Mises’ discussion of the “Ricardian law of association” (or free trade by comparative advantage) is a perfect example of this, and is given in Mises’ Human Action: A Treatise on Economics (4th edn, 1996), pp. 159–164 (for discussion, see Murphy and Gabriel 2008: 65–66; Vaughn 1994: 78).
First, it is perfectly clear that even Mises admits some role for empirical evidence in praxeology. In fact, the alleged “apodictic certainty” for his praxeology claimed by some modern Austrians vanishes when we look carefully at a candid passage of Mises himself:
“Every theorem of praxeology is deduced by logical reasoning from the category of action. It partakes of the apodictic certainty provided by logical reasoning that starts from an a priori category. Into the chain of praxeological reasoning the praxeologist introduces certain assumptions concerning the conditions of the environment in which an action takes place. Then he tries to find out how these special conditions affect the result to which his reasoning must lead. The question whether or not the real conditions of the external world correspond to these assumptions is to be answered by experience. But if the answer is in the affirmative, all the conclusions drawn by logically correct praxeological reasoning strictly describe what is going on in reality” (Mises 1978 : 44).An assumption about “real conditions of the external world” is a synthetic proposition. If the “question whether or not the real conditions of the external world correspond to these assumptions is to be answered by experience,” then we need empirical evidence.
And we can add to Mises’ last sentence: if the answer is in the negative, then the conclusions drawn even by valid praxeological reasoning do not describe what is going on in reality. They describe a non-existent, fantasy world.
Mises’ praxeological case for free trade is such an example. Mises’ argument is itself heavily dependent on Ricardo:
“Ricardo expounded the law of association in order to demonstrate what the consequences of the division of labor are when an individual or a group, more efficient in every regard, cooperates with an individual or a group less efficient in every regard. He investigated the effects of trade between two areas, unequally endowed by nature, under the assumption that the products, but not the workers and the accumulated factors of future production (capital goods), can freely move from each area into the other” (Mises 1996: 159).Mises correctly notes that there were certain assumptions made by Ricardo for his principle of comparative advantage to work. Mises was writing the original edition of Human Action before 1949, long before the era of globalization and liberalized capital markets that began from the 1970s.
“Ricardo, however, starts from the assumption that there is mobility of capital and labor only within each country, and not between the various countries …. Now, Ricardo’s assumptions by and large held good for his age. Later, in the course of the nineteenth century, conditions changed. The immobility of capital and labor gave way; international transfer of capital and labor became more and more common. Then came a reaction. Today capital and labor are again restricted in their mobility. Reality again corresponds to the Ricardian assumptions (Mises 1996: 164).
The period from 1945 to 1973 was indeed a world where capital controls restricted foreign investment to some extent and labour mobility was more restricted than in the 19th century. Mises even concedes that by the late 19th century the conditions assumed by Ricardo did not necessarily hold.
What Mises completely misses is that, because of hidden assumptions in the argument for comparative advantage, it is highly doubtful whether his argument for comparative advantage works even for 1945–1973 period. Before we examine the hidden assumptions, however, it is useful to look at the stated assumptions.
Even neoclassical arguments for free trade rely on David Ricardo’s principle of comparative advantage, though of course modern neoclassical theory uses the more sophisticated Heckscher–Ohlin model as its defence of free trade. But this model has been increasingly challenged by modern critics (e.g., Gomory and Baumol 2000), and there are rival theories in mainstream economics like New Trade Theory (NTT), to which Paul Krugman has made contributions (for some other critical work on free trade, see Prasch 1996; Gomory and Baumol 2000; Reinert 2007; Fletcher 2008; Baiman 2010).
It should be noted that Ricardo wrote the book Principles of Political Economy and Taxation in 1817. This was at a time before the full effects of the industrial revolution were clear, a point which we will return to below.
Ricardo’s principle of comparative advantage requires two conditions to work properly, as follows:
(1) Domestic factors of production like capital goods and skilled labour are not internationally mobile, and instead will be re-employed in the sector/sectors in which the country’s comparative advantage lies;As is admitted even by Mises, by the late 19th century assumption (1) was questionable.
(2) Workers are fungible, and will be re-trained easily and moved to the new sectors where comparative advantage lies (Prasch 1996: 39–40).
Today it is also the case that both capital goods themselves and investment money for production are very mobile, so that (1) is also not true. Proposition (2) is also questionable in many cases (Prasch 1996: 40–41).
Once capital becomes extremely mobile internationally, we no longer have comparative advantage, but absolute advantage. It is not at all clear that free trade under “absolute advantage” is beneficial to all nations. In Ricardo’s day, internationally mobile capital was not that significant. David Ricardo observed that the immobility of capital in his day prevented capital from seeking absolute advantage. He described it as
“the difficulty with which capital moves from one country to another, to seek a more profitable employment, and the … [ease] with which it invariably passes from one province to another in the same country” (Ricardo, On the Principles of Political Economy and Taxation, 7.18).In Ricardo’s day, capital mobility did not happen on a large scale because capital and technology were more difficult to transfer. But it never occurred to Ricardo that, in a world of mobile capital and easily transferable technology, capital would seek absolute advantage in a destructive way to its home country.
