Ebola and liberty

Ron Paul argues that the solution to containing diseases like Ebola is to allow foreign countries to grow their economies so that they can afford modern medical facilities.

On the face of it that makes sense, as does so much of he says. But it does link to another issue: what is free trade, and what should it be?

Twenty years ago, billionaire Sir James Goldsmith warned that the General Agreement on Tariffs and Trade would destabilise society by undermining the labour forces of developed economies. This is exactly what has happened, and it also has the potential to unsettle the countries to whom the work has been outsourced or "offshored". I had previously produced a jokey graphic to illustrate the disruptive effects of what I might call "free trade without brakes or steering":

from Broad Oak Magazine, 18 June 2012

The order-givers have, in effect, used the Chinese like coolies and are quite prepared to switch to other countries (such as Vietnam) to keep down labour costs; and to "re-onshore" business to the USA when robots can do the work instead.

I don't at all include Ron Paul in this picture, but it does seem to me that if we are to have peaceful evolution on world trade then we need more than GATT, TPP and TTIP, which are (as far as I understand) simply battering-rams for accumulated capital to force its way into markets irrespective of the human costs there and at home.


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The coming tide

Thanks to Tyrone for his comment directing us to a YouTube presentation by W E Pollock, someone I've viewed with interest before. The comment was in response to an FTAphaville piece that asked why the Dow was rising so strongly.

Pollock, whose presentations are useful to the layman because he is at pains to be clear and calm, notes that the volume of trade is low, which may mislead us as to the value of the market as a whole. It is as if, in a slow-moving housing market, your neighbour suddenly manages to sell his house for much more than expected, because the purchaser has certain private reasons to get in.
He also notes that the gains on the Dow are counteracted by the fall in the dollar's value, and this is a theme I've touched on many times. You have to look at real gains; and even when you think you're beating the present rate of inflation in your country, currency exchange movements may be the early indicators of higher future inflation. This is why, comparing where we are now to the period 1966 - 1982, I think we may yet see the real-terms equivalent of Dow 4,000 and FTSE 2,000.

Pollock goes on to consider gold, over which he puzzles (but then, there's a lot of dirty work and hugger-mugger in that market); and oil - if foreign economies begin to recover and industrial production rises, increasing the demand for oil, then if the dollar continues to be weak the price of energy in the USA will become so high as to damage growth prospects there.

So, where are we with all this?

Even academic economists are beginning (very belatedly) to question the validity of their models. Across the world, the games are so weighted and rigged, the rules so suddenly variable, that we are talking about how things ought to work, rather than how they really do. This is why it's now a fertile ground for conspiracy theorists: there really is a lot of conspiracy. Trouble is, we don't know all of the plots, all of the players, and all of the details.

What I think we can do, is look at the ocean tide, and not at the individual waves.

Historically, Western countries became wealthy on technological advances and were able to sell goods not just to each other, but to undeveloped countries in exchange for cheap resources. Then the latter countries began to industrialise, and goods could be carried at low unit cost in vast bulk across oceans and continents. All that remained was to break down political barriers to trade, as Nixon began to do with his visit to China in 1972.

Trouble is, controlling the rate of change. It's one thing to turn on your oil-fired central heating, another if your fuel storage tank catches fire. We want to carry on as we are (or as we used to be), but poor people are in a hurry to attain our wealthy lifestyles, and are disinclined to progress more slowly. Vast international businesses and globe-trotting billionaires stand to do very well out of facilitating this trade; national politicians are under pressure from their voters to resist it - but on a personal level, will know how rich they themselves will be when they leave office, so long as they don't try too hard for the people who elected them.

So, while I don't quite subscribe to the Dick-Dastardly-and-Mutley view of politician's summits (G-name-a-figure, Bilderberg, et al.), I can see the natural attraction for them of a world (or at least supranational) government. It means being further away from the Great Unwashed, mixing with all the Right People, fine wines and yachts etc; it means going with the flow, helping wealth and power to gather into certain centres, and organising dole handouts to regions that lose out as a result. Only the fools will try to play King Canute.

Imagine the world economies as a series of canal locks descending a steep hill. We are in the top section, the poor countries lower down. Now if all the gates are opened at once, there will be a destructive gush of water; the narrowboats in the top lock sink into the mud; the ones at the bottom float on a higher tide; a brave soul on a surfboard (the international trader) rides a thrilling wave down the hill.

