Guru of economics does an about-turn on free trade

Indian Express Newspapers (Bombay) ^ | Tuesday, October 19, 2004 | Jay Bhattacharjee

[Willie Green]

For education and discussion only. Not for commercial use.

At 89, after decades of speaking in favour of it, Paul Samuelson says it's not such a good thing after all

A battle royale has just been initiated in the rarefied world of economic theory, although the rumblings have not yet reached these shores. The first salvo has been fired by no less a person than Paul Samuelson, and the targets he has chosen include some of his most prominent acolytes and disciples.

The MIT professor, winner of the Nobel Prize in 1970 and research mentor of countless economists, who later became major scholars in their own right, has re-assessed his entire stand on globalisation and the benefits that accrue from the process. In doing so, Samuelson has been scathing in his critique of some of his students, including Jagdish Bhagwati, once a member of his innermost circle.

In an article in the Journal of Economic Perspectives, Samuelson has postulated that free trade, far from being an unqualified blessing, may prove to be a major drawback under certain circumstances. The major cult figures who are sought to be chastised by the guru on this issue are Gregory Mankiw, Bhagwati and countless other `globalists'. The first two have been mentioned by name in the article's opening paragraphs as purveyors of `polemical untruth'. In the corridors of theoretical economics, you cannot get more direct than this.

The thrust of Samuelson's analysis is that a country like China, basically a low-wage economy, will create a net negative impact on the American people, when it manages a substantial rise in productivity in an industry in which the United States was earlier a leader. Initially, American consumers may benefit from low-priced goods in their supermarket chains, but their gains may be more than neutralised by large losses sustained by American workers who lose their jobs. This thesis, from the erstwhile mastermind of the neoclassical school of economic thought, has led to tumult in the profession even before its official publication.

Among Samuelson's fellow liberals, this revisionism has been a welcome development and could not have come a day sooner. Many American commentators are saying this is a clarion call for the US to launch serious programmes for supporting workers displaced by globalisation. American workers need a much stronger and a viable safety net, on the lines of their European counterparts or even those in Canada, the immediate northern neighbour. Some American economists are even saying empirical research on the subject in the past was skewed, because of the in-built biases of the free-trade proponents.

Claims of substantial gains from free-trade were based on `extraordinarily poor studies', according to one commentator, Jeff Madrick, who goes on to add there is now hope for a more balanced perspective in future research in international trade theory. Policymakers in Washington are now being urged to move away from their high perches and to take a hard look at ground realities. When one of the most respected contemporary economists has stepped out of the shadows and said things are not as simple as they were earlier made out to be, it is a development that cannot be ignored. Another observer, Pat Choate, feels this paper is the correction of `an embarrassing mistake'.

Samuelson, at the age of 89, is signalling to his disciples that they should think about the real world rather than `postulate assumptions and develop elegant models which ultimately are irrelevant'. More critical economists, like Paul Roberts, feel the maestro's attempt to patch a leaking vessel that is ultimately doomed will just not work. Roberts suggests the paper responds to an insightful critique by Ralph Gomory and William Baumol, another economist familiar to all Indian students of economics.

In their publication, Global Trade and Conflicting National Interests, Gomory and Baumol launched a powerful attack on orthodox international trade theory. They showed free trade is characterised by conflicting interests and not by mutual benefit, as neoclassical economists assume. Roberts, in fact, lambasts Samuelson for not taking on the issue of outsourcing in any depth.

While the friendly fire in this debate is clearly sympathetic to the overall theme, the globalists are clearly worried. The damage-control effort of this brigade is led by none other than Jagdish Bhagwati, the former Samuelson disciple, singled out in the paper for reprobation. The Columbia don has reportedly prepared a response to Samuelson, which will be published in the same journal.

Bhagwati, of course, got a lot of media attention recently when he described John Kerry's trade policies as `voodoo economics'. He has been one of the most committed globalists for many years and was a defender in the 1980s for the Japanese trade lobby, which he exonerated from charges of protectionism, while reserving his blame for `bullying' American policy-makers. He dismissed the argument that non-tariff barriers significantly reduced Japan's appetite for imports from America. There is now sufficient evidence (and semi-official admission) that Japan was a major protectionist country throughout its period of growth in the 1960s and much later on.

