"Free Trade", Ricardo and Comparative Advantage

Hello, first thread on ATS. I'll try to keep the opening post simple. "Free trade", as theorized by David Ricardo, includes the theory or "law" of comparative advantage. In Riccardo's model it was absolutely imperative that capital and labor were immobile. A quick overview:

www.youtube.com...

The "law" of comparative advantage would only make every nation prosper if, for example, businesses in the USA stayed in the USA and US workers stayed in the US. Then businesses in, lets say, China, would stay in China along with workers in China. Labor and capital (productive capabilities) would be immobile in all nations then various nations would produce/trade under the law of comparative advantage. This is not our current reality.

In today's interconnected world economy capital and labor both are highly mobile. This means capital can (and does) chase cheap labor around the globe while also "importing" cheap labor domestically. Economists have warped the law of comparative advantage over the years to excuse high levels of capital/labor mobility.

www.bloomberg.com...

What does this mean? In my opinion it means exactly what it means. Capital now has the luxury of moving productive capabilities across the globe in so chasing cheaper sources of labor whilst at the same time bringing skilled and unskilled workers into their own countries in order to take advantage of cheap labor. They achieve this with H1b VISA's for "skilled labor" and (illegal and legal) immigration for "unskilled" labor. This set up undermines the "law" of comparative advantage and places downward pressure on wages in America. It is partly responsible for the widening income gap, to a much larger extent than most economists are willing to admit. It is also responsible for such high unemployment/underemployment numbers and also responsible for the expanding low wage service sector in America.

Economists will harp on about the folly of protectionism but what I advocate here is not protectionism- simply an adherence to the original Ricardian model of comparative advantage.

An article by Charles Schumer and Paul Craig Roberts highlights my point:

www.nytimes.com...

There is no abundance of living wage productive jobs taking the place of all the jobs being offshored. The blue collar American working class has absolutely paid the price since the 1970's. The wage gap has exploded since then. Capital has accumulated into a shrinking minority classes hands since the 1970's/80's. Expanding with China's market reforms and "free trade" agreements such as NAFTA, CAFTA etc. There's also the matter of technological unemployment adding to the low wage American workforce. Gone are the post war boom days when a high school graduate or dropout could support a family with hard work in either industrial production or construction.

Who is to blame? In my opinion not the politicians. These problems arise in economic departments across the country. The American "low skilled" workforce has been absolutely sold out in favor of increasing profits for the rich and lower consumer prices for the shrinking "skilled" workforce who are able to hold onto their jobs. When will Americans begin to tar and feather these economists?

Solid first thread Jean. Thank you

Does Ricardo have anything to say about such things as one nation, both capital and labor, having an advantage over other nations, capital and labor? Such as the US experienced as it took advantage of cheap and abundant resources across the continent when the industrial age began booming? Or how the whole 'balance' could be so thrown off kilter after the second world war when the rest of the industrial world was in shambles but the US had the might of it's productive infrastructure pumping out goods at record pace?

Under his model, how would this immobile 'balance have been possible at all.

a reply to: JeanPaul
First of all thanks for starting a real economics thread.
That said I think trying to argue for or against free trade/ protectionism based on Ricardo is a little bit like trying to understand a nuclear power plant based just on Newtonian physics. However that is a criticism that goes both ways to those arguing for protectionism and those espousing free trade as always a good thing.
There are a number of fairly major assumptions regarding how comparative advantage works in Ricardo's model and I don't think limits on mobility of capital or labour is its biggest flaw. Many of the same classical economic assumptions of the theory would also suggest that even with free movement there is a self correction back to comparative advantage.
I think a bigger problem with free trade is that it ignores the effect of income inequality that is both a result and a driver of international trade. Even if country A & country B both benefit in terms of GDP from trade it does not necessarily follow that everyone or even most people in either country benefit.

a reply to: TerryMcGuire
I think what you are looking at is the difference in absolute and comparative advantage. Ricardos theory is basically that even if one country has absolute advantage in being produce everything cheaper then it can still benefit from international trade by specialising in producing what it is best at and trading for the rest as this maximise combined production across the economies. Like most classical economics it is mathematically true but fairly disconnected from reality.

originally posted by: ScepticScot
a reply to: JeanPaul
First of all thanks for starting a real economics thread.
That said I think trying to argue for or against free trade/ protectionism based on Ricardo is a little bit like trying to understand a nuclear power plant based just on Newtonian physics. However that is a criticism that goes both ways to those arguing for protectionism and those espousing free trade as always a good thing.
There are a number of fairly major assumptions regarding how comparative advantage works in Ricardo's model and I don't think limits on mobility of capital or labour is its biggest flaw. Many of the same classical economic assumptions of the theory would also suggest that even with free movement there is a self correction back to comparative advantage.
I think a bigger problem with free trade is that it ignores the effect of income inequality that is both a result and a driver of international trade. Even if country A & country B both benefit in terms of GDP from trade it does not necessarily follow that everyone or even most people in either country benefit.

