From the Mixed Up Files of Mr. Paul Craig Roberts

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Advance warning, this is a long one. No bitching if you decide to click "more," please…

It's a couple years now since former Reagan administration econowonk Paul Craig Roberts astonished his free-trading erstwhile allies by collaborating with Sen. Chuck Schumer (D-N.Y.) on an anti-outsourcing New York Times op-ed that was rapidly and roundly condemned as an embarassing farrago. I checked in with PCR's latest jeremiad on the topic mostly out of a morbid curiosity, and came up rather perplexed:

The offshore outsourcing of American jobs has nothing to do with free trade based on comparative advantage. Offshoring is labor arbitrage. First world capital and technology are not seeking comparative advantage at home in order to compete abroad. They are seeking absolute advantage abroad in cheap labor.

I'm just not sure what to make of a paragraph like this: Either I'm confused, or Roberts is. The whole point of the notion of comparative advantage is to explain, in cases just like this, why trade can be mutually beneficial even when one party to the transaction has an absolute advantage. So, to dumb it down to a textbook example, and with apologies to those of you for whom this is very old hat: If Productivestan can make Widgets at $10 and Thingers for $20, while in the Republic of Inefficia, both have a $25 production cost, Productivestan has an absolute advantage, but both of them can be better off if Productivestan specializes in its comparative advantage (Widgets) and they trade, as you can easily enough prove to yourself by plugging in capital endowments and running through different production scenarios. The upshot is that even when "everything," which is to say, any good considered individually, can be made more cheaply in Bangalore, you won't actually get them doing all the production while we all just twiddle our thumbs or cut each other's hair or something. (Though, incidentally, Roberts' claim that "No country benefits from trading its professional jobs, such as engineering, for domestic service jobs" seems pretty dubious too: Obviously along some margin many do. What is a nation of Widgetmakers supposed to do with all that import revenue when they want a back massage or a liver biopsy? Fly overseas? Who will drive the cab to the airport?)

And yet that seems to be precisely the scenario Roberts is imagining, with a lot of mysterious handwaving about how comparative advantage, which is supposed to be a response to precisely this sort of scenario, suddenly doesn't apply. But nothing very interesting here turns on whether they're only shipping Widgets and Thingers both ways, or also shipping some capital from Inneficia to Productivestan and sending goods back. I'm not sure what Roberts can mean when he says first world capital is "seeking" absolute rather than comparative advantage, unless he's somehow imagining that this whole process is supposed to work by some kind of conscious planning, where the firms are supposed to be calculating the optimal division of production—not just for their firms and their goods, but for the whole set of economies—in advance. But that would be mad, so maybe I'm missing something.

What's more clear is that, when he's not posing as the lone genius who has seen the truth orthodoxy-bound legions of professional researchers and theorists keep obstinately refusing to acknowledge, Roberts' desparation to dig up other credible economists who've had the scales similary fall from their eyes leads him to some rather overstated conversion scenarios. So, for instance, he conscripts as an ally Princeton economist Alan Blinder, who supposedly deals a death blow to the fusty old notion that free trade will promote the general welfare in a recent Foreign Affairs essay. And Blinder does seem to think this will be an unusually disruptive production shift as it's happening, and that for various reasons already developed countries are likely to see near-term declines in service sector wages. But here's some of the rest of what he says:

The normal gains from trade mean that the world as a whole cannot lose from increases in productivity, and the United States and other industrial countries have not only weathered but also benefited from comparable changes in the past. […] Most obvious is what to avoid: protectionist barriers against offshoring. […] Governments could probably do a great deal of harm by trying to block such trade, but in the end they would not succeed in repealing the laws of economics, nor in holding back the forces of history.

Roberts does seem to be more straightforwardly echoing the views of one of his favorite sources, Norm Matloff, a computer science professor whose primary avocation appears to be penning long missives to VDare. But we're back in muddier territory when it comes to "Morgan Stanley's Stephen Roach, formerly a cheerleader for globalization," who has indeed grown more pessimistic, but concludes one especially pessimistic rumination, referenced by Roberts, as follows:

Gains in the developing world are increasingly feared to come at the expense of the developed world. This has taken the world to the brink of a very slippery slope—the blame game. Middle-class workers and their political representatives are up in arms. The pressures bearing down on a productivity-led US economy are the final straw for the body politic. Witness the outbreak of China bashing in the US Congress.

Yet protectionism may not be the real risk in all this. I don't believe that the world would be so foolish to repeat the tragic mistakes of the 20th century. The more likely danger is that the powerful countries in the industrial world now view the Chinas and Indias of the developing world with a growing sense of distrust—more as economic adversaries than as strategic partners. A world of distrust may well squander the greatest opportunities of globalization.

Of course, Roberts too would bristle at any suggestion he's a protectionist—such accusations are just one more symptom of free-traders' hopelessly archaic mindset, like that of some aging Cold Warrior unable to concieve of any opposition not rooted in Soviet Marxism. Except… he never quite manages to explain, at least in the course of this piece, what his infinitely more nuanced program is meant to consist of. The others are clearly talking about some kind of action to buffer the parties hit by the sudden economic changes—but damned if Roberts doesn't sound convinced that it's the offshoring itself that's hellspawn that needs to be exorcised, the sooner the better.

