Skip to comments.Stop the World! Second Thoughts by a First Rank Economist OR The Case for Free Trade Crumbles
Posted on 11/20/2004 9:56:42 AM PST by curiosity
When the 1970 Nobel laureate Paul Samuelson was asked what it takes to win a Nobel Prize, he volunteered, "It doesn't hurt to have good students."
But even Samuelson's overachieving students -- he has taught economics at MIT for six decades -- sometimes need to be put in their place. At least that seems to be the subtext of a new Samuelson paper in the Journal of Economic Perspectives.
Samuelson argues that, far from representing an unmitigated boon, free trade may in some circumstances prove a net loser. Among countless globalists who stand duly corrected, not the least chastened are two of Samuelson's own former students: Jagdish Bhagwati and Gregory Mankiw. Noted for their ardent embrace of globalism, the pair are identified by name as purveyors of "polemical untruth" in Samuelson's opening paragraphs.
Samuelson's insight is that if a low-wage country like China suddenly makes a major productivity leap in an industry formerly led by the United States, the result can be a net negative for the American people. Although American consumers may benefit via low-low prices at Wal-Mart, their gains may be more than outweighed by large losses sustained by laid-off American workers.
This conclusion, coming as it does from the pope of economic orthodoxy, is already (even before its official publication) causing a sensation in the economics profession.
Mainly the reaction is positive. Certainly this sudden flash of the obvious has come not a moment too soon for many of Samuelson's fellow liberals.
According to Jeff Madrick, author of Why Economies Grow and editor of Challenge, the take-home message is that the United States needs to do much more to support workers thrown on the scrap heap by globalism.
"The Samuelson paper is a strong argument from the most illustrious of neoclassical economists for a much stronger safety net for American workers," Madrick says. "The price being paid for free trade is falling on many workers, and there's little empirical doubt of that anymore. Moreover, I think the bias among free-trade advocates has skewed the empirical research in the field. Claims of finding that gains from free trade are many magnitudes larger than the losses have been based on extraordinarily poor studies that have hardly been criticized. Maybe some serious sense -- I would ask only for balance -- will now return to trade economics."
For James Fallows, a liberal-leaning critic of Washington's blink-first style in trade diplomacy, Samuelson's analysis is a call to policy-makers to break free from utopian theories and, instead, take a hard look at the real world.
"The great problem in Western discussion of trade theory has been its simpleminded Panglossianism," he says. "The main thing that has supported globalism, apart from the self-interest of many powerful participants, has been the idea that economic theory was 100 percent on the side of Dr. Pangloss. To have the most esteemed of all modern economists say that things are not this simple is a very important step."
On the moderate right, Pat Choate sees Samuelson's paper as essentially defensive, less a confident breakthrough than the correction of an embarrassing mistake.
At the age of 89, Samuelson is finally stepping onto the road to wisdom, says Choate. It is a road where uncertainty prevails over the certainty of the laws of economics, which are not laws but ruminations by closeted academics. His article is important, for it effectively gives permission to his disciples to begin to think about the real world, rather than try to postulate assumptions and develop elegant models which ultimately are irrelevant.
Paul Craig Roberts, a fiercely anti-globalist economist who served as President Ronald Reagans assistant treasury secretary, puts it even more pointedly. Samuelsons rethink, he suggests, is merely an attempt to patch up a leaking, and ultimately doomed, vessel.
As he points out, the paper is in large part a reaction to arguments made by Ralph E. Gomory and William J. Baumol, who in Global Trade and Conflicting National Interests have mounted a powerful challenge to the orthodoxy's utopian take on international trade. Roberts adds, Gomory and Baumol show that, in the relevant zones, free trade is characterized by conflicting interests -- not by mutual benefit, as economists unthinkingly assume."
In Roberts' view, though the Samuelson paper is an important modification of free-trade theory, Samuelson has chosen his assumptions carefully to avoid any frank discussion of the widespread damage being caused by outsourcing.
If Roberts is disappointed by the narrowness of the Samuelson modification, many on the globalist side of the trade argument are evidently worried. A leader of the damage-control effort is none other than Bhagwati, the former Samuelson student singled out for obloquy in the paper.
Already Bhagwati, a Columbia University professor, has collaborated with two allies in a hastily written response that will be published in the same journal.
Judging by a bad-tempered recent contribution to The Wall Street Journal, Bhagwati is clearly rattled. Describing John Kerry's trade policies as "voodoo economics," Bhagwati embarrased his cause by hurling juvenile personal abuse at the anti-globalist CNN presenter Lou Dobbs.