(Sorry, don't know how to use the quote function yet)

You said: "That said I think trying to argue for or against free trade/ protectionism based on Ricardo is a little bit like trying to understand a nuclear power plant based just on Newtonian physics."

Well, that's the thing, I'm not arguing for protectionism, Ricardo wasn't arguing for protectionism, just the opposite. He was arguing in favor of free trade. Over the years the definition of free trade has come to include high levels of capital/labor mobility which has undermined the benefits to a large portion of the American working class. Now "free trade" entails massive corporations chasing cheap labor across the globe while importing cheap labor domestically. Labor itself has become the commodity. Instead of China producing tea because they have a comparative advantage they produce cheap labor for everything. The USA is in danger of losing most jobs which don't require face to face service because American working class cannot work at such low wages as seen in India/China/Vietnam and survive.

You said: "There are a number of fairly major assumptions regarding how comparative advantage works in Ricardo's model and I don't think limits on mobility of capital or labour is its biggest flaw"

I don't think limited capital/labor mobility was a flaw in the law of comparative advantage I think it was absolutely essential if each nations working population was to prosper. Economists will absolutely refuse to entertain this thought, they'll do what you just did here, label it "protectionism". Ricardo wasn't advocating protectionism. He was showing how the market system should function. How free trade could benefit all nations populations.

You said: "I think a bigger problem with free trade is that it ignores the effect of income inequality that is both a result and a driver of international trade"

I think they ignore it because of the fact they have defined "free trade" in a manner which excuses/ignores the fact that corporations chase cheap labor around the globe. They "assume" American workers will move on to bigger and better things. Fact of the matter is there are not enough well paying working class jobs to replace the ones being offshored. Even further, "skilled" positions are being offshored to nations such as India and China as their populations gain viable education. The future looks grim and it's in large part because of these economists who refuse to question "free trade" as they define it.

How do you define "free trade"? I would define it as nation A producing then trading the finished product with nation B which has produced its own products for trade. When nation A sends productive capabilities to nation B that's not trade. That's chasing cheap labor. The issue I have is that the flag of "free trade" is wrapped around chasing cheap labor. Who wins? The multinational corporations. Who loses? The American working class who are on average 1
$15-20k in debt, working in low wage service jobs (which require face to face service).

The USA was most prosperous when we had a large industrial base. When we actually produced a massive amount of commodities and traded with other nations. This began to decline in the 1970's with the increase of offshoring production. As other nations develop more than manufacturing jobs will be offshored, pretty much any jobs that CAN be offshored to lower paid workers WILL be offshored to lower paid workers. I say we start with the economists jobs.

Most of the STEM field jobs are in danger. Even service jobs are going to foreign workers. Tech firms have colluded to bring in more "skilled" workers in order to put downward pressure on wages. Even US doctors are in danger. The face of medicine is changing in America. Engineering etc.

Tech firms are lying and saying there are no American's properly educated to fill these positions. Construction firms are doing the same, the thought of it is absurd! When unemployment was at %10 construction companies said they didn't have enough workers!

www.reuters.com...

A newer article (above) but they've been saying it for a few years now. On the H-1B visas (below), tech firms are full of crap as well:

www.epi.org...

We can start reversing this by ending the expansion of H-1B visas that Obama has just given these corporations. We can also stop construction companies from hiring undocumented workers. Either that or FORCE undocumented workers to unionize. Unionize or be deported, but that would defeat the whole point of "illegal" immigration now wouldn't it?

On "free trade" we could impose penalties on US corporations which offshore in the cheap labor chase if in fact there are Americans who can do these jobs. You'll call this "protectionism" but by my definition chasing cheap labor is not "free trade".

a reply to: JeanPaul

Labor is not mobile in the world.
Capital is and it gives that segment of economies a tremendous advantage.
Toss in the concentration of that asset and it's capacity to destabilize the structures to the advantage of the holders of the wealth, well, it becomes titanic.
Recall that the Elite mostly got off that boat.

originally posted by: largo
a reply to: JeanPaul

Labor is not mobile in the world.
Capital is and it gives that segment of economies a tremendous advantage.
Toss in the concentration of that asset and it's capacity to destabilize the structures to the advantage of the holders of the wealth, well, it becomes titanic.
Recall that the Elite mostly got off that boat.

