Understanding the Global Economy

Comprensión de
la economía mundial

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Neoclassical trade theory is an application of neoclassical economics to the field of international trade. The theory argues that the optimal economic strategy for a nation is to exploit its comparative advantages by using the most efficient means possible: the free operation of production and product markets and open competition among companies. Extended to the global economy, neoclassical theory implies that

  • free mobility of products and factors of production across national boundaries will maximize efficiency1
  • all economic actors specialize in what they do best within a nation and between nations
  • all resources will be allocated toward the industry or investment that will produce the highest rate of return, which results in optimal allocation of resources and
  • once the optimal allocation of resources is achieved, more trade will make someone richer but, as a consequence, will make someone else poorer.2 
Productive efficiency is also achieved through the exploitation of comparative advantages as companies are forced by competition in the market to use the most efficient production techniques available. The broader market and the greater possibilities for specialization of the global market makes it the most efficient market.
An intergalactic market would be even more efficient than a global market, if beings to trade with were discovered in other galaxies, or if Earthlings were to colonize the planets of other suns.
Comparative advantage is coffered to a nation due to its natural endowment of factors of production. Nations with abundant labor relative to capital will specialize in the production of labor-intensive goods. Nations with high savings rates, which makes capital abundant relative to labor, will specialize in the production of capital-intensive goods. Nations endowed with natural resources will produce natural resource-intensive goods.

In 1817, David Ricardo wrote the classic case for the theory of comparative advantage using the concept to explain why Portugal exported wine as England exported cloth.

To produce the wine in Portugal might take only the labor of eighty men for one year. However, to produce the cloth in the same country might take the labor of ninety men for the same time. It would, therefore, be advantageous for her to export wine in exchange for cloth.3

I.i. Comparative advantage as explanation

What has to be explained are the facts of trade and central among them are the facts about which nations export what products. Although the facts about which nations export what products are perhaps the most basic type of facts to be explained, other types of facts often commingle, such as the facts about who succeeds in achieving export-led economic growth. That latter type of fact can be sorted by regions, nations, industries, or companies. The facts to be explained will include, for example, why

  • growth in Europe was slow in the 1990s
  • Japanese economic growth was fast in the 1970s
  • Germany is successful in chemical exports and
  • Merck grew to be a leading pharmaceutical firm.
  • Neoclassical theory gives a name for these facts that explain comparative advantage as each of the following nations, continents, or corporations has one or more comparative advantages:

  • Portugal still exports wine
  • England, in the early 19th century exported cloth
  • Europe's exports grow slowly since it lacks comparative advantage
  • Japan had comparative advantage in many markets in the 1970s
  • Germany still has a comparative advantage in chemicals and
  • Merck has a comparative advantage in several pharmaceuticals.4
  • As with other well-known theories, comparative advantage is in danger of becoming true by definition that is a tautology: a verbal formula compatible with facts that have been and may yet be discovered telling us nothing about the real world. The risk is that the concept becomes empty as the valid name for whatever happens. It is similar to the risk run by positive reinforcement: if people do what they do because they find it a positive reinforcement, then that motivates e.g.,even the masochist who gains reinforcement through pain. Comparative advantage also runs the risk of being compatible with any factual evidence whatsoever might occur.

    In Ricardo's original examples, comparative advantage was saved from being true by definition because Ricardo referred to certain physical facts such as the soil and climate of Portugal, which is suited to growing the kinds of grapes that make good wine; thus, Portugal exports wine. These facts refine further by listing the molecular and crystalline structures distinct in Portuguese soil and temperatures at which the desirable chemical reactions inside growing grape cells most rapidly occur. The phrase comparative advantage, then, takes form in Ricardo's original context as a name for certain physical facts that may or may not be true at any given time and place, which would make their being true in the early 19th century in Portugal a significant fact.

    Facts about the physical characteristics of the factors of production that belong to, fall upon, or are earned by nations and firms, thus, define a comparative advantage. The concept can then be construed in narrow or broad terms depending on how many factors causing trade to flow as it does enter the example. We can explain why which nations export what products by observing the main comparative advantages of

  • cheaper labor costs
  • superior technology
  • easier compliance with environmental regulations
  • government subsidizes exports
  • reputation for reliable and high quality products
  • superior marketing organization
  • facilitation via bribes or intimidation of the buyer and
  • the seller owns the buyer as a foreign subsidiary or colony.
  • In the limiting case, one may have no clue why nation x exports product y successfully. Nevertheless, one can assert that the explanation of its success is that country x has a comparative advantage. Whatever the reason for the fact to be explained may be, its name is comparative advantage.

