Posts Tagged ‘comparative advantage’

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Greg Mankiw’s fascinating, bizarre, twisted logic

February 4, 2011

I have the privilege of taking a macroeconomics class that uses a textbook by Greg Mankiw, former economic adviser to George W. Bush. Which has been kind of weirdly enjoyable, because Mankiw presents such a caricature of economics that it’s really easy to pinpoint weaknesses of the field. His text, for instance, offers absolutely no critique of GDP – he mentions that GDP doesn’t cover the informal sector, but makes no mention of why GDP might be a problematic measure of national well-being.

Here a couple choice things from the textbook we’re using and his Principles textbook, which I found online. First, from the latter:

International trade in goods and services can improve the economic well-being of a country’s citizens. Trade is, in some ways, a type of technology. When a country exports wheat and imports textiles, the country benefits as if it had invented a technology for turning wheat into textiles. A country that eliminates trade restrictions will, therefore, experience the same kind of economic growth that would occur after a major technological advance.

This has got to be the weirdest and least compelling defense of Ricardian comparative advantage I have ever read.

On why capital does not flow to poor countries:

Poor nations have not only lower levels of capital accumulation… but also inferior production capabilities… a second reason capital might not flow to poor nations is that property rights are often not enforced. […] Whichever of these two reasons is correct, the challenge for poor nations is to find ways to reverse the situation. If these nations offered the same production efficiency and legal proetctions as the U.S. economy, the direction of international capital flows would likely reverse. The U.S. trade deficit would become a trade surplus, and capital would flow to these emerging nations. Such a change would help the poor of the world escape poverty.

I like how Mankiw manages to, in one stroke of ingenious logic, blame poor countries for being poor and for perpetuating the U.S. trade deficit.

Less humorous and more indicative of the nature of this textbook are Mankiw’s “Four Most Important Unresolved Questions of Macroeconomics,” with which he closes the book:

  1. How should policymakers try to promote growth in the country’s natural level of output?
  2. Should policymakers try to stabilize the economy?
  3. How costly is inflation, and how costly is reducing inflation?
  4. How big a problem are government budget deficits?

These all seem like real issues, to be sure, but contrast Mankiw’s list with a list in Macroeconomics in Context, an introductory textbook that attempts to present a more holistic economics curriculum. This book ends with a chapter called “Macroeconomic Challenges for the Twenty-First Century” and addresses:

  • Macroeconomics and human development: the relationship between economic growth and human development; human development when there is already “enough”
  • Macroeconomics and ecological sustainability: the relationship between economic growth and global population problems, resource depletion, pollution, and climate change

Economics as a means, not an end: perhaps that’s part of what Mankiw is missing.

Flying Whale

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Beating up on Ricardian comparative advantage

April 22, 2010

I’m currently reading Erik Reinert’s How Rich Countries Got Rich and Why Poor Countries Stay Poor. Immediate digression: part of why this book is notable is because the likes of Martin Wolf (Financial Times) said in the incredibly condescending manner typical of such pundits when speaking of critics of the neoliberal model, “Unlike much of the writing produced by opponents of contemporary globalization, [this is] a serious book, by a serious person.”

Anyway, after reading about 80 pages, my impression is that this is basically Ha-Joon Chang’s Kicking Away the Ladder (arguing that today’s developed countries are telling today’s developing countries not to do exactly what those rich countries did themselves to develop) but written with a keen eye towards the history of the discipline of economics. Reinert makes the argument that an entire alternate canon of economics, grounded in the German historical school, Schumpeter, List, etc, has been crowded out by neoclassical economics derived from Smith and Ricardo. This is nothing new if you’ve studied sociology, which in many ways carries on the traditions of the German historical school with a slightly different analytical perspective.

What’s fun is that Reinert is absolutely merciless when it comes to trashing Smith and Ricardo. I often find myself defending so-called global justice activists by saying things like, “we’re not anti-trade; it’s not like we’re saying ‘go to hell David Ricardo’ all the time.” The first part is true. Perhaps I should rephrase the second; after reading a bit of this book, maybe “Go to hell David Ricardo” is exactly what I should be saying. Right there in the introduction, Reinert says: “…historically the most important contribution of Ricardo’s trade theory was that, for the first time, it made colonialism morally defensible.”

Bang!

He elaborates later:

That a nation specializes according to its “comparative advantage” means that it specializes where it is relatively most efficient compared to another nation…. this theory creates the possibility for a nation to achieve a “comparative advantage” in being poor and ignorant. This happens beacuse the trade theory that forms the basis of today’s world economic order is based on nations exchanging identical labour hours – devoid of any qualitative features – against other such labour hours, in a system where production is absent. Ricardian trade theory sees a Stone Age labour hour on a par with a Silicon Valley labour hour, and therefore predicts that economic integration between these two types of economies will produce economic harmony and equalization of wages.

More later.

Flying Whale