Yes it is mobile. Workers from China have been transported to Mexico en mass. '"Skilled" workers from India, China, Indonesia etc are coming to the US in droves as their (home countries) education systems expand. Workers from all over South America are coming into the US. Skilled and "unskilled" labor flocks to the USA and big business uses it to place downward pressure on wages, as a compliment to offshoring.

edit:

Have a read:

www.wsj.com...

More workers from China are coming to the US than from Mexico. They're also going to Mexico around the border to work in factories. India is also sending a lot of workers in the STEM fields.

Question for you, if you had kids, around age 13, what would you want them to choose for a career path? What sort of degree? What jobs are going to pay well and be secure in the USA? The misconception is that only "unskilled" jobs are going to foreign workers. There doesn't seem to be any end in sight. This isn't an argument against immigrants by the way. I would support 100% open borders if A. everyone unionized and B. everyone paid taxes. This is more so about corporations offshoring though. Offshoring and also paying people to come here and take "skilled" positions. Both place downward pressure on wages for everyone.

If 500 doctors come to the CA from China and India, and are willing to work for $120k less than American doctors, this will place downward pressure income for all doctors in CA as time passes. Same in the tech industry. Same with construction.

Thank you, JeanPaul, for the well-thought and communicated post! S&F for you!!

Will comment further after reading/watching the links.

a reply to: JeanPaul
No need to apologies about the quote thing. I usually post from my phone and attempts to quote back tend to go horribly wrong.
The argument that would be made by most neo-classical economists would be that a free movement of labour is just another part of free trade and would end up with the same net result. Market adjustments would take place and there would remain a net benefit to trade. They would suggest the reason this does not take place is due to restrictions on free trade and movement of capital /labour/ finance. For example Chinas active management of its currency.
Just be clear I don't agree with this view, just pointing out the counter case. It is not that economists don't question these things, it is more that the prevailing conventional economic view is that the benefits of free trade massively outweigh any costs.
My own view is that free trade (including free movement if labour/capital) is a good thing but not when based on exploitive relationships. A lot of macroeconomic analysis ignores or at least does not give sufficient weight to organisational/institutional factors that affect how economies really operate. For example sticky wages (labour resisting cuts to wages) in developed economies and the reverse of companies exploiting large poorly paid labour pool in less developed countries.
You make an excellent point about skilled jobs where many economists and even more politicians don't sufficiently distinguish between the types of jobs that are being created/lost.
Proposing controls movement of labour or capital is effectively a form of protectionism. However lets not automatically treat that as a dirty word. I personally don't think we can separate economics from ethics and if protectionism means forcing companies and governments to deal with inequality and exploitation then I have no problem with that.

originally posted by: ScepticScot
a reply to: JeanPaul
No need to apologies about the quote thing. I usually post from my phone and attempts to quote back tend to go horribly wrong.
The argument that would be made by most neo-classical economists would be that a free movement of labour is just another part of free trade and would end up with the same net result. Market adjustments would take place and there would remain a net benefit to trade. They would suggest the reason this does not take place is due to restrictions on free trade and movement of capital /labour/ finance. For example Chinas active management of its currency.
Just be clear I don't agree with this view, just pointing out the counter case. It is not that economists don't question these things, it is more that the prevailing conventional economic view is that the benefits of free trade massively outweigh any costs.
My own view is that free trade (including free movement if labour/capital) is a good thing but not when based on exploitive relationships. A lot of macroeconomic analysis ignores or at least does not give sufficient weight to organisational/institutional factors that affect how economies really operate. For example sticky wages (labour resisting cuts to wages) in developed economies and the reverse of companies exploiting large poorly paid labour pool in less developed countries.
You make an excellent point about skilled jobs where many economists and even more politicians don't sufficiently distinguish between the types of jobs that are being created/lost.
Proposing controls movement of labour or capital is effectively a form of protectionism. However lets not automatically treat that as a dirty word. I personally don't think we can separate economics from ethics and if protectionism means forcing companies and governments to deal with inequality and exploitation then I have no problem with that.

Ya, I know they would consider it protectionism. I simply don't because I don't consider chasing cheap labor "trade". Anyhow, market adjustments don't take place. For everyone. Americans all don't move on to "bigger and better things". Recent studies have conformed the impact on so called "low skilled" American workers. There's a net benefit for the overall economies of the nations "trading" but not for the workers.

How is it exactly "trade" when company A moves to China chasing cheap labor, then moves to Vietnam, then on to the next developing country when workers in Vietnam demand higher wages. This isn't trade. That's my whole point.