    A scientific explanation: a causal explanation, however, requires more than something to be explained and something that is proposed to explain it. Disregarding for now some of the weaker senses of the term cause, let us take the term in two of its standard strong senses and postulate that to say that x causes y is to say that the existence of x is a sufficient condition for the existence of y; thus, if x exists y must exist and x produces y. When we put comparative advantage in the place of x, which is supposed explain it and the facts of trade in place of y, which is supposed to be explained we get 1) the existence of comparative advantage is a sufficient condition for the existence of the facts of trade and 2) comparative advantage produces the facts of trade.

    Now we have a choice, suggested by the discussion above, concerning what kind of meaning to give to comparative advantage as either (1) a concept, (2) an economic theory, or (3) a name for the facts as, in the most apparent case, physical facts said to explain the facts of trade whatever the facts may be in any given case.

    If we choose meaning # 1, then the theory in question is open to the objection that it offers a more-or-less plausible story claiming to explain the facts observed. Once the facts to be explained are known, it is possible to spin any number of theories from which they can be deduced or predicted. For example, we know that Detroit has become a rust belt city characterized by poverty, crime and vice. Therefore, we can form a theory about the comparative advantage of Japanese auto makers, a theory about the breakdown of family values in the USA and other theories for which the observed facts serve as confirmation because the theory will predict the facts observed. The generality of a conceptual theory like comparative advantage makes it vulnerable to the charge that manipulation can make it true whatever the facts may be.5

    If we choose meaning ( 2) we then give specific content to comparative advantage. Then, it becomes clear that the facts that it explains are incomplete. Even in a simple case such as Ricardo's Portuguese wine, it is clear that, in addition to the soil and climate of Portugal, other factors must be present before wine barrels will ship from Lisbon. Thus, the comparative advantage specified is not a sufficient condition for wine export. A country could not produce a wine export by relying only on the factors of production on Ricardo's list of Portugal's comparative advantage.6 The inverse point is also valid. Therefore, just as the existence of a natural comparative advantage is insufficient to cause international trade, the existence of the international trade does not necessarily reflect a natural comparative advantage. One example, among many, is found in the following excerpt from a dictionary of commerce in 1797:

    The large quantity of grain that Poland exports every year would give the impression that the country is one of the most fertile in Europe. However, those familiar with Poland and its people know that even if Poland has fertile regions there are more fertile, better cultivated regions elsewhere, which do not export grain. The truth is that the nobles own the land in Poland and hold the peasants as slaves (90% of the population) taking their products and, thus, leaving them to eat barley and oats. While other Europeans eat most of their best grains, the Poles retain only a small part of their wheat and rye. Thus, one might think the Poles harvest their grain only for trade to foreign lands.7

    Regarded as an explanation of the observed facts of international trade, comparative advantage is either too broad, too narrow, or somewhere in between. When it is too broad, it is a superfluous comment about whatever happens. When it is too narrow, it is not a causal explanation. When it is somewhere in between, it lacks substance, to the extent that it is a broad, theoretical construct without an explanatory power, to the extent that it is specific.

    I.ii. Comparative advantage as prescription

    Neoclassical prescriptions for international trade appeal to at least these three types of ethical principles:

    1. the natural law, which holds that what is natural is good 8
    2. the utilitarian, which claims that right is whatever brings the greatest happiness to the greatest number of people and
    3. the deontic of Kant, which purports that respect for liberty is the moral imperative of respect for persons.

    Thus, one might object that I am reading history backwards and argue that capitalism formed first and, then, to justify it, produced the ideologies of

  • neoclassical economics
  • the relevant versions of the natural law principles
  • utilitarianism and its successors and
  • Kantian ethics. I will, for now, ignore that objection and treat arguments that advocate following the principle of comparative advantage in international trade as grounded in ethical principles. I prefer that to treating modern ethical principles as an essential part of the ideology of our commercial civilization.
  • In review, the physical facts like soil and climate define a comparative advantage as an explanatory principle. Other factors followed that explain trade flows, which may work with the principle. One of them was that nation X exports commodity Y because the government of X subsidizes the export of Y. That suggestion should stand out as an odd item on the list.

