Ricardo Revisited

After last week's bleeding heart post about the downside to our absolute acceptance of the concept of free trade, m* finally got around to opening up the October issue of The Atlantic, a magazine recently suffering from a summer-long bout of irrelevance, and worse - has anyone else had about enough of Robert D. Kaplan's context-free sycophantic martial worship?

However there were two very timely items directly connected with the free-trade (or not) discussion that m* heartily recommends. (A nominal subscription to read the articles is required). First up was a lively debate in the letters section on James Fallows' partly good, partly just bizarre, July/August essay on the terms of trade with China, "China Makes, the World Takes." Peter Navarro, author of the book "The Coming China Wars" counters Fallows' rosy piece by highlighting the darkside of the industrialization and globalization picture:

"China’s competitive advantage in world manufacturing markets is largely due to a web of illegal export subsidies, rampant counterfeiting and piracy, a grossly undervalued currency, and lax environmental and health and safety regulations. While they have benefited the American firms and other multinational companies that are offshoring to China, these mercantilist practices have put tens of millions of people out of work around the world—from the American Rust Belt to Mexican maquiladoras to the markets of Lesotho."

This may be a good place to also direct readers to an astonishing piece on the PIMCO website entitled "Renegade Economics: The Bretton Woods ll Fiction" where the authors take to task both the US and China for practicing "renegade economics" but in particular lay serious criticism on China for playing the competitive devaluation card (and getting away with it) for the better part of fifteen years. In their minds, much of the seeds of the current "savings glut/credit bubble" were sown in Chinese - as opposed to Japanese or US - monetary (and political) policy. Considering the relative importance of the China bid for the $700 billion of bonds in the Pimco portfolio, m* finds this an interesting position to advocate.

Back to the Atlantic, senior editor Clive Crook writes about the current backpedaling among prominent mainstream (well, orthodox anyway) economists on the benefits of free trade and that one true idea in all of economics, Ricardo's comparative advantage, in "Beyond Belief."

He writes, "For nearly 200 years, the principle of comparative advantage, and the ideas that flowed from it, divided the world into two camps: those with basic economic literacy; and the rest." Um, Clive? m* would like to mention that it's a pretty big world out there. He goes on to note that while challenges to the thesis on technical grounds have thus far been vanquished, notable members of the profession seem to have a problem reconciling it's conclusion with their own observation of the times.

How ironic, for that is essentially the problem with economics in a nutshell. The key that Crook misses in his glib recounting of contemporary research is not that theory is necessarily wrong, but that it often has little if anything to say about the "adjustment path" to being right. In other words, those economists whose shift is "both momentous and disturbing" are taking notice of an heretofore under-appreciated intermediate term, where the frictions of adjustment between equilibria occur. Since "in the long run we are all dead," this time-frame is therefore of importance to many people, likely even a few noted economists and senior editors.

For a serious exposition (with a humorous image) of "adjustment path" see Krugman's recent paper on the dollar and the potential for what he calls a "Wile E. Coyote moment."