Free-traders will argue that trade brings mutual benefits; but I don't think the argument works when world income disparities are so great. A Dutchman bought Manhattan from the occupying tribe for $24, but I doubt they'd get it back for that price now, not even with 400 years' interest.

It's coming, it's coming fast, it's coming destructively; and the people we pay to stop it are telling us the lies we want to hear and planning their personal advancement*. Let us return the favour.

* “It is a totally wrong notion of people to assume that the government does anything for the people; the government is there to do something for itself, and not for the people” – Marc Faber on GoldSeek, 12 September 2009

Should we leave the EU?

Is this a fair picture of our relationship with the Far East and Europe? If so, what happens if we disconnect from "ever-closer union?" Wouldn't they just throw away the straw and drink straight out of the glass?

The free market and redistribution of wealth

Jesse argues the free market case: interventions just make things worse; real wages in Western economies must decline; international currencies must float freely.

Okay, if we also have some other system of supporting our workers through the change, instead of import tariffs and other protectionist measures. You can't drop masses of people from a great height and expect society to remain stable.

A lot of our present arrangements - health, education, welfare - seem to me to be a fairly inefficient way of transferring wealth from the upper strata to the lower, less the cost and inconvenience of all the system servicers in between.

Why don't we get honest and open about the need for wealth redistribution, balanced with the need to encourage enterprise? Could we get rid of weaselly taxes and insidious benefit traps? All we need is some way of levelling the playing field between groups of workers in very different parts of the world, in such a way as not to force the game to be abandoned by either side. Can anyone propose a system of financial support - could some form of the Citizens' Basic Income be made to work?

Inflation, deflation, the world economy and freedom

This article by Matthew Beller on the Mises website tries to show how the US government can't "print its way out" of the present crisis.

The Federal Reserve controls the "monetary base" of physical currency and bank deposits, which represent only 15% of the money supply; the rest is bank lending. Currently, the banks are in a fright, so they are reducing credit, on which the economy depends. But if the Federal Reserve increases the monetary base, the banks' ability to multiply their deposits could lead to hyperinflation and the destruction of the dollar altogether. Hence the attempts to maintain confidence in the banking system instead, even if that means expensive financial support.

This isn't enough for the monetarists. They say the lending in the recent boom went on consumer spending, which encouraged producers to make too much of the wrong stuff and so the economy developed in the wrong way. The econo-Puritans say we should accept deflation because, although temporarily painful, it will rebalance the economy for a more sustainable long-term future.

However, nobody likes nasty medicine, so a political question is whether democracies will allow politicians to take timely corrective action. Past history suggests that we'll only vote for the treatment when we're half-dead, and even then, we'll curse the doctor afterwards.

My feeling is that this tendency to delay means that underneath the business cycle is a fatal linear trend, moving wealth and power to less democratic countries. When the world economy recovers, it may be on very different terms: for although (e.g.) China may suffer a setback as the Western consumer reduces spending, Chinese industrial capacity has been growing over recent years - not only the factories and tools, but equally importantly the skills base. At the upturn, the East will be well-placed to cater for reviving demand, while the West struggles to supply appropriately-skilled labour, and tries to buy back some of the industrial materials it had previously exported. And as the East industrialises, it will generate locally a greater proportion of world demand.

I cannot see how we can avoid becoming poorer, on average, than we have been in past decades, even if an elite in our society grows richer and more powerful (a phenomenon associated with more impoverished economies). We cannot rely on high-end production: China will address its quality issues, as Japan did in the 1950s. Nor can we be complacent about intellectual property rights, in a world where might makes right.

But China itself has deep problems - an growing and ageing population; an increasingly unbalanced demographic structure, thanks to attempts to limit family size; pollution; water shortgages; declining quality of farm land. The Chinese leadership faces a long-term challenge in dealing with unsatisfiable domestic expectations, which will tend to make it intransigent in its relations with foreign powers. The East-West contest may become characterized by desperation on both sides.

