I'm not sure I agree on the final destination but it's an interesting ride.
From Law & Liberty, January 2:
At Harvard University in the late 1930s, the mathematician Stanislaw Ulam used to tease the economist and future Nobel Prize winner Paul Samuelson, “Name me one proposition in all of the social sciences which is both true and non-trivial.” It took Samuelson years but, eventually, an answer occurred to him: the Ricardian theory of comparative advantage. Even if Portugal produces both cloth and wine more efficiently than England, as David Ricardo had demonstrated in 1817, the countries can still benefit from trading Portuguese wine for English cloth.
Generalized, this principle forms the basis of the economist’s case for free trade. “The theory of comparative advantage is a closely reasoned doctrine which, when properly stated, is unassailable,” Samuelson would write in his industry-leading textbook, Economics, which debuted in 1948. “With it we are able to separate out gross fallacies in the political propaganda for protective tariffs aimed at limiting imports.” Almost half a century later, Professor Paul Krugman confirmed, “the essential things to teach students are still the insights of Hume [a contemporary of Adam Smith] and Ricardo.”
Anyone who has taken an introductory course in economics learned just that, and anyone giving even cursory attention to current affairs has heard the same message repeated ad nauseam and with absolute confidence by Nobel laureates proclaiming their unanimity and mocking dissent. On free trade, said Milton Friedman, “economists have spoken with almost one voice for some two-hundred years.” Friedrich Hayek promised that “the self-regulating forces of the market will somehow bring about the required adjustments to new conditions,” including “necessary balance … between exports and imports.” Krugman concurred that “trade deficits are self-correcting” and, frustrated that “carefully explaining economic concepts like, say, comparative advantage [] doesn’t work,” he suggested, “What does work, sometimes, is ridicule. If you can make someone who imagines himself to be a deep sophisticate look silly, sometimes it gives him—or at least someone else who might be tempted to follow the same route—pause.”
After the Cold War’s end, a bipartisan consensus solidified amongst political leaders who accepted the free-trade consensus and accelerated globalization, in quick succession forming the North American Free Trade Agreement (NAFTA), launching the World Trade Organization (WTO), and granting China permanent normal trading relations (PNTR) as a WTO member. Standing in the White House briefing room in 2000 to present, a letter signed by 149 economists supporting PNTR with China, Nobel laureate Robert Solow explained, “An awful lot of the intellectual power of the economics profession has signed this letter. And it’s such a simple proposition it doesn’t really require that. You could not generate a hard exam question out of the material here.” Writing in the Wall Street Journal, Clinton’s Treasury Secretary, Larry Summers, crowed, “On this issue there has been only one answer.”
Reality, unfortunately, found a second answer. US exports and imports were roughly balanced in 1992; in 2022 the trade deficit exceeded $900 billion for the first time. Even in advanced technology products, the same 30-year period saw the United States swing from a $60 billion surplus to a nearly $250 billion deficit. Economic growth and business investment slowed, with the 2000s and 2010s turning in the worst and second-worst decades of the post-war period. In manufacturing, productivity growth turned negative—American factories needed more labor in 2022 than in 2012 to produce the same output. The crown jewels of American industry, revolutionary innovators like General Electric, Boeing, and Intel, lost their positions of global leadership. The US-China trading relationship became the most imbalanced in world history and cost millions of American jobs. Tesla Motors, an icon of contemporary American innovation, reports that most of its key stakeholders reside in China and CEO Elon Musk pledged in July to enhance “core socialist values.”
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Americans are rightly confused and frustrated by the failure, especially given the confidence with which a different outcome was promised. The political system has begun to respond. Donald Trump and Hillary Clinton both campaigned against the Trans-Pacific Partnership in 2016 and, as president, Trump imposed harsh tariffs on China that President Biden has kept in place. But within the Biden administration, an old guard continues to advocate a very different agenda. In June, Treasury Secretary Janet Yellen testified before Congress, “We gain and China gains from trade and investment that is as open as possible.”