    That an export subsidy would be a comparative advantage is unusual because subsidies typically interfere with the natural play of comparative advantages. Government intervention in the market may distort the market, thus, creating artificial prices. It is true that the concept comparative advantage can include a competitive advantage created by a government subsidy. However, the narrow view of the concept is more often true, which is to say that the subsidy violates the natural principles of trade.

    Such allusions to nature, explicit or implicit, illustrate the tendency of neoclassical economics to make a critical distinction between certain practices and institutions viewed as natural or not based on their relationship to capitalism. Those that are viewed as natural include private property, the market, freedom of contract, trading in stock markets and the taking of securities for loans. All of these are disguised behind the positive moral "halo." In contrast, practices and institutions that are viewed as unnatural include public ownership of a means of production, tariffs, subsidies, labor unions, rent control and cancellation of debt. These are supposed to portray the negative moral "shadow."

    Neoclassical prescriptions for policy, however, often draw strength not from the view that what is natural is good, but the view that human nature is bad. Therefore, the policy prescriptions back the argument that the decisions made by the market are better than those made by governments, which consist of fallible people. Competitive markets are not comprised of people in the same way that governments are. Competitive markets are impersonal and impose a discipline that is said to make humans behave better than they would otherwise behave. Overall, markets manage to harness self-interest and make it work for the ideal of human welfare.

    Given that human nature is bad, any deliberate policies designed to improve society by interfering with market mechanisms will necessarily be flawed because of power politics, corruption, dishonesty, influence-peddling, prejudice and the like. Similarly, any appeal to higher motives will be less effective than the appeal to lower motives brought by market competition.9

    Neoclassical economics revises and restates the propositions of classical economics that were expressed in late 18th and early 19th century England and France. In those optimistic days, leading thinkers expected freedom and the advancement of science to lead to happiness for all humanity. It was the task of the science of political economy to show that a free economy would lead to happiness. It was the task of the philosophy of utilitarianism to justify the expected outcome of free markets and free trade by showing that happiness is the goal for humans to persue.10

    One optimistic thinker, Jeremy Bentham, defined happiness as pleasure.11 Bentham advocated evaluating legislation (to decide whether to enact it or to repeal it) by measuring how much pleasure it produced. Rousseau suggested a way to measure happiness even cruder than Bentham's schemes for measuring the quantity of pleasure produced by any given law. Rousseau measured happiness by counting the population finding that under unhappy conditions of extreme misery, most infants do not survive.12 Whether children survive, hence whether the population grows was, thus, for Rousseau the measure of happiness.

    At first mainstream economics allied itself with utilitarianism in maintaining the greatest happiness for the greatest number. The alliance touted the specialization of labor as guided by the law of supply and demand. They exaggerated its global corollary, which is free trade guided by the principle of comparative advantage. John Stuart Mill refined the concept of happiness so that educated tastes and perhaps even spiritual regeneration would count among the desirable outcomes as promised by the wonderful economic quasi-machine.13

    Mainstream economics, however, withdrew the principle of happiness because the free markets, in many ways, did not always lead to happiness. That was clear, for example, in the proposition of welfare economics that an extra dollar for a poor person buys more happiness than the same extra dollar would buy for a rich person,14 which implied that sharing the wealth, rather than free markets would maximize happiness. Mainstream academics discovered that happiness was a vague and unscientific concept and, therefore, economics should omit it. Instead of taking happiness as the aim, one could rewrite, for example, the law of supply and demand with lists of people's revealed preferences. These would be made known whenever people walked into markets and took one product off the shelf instead of another, with an economist standing by to observe the facts of choice and count them.

    The shift from the principle of happiness to the code of choices made economics more exact and insulated it from criticism.15 Having given up the utilitarian happiness, mainstream economics retained the utilitarian premise that an optimum is always a maximum or a minimum. It continued to borrow tools from physics and pure mathematics for calculating the maxima and minima in general. The optimum prescribed was to maximize revealed preferences as benefits and minimize costs. The code by which comparative advantage ought to be followed became a precision tautology.