This whole line of argument, incidentally, is rather beautifully presaged in a Paul Krugman essay of some ten years back called (with a nod to Daniel Dennett) "Ricardo's Difficult Idea." I think he hits on a very real syndrome there—one libertarians are scarcely immune to—wherein people are always anxious to hear some new insight has overturned all our old ways of thinking, even (perhaps especially) when the old way wasn't that well understood in the first place. Presumably this is why people with scant interest in classical mechanics and astrophysics, about which we know a fair amount with confidence, will snatch up extremely speculative books about string theory. Definitely worth a read. [x-posted @ NftL]

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  1. Regardless of his supposed anti-trade indiscretions, Mr. Roberts has been one of the most cogent and hard-hitting critics of our Commander in Thief, the losing war in Iraq, and most of all, his own party’s increasing madness.

    For all that, I’ll forgive a little Buchanan style protectionism …

  2. I think that disclaimer about the length of this entry will scare a lot of people off. It is not that long.

  3. The others are clearly talking about some kind of action to buffer the parties hit by the sudden economic changes–but damned if Roberts doesn’t sound convinced that it’s the offshoring itself that’s hellspawn that needs to be exorcised, the sooner the better.

    I think the unemployment rate story may be one of the most undereported stories right now. I don’t care if it’s people who want to build a fence on the border or oursourcing alarmists–why don’t we make them explain the current unemployment rate?

    Unemployment, right now, is comparable to where it was during the Vietnam War. …which means really low. …and last I looked, real wages kept up with inflation over the last fifteen years or so.

    …and how long has it been since outsourcing became an issue? Hasn’t it been some fifteen years–I think I remember hearing the term back when “downsizing” was in vogue, no?

    Every so often, I hear about these phantom hoards of unemployed [insert displaced trade] and how their displacement is going to shake the foundations of our economy. …it hasn’t happened yet, and we seem to be pretty far down the trade with China / outsource to India road. Are we yet to hit some critical mass? …some critical mass of structurally unemployed?

    Considering the unemployment rate is at 4.7%, how big can structural unemployment be?

  4. Isn’t the new housing starts slowdown going to lead to a surge in unemployment?

  5. Ken,

    I couldn’t agree more. What’s especially funny is to hear my coworkers complain about the brown menace, while at the same time, we can’t get subs to bid our jobs because they have no manpower. I always ask them whose job the Messicans are taking, but they can never tell me.

    Nick

  6. Isn’t the new housing starts slowdown going to lead to a surge in unemployment?

    No. …well, maybe a small blip. …and I’m goin’ prognosticator here, but I’d expect that the slowdown in housing starts is likely to be short lived. …especially in the Southwest.

    There are multiple differences between the housing slow down now and the slow downs in 1991 and 1982. …yes, interest rates among them, but the big difference to my eye is unemployment. It’s one thing if you can’t make your mortgage payment ’cause you lost your job and you can’t find another one (’91 and ’82)–quite another if you can’t make your mortgage ’cause you bit off more loan than you could chew. …So you got some fancy interest only loan and now you can’t make the payment? Give the house back to the bank and declare bankruptcy–big deal! Somebody actually sends you another credit card when you declare bankruptcy–funny how that works, huh?

    So you haven’t lost your job–you just became a renter. …big deal.* The people who speculated on your lender or on your mortgage obligation take a hit. …so what? That’s what happens to speculators in a downturn. …It ain’t the S&L Crisis.

    Anyway, if there is a lengthy housing downturn, construction workers will have little difficulty finding other jobs given that unemployment is so low. Inflation and a weaker dollar are much bigger problems with a very simple solution. …It involves throwing the drunken sailors out of Congress and the White House. That’ll do us much better if we’re worried about wage growth. …much better than worrying about outsourcing!

    Indeed, if our current unemployment rate and the way wages have kept up with inflation over the past fifteen years are a result of outsourcing (or free trade or illegal immigration), then let’s all hope the trend accelerates.

    *What that does to consumer spending is another question. …for a number of reasons, I don’t think that’s as bad as advertised either.

  7. Ricardo’s ‘dificult Idea’ is made elegant, simple and beautiful by Ludwig von Mises in his book ‘Human Action’ startin on pg 158 and following thru the section on the Ricardian Law of association.Von Mises enables us thru these devices to glimpse not only the axiom of economics but the very nature of mans ubiquitos nobility of humanity itself.

  8. What a bizarre coincidence! My friend who actually got me to take libertarianism seriously sent me the link to this article just last night, and now Hit & Run links to it, too!

    The main difference is that my friend (A) read the article several days ago, and (B) seems to think it’s worth taking seriously. (I’ve come to realize that my friend is a libertarian of convenience: when his job is “threatened,” that’s Totally Different.)

    Oh, and I like how the article is surrounded by links to paranoid screeds about Israel and 9/11. Classy.

  9. “I think that disclaimer about the length of this entry will scare a lot of people off. It is not that long.”

    Well, whenever I go over about three paragraphs, there’s invariably one or two people who read the thing through, then take another minute of their precious time to inform us their time is too precious to waste reading long blog posts. I won’t claim to understand it, but I figured I’d try to preempt it.

  10. The irony, of course, is that the protectionist doctrine is far older than the radical ideas of Smith and Ricardo.

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