Friday, October 28, 2016

Bill Mitchell on the Case against Free Trade

A nice critique of free trade here:
Bill Mitchell, “The Case against Free Trade – Part 1,” Billy Blog, 27 October, 2016.
Bill Mitchell analyses the Heckscher-Ohlin model of free trade, and notes that this model requires the following grossly unrealistic assumptions:
“1. There is always full employment through price flexibility. Inputs can move freely within countries between technologies and commodities, which means that labour can move without any costs involved between two types of production (say farming and manufacturer). Capital can also move freely (it is assumed to be ‘malleable’).

2. Perfect competition exists in each country, which means that input suppliers cannot influence the price they receive and firms cannot influence the price they sell products at. The pure free market demand and supply forces determine prices.

3. Both countries have identical production technology which means that each nation can produce a given output of a particular commodity with the same capital and labour inputs should they choose.

3. There are constant returns to scale in production in both countries, which means that if the inputs of labour and capital are doubled, output will double.

4. The two commodities in question are produced using different technologies (different ratios of labour and capital), which means that a nation with lots of capital might be better placed to produce the more capital intensive good.

5. Inputs cannot move freely between countries, which means that capital cannot move freely.”
Bill Mitchell, “The Case against Free Trade – Part 1,” Billy Blog, 27 October, 2016.
As Mitchell notes, the case for free trade was questioned even within neoclassical economics by the 1980s with the so-called “New Trade Theory,” which tried to model the reality of increasing returns to scale and imperfect competition.

Of course, had neoclassicals bothered to take seriously the Post Keynesian critique of free trade, they would have known free trade theology was nonsense well before the New Trade Theorists, such as, for example, through the following Post Keynesian work:
Kaldor, Nicholas. 1978. “The Nemesis of Free Trade,” in N. Kaldor, Further Essays on Applied Economics. Duckworth, London. 234–241.

Kaldor, Nicholas. 1980. “The Foundations of Free Trade Theory and their Implications for the Current World Recession,” in E. Malinvaud and J. P. Fitoussi (eds), Unemployment in Western Countries. MacMillan Press, London. 85–100.

Kaldor, Nicholas. 1981. “The Role of Increasing Returns, Technical Progress and Cumulative Causation in the Theory of International Trade and Economic Growth,” Économie Appliquée 34.4: 593–617.

Robinson, Joan. 1973. “The Need for a Reconsideration of the Theory of International Trade,” in M. B. Connolly and A. K. Swoboda (eds.), International Trade and Money: The Geneva Essays. Allen and Unwin, London. 15–25.

Robinson, Joan. 1974. Reflections on the Theory of International Trade. The University Press, Manchester.

Robinson, Joan. 1979. Aspects of Development and Underdevelopment. Cambridge University Press, Cambridge and New York.
My own posts against free trade are below:
“Ian Fletcher on Free Trade,” September 10, 2016.

“Robert Murphy’s Debate on Free Trade,” August 7, 2016.

“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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  1. Free trade is bad, sure but Prof Mitchell doesn't seem to realize what he has done there.

    The motivation for arguing against free trade is that it imposes constraints on poorer nations. So Mitchell is conceding that trade can put constraint on fiscal policy.

    (As in if international trade, doesn't constrain fiscal policy, why oppose it at all?).

    1. I agree it's not a complete critique against Free Trade, but also remember that this is only part 1 of his series. Balance of Payments concerns and its effects on demand, output, productivity and innovation, as well as the distortionary effects that trade deficits have on asset markets and other sectoral balances , e.g. necessitating public deficit spending, higher private credit growth or lower national savings to maintain positive GDP.