The neoclassical and Misesian argument for free trade is dependent on the capital of one country remaining in that country and being put to work in some other productive domestic industry, where comparative advantage lies. This is not what happens today, where capital from Western countries seeks absolute advantage in the developing countries. Movement of capital to a place where it has absolute advantage simply causes de-industrialization in Western countries, as capital moves to nations with the lowest unit labour costs, and higher wage countries experience falling wages and high unemployment (Holt 2007: 103). Moreover, the large-scale movement of service industries overseas (often called “outsourcing”) is just as damaging.
With the collapse of manufacturing and other production, nations suffer higher unemployment and higher trade deficits. Capital does not simply move from one domestic sector to another where comparative advantage lies, because of international capital mobility and the drive for lower wages and higher profits. Thus the changes in domestic investment that would happen under the assumptions of Ricardo do not happen.
But, even if all the assumptions stated above are true, there are still devastating hidden assumptions underlying the whole argument of Ricardo and Mises. These hidden assumptions are precisely the type of synthetic propositions I have referred to in my earlier post on praxeology.
The hidden assumptions are as follows:
(1) it does not matter what you produce (e.g., you could produce pottery), as long as you do it in a way that gives you comparative advantage;These hidden assumptions are utterly absurd. First, it does matter what you produce. Reliance on primary commodity exports whose prices are subject to volatility is not a successful strategy for economic development in most countries; in fact, such countries reliant on primary commodities and service industries are usually poor developing nations.
(2) technology is unchanging and uniform; and
(3) there are no returns to scale (Galbraith 2008: 68; Chang 2003: 292).
Moreover, as Galbraith as noted:
“Comparative advantage operates on the assumption of unchanged technology and constant returns to scale. There are no economies of scale, no learning curve, no improvements in productivity as output increases. The only requirement is that conditions of production differ, so that one good—in terms of the other—is relatively more expensive in one country and relatively less so in the other. The only efficiency gained from trade stems from the reorganization of production and the reallocation of factors—labor, capital, land—to their best uses in the new, larger, common market … But the argument does not generalize to the real world. Given three countries and three commodities, it is not obvious that each country will always be the relatively most efficient producer of exactly one good. And then what? Does the country that has no comparative advantage produce nothing? Does it refuse to trade? If its “comparative advantage” lies in exporting labour and closing up shop, is this acceptable? The textbooks do not say. The actual world has some 220 countries and thousands of distinct commodities. In this world—the one where we actually live—the calculation of comparative advantage is intractable, and the doctrine says nothing about who should specialize in what, still less that specialization will exactly reproduce full employment in each place ... Further, comparative advantage is based on the concept of constant returns: the idea that you can double or tripe the output of any good simply by doubling or tripling the inputs. But this is not generally the case. For manufactured products, increasing returns, learning, and technical change are the rule, not the exception: the cost of production falls with experience. With increasing returns, the lowest cost will be incurred by the country that starts the earliest and moves fastest on any particular product line … For most other commodities, where land or ecology places limits on the expansion of capacity, the opposite condition—diminishing returns—is the rule. In this situation, there can be no guarantee that an advantage of relative cost will persist once specialization and the resulting expansion of production take place” (Galbraith 2008: 68).In the real world, production in high-value-added sectors like manufacturing leads to innovation, advancement of technology, increasing returns to scale, synergies, and strong economic growth. That is why manufacturing drives industrialization and makes nations rich. The basis of a modern first world economy is manufacturing and high-value added industries. Writing in 1817, Ricardo did not understand the full implications of the industrial revolution for economic development.
As is shown brilliantly by Erik S. Reinert in How Rich Countries Got Rich, and Why Poor Countries Stay Poor (Carroll & Graf, New York, 2007, p. 301ff.), a developing nation can follow rules of comparative advantage to the letter, and still remain mired in poverty and stagnation, with low-valued-added production and decreasing returns to scale.
A catastrophic example of the effects of comparative advantage was seen in Mongolia’s economy in the 1990s. Mongolia, under advice from the World Bank, implemented free trade, which caused its manufacturing sector to collapse, and it shifted to raising livestock (where its comparative advantage lay, according to classical trade theory). The result was a halving of per capita GDP and ecological disaster, as increasing livestock production led to diminishing returns, overgrazing, and desertification (Reinert 2004: 157–214).
Such free trade by comparative advantage is not a successful path to economic development.
In a world where a developing nation specialises in primary commodities, often according to the dictates of comparative advantage, it is normally cheaper to buy manufactured goods from overseas. But, under such circumstances, a Third World country will not industrialize. It will be permanently mired in poverty, commodity exports or service industries (the typical type of third world economy). There are sound reasons for violating free trade theory and creating your own high-value added industries, where the home market has sufficient demand for the products of those industries, through targeted infant industry protectionism or modern import substitution industrialization (Chang 2002, 2003, 2007; see also “Industrial Policy: A Brief Comment,” June 21, 2010)
The alleged economic advantages of free trade claimed by Misesian praxeology and by Ricardo are simply false, because of the false hidden premises in the argument.
