijuana supermarket, requires five to six hours of labor. To enforce this system, maquiladora workers are required to belong to unions that have no intention of raising low wages or ending dangerous working conditions. Throughout NAFTA's 10-year history, workers have organized independent unions, willing to fight for a larger share of the enormous wealth the factories produce. But these efforts have been met with firings, plant closures and even physical violence. Ten years of hearings held under NAFTA's labor side agreement have documented extensive violations of labor rights. In those few instances in which workers have successfully formed independent unions, as they did at Tijuana's Han Young plant in 1998-9, their strikes were broken, despite guarantees under Mexico's Constitution and federal labor law…”

NAFTA's Legacy -- Profits and Poverty, by David Bacon
Published on Wednesday, January 14, 2004 by the San Francisco Chronicle

Anonymous said...

The figures from Sala-i-Martin & the WDI are worthless:

Anonymous said...

"a self-described "hardcore libertarian"

Propertarian would be a better description -- they do, after all, have little in common with genuine libertarians like Emma Goldman.

Nor, for that matter, do they have any issues with the restrictions of freedom associated with capitalism and wage labour... Which is a strange position for someone who claims to favour liberty to take...

An Anarchist FAQ

Anonymous said...

THis is a long, productive and interesting lilst of comments on a significant economic issue that seems to have been "measured" to death. Anon's citation, just above, brings everything back into the clarity of the light of day. Error of measurement x error of measurement x disputable assumptions = totally useless conclusions. That's not the worst part of it all. Apparently a great many economists don't find this phenomenon too disturbing and continue to base their arguments on such "research," if that's what it can be called. I'd call it ideological screed.

YNS, What's your opinion?

YouNotSneaky! said...

If you want to live on $2/day 'younotsneaky' go ahead. Your commitment to such a level of income must surely also see you advocating the complete openness of the border between the United States and Mexico. After all, if $2/day is good for those down South it must surely be good for everyone!"

Don't be dumb. No one's coming even remotely to saying that living at 2$ is a good thing. I don't know what else to say. Just don't be dumb.

YouNotSneaky! said...

"The figures from Sala-i-Martin & the WDI are worthless:"

This looks like a potentially interesting criticism of the Sala-i-Martin numbers, it's not clear however how it relates to the WDI numbers since the revisions was produced by WB researchers as well.

YouNotSneaky! said...

"YNS, What's your opinion?"

My opinion is that economists generally try to use the best numbers out there, which can often still be pretty bad. Measuring people's incomes, not to mention various intagibles, is a difficult business. But rather than seeing this as a economists' ideological bias, this is usually just doing research in an imperfect world. If better, more convincing (i.e. constructed with better methodology) numbers become available usually people start using those (there's of course the usual dissemination and diffusion lags).
The ideological bias here is more with people who a priori reject any numbers that don't fit in with their preconceptions.

I plan on looking at the Chen and Ravillon numbers in more detail later this week. This doesn't appear like something you can just make up your mind about in a few minutes of internet browsing.

Anonymous said...

There is a difference between developing a theoretical construct then generating the testable hypothsis that extend from that theory and then actually testing that(those) hypothesis in an emperical fashion and, otherwise, going through steps one and two and then being satisfied to rest on the laurels of ones brilliance in the field of theoretical economics. Less than veridical data is insufficient to uphold hypothetical constructs in the social sciences. Theoretical economics is fine as an intellectual exercise. It doesn't cut the mustard when it comes to predictive validity.

Myrtle Blackwood said...

In response to:

BR: ".. After all, if $2/day is good for those down South it must surely be good for everyone!"

YouNotSneaky said:
"Don't be dumb. No one's coming even remotely to saying that living at 2$ is a good thing. I don't know what else to say. Just don't be dumb."

Well, please clarify what you meant YNS. After all you did say:

"Poverty rate for Mexico (% of people living at less than 2$ per day in PPP terms):
1984 -- 40%
1992 -- 22%..."

Is 'poverty rate' and 'poverty' two different things for you??

YouNotSneaky! said...


But there's no 'theory' here. It's all empirics - estimating income distributions across countries and time. I don't know what you're talking about.