And so democracy in the West will come under pressure. In difficult times, people are thrown back on a network of social relationships and mutual expectations, but sudden, unreal access of wealth has tempted us to put our faith in the amassing of cash, and/or government intervention, to the detriment of agreed internal social control and support systems. When the system enters its failure phase, which Fischer ("The Great Wave") thinks may be starting, the social threads begin to snap: inflation, crime, family breakdown, war. The reification of the ties that bind us together tempts our government to maintain the social order through externalised means of surveillance and enforcement. Ultimately, the mismanagement of national budgets is a freedom issue.

Free trade, or shop local?

An essay on the basic argument for trade, at Mises. But the author does admit a problem with externalised costs that aren't taken into account.

A thought: what if we in the UK really don't have much of a comparative advantage in any area, long-term? Once the East has caught up on skills, what do we have that anyone will want to buy?
And what about the monetary distortions in the market? It's like Monopoly with some players cheating by using secret stashes of extra banknotes.

Are the economists misled by an idealised picture of economics?

Are free trade and small government the answer?

Liberal economists argue consistently for free trade, libertarians argue constantly for smaller government. We can easily see the faults of over-regulation and the centralisation of power.

But what would happen to the poorest if we really did move towards laissez-faire capitalism? I don't mean the poor in India and China, who are currently benefiting from open markets; I mean the poorest in the USA and UK. Would things really sort themselves out to the good of all?

Or would we find that we'd leapt from the frying pan into the fire?

Nationalism and internationalism

"James Higham" joins his voice to those who detect a revival of the nationalist spirit.

I don't think nationalism will be confined to losers in the game, or rejected by those who claim to love all mankind. Once there was Bukharin/Stalin's "Socialism in one country"; soon it'll be "China first". I can't blame the latter - they have worked so hard for what they've got, and won't understand why we think we can whinge it all back from them.

Speaking as the man in the street, my perception is that we have had a long period in which global businesses and a carpetbagging international managerial class developed and made fortunes. The liberal economists say this system is great for all of us, and should stay that way; perhaps so, if we had honest money and sound national budgets, so the correction mechanisms could steer the course of international trade more steadily.

But thanks to criminal negligence, incompetence and greed by those who could have maintained the integrity of the economic system, I think the aspirant working class and lower middle class in the developed world are paying heavily, and will pay more heavily. As they give up on their aspirations, we shall see a ballooning underclass, increasing the drag on national economic performance; but the situation may prove impossible to change for electoral reasons in a sort-of-democracy. The gap between rich and poor in our countries has widened, but will widen further: "Devil take the hindmost."

At the same time, on both sides of the Atlantic, people suspect a sell-out by the political class, which is intertwined (professionally and often maritally, or extra-maritally) with the business, media and public relations people. I have often said that I think we are seeing the reconstruction of the aristocracy in Europe. Many Americans also fear that their society is moving away from its historic and constitutional foundations.

The implications for democracy, social cohesion and international relations are worrying.

More old news

Thomas Nast: "The Comet of Chinese Labour" (1870)

The use of cheap foreign labour to undercut unionised American workers and benefit big business, is not new. But as this cartoon shows, it is easy, perhaps politic, to focus on the foreigner, who after all is merely trying to earn a living like the rest of us, and deserves decent treatment, out of common humanity.

"Pacific Chivalry" (August 7 1869)

How do we get a balance between the advantages of international trade, and the obligation of each State to look after its own people?

New Growth Theory and Friedman's "Flat Earth"

Here's an interview with Thomas Friedman in Yale Global Online (18 April 2005). Some quotes, with the issues I see in them italicised:

Lean thinking:

Wal-Mart doesn't make anything. But what they do is draw products from all over the world and get them into stores at incredibly low prices. How do they do that? Through a global supply chain that has been designed down to the last atom of efficiency. So as you take an item off the shelf in New Haven, Connecticut, another of that item will immediately be made of that item in Xianjin, China. So there's perfect knowledge and transparency throughout that supply chain.

International trade vs local social costs:

The consumer in me loves Wal-Mart... And not just me... Some lower-income people are stretching their dollars further because of Wal-Mart...The shareholder in me... loves Wal-Mart... The citizen in me... hates Wal-Mart, because they only cover some 40 percent of their employees with health care... [For the rest,] we tax-payers pay their health care. And the neighbor in me... is very disturbed about Wal-Mart. Disturbed about stories about how they've discriminated against women, disturbed about stories that they've locked employees into their stores overnight, disturbed about how they pay some of their employees. So... I've got multiple identity disorder, because the shareholder and the consumer in me feels one thing, and the citizen and the neighbor in me feel something quite different.