    A society in which everyone reveals all their choices will be one in which a maximum of preferences are revealed. Similarly, the traders in an international transaction reveal that they prefer what they buy over what they sell. The conclusion that the more trade the better does not require a premise once the definition of better becomes established by choices. That is because trade is mainly the name for the bargains that people, companies and nations choose to make.

    In the practice of economic research, the magnitude of the preferences revealed is measured by how much money changes hands. Therefore, it follows from x = x that the more things that people buy the more they buy. Measures of welfare such as gross domestic product per capita are established mainly by counting how many dollars worth of goods and services are produced, which in turn depends on how much people are willing to pay for what they buy. Invariably, the paradox occurs: as traditional cultures are monetized, the people become impoverished by 1) the forces that deny them their traditional means of production and 2) their dependence on unstable opportunities for paid work and a livelihood.

    At the same time, the traditional peoples begin to suffer from what the sociologist Emile Durkheim called anomie: social instability resulting from a breakdown of norms and values because of the dissolution of the traditional social structures. For these two reasons, among the others, those people become more miserable. Nevertheless, the standard statistical tools of mainstream economics, e.g., per capita income in dollars per year, report that the human welfare is rising. Critics of neoclassical economics have called for the measuring of economic performance based in the physical reality. Hazel Henderson, for example, favors the testing and measuring of sustainability as human and species longevity, nutrition, air quality, water purity and.16 In a sense, Henderson proposes to restore the division of tasks between the science of political economy and the utilitarian philosophers. The successors to the political economists are, thus, the Hendersonian social scientists whose role is to study the

    • combinations of markets and planning
    • distributions and forms of property
    • institutions for organizing labor and
    • processes of international exchange of each element to produce a particular outcome as permutations and combinations of the processes. The successors to the utilitarian philosophers are the Hendersonian evaluators and social critics who provide the rationales for the measurements used to assess the outcomes. In such a framework, questions about the merits of using the principle of comparative advantage, however broadly the concept might be construed, would become empirical questions. It would be relevant to offer physical facts and psychological facts as evidence to answer them.

    The advocates of free trade no longer try to prove that a nation specializing within its comparative advantages brings prosperity to its people. They still claim that consumers are better off with greater access to inexpensive foreign goods though they have quit claiming that it makes consumers happy. Now it is enough to say that consumers get what they want. The moral case in favor of free trade, therefore, relies less on a theory about what is good for people. It relies more on an appeal to freedom per se—regardless of its consequences.

    The appeal to free consumer choice, therefore the case for free international trade guided by comparative advantage, finds support in those theories of ethics, such as Kant's deontic ethics, which make right and wrong independent of the results of actions. Such theories typically enshrine freedom as an overriding value that ought to be respected, come what may.17

    This same predominant value is applied to the distribution of wealth within the principle known as Pareto optimality. It asserts that the distribution of goods in society is optimal when all willing trades have been made. That is when there are no longer any two parties who are willing to exchange what one has for what the other has, even if the disparity between wealth and poverty worsens. The option that the distribution of the world's goods could be improved by compelling someone to give something unwillingly is excluded as ethically unacceptable.18

    I.iii. Comparative advantage as metaphysics

    The theory of comparative advantage can be regarded as the application of neoclassical economics to international trade. In turn, neoclassical economics can be regarded as the application to a particular social science of the metaphysics of economic society. The general assumptions of economic society form the background from which the implicit and explicit premises of neoclassical economics are derived.19

    My use of the term metaphysics instead of the more familiar terms: ideology or worldview has more than one motive and it has my optimistic confidence. The system of metaphysics is the traditional activity of philosophers, which has contributed to the construction of Western ideas in general and of economic ideas in particular. Here I emphasize the extent to which social reality is a deceptive construct by design and I encourage efforts to reconstruct it. I share the romantic optimism of the early 19th century because I expect the right combination of ethical philosophy and advancing social science to lead to happiness for all humanity. Classifying the presuppositions of neoclassical economics as a metaphysical model is, among other things, a way of saying that economics can be improved and even superseded by the design and growth of a better social reality.