"After all, if $2/day is good for those down South it must surely be good for everyone!"

This is you saying something like this, and insinuating/implying that I or someone else has said that. It's crap.

"Well, please clarify what you meant YNS. After all you did say:

"Poverty rate for Mexico (% of people living at less than 2$ per day in PPP terms):
1984 -- 40%
1992 -- 22%...""

Uhhhh... I don't know what is there to clarify here. In nineteen eighty four, forty percent of all Mexicans were living on less than two dollars per day per day in purchasing power parity terms. In
nineteen ninety two, twenty two percent of Mexicans were living on less than two dollars per day per day in purchasing power parity terms.

How in heck do you get the implication from that, that there is something good about people living on 2$ a day, or that that is enough?

"Is 'poverty rate' and 'poverty' two different things for you??"

Poverty is being poor. Poverty rate is number of people who are poor divided by total population.
Again, what is there to clarify?

Anonymous said...

"Its all empirics - estimating income distributions..."

Estimating something is akin to educated guessing. The fact that those guesses are based on data that are subject to significant errors of measurement only makes the endeavor even less empirical. Putting a ruler to an object doesn't give us a measure of that object if the gradations on the ruler are inaccurate, except if you're a social scientist who can't recognize the limits of his data collection techniques or the inadequacy of the type of data to begin with. Simply wishing that your science is as accurate as physics doesn't make it so. Physicists know when they are stepping out over the line of empiricism and identify themselves then as theoretical physicists. They state with relative clarity that what they are engaged in is formulating reasonable hunches about the nature of the universe. There's nothing wrong with such a branch in economics so long as the participants know which branch they're hanging off of.

YouNotSneaky! said...


Here's (one of) the Chan and Ravallion papers that the letter to the editor provided by anonymous (thanks for linking it) references:

(yes, I just got my pdf capable computer back)

It should be noted that even with these numbers, the incidence of poverty has fallen although the absolute numbers have stayed constant or gone up somewhat in a world of positive population growth.

I'm not 100% clear on what accounts for the difference between these estimates and those of other researchers as the general methodology is actually in an older paper (2004) which I haven't been able to find online yet.

However, in general there's 3 issues, or 3 classes of issues here, when trying to come up with poverty measures (or for that matter, inequality, or any moment of the income distribution):

1. Estimating the general distribution of nominal income.

1a. What source to use? Household surveys or national income accounts, or yet some other source? Or is there some way to utilize all information. Both of these have their disadvantages and advantages. No free lunches here.

1b. Given that you've settled on a particular data source (or mix of them) what method to use to infer an overall distribution from the few, possibly non-random observations you got? Kernel estimation or nonlinear least square? What size bins to pick? Baysian methods? Etc. All methods have their disadvantages and advantages. No free lunches here.

2. Converting it all to numbers that are comparable across countries and time
2a. PPP adjustments
2b. What price index to use? It seems like at least part of the possible problem with the SiM #s is that he used a general price level (though, contra that letter I believe it was the CPI not the GDP deflator) rather than a price index specific to poor households. However it is notoriously hard to get both the prices of individual, disaggregated goods, as well as to figure out what a typical consumption basket of poor people in various countries actually is.

3. Conceptual issues - 'what is poverty'

3a. Jack (or was it juan) above mentioned basic needs. So a poverty line should reflect the inability to acquire these. And 2$/day may be too low for that. Actually I think the standard 1$ and 2$ benchmarks are generally used because they're round numbers and they underscore the seriousness of the problem. As long as the same consistent benchmark is used and it's not, I dunno, 100$ per day or something, then it should be fine.
3b. More problematically, should poverty be measured using consumption or income data? From a cursory reading this appears to be another source of divergence between the two numbers. I think you can make some arguments both ways here.

Ok that's it for now.

Anonymous said...

You see, that wasn't too difficult. A well organized review of the deficiencies inherent in the data collection and summarization processes and the difficulty of the analysis that follows. It would be helpful in any discussion of any social phenomenon, of which economics is one, if there were a more wide spread recognition of these short comings. I've not been saying not to do the research as it is. The preface in such studies is all too often woefully lacking in disclosure. Simply put, confession is good for the soul, or the argument, as the case may be.