New Growth Theory issues:

What is the mix of assets you need to thrive in a flat world? Money, jobs, and opportunity in the flat world will go to the countries with the best infrastructure, the best education system that produces the most educated work force, the most investor-friendly laws, and the best environment. You put those four things together: quality of environment that attracts knowledgeable people, investment laws that encourage entrepreneurship, education, and infrastructure. So that's really where, in a flat world, the money is going to go.

And I don't really believe much in foreign aid because I think, at the end of the day, that's not how countries grow and get rich. But to the extent that you are going to give foreign aid, it should be to inspire, encourage, and help develop one of those four pillars for whatever developing country you're dealing with. But I do believe in trade, not aid. I think that axiom still applies, even more so in a flat world.

Security:

The flat world is a friend of Infosys and of Al-Qaeda. It's a friend of IBM and of Islamic jihad. Because these networks go both ways. And one thing we know about the bad guys: They're early adopters...

Trade, nationalism and peace:

...what I call the "Dell Theory" – you know, Dell Computers. The Dell Theory says that no two countries that are part of the same global supply chain will ever fight a war as long as they're each still part of that supply chain... here's what I predict: If you do go to war and you're part of one these supply-chains, whatever price you think you're going to pay, you're going to pay ten times more. Once you lose your spot in the supply chain because you've gone to war, the supply chain doesn't come back real soon. They're not going to. Fool me once, shame on you; fool me twice, shame on me. That's why you really risk a lot. And that's why these supply chains now really mean a lot. They're the new restraints.

Anti-globalization:

The anti-globalization movement ... is basically dead today – because China and India have embraced this process and this project... The anti-globalization movement... [are] all still talking about the IMF and the World Bank and conditionality – as if globalization is all about what the IMF and World Bank impose and force on the developing world. Well when the world is flat, there's a lot more globalization that's about pull. This is people in the developing world – in China, Russia, India, Brazil – wanting to pull down these opportunities.

Intellectual property rights:

Look at what happened in [India] with intellectual property law... there's no question that we did want India to have intellectual property protection to protect our products... But what it turned out was that a lot of Indians wanted it as well because they become innovators themselves. They are now plug-and-playing in this world and they want the intellectual property protections for their innovations.

Failure of Western technical education:

There is a crisis. We're not producing in this country, in America, enough young people going into science and technology and engineering – the fields that are going to be essential for entrepreneurship and innovation in the 21st Century. So we're at a crisis – it's a quiet crisis, as Shirley Ann Jackson from the Rensselaer Polytechnical Institute says. If we don't do something about it, then in 10 to 15 years from now this quiet crisis will be a very big crisis. And that's why my friend Paul Romer at Stanford says – and I totally agree with him – is a crisis is a terrible thing to waste. And right now we're wasting this crisis.

A Bluffer's Guide, Part Zero

The new British Prime Minister, Gordon Brown, has a reputation for being fearsomely intellectual. In a speech back in 1994 he referred to "post neo-classical endogenous growth theory", a shut-'em-up phrase if ever there was one.

Except with Members of Parliament, who are no strangers to bull, many of them having buffed up their chatter muscles at Oxford and Cambridge. Michael Heseltine (Pembroke College, Oxford), then President of the Board of Trade for the Conservative government, suspected Brown (Edinburgh) had gotten this showy material from his economic adviser, Ed Balls, and drawled, "It's not Brown, it's balls."

For in most cases, you can say it more simply. Or if you prefer, you can go ahead and hit people over the head with it, but be prepared to clarify if challenged.

So I've looked for relatively simple explanations of EGT (shall we who are now in the know agree to use this outsider-excluding acronym?). Here's what I've got so far:

Endogenous growth theory - from Investopedia

And here's something else worth reading, by Gladys We. It is a few pages long, but it explains it well enough so I can understand it - I think.