Baiman, R. 2010. “The Infeasibility of Free Trade in Classical Theory: Ricardo’s Comparative Advantage Parable has no Solution,” Review of Political Economy 22.3: 419–437.
Chang, H.-J. 2002. Kicking Away the Ladder: Development Strategy in Historical Perspective, Anthem Press, London.
Chang, H.-J. 2003. Rethinking Development Economics, Anthem Press, London.
Chang, H.-J. 2007. Bad Samaritans: Rich Nations, Poor Policies, and the Threat to the Developing World, Random House Business, London.
Fletcher, I. 2008. “Fatal Flaws in the Theory of Comparative Advantage,” American Economic Alert (November 6)
Galbraith, J. K. 2008. The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should too, Free Press, New York.
Gomory, R. E. and Baumol, W. J. 2000. Global Trade and Conflicting National Interests, MIT Press, Cambridge, Mass.
Holt, R. P. F. 2007. “Post Keynesian Economics?,” in M. Forstater, G. Mongiovi, and S. Pressman (eds), Post Keynesian Macroeconomics: Essays in Honour of Ingrid Rima, Routledge, London. 89–107.
Korzeniewicz, R. P. 2001. “Comparative Advantage and Unequal Exchange,” in P. Anthony O’Hara (ed.), Encyclopedia of Political Economy. Volume 1. A–K, Routledge, London and New York. 127–131.
Mises, L. 1978 . The Ultimate Foundation of Economic Science: An Essay on Method (2nd edn, Sheed Andrews & McMeel, Kansas City.
Mises, L. 1996. Human Action: A Treatise on Economics (4th rev. edn), Fox and Wilkes, San Francisco.
Murphy, R. P. and A. Gabriel, 2008. Study Guide to Human Action: A Guide Tutorial of Ludwig von Mises’s Classic Work, Ludwig von Mises Institute, Auburn, Ala.
Prasch, R. E. 1996. “Reassessing the Theory of Comparative Advantage,” Review of Political Economy 8.1: 37–56.
Prestowitz, C. 2004. “Free Trade and Outsourcing Are Not the Same,” Financial Times (25 April).
Prestowitz, C. V. 2005. “China as No. 1,” American Prospect, February 21
Prestowitz, C. V. 2010. The Betrayal of American Prosperity: Free Market Delusions, America’s Decline, and How we Must Compete in the Post-Dollar Era, Free Press, New York and London.
Reinert, E. S. “Diminishing Returns and Economic Sustainability; The Dilemma of Resource-based Economies under a Free Trade Regime,”
Reinert, E. S. 2004. “Globalization in the Periphery as a Morgenthau Plan: The Underdevelopment of Mongolia in the 1990s,” in E. S. Reinert (ed.), Globalization, Economic Development, and Inequality: An Alternative Perspective, Edward Elgar Pub., Cheltenham. 157–214.
Reinert, E. S. 2007. How Rich Countries got Rich, and Why Poor Countries Stay Poor, Carroll and Graf, New York.
Roberts, P. C. 2004. “Clarifications on the Case for Free Trade” Mises Daily (January 10) http://mises.org/daily/1420
Roberts, P. C. 2007. “Commentary & Analysis: Economists In Denial; Blind To Offshoring's Adverse Impact,” Manufacturing & Technology News 14.3 (February 6)
Roberts, P. C. 2009. “The Problem of Free Trade,” Counterpunch 16.2 (January 16–31).
Ruffin, R. 2002. “David Ricardo’s Discovery of Comparative Advantage,” History of Political Economy 34.4: 727–748.
Schumer, C. and Roberts, P. C. 2004. “Second Thoughts on Free Trade,” New York Times (6 January).
Vaughn, K. I. 1994. Austrian Economics in America: The Migration of a Tradition, Cambridge University Press, Cambridge.
There is one problem, and I am going to be very emphatic on this point.ReplyDelete
More capital is invested in industrial western nations than in the Third World. Whether or not capital is mobile, investors prefer to invest in richer countries than poorer countries, and prefer to invest closer to home than abroad. This phenomenon was best illustrated by James Jackson's report on US direct investment abroad. http://www.fas.org/sgp/crs/misc/RS21118.pdf
I see you have cited Paul Craig Roberts, a big believer in Global Labour Arbitrage. How does he explain the fact that United States invests more in manufacturing in Netherlands (a tiny country) than it does in China? Where are Roberts and Senator Schumer complaining about Dutch people stealing American jobs? The Dutch workers are paid much more than Chinese workers are. This hole in the GLA theory is glaring, although I am not saying you believe in it.