What is clear is that Bhagwati has plenty to be rattled about. As one of the earliest and most extreme globalists, he has offered several hostages to fortune over the years, most notably in his indecent embrace of the Japan trade lobby in the 1980s. Blaming "bullying" American policy-makers for most of the tension at the time in U.S.-Japanese relations, he exonerated Japan from charges of protectionism. Writing in Fortune magazine in 1989, for instance, he argued that the evidence was "slim" that nontariff barriers significantly reduced Japan's appetite for American exports.
In what must have been the ultimate bad hair day for Bhagwati, one of Japan's leading spokesmen has now admitted that Tokyo's 1980s denials of protectionism were poppycock. The admission came from Mitsubishi Corporation President Minoru Makihara, who told the Tokyo foreign correspondents' club that the Japanese market in the 1980s was "still closed and tightly protected.
Bhagwati's demeanor cannot have been improved by the realization that Japans continuing trade surpluses (they never went away) are likely soon to re-emerge as a hot-button issue in Washington. The reason: Japans current account surplus is headed for a record $170 billion this year. By comparison, in 1989 -- which was both the last year before the Tokyo stock-market crash and the year of peak Washington lamentation about Japans juggernaut trade strategy -- Japan earned a current surplus of a mere $57 billion.
Under the circumstances, Bhagwati seems a weak candidate to lead what will obviously be a hard fight to defend academic orthodoxy. Certainly only the first casualty will be Henry Kissinger's cruel witticism about academic life: that the fights are so bitter because the stakes are so low. This is one dispute where the stakes justify the bitterness.
[Eamon Fingleton's] earlier book, Blindside: Why Japan Is Still on Track to Overtake the U.S. by the Year 2000, was named one of the Ten Best Business Books of 1995 by Business Week
Free trade benefits american investors at the expense of american workers. However, the process of globalization is unstoppable and it's utopian to think that much can be done to help either the American worker or the environment until the process of worldwide equalization of standards, living conditions, and legal structures progresses much further than at present.
Globalism = Communism
"Do not imagine, gentlemen, that in criticizing freedom of trade we have the least intention of defending the system of protection."
. "One may declare oneself an enemy of the constitutional regime without declaring oneself a friend of the ancient regime."
. "Moreover, the protectionist system is nothing but a means of establishing large-scale industry in any given country, that is to say, of making it dependent upon the world market, and from the moment that dependence upon the world market is established, there is already more or less dependence upon free trade. Besides this, the protective system helps to develop free competition within a country. Hence we see that in countries where the bourgeoisie is beginning to make itself felt as a class, in Germany for example, it makes great efforts to obtain protective duties. They serve the bourgeoisie as weapons against feudalism and absolute government, as a means for the concentration of its own powers and for the realization of free trade within the same country."
. "But, in general, the protective system of our day is conservative, while the free trade system is destructive. It breaks up old nationalities and pushes the antagonism of the proletariat and the bourgeoisie to the extreme point. In a word, the free trade system hastens the social revolution. It is in this revolutionary sense alone, gentlemen, that I vote in favor of free trade." : Karl Marx
Yeah! And it turns out that the Earth is really flat, afterall.
So, you agree with Marx?
I think your should read THE WEALTH OF THE NATIONS by ADAM SMITH.
Don't forget Paul Krugman, though I think he's with Princeton now.
I have. And I've studied it. And I've written about it. And I've taken exams about it. So if you think I'm unfamiliar with Smith, prove it. Make my day.
Moreover, I can say the same about Marx. How about you?
Unfortunately, freepers are biologically unable to admit that free trade is contrary to conservatism.
If you wish to make a reply, please do so here, instead of private mail.
Not "pure" enough, huh? LOL
I think your should read THE WEALTH OF THE NATIONS by ADAM SMITH.>>>>>>>>>>>
The theories which support free trade are all based on the concept that there is essentially full employment. Ricardo's theory is irrelevant in today's world as practically nothing trades on the basis of comparative advantage. If a country does not have an absolute advantage in producing a product it will not be able to sell the product on the world market.
Samuelson is a Nobel Laureate, same as Milton Friedman.
....and a nation's economy dependent on DEBT, Walmart, McDonald's , Sam's Club is unsustainable.
For how long we will keep consuming and will keep sending our manufacturing overseas.
Where goes the manufacturing, there goes the RESEARCH & DEVELOPMENT.
It is a race towards the bottom.
which means he's in the same distinguished category of nobel prize recepients as yassar arafat.
Some great company to have.
The many now-bankrupt American workers who lost their jobs and their homes can attest to this fact as they're struggling to pay their bills.
I don't hear much concern for American workers in Washington, they're too busy importing more foreigners to do American jobs.