Sunday, August 7, 2016

Robert Murphy’s Debate on Free Trade

I am sorry it took me so long to see this video.

The Austrian economist Robert Murphy (who blogs here) debates a conservative called Theodore Beale (aka Vox Day) (who blogs here) in the video below on free trade (see also here and here).

Beale appears to be some kind of evangelical, populist conservative, skeptical of free trade. I was astonished to hear him quote Steve Keen at 20.26 following.

Despite some very good points, Beale (aka Vox Day) could also have made the following points:
(1) yes, Ricardo’s original case for complete free trade by comparative advantage is flawed. Beale / Vox Day made a bad mistake by failing to understand this. There is a devastating empirical counterargument to Ricardo.

In the real world, industries have constant, increasing or diminishing returns to scale. The path to wealth and First World development for most countries lies in manufacturing, not in dead-end diminishing returns to scale sectors like agriculture.

First, Ricardo’s comparative advantage argument for free trade actually uses a naive labour theory of value assumption in its argument. Who cares about immediate labour hours, when the long-term benefits of manufacturing are far better than immediate increased output based on labour time? Why would Austrians rely on a vulgar labour theory of value here?

Ricardo’s abstract argument utterly fails in the real world. Portugal would be justified in developing a manufacturing cloth industry and other industrial sectors (even if it required imposing tariffs) and ignoring free trade. In the long run, this is what will make it rich. Wine and diminishing-returns-to-scale sectors are a path to poverty. On this, see here and here.

(2) with respect to the empirical evidence on protectionism, Britain in fact used intense protectionism to create its cotton textile industry in the 18th and early 19th centuries, and America developed into the greatest manufacturing nation on earth behind a wall of protectionism.

(3) the argument for unrestricted free trade by Ricardo’s principle of comparative advantage requires a number of stated or hidden fundamental assumptions to work properly, as follows:
(1) domestic capital or 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;

(2) workers are fungible, and will be re-trained easily and moved to the new sectors where comparative advantage lies.

(3) 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;

(4) technology is essentially unchanging and uniform; and

(5) there are no returns to scale.
Assumption (1) doesn’t hold today and what happens is movement of capital under the principle of absolute advantage (Lavoie 2014: 508). This results in a type of race to the bottom for industrialised countries that do not protect their industries.

(2) is of course highly questionable. (3), (4) and (5) are utter nonsense. Abstract pro-free trade arguments often seem to make the implicit assumption of full employment, or the effective tendency to full employment, in all nations as well, which is yet another mad and unrealistic assumption (Lavoie 2014: 508).

Movement of capital to a place where it has absolute advantage tends to cause de-industrialization in Western countries, as capital moves to nations with the lowest unit labour and factor costs, and higher wage countries experience falling wages, high unemployment and rising trade deficits. On this, see here.

(4) A country like China actually makes the process worse by actively intervening via mercantilist industrial policies to promote offshoring of manufacturing to their country. But even if this intervention didn’t happen, unrestricted free trade would still have deleterious consequences for the high wage countries.
All in all, Beale / Vox Day’s critique didn’t go far enough.

Lavoie, Marc. 2014. Post-Keynesian Economics: New Foundations. Edward Elgar, Cheltenham.

Further Reading
See here:
“The Cult of Free Trade in a Nutshell,” July 4, 2016.

“Ricardo’s Argument for Free Trade by Comparative Advantage,” July 5, 2016.

“Erik Reinert versus Ricardo on Free Trade,” July 5, 2016.

“Ha-Joon Chang on Wage Determination in First World Nations,” July 6, 2016.

“A Heterodox and Post Keynesian Bibliography on Trade Theory,” July 7, 2016.

“Erik S. Reinert on Heterodox Development Economics,” July 9, 2016.

“Britain’s Protectionism against Indian Cotton Textiles,” July 12, 2016.

“Those Free Trading British Cotton Textile Manufacturers,” July 13, 2016.

“Friedrich List on English Free Trade and the Colonisation of Germany,” July 22, 2016.

“Mises on the Ricardian Law of Association: The Flaws of Praxeology,” January 25, 2011.

“The Early British Industrial Revolution and Infant Industry Protectionism: The Case of Cotton Textiles,” June 22, 2010.

“Protectionism and US Economic History,” June 8, 2014.

“A Short Bibliography on Protectionism and Industrial Policy,” April 30, 2016.
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Lord Keynes @Lord_Keynes2


  1. Marx:

    "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."
    Nice quotation.

  2. I decided to look up Ian Fletcher on youtube. Seems he has some very interesting things to say. You should check him out.

  3. Vox Day actually accepts Austrian economics; it's probably his politics (alt-right) that leads him to reject free trade (which isn't to say that he's wrong to reject it).

    As usual with internet Austrians, he holds some bizarre views:

  4. The other points aside, Ricardo's comparative advantage is explicitly not a labor theory of value as its fundamental reasoning is that economic actors can trade to their advantage when the labor involved in the exchange is not equal.

  5. That is a nice quote. I asked from Randall Wray about BIG. He said that Marxists support It because they want to destroy our production system.

  6. Pretty good additional arguments to Vox Day's arguments but I've never seen opponents to "free trade" use the arguments that the old protectionist such as Henry C. Carey and David Raymond use which as far I see still stand and where simply ignored.

    The original protectionist used the physical argument that increasing transactions aka GDP isn't increasing wealth because the physical cost of transporting raw materials to distant processing factory then a those refined materials to a more distant parts factory and then those parts to a place of assembly and then to a retail is huge energy waste. The argument was simply dismissed as Malthusian.

    The second argument of the old protectionist was that currency arbitrage as a cost in production.

    Free Trade assumes that currency is a neutral commodity in production and that when a product is made in one country where materials and wages are prices in one currency system and then sold to another country for a different currency that competition between those products and the domestic products is "neutral" and " frictionless" for domestic producers of competing products and can't possibly distort domestic pricing regarding production cost information in the market.

    Can a Free Trader please explain how a domestic producers to suppose to compete with foreign producers who don't have to add the cost of obtaining US dollars when they produce goods because all their production costs are in yuan which they can get due to their banking policy which has easier credit creation for exporting than US Banks give for US based production and all production cost require these harder to get dollars?

    How can any US domestic production ever compete? Free Trade can only work if there is only a single global currency and is total neutral and credit assess is governed by uniform rules regardless of nation which we heterodox know can never be the case.

    Free Trade is and was always a Imperialist policy to force the colonies to be raw materials exports and never develop a skilled and educated working class which will naturally become nationalist and populist revolutionaries.