It's more expensive to do business in the poor world. It's hard to build factories on a remote mountain or desert, transfer employees there, build housing for them, train them, and be able to keep them productive under those climate conditions. Even if you are assured a higher rate of return due to scarce capital, the risk is much greater, due to the difficulty of setting up a business and transporting goods in and out of those remote places. Low wages do absolutely nothing to encourage entrepreneurs, who have no reason prefer between a highly productive high wage worker and an unproductive low wage worker.
American capital in manufacturing is invested mostly at home, then at Canada, and then at Western Europe. A residual amount goes to Third World. Trying to call out those who support international trade on the grounds that capital may fly away from those countries is ridiculous, because that capital flight to the Third World NEVER HAPPENED. On the contrary, countries like India receive very little foreign investment and what they do receive, they try to block, out of xenophobism.
I am amazed by protectionists like P. C. Roberts and Patrick Buchanan who invent fictitious situations, like a fictional flight of capital to the Third World, and assume that the debate is between those who think capital flight is good and those who think it's bad. Except this fictional situation NEVER HAPPENED.
Here's an interesting fact - American car manufacturer Ford earns $30,000 per employee and Chinese car manufacturer Geely earns $1,000 per employee. Ford has roughly 90,000 employees and Geely only 10,000 employees. (speaking from memory) The Americans are more productive and create more jobs, even at higher wages.
Protectionists just don't know how to distinguish between wages (pay per worker) and labour cost (pay per good produced). They have proven themselves the most incompetent lot, especially that corporate lobbyist Ian Fletcher. Some of them defend themselves by calling themselves "infanty industry protectionists" - good one, because an industry protected and coddled always remains an infant industry!
"Whether or not capital is mobile, investors prefer to invest in richer countries than poorer countries, and prefer to invest closer to home than abroad."ReplyDelete
That doesn't stop a large amount of Western capital moving to China and South Asia.
"Except this fictional situation NEVER HAPPENED."
This statement is disproved by a simple graph:
And even China itself is suffering now from Western and Japanese/East Asian capital moving to Vietnam and India:
"Some of them defend themselves by calling themselves "infanty industry protectionists" - good one, because an industry protected and coddled always remains an infant industry!"ReplyDelete
Infanty industry protectionism's sucesss is seen throughout the last 400 years.
The US is the most obvious example of its success: the US in the 19th century was the most protectionist nation on earth, but also the fastest growthing (Paul Bairoch, 1993. Economics and World History: Myths and Paradoxes, University of Chicago Press, Chicago. pp. 32-37).
See also Ha-Joon Chang, 2002. Kicking Away the Ladder: Development Strategy in Historical Perspective, Anthem Press, London.
The UK used protectionism to create a textile industry in the late 18th century to 1821, when it could not compete with India:
Japan, South Korea, and Taiwan are industrial giants because of import substitution industrialization:
"Large" amount is an arbitrary statement. Americans have invested only $25 billion annually in China (as per Jackson's report), which is a tiny figure compared to the amount they invest in their own country and Canada.ReplyDelete
You have yet to make a case for whether *most* capital from a country actually goes away abroad. That never happens.
Are you telling me that the loss of *just* $25 billion will cost hundreds of thousands or millions of jobs? That is not even 1% of the capital in American banks. America's loss of manufacturing jobs was a painful process, but those jobs didn't get stolen abroad and they did not go anywhere. Once, 60% of Americans were agricultural workers. Now, it's a tinier part of the populaton, but they produce so much food now that they have an obesity problem. Fact is that an American just by arranging items on a shelf makes enough money to fill his stomach till obesity, have a television set, have an apartment, go to work by car or a bus every day, and even waste some money on petty luxuries he does not need. America produces so much that an American can live on a lot by producing very little. As Jagdish Bhagwati says, it's not what you produce but what you consume that determines your standard of living. You may produce potato chips to buy microchips to become intelligent, while you may produce microchips to buy potato chips and become dumb.
You are familiar, by the way, with the Korean crisis? You use Korea's ISI as proof of its success. Korea used to coddle its heavy and petrochemical industries with guaranteed loans given continuously and repeatedly, laws made to favour them, subsidised goods given in excess, everything. Korean businesses became fat and lazy and simply kept eating up capital. The moment Korean banks (controlled closely by government) started running out of money and stopped giving it, the Korean businesses hungry for money started falling apart, and they begged to be rescued. Companies like Daewoo had been "rescued" too many times, and they were allowed to fall apart for the first time. Then the Koreans recovered. Industrial policy is a disaster, where businesses become a liability to society rather than an asset.
How will you justify this practice in a democracy (if you believe in it) and tell ordinary people that the government will put their money into the pockets of businessmen, keep double standards in law to protect them, and ask them to bear more expensive foreign goods in order to make the businessmen richer?
I am familiar with Ha Joon Chang, who has yet to refute the simple fact that development in any country is limited to the amount of capital it has, and whether goods come from abroad or from home will not reduce the amount of capital in a country. Britain had far more capital than India ever did and had far more developed financial institutions than India did, and could easily invest huge sums in a new industry and beat out any Third World country. And even if it did not do so in textiles, it could have done so in any industry, and it did. There is no point in using protectionism as a source of prosperity, when Britain always had more capital than India.