    What I choose to call the metaphysics of economic society Louis Dumont refers to as an economic ideology. Dumont compares the ideology (the metaphysics) of modern economic civilization to the ideologies of other great civilizations.19b He sees similarities between the central concept of his work, the economic ideology and a number of well-known concepts and theories in social science; about this, he wrote:

    We verge here on the robust demonstration by Karl Polanyi in The Great Transformation of how exceptional the modern era is in the history of mankind in regard to the separation of the economic aspects and the sacred role of the market and its cohorts in the liberalism that dominated the 19th and early 20th centuries. I propose a wider view, while at the same time building on an old sociological tradition. The holism and individualism contrast, as it has developed from my study, without any conscious imitation is in line with Sir Henry Maine's, Status and Contract and with Ferdinand Tonnies, Community and Association.20

    It is well known that neoclassical economic theory begins with the market and presupposes the market and its cohorts, which are 1) private property, 2) rational economic actors and 3) competition. This innovative approach places the institutional structure of modern society and its ideological reflection, which is economic theory into the context of scientific explanation, ethics and the tradition of metaphysics.

    A metaphysical shift will challenge some ways of thinking of scientific explanation and promote others. In his seminal essay, Interpretation and the Sciences of Man, Charles Taylor proposes what I call the metaphysical shift. He argues that social science is now in a position to improve the quality of its explanations by taking a more perceptive view of the regularities observed in social behavior.21 After Ludwig Wittgenstein, social science can improve its accounts of social phenomena by acknowledging and exploiting the relationship of human action to language shown by Wittgenstein in his later works. He thought of human action as governed by the constitutive rules of language-games (sprachspielen) in which discourse and practice are inseparable.22

    By contrast, much of the social sciences and, in particular, neoclassical economics have used the mechanism instead of the language-game as its implicit and sometimes explicit metaphysics.23 Much of the vocabulary of economics, thus, is borrowed from the science of mechanics as equilibrium, stability, elasticity, expansion, inflation, contraction, flow, force, pressure, resistance, reaction, movement and friction. Human behavior is, therefore, simplified in order to analyze it in terms of mechanical metaphors.

    Wittgenstein realized that thinking of reality in terms of machines presupposes, what is often not the case, that it is made of parts that function consistently in standard ways. Thus, in his attempt to dismiss metaphysics in general and in particular mechanistic metaphysics, ones by which he was most tempted, Wittgenstein wrote:

    If we know the machine, it seems that every movement it will make, is exactly predetermined. We speak as if the parts could only move in a certain way, as if they could not do anything else. Why do we forget that they might bend, break, melt and so forth?24

    Wittgenstein's theory fails to produce the usual product that is output from the usual factors that are inputs. Therefore, this shows that the mainstream neoclassical economic theories fail to provide accurate predictions of economic behavior when the parts do not function as expected. Samuel Huntington cites an example that he wrote in the following:

    The easy assumption by Western economists in the 1980s that devaluing the dollar would reduce the Japanese trade surplus proved to be false. As the yen appreciated to nearly one hundred yen to the dollar, the Japanese trade surplus remained high and even increased. The Japanese were, thus, able to sustain both a strong currency and a trade surplus. Western economic thinking tends to posit a negative trade off between unemployment and inflation with an unemployment rate much less than 5% thought to trigger inflationary pressures. Nevertheless, for years Japan had an unemployment rate averaging less than 3% and inflation averaging half that. Japan's low level of manufactured imports, one careful study concluded, cannot be explained through standard economic factors. The Japanese economy does not follow Western logic.25

    The unstable part that falsify explanations and predictions, offered by social theories rooted in the image of the machine, is Homo sapiens whose adaptation to its ecological niche is culture. Economic culture is only one form of culture, the kind of culture whose metaphysics is that of economic society. Therefore, the projects for social change that are conceived and planned as exercises in economics do not fit traditional cultures. Larry Naylor's report on Operasi Koteka, a development project in Indonesia, describes it as follows:

    Operasi Koteka provided for the introduction of new agricultural practices, cash crops and the wearing of clothing. Without a market-exchange system, wage-labor jobs and knowledge of money, these changes had little chance of being implemented. The mandate that the local people wear new styles of clothing was clearly out of step with economic reality. It simply did not fit with local conditions, let alone the traditional culture. The purchase of clothing and its care required money.