In academia, meanwhile, most economists refuse to acknowledge any problem at all. A 2012 survey by the University of Chicago presented 35 prominent economists with the statement, “Trade with China makes most Americans better off because, among other advantages, they can buy goods that are made or assembled more cheaply in China.” All 35 agreed. In his 2021 book, The Wall and the Bridge, Professor Glenn Hubbard, chair of President George W. Bush’s Council of Economic Advisers, suggested, “Let’s go back to Econ 101.” Citing “classical economist David Ricardo’s idea of ‘comparative advantage,’” Hubbard explained that “with two countries, if each specializes in the good or goods they produce more efficiently, there are gains from trade.”
In the years ahead, America will continue to turn away from the excesses of globalization, as it should. Doing so effectively will require not only the understanding that something has gone wrong, but also an understanding of what went wrong and why. Ideally, economists might come to recognize their own mistakes and participate in this rebalancing. But to paraphrase Krugman, if careful explanation does not prompt a rethinking, then ridicule will be well deserved.
What economists have missed in their blind embrace of free trade is a two-fold problem, part conceptual and part technical. The conceptual problem is quite straightforward: making things matter. This should not be a controversial assertion, but in fact, many economists will take issue with it. Michael Boskin, chair of President George H. W. Bush’s Council of Economic Advisers, famously quipped, “Computer chips, potato chips, what’s the difference?” Michael Strain, director of economic policy studies at the American Enterprise Institute (AEI), says of the United States being a manufacturing center, “we should not want to be.” Adam Posen, president of the Peterson Institute for International Economics, has argued that “what’s really going on here” with concern for American manufacturing is “the general fetish for keeping white males of low education outside the cities in the powerful positions they’re in in the US.”
But a nation’s capital investments, the capabilities it develops in its firms and workers, the supply chains it fosters, and the types of research and development it pursues all have important implications for the trajectory of its growth, the opportunities available to its citizens, and its power on the global stage. What is made in a country determines what else is made in the country; and what will be made tomorrow.
Andy Grove, the brilliant engineer who led Intel in its heyday, warned after his retirement about the folly of believing that a nation could offshore manufacturing while keeping innovation at home. “Our pursuit of our individual businesses, which often involves transferring manufacturing and a great deal of engineering out of the country, has hindered our ability to bring innovations to scale at home,” he wrote. “Without scaling, we don’t just lose jobs—we lose our hold on new technologies. Losing the ability to scale will ultimately damage our capacity to innovate.” The successful transition from prototype to production is as challenging and vital as the flash of brilliance in the garage. Without capacity for the former, both the inspiration for and value of the latter diminishes quickly.
With its infamous wine and cloth, the Ricardian model elides this challenge—specializing in either product might be equally valuable. But change the model to advanced semiconductors and cloth, and the benefit to a nation of abandoning its role in the chip industry to focus on weaving is harder to discern. Complicating matters further, once the products at issue are of different strategic value, any nation might rationally place its finger on the scale to gain comparative advantage in that which it prefers to produce. Another nation trusting that it would benefit from free trade regardless would soon find itself specializing in that which no one else wants. The most technologically advanced economy could find itself running a $250 billion deficit in advanced technology products, incapable of fabricating advanced chips that it pioneered. In that country, national security would be put at risk, productivity growth and innovation would decline, and workers and their families and communities would ultimately pay the price in worsening economic prospects.
A second, more technical problem compounds the first. Trading cloth for semiconductors might not strengthen the economy, but it would at least yield a hot labor market for shepherds. This assumption is fundamental to Ricardo’s model, and originates even earlier, in The Wealth of Nations, where Adam Smith wrote, “If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage” (emphasis added). John Stuart Mill, elaborating on Ricardo’s analysis, described international trade as “always [] in reality, an actual trucking of one commodity against another.” What happens to the model, though, if goods are exchanged not for goods but for assets? Liverpool’s factories could relocate to Lisbon. Portugal could make the wine, the cloth, and the semiconductors and trade them to England in return for prime London real estate, or perhaps bonds committing the British Crown to payment at some future date....
....MUCH MORE
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