""Large" amount is an arbitrary statement. Americans have invested only $25 billion annually in China (as per Jackson's report), which is a tiny figure compared to the amount they invest in their own country and Canada."ReplyDelete
The effects of investment in low wage countries is qualitatively different from investment in other industrialized nations.
“You have yet to make a case for whether *most* capital from a country actually goes away abroad. That never happens.”
*Most* capital does not need to go abroad: if significant amounts of manufacturing capital go abroad it will have significant effects on the economy.
Are you telling me that the loss of *just* $25 billion will cost hundreds of thousands or millions of jobs?
Not just capital in the sense of investment money: we are talking about capital goods, factories closing down and moving to low wage countries.
“You are familiar, by the way, with the Korean crisis?” …
Provide some actual references and links on this alleged “crisis”, and I am happy to comment on it.
“I am familiar with Ha Joon Chang, who has yet to refute the simple fact that development in any country is limited to the amount of capital it has, and whether goods come from abroad or from home will not reduce the amount of capital in a country.”
That economic development is limited by access to technology, capital goods, and foreign exchange is the basis of Ha Joon Chang’s analysis – not only does he have no need to “refute” it, it is an obvious fact completely consistent with ISI.
And anyway regarding your link to this article:ReplyDelete
It shows $810.2 billion in US investment in the low wage developing world in 2009.
Latin America $679.0 billion
Middle East $37.0
When you close factories in America and shift them to these areas, the US trade deficit rises and higher US unemployment results.
The key passage in your link is here:
“On the whole, U.S. firms invest abroad to serve the foreign local market, rather than to produce goods to export to the United States, although some firms do establish overseas operations to replace U.S. exports or production, or to gain access to raw materials, cheap labor, or other markets.”
James K. Jackson, “U.S. Direct Investment Abroad: Trends and Current Issues,” July 28, 2010, pp. 4–5.
Foreign direct investment for production in a country to market the output to people in that country is a different matter (and I don’t object to it), and that is basically what is going on in US direct investment to Europe and Canada.
But US direct investment to China and other low wage platforms is done to ship goods back to the US markets, causing de-industrialization.
The solution to this problem for industrialized nations is here:
Developing nations can develop through ISI and domestic Keynesian internal growth, and that will be assisted by larger free trade areas with proper, integrated fiscal, monetary and economic policy.
Talking of free trade, Stephen Marglin discusses how including classes into the standard models of free trade changes the outcome. I'm not aware of anyone else in academia who includes this obvious fact, so it is nice to see someone discuss it.ReplyDelete
He does so in "The dismal science : how thinking like an economist undermines community" (Cambridge, Mass. : Harvard University Press, 2008) It is worth reading.
And talking of areas where Mises conclusions are at odds with reality, I should point to when he stated that people "err" in thinking that profit-sharing "would spur the worker on to a more zealous fulfilment of his duties" (indeed, it "must lead straight to Syndicalism") and it was "nonsensical to give 'labour' . . . a share in management. The realisation of such a postulate would result in syndicalism." (Socialism, p. 268, p. 269 and p. 305)
The empirical evidence is overwhelmingly against Mises -- participation in management and profit sharing almost always INCREASE productivity. Which suggests why "Austrians" are so dismissive of empirical evidence, as it exposes flaws in the great chains of deductive reasoning they so love.
Interestingly, these schemes are usually discontinued in spite of their benefits. Why? Because management/owners recognise that if workers manage their own work then they will soon come to realise that they do not need managers/owners. So bosses recognise that it "must lead straight to Syndicalism" and stop them, in spite (or, perhaps, BECAUSE) of their higher efficiency and productivity.
Somewhat beside the point, but I thought it relevant to share...
I don't oppose syndicalism or worker run enterprises - they would probably provide a better system for production.ReplyDelete
However, I think the overall economy would still need macroeconomic management, financial regulation, and probably incomes policy.
I will look at Stephen Marglin, "The dismal science: how thinking like an economist undermines community" (Cambridge, Mass.: Harvard University Press, 2008).
About the Korean crisis, much of what I know of it is from Frederic Mishkin's The Next Great Financial Globalization.ReplyDelete
But curiously, what is such a bad thing about a trade deficit? The countries with the largest trade surpluses - Saudi Arabia, Russia, China, Nigeria,.etc are largely quite poor and with more unemployed (with a few exceptions like Japan and Germany), while the biggest trade deficits are seen in UK, US, Australia, and Italy. Let alone the arbitrary idea that trade happens between nations when it actually happens between businesses and individuals across nations, would it not be preferable to be able to import as much possible in return for exporting as little as possible? You can't eat, drink, wear, or use what you export. (Unless we all must now start eating foreign currency on our dinner tables!)