Politically, it seems EGT can be used as an argument against free trade and intellectual property rights. For the latter, see page 5, point 5; okay to steal someone's ideas, refine them and then copyright them. I'm sure there's Far Eastern firms that'd be fans of this policy; something to advocate amiably over the pre-prandial sherry in the Senior Common Room - until you put it into practice by plagiarizing the Master's work.

UPDATE (Saturday morning):

It's now called "new growth theory". EGT is so last evening.

The world is flat - or is it? Is Leamer right about Friedman?

Thomas Friedman's book, "The World Is Flat" is a best-seller - Wikipedia summary here. Friedman's related website is here - I think the photograph of the author is interesting, for those who like to read faces.

Last year, Edward Leamer reviewed Friedman somewhat snippily here. Gosh, I wish people could be more succinct. As Byron wrote of Coleridge, "I wish he would explain his explanation". Still, I guess Leamer has to fly the flag for critical scholarship.

The issue is important: does globalization threaten America's standard of living? Free traders say no. But have a look at Figure 6 on page 33 of Leamer, showing global income distribution in 1980, when US per capita GDP was 4 times the world average. That's quite some inequality, and if they were two very different levels of water in the same canal, opening the lock between them would see wealth gush from A to B.

So as barriers to trade are coming down, why hasn't this happened? Leamer says (p.34), "Much of the difference in GDP per capita among countries comes from the greater amounts of physical and human capital in the West, which advantages aren’t going to go away any time soon."

I'm not so sanguine. As regards human capital, I think the East is very keen indeed to increase its investment in education and training, and isn't hampered by notions of equality of outcome for its students. As to industrial capital, we are watching a vast sucking-in of resources, right down to our iron manhole covers, by China and other emerging economies; but also (particularly in China) we see a rapid and determined acquisition of slowly-accrued Western intellectual capital.

I think the catch-up process would be even faster in China if their industries observed patent and copyright more scrupulously, so they weren't almost wiping out each other's profit margins in their domestic market; and financial capital will accumulate far more rapidly when Chinese manufacturers get to keep more of the foreign buyer's price, instead of losing most of the profit to shippers, distributors, marketers and advertisers. If I were Chinese, I'd be looking at those areas for the training of my bright young people; and I bet they are.

Figure 7 on page 35 compares global income distribution in 1980 and 2000. The rich have done fine, the middle earners have made almost no progress, the poor are gradually rising. But when you think about it, maybe the middle is progressing: Western industrial workers are losing their jobs and looking for work in less well-paid service industries, while new industrial jobs are being created abroad. James Kynge ("China Shakes The World") says he sees heavy industry taking over on the Chinese coast, and labour-intensive light industry being forced inland. The move from low-skilled to higher-skilled labour in China is certainly a progression, matched by downward movement in the West. I wonder what the higher end of the graph will look like in another 20 years, when the Chinese have their own armies of industrial tycoons, company VPs, economics professors, investment analysts and marketing experts? I bet they're quite content to watch their coolie-work go to even poorer countries, as long as it doesn't happen too soon in the game.

Leamer admits (p.46): "The real bottom line: we do not know the breadth and intensity of global contestability of US jobs, and until we do, we will not have a real handle on the impact of global competition on the US workforce."

Why is he relaxed? See page 48:

"Finally, I want to comment on what I think is the big issue. It isn’t globalization or a flat world; it’s technology and the post- industrial labor markets.

The US is in the midst of a radical transformation from industrial to post-industrial society. Some of this transition is associated with the movement of mundane manufacturing jobs to low-wage foreign locations, but much of it comes from the dramatic changes in technology in the intellectual services sectors. The policy response to the globalization force is pretty straightforward: we need to make the educational and infrastructure investments that are needed to keep the high-paying non-contestable creative jobs here at home and let the rest of the world knock themselves silly competing for the footloose mundane contestable jobs."

Well, I don't think the rest of the world is quite as silly as that. I don't think Western education systems are geared to excellence, as once they were; so for that reason, as well as IPR enforcement issues, I don't think we can bank on using our intellectual property to sustain our global income differential. I don't think multinational businesses have, or feel they can afford, nationalistic sentiment. And whenever I read statements that start "we need to do x", I get the feeling that x isn't going to happen. Individuals will still make their stellar way, but I can't envision the West as a whole reclining in comfort in a "post-industrial" society.

But maybe I'm wrong.