Most of us who have worked in this country's corporate sector and interacted with Japanese companies will vouchsafe for the enormous clout of these organisations and the seamless interlinking between the much-vaunted MITI and Japan's private business. In any case, Japan's continuing trade surpluses are likely, once again, to become a controversial issue in Washington very soon.Bhagwati will have his work cut out, as he takes on his former guru in a no-holds-barred fight to defend orthodox economics.

In these shores, North Block and Raisina Hill would do well to ask their think-tanks to introspect on the complex subject. Else, they can be taken to task for swallowing the globalisation mantra a tad too uncritically.

The writer is a financial-corporate analyst and a member of the Delhi Stock Exchange.

[Willie Green]

ping

[Wolfie]

S'up WG. All tied up, eh?

[sarcasm]

The thrust of Samuelson's analysis is that a country like China, basically a low-wage economy, will create a net negative impact on the American people, when it manages a substantial rise in productivity in an industry in which the United States was earlier a leader. Initially, American consumers may benefit from low-priced goods in their supermarket chains, but their gains may be more than neutralised by large losses sustained by American workers who lose their jobs.

Where have I heard that before?

[JoeV1]

These are just elite theorists who have nothing better to do. I any case it's far top late to put this genie back into the bottle.

[Austin Willard Wright]

Yeah, and Samuelson also praised the wonderful growth of the Soviet economy in his textbook, all the way to 1989. Nuff said.

[the invisib1e hand]

samuelson is no smith, no von mises.

[The_Republican]

337,000

[the invisib1e hand]

whole lotta flip-floppin' goin' on up there in along the chahles.

[RustysGirl]

"American workers need a much stronger and a viable safety net, on the lines of their European counterparts or even those in Canada, the immediate northern neighbour."

Grover Norquist would stroke out!

[Willie Green]

590 billion

[arthurus]

Samuelson is a Keynesian anđ thus a tinkerer . Immutable principles are, for such "economists," subject to change to suit the desired politics.

[zb42]

At 89 <----------[ Methinks all Mr. Bhagwati need do, is to start his riposte thusly... ]

[Glenn]

Methinks all Mr. Bhagwati need do, is to start his riposte thusly

You suppose that he is demented?

[Willie Green]

He's 3 years younger than Milton Friedman.

[Jaysun]

The thrust of Samuelson's analysis is that a country like China, basically a low-wage economy, will create a net negative impact on the American people, when it manages a substantial rise in productivity in an industry in which the United States was earlier a leader. Initially, American consumers may benefit from low-priced goods in their supermarket chains, but their gains may be more than neutralised by large losses sustained by American workers who lose their jobs.

This is a strange theory. What industries is he talking about? The telemarketing industry? The industry responsible for producing goods for the "Dollar Store"? Can anyone think of an industry that we are presently the most productive in, but that also has seen widespread movement to foreign countries?

[Moonman62]

Initially, American consumers may benefit from low-priced goods in their supermarket chains, but their gains may be more than neutralised by large losses sustained by American workers who lose their jobs.

The real power is that it frees up resources so we can create newer more lucrative markets.

[zb42]

He's 3 years younger than Milton Friedman.

True, but Friedman is not categorically refuting his entire life's work at this late stage in life.

This is not to say that bed side conversions are not valid, but from what I read of your excerpt it seems that Mr. Samuelson is assuming the American work force is not flexible enough to adapt to evolving labor market conditions.

In any event, the genii is out of the bottle and Mr. Sameulson's parting shot from his bed and Mr. Bhagwati's response will make interesting reading.

[ex-snook]

Thanks Willie. It's becomming more and more obvious that when we export both our factories and our dollars, it is lose-lose.

[gcruse]

American workers need a much stronger and a viable safety net, on the lines of their European counterparts

Europe is trying to dig out of that hole right now.  There's something human and ironic about latching onto failure just as others are reaping its downside.  As for me, I try to learn from the mistakes of others as I've found that  life is too short to make every mistake for myself.