"But curiously, what is such a bad thing about a trade deficit?"ReplyDelete
Large and potentially unsustainable current account deficits caused by a significant shift of domestic production overseas are problematic.
But I don't regard all trade deficits as problematic in themselves, when they are obviously sustainable.
Australia's current account deficits appear to be sustainable, for example.
In fact, I have argued before with pro-free market supporters over trade deficits, particularly those who think any trade deficit means your "living beyond your means."
Take the case of the UK. If the UK manages to attract a capital account surplus to fund its current account deficits over the past 50 years, then it was NOT living beyond its means.
It attracted the money to pay for imports – the means to pay for current account deficits were available because foreigners bought UK financial assets and real assets and the US dollars to pay for imports flowed in. Simple as that.
Lord Keynes, I think that what you're saying is not that praxeology has "flaws". I think that Mises would agree that the job of the economist is to check if those "subsidiary assumptions" hold true when analyzing some phenomena. But I still find praxeological models quite useful, I think.ReplyDelete
Maybe, a better critique of Mises's praxeology would be much more philosophical. For example, maybe some of the conclusions arrived thanks to the praxeological framework are just trapped in definitions and tautologies, and don't add any new knowledge.
For example, praxeology doesn't seem to provide an answer to the most important questions in economic science, for instance, Say's law (does it work?), involuntary employment (does it exist in a free market?), equilibrium theory (do markets tend to equilibrium?), business cycles (how hard will the bust be in order to have a sound recovery?) and so on.
"However, I think the overall economy would still need macroeconomic management, financial regulation, and probably incomes policy."ReplyDelete
Most anarchists would agree with the need for co-operation and co-ordination across workplaces and industries, the need for credit (finance) to be socialised (or "republicanised", to use Proudhon's expression). In fact, the notion of a "universal association" or "agro-industrial federation" (to use, yet again, Proudhon's expressions) have been long standing in libertarian (socialist) thought.
This is discussed in the introduction to "Property is Theft!", my new anthology of Proudhon's works:
Btw, have you ever thought about the similarities between Proudhon's ideas and Keynes? Given Keynes comments on Gesell, a follower of Proudhon. Dudley Dillard’s essay “Keynes and Proudhon” (The Journal of Economic History 2: 1 (1942)) discusses some aspects, but completely ignores Proudhon's ideas on workers association.
Again, sorry raising something not directly related to the subject.
I have just read D. Dillard, 1942. “Keynes and Proudhon,” Journal of Economic History 2.1: 63–76.ReplyDelete
Two passages stand out:
“Both Keynes and Proudhon repudiate the assumption implicit in the main body of orthodox principles of economics, that all capital is industrial capital. They are agreed that financial capital, because of its strategic place in the mobilization and exchange of industrial capital, possesses characteristics that impose profound limitations on the functioning of an otherwise sound competitive system. It is precisely the manipulation of financial capital that is responsible for the characteristic difficulties associated with capitalism; namely, lack of effective demand, crisis, depression, unemployment, and poverty” (p. 68)
“In the theories of both men the preference for holding money is related to a particular concept with which the alleged uniqueness of the entire theoretical system is associated. Keynes's concept is ‘liquidity preference’; Proudhon’s, ‘constituted value’” (p. 69).
These are indeed interesting similarities – I haven’t seen this before.
Though I don't enough about hsi ideas, I note this summary of his economic system described here:
"Proudhon called himself a socialist, but he opposed state ownership of capital goods in favour of ownership by workers themselves in associations. This makes him one of the first theorists of libertarian socialism. Proudhon was one of the main influence for the theorization, at the end of the 19th century and in the 20th century, of workers' self-management"
"Towards the end of his life, Proudhon modified some of his earlier views. In The Principle of Federation (1863) he modified his earlier anti-state position, arguing for "the balancing of authority by liberty" and put forward a decentralised "theory of federal government".
I am assuming there would then be a democratic federation of the workers' federations - an entity over and above them which have some functions analogous to government. If so, that entity could presumably engage in macroeconomic management, when it was needed.
"Though I don't know enough about his ideas,"
Although this is going to be a snarky comment, I am amazed how bourgeois men - like Proudhon, a politician, and Marx, a philosopher - have a lot of opinions on what working people should or should not do, without ever having worked in their life.ReplyDelete
What is admirable about Swedish social democracy is that Swedish politicians admitted they knew nothing and had next to no knowledge about specialized fields on which they hoped to make decisions, and they thus brought together business, labour, and peasantry to confer with them in a council, let them make the laws, and then implement them. No presumptions and none of this talk about what society should be and how they'll organize it, and none of this talk about how they know what working people think.
I know this is off topic but I'm trying to understand Post Keynesian economics. Some of topics that you are discussing are just slightly over my head. Could you recommend any books or textbooks that might help me? I have not taken any courses in economics and my understanding is limited. I'm reading "Financial Markets, Money and the Real World" by Paul Davidson. I'm getting about 70 percent of the material. So I'm looking for something just a little easier. Thank you. Oh yes, you are doing a fine job. Thanks for all your hard work.ReplyDelete
Links on Post Keynesianism:ReplyDelete
Post Keynesian Economics Study Group, http://www.postkeynesian.net/
J. E. King (ed.), Elgar Companion to Post Keynesian Economics, Edward Elgar Publishing, Cheltenham, UK and Northampton, MA.
