Tuesday, November 15, 2005

Fight! Fight! Fight!

The Fluffy Economist takes on the Mighty Worstall in an economic theory showdown!

FE's issue is with Ricardo's free trade theories. As we all know, Timmy—and many others—believe that there should be no barriers to trade at all, but the FE argues that "Ricardo's often-peddled arguments for free trade are obsolete, due to their reliance on perfect mobility of capital and labour as well a complete disregard for the existence of time".
Economies have a history. There are industries which make them tons of cash today, which could be dead ducks tomorrow as technological advances abroad overtake domestic competencies. Trade barriers give countries useful breathing space to sustain their economies during this transition and hopefully allow the domestic market to find something better to do. In the meantime, consumer confidence can be sustained as protected industries can let workers down gently instead of creating mass employment that can paralyse regions and cause widespread misery.

This does seem fair enough, although I'm sure that Tim will disagree. However, it has always seemed to me that the social realities of free trade have the potential to be somewhat devastating. This is why I have always tried to qualify the extent to which I believe that unfettered free trade is a good thing, especially in the matter of labour transfer.

The FE also points to the idea of power as an economic lever.
The other part of the free trade argument is that it ignores all concepts of power. A developing country faced with a multinational with an annual turnover worth twice its GDP will not be able to keepit in check. Of course good governance is a (perhaps THE) major issue in development but one mitigating factor is surely that legal institutions aren't allowed to develop when the economic incentives distort them so much. What is more, studies of knowledge spillovers from multinationals to domestic industry have shown the latter does not gain from the presence of the former. (China's tactic was to use trade liberalisation to actively guide technology into domestic hands, a luxury not open to say Chad or Bangladesh) . Trade controls are therefore a check on the tremendous power faced by developing countries, which hampers their development of technical knowledge and appropriate legal/economic institutions.

The benefits of allowing developing nations, for instance, to manufacture generic HIV anti-virals, rather than simply buy them from the developer, emcompass more than a monetary saving; they also gain the knowledge of how the drug works and how to then develop new ones. This allows them to become a little more self-sufficient in that area, and thus helps the whole world.

The free flow of information is just as important as the flow of capital.

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