This work is like a dictionary: you can look up topics.
John Edward King, A History of Post Keynesian Economics since 1936.
Also, you can read some of my posts here:ReplyDelete
The Utility of Money in Post Keynesianism
Money is not a Neutral Veil
Neoclassical Synthesis Keynesianism, New Keynesianism and Post Keynesianism: A Review
Post Keynesian Resources
Another thing of great value would be to explain the relationship between Keynes, Post-Keynesianism, Chartalism and MMT.ReplyDelete
Something I read you might find interesting (the review by Brady):
LK, as for your critique of Ricardo's assumptions (your post has nothing to do with Mises' praxeology).ReplyDelete
First off, Ricardo stated them explicitely in his work, so they were never "hidden".
Second, I can't see how Mises argument is allegedly "dependent" on Ricardo. After all, you yourself quote Mises saying Ricardo's assumptions do not hold.
Third, even though Ricardo used factor immobility assumption (both of the conditions you specify) in his basic models, comparative advantage does not need them:
"First off, Ricardo stated them explicitely in his work, so they were never "hidden".ReplyDelete
Mises' argument has the same hidden assumptions as Ricardo's:
(1) it does not matter what you produce (e.g., you could produce pottery), as long as you do it in a way that gives you comparative advantage;
(2) technology is unchanging and uniform; and
(3) there are no returns to scale (Galbraith 2008: 68; Chang 2003: 292).
"After all, you yourself quote Mises saying Ricardo's assumptions do not hold."
"Then came a reaction. Today capital and labor are again restricted in their mobility. Reality again corresponds to the Ricardian assumptions (Mises 1996: 164)."
He maintained that after the 1930s, the argument worked again.
And are you really suggesting that Mises doesn't support free trade?
As for Donald J. Boudreaux, “Does increased international mobility of factors of production weaken the case for free trade?,” it i fille diwth unsuported claims, mere assertions without evidence:
With all factors of production better able to find employment anywhere in the world in more productive uses, some factors will leave Ricardia for elsewhere and other factors from
elsewhere will migrate into Ricardia. This increased productivity p. 375
On pp, 376-377, he actually concedes that "American workers’ comparative
advantages might shift from industries featuring specialized and
highly productive capital equipment to industries characterized by
production methods that are more labor-intensive" - in others words de-industrialization. He then goes on to say that this is no problem!
Modern Monetray Theory/neochartalism is a revial and development of chartalism.ReplyDelete
"[Chartalism] was developed by economist G.F. Knapp into the 1920s, with important contributions by Alfred Mitchell-Innes also. It was influential on the 1930 Treatise on Money by John Maynard Keynes – Knapp and Chartalism are cited approvingly on its opening pages. Chartalism experienced a revival under Abba P. Lerner, and has a number of modern proponents, who largely identify as post-Keynesian economists."
You might say that the full promise of the functional finance model of Lerner (influenced by chartalism) was aborted after neoclassical synthesis Keynesians took over economics in the US:
The idea that the state needs to issue debt to private markets when the government runs a deficit is wrong.
Chartalism/MMT was later revived by people affiliated with the Post Keynesian school and with Hyman Minsky.
isPost-Keynesianism, Chartalism and MMT.
LK, deindustrialization is a problem only for socialists who rely on an electorate of mindless massess of factory workers. If worker productivity keeps increasing (and it does), then it means progress. Manufacture of physical goods is 19th century news, so no wonder it shifts to comparatively less developed nations nowadays, that's precisely what comparative advantage is about. Developed nations comparative advantage will increasingly be in creative industries. Sure it does not matter what you produce, non-USA Box Office sales of one single movie Avatar was bigger than GDP of about 30 countries, so why physical goods production is supposed to be so important? Especially that 21st century technology will likely eliminate the need for most, if not all, factory workers, so we should all the more applaud the shift that smoothly prepares developed nations for the future. It is you who assume unchanging technology, you'll always Luddite-ing anything that changes the status quo. Also, I can't see what economies of scale have anything to do with comparative advantage, the same economies of scale are available to factories from any country.ReplyDelete
"Manufacture of physical goods is 19th century newsReplyDelete
That says it all.
"so no wonder it shifts to comparatively less developed nations nowadays, that's precisely what comparative advantage is about."
This kind of shift of production due to absolute advantage also applies to services, so yoru argument above only focussing on industry misses the point.
"Especially that 21st century technology will likely eliminate the need for most, if not all, factory workers"
Yes, that may well be true, as I have argued here:
Such a development would increase the need for Keynesian demand management and full employment policies.
"so we should all the more applaud the shift that smoothly prepares developed nations for the future"
Shifting manfacturing to low wage nations where life is cheap and workers even cheaper REDUCES the incentive for, and stimulus to, greater automation and use of technology to cut costs in production.
High wage countries, by contrast, incentivise
the use of automation and use of technology
to cut costs.
"This kind of shift of production due to absolute advantage also applies to services"ReplyDelete
Jobs like call center or animation are usually less sophisticated and creative even than modern factory ones. Basically outsourcable are only the tedious and repetitive services. Programming is probably the only exception, but even there Indians usually write software as previously designed in the US.
"Such a development would increase the need for Keynesian demand management and full employment policies."
There is no progress without people losing jobs. First you'd have to prove that overall unemployment rises, productivity falls, and not just temporarily because of government monetary bubble burst.
"Shifting manfacturing to low wage nations where life is cheap and workers even cheaper REDUCES the incentive for, and stimulus to, greater automation and use of technology to cut costs in production."
Liberal ideology is indeed a safe bet employmentwise (for public employees that is). Increased automation? Government aggression. Reduced automation? Government aggression. Fixed automation? Government aggression. Cool.
"Shifting manfacturing to low wage nations where life is cheap and workers even cheaper REDUCES the incentive for, and stimulus to, greater automation and use of technology to cut costs in production."ReplyDelete
Yes, that is what happens in the short run, but when a level of homogeneization is reached, those incentives will reappear. Today's world inequalities can be severely brought down by free trade between countries, and its a very economic way to let capital flow into "low wage nations".
"but when a level of homogeneization is reached"ReplyDelete
What? When real wages in the US are at the level of China? After the US stanard of living has been gutted?
"today's world inequalities can be severely brought down by free trade between countries"
I don't object to foreign direct investment that transfers developed world capital and technology to the developing nations.
The way to Third World development lies in government creation of proper infrastructure, and import substitution industrialization (ISI), and with larger regional trading zones.
But the developed world needs an industrial policy to maintain its industry.
What I meant is that there's no need of developing the use of technology when workers are cheap. If they are cheap, the best use of capital is to develop the use of technology in those areas that work is expensive!ReplyDelete
You seem to support protectionism for the developed world, and that undermines your statement about free trade. I just can't see how you can defend protectionism from an economic point of view, it's an un-economic policy.
"What I meant is that there's no need of developing the use of technology when workers are cheap"ReplyDelete
Productivity gains and a wealthier society will come from application of technology to ALL types of production, no matter how cheap the labour is.
"You seem to support protectionism for the developed world, and that undermines your statement about free trade."
I don't suport "free trade", and there is, moreover, no such thing as completely "free" trade since there are always distortions of markets. There is no contradiction here.
For god's sake, educating your workforce and giving people skills is a distortion of free markets and fre etrade.
I support mutally beneficial trade - managed trade, if you want.
The belief that trade is always beneficial is like a religious fundametalist dogma.
And anyway the type of mass automation of production that may well happen this century will require Keynesian demand management and full employment policies anyway:ReplyDelete
Lord Keynes, what do you think about interest rate policies? I've heard from many Keynesians that the interest rates should be kept very low, even some of them say they should be almost zero.ReplyDelete
what do you think about interest rate policies?ReplyDelete
Keynes did indeed call for low interest rates. But also euthanasia of the rentier.
You can achieve that last idea (to some extent) by effective financial regulation, and an activist government regulator to keep banks honest and a central bank to prevent speculative asset bubbles. In this case, low interest rates encourage productive investments.
One major flaw of Austrian business cycle theory (ABCT) is its failure to understand financial regulation. Low interests do not have to lead to asset bubbles.
And, needless to say, I don't for a moment buy ABCT's explantion of recessions due to lengthening of the structure of production in the capital goods sector. That is rubbish.
Hey, LK, you may have overlooked my last comment, unless you are fine with it ;)ReplyDelete
"activist government regulator to keep banks honest"ReplyDelete
So how many keynesians do you think it should take to run, say, US economy?
Your model of capital and factors of production in general is in the keynesian spirit. in real life they are necessarily heterogenous, each with their associated opportunity costs of transfer of conditions. This is again, strictly true. Hence your argument, is strictly incorrect.ReplyDelete
Do you like Keyne's idea of the ICU and bancor as a way to eliminate trade deficits?ReplyDelete
Yes, but re-formulated on modern Post Keynesian lines:Delete
Paul Davidson, "Reforming The World's International Money", paper presented at conference on "Financial Crisis, the US Economy, and International Security in The New Administration", New York, November 2008.
I'm taking this online course through a website that offers subjects taught by actual university professors for free:ReplyDelete
I'm in the 2nd week of instruction, and Comparative Advantage has been brought up. So I had to come here & see what you said about it lol
I hope the Prof explains his rationale a bit better because the situation he describes doesn't look like an advantage to me!
I couldn't help but notice you were blessed with the presence of Miss Joanna Liberation ;-) I remember her from the Critiques of Libertarianism blog. In fact, that's how I found out about your blog as well.