    Although the Dutch had brought the concept of money, Indonesian money was just as strange as clothing to the Dani. As their traditional culture had neither markets nor money, the Dani had little understanding of money, little of it and even fewer opportunities to acquire it.26

    As noted in the context of Ricardo's classic example of comparative advantage, the export of Portuguese wine, when comparative advantage is not a tautology, is an incomplete causal explanation. The sun shone on Portugal and microbes beneficial for viticulture thrived in its soil for many years before a single keg of wine crossed a Lisbon dock bound for England. This type of metaphysics, which is an institutional structure reflected and articulated as a logical ideology, brings about some of the additional conditions needed to complete the causal explanation of the wine trade. The requisite elements for the trade were a market, money, rational economic actors, accumulated capital devoted to business for profit and a government disposed to encourage and protect trade. It follows that a metaphysics has causal powers. Therefore, where a different metaphysics prevails different human behaviors result.

    A metaphysics is the system of basic concepts that frames an outlook and basis for both epistemology and ethics. In such a framework, epistemology and ethics support each other. I have argued elsewhere that such was the character and social function of the first book to bear the name, which is Aristotle's book, Metaphysics.27

    The market and its concomitants provide a common root and mutual support for a certain version of scientific knowledge and for a certain version of ethics. That is another reason for thinking of the theory of comparative advantage as embedded in a metaphysics. Thus, the market produces a result that is ethically unacceptable, when, as Frances Moore Lappé wrote: The peasants of El Salvador who have no money are left voiceless at the dinner table.28

    Neoclassical economic science rescues the market from its ethical indictment. The answer to the indictment reads that is just the reality because there is no effective demand for rice and beans in rural El Salvador, which, thus, has a comparative advantage in the production of cotton to manufacture clothing for export. Therefore, naturally, the land grows textiles to feed the insatiable export, while the satiable people go hungry. The scientific theory of the market as used here explains how the world works, whether we like it or not.

    On the other hand, ethics does sometimes rescue science by 1) permitting the preferred conclusion to be drawn and 2) denying that the facts, as they are, must simply be accepted. When Japan, for example, declines to import TV sets from the United States, the facts do fail in terms that rely, by their connotations, on ethical criteria. The Japanese market for TV sets is, therefore, distorted, its prices are artificial and the government interferes into its free operation.

    Here the market reappears again, though this time not as a brute (inescapable) fact, but instead as a normative ideal that has been violated. The market and its concomitants, thus, bridge the is to ought divide in a most remarkable way one that provides conceptual foundations both for statements of fact and for value judgments. This is another reason to think of neoclassical economics as a metaphysics.

    Resources

    1. Candace Howes, "Constructing Comparative Advantage: Lessons from the U.S. Auto Industry," in Trading Industries, Trading Regions. op. cit. p. 48 ff.; Candace Howes and Ann Markusen, "Trade, Industry and Economic Development," in Trading Industries, Trading Regions. op. cit. p. 12 ff.

    2. This is the Pareto criterion for optimality. William J. Baumol discusses it, in Economic Theory and Operations Analysis, chapter 16 (Englewood Cliffs, NJ:: Prentice-Hall, 1965) p. 376

    3. Ricardo, On The Principles of Political Economy and Taxation (London: J. M. Dent, 1911, first edition 1817) p. 82.1a

    4. Helzi Noponen, "Scale and Regulation in an Innovative Sector: Jockeying for Position in the World Pharmaceuticals Industry", in Trading Industries, Trading Regions. op. cit. p. 175-211

    5. The introduction to a UN statistical report on the world economy shows that when analyzing comparative advantage, the economists at first focused on a country's relative factor endowments, such as labor and capital. Later, economists realized that much more had to be considered such as education, research and development, technology transfer, the availability of raw materials and feedstock, cross-border mobility, political constraints on (or incentives for) restructuring and other realities.

    The interaction between the determinants of comparative advantage is more complex than they had first thought. Comparative advantage is a constantly changing concept. [p. 5.] Ultimately, comparative advantage refers to whatever determines costs.

    The U.N. Industrial Development Organization: UNIDO, Changing Patterns of Trade in World Industry: an Empirical Study on Revealed Comparative Advantage (New York: United Nations, 1982) p. 4-6. Instead of describing what has to be explained, which will explain why prices and trade flows are as they are, comparative advantage becomes a name for whatever the explanations may be.

    6. Jacob Viner reviewed extensively the attempts of 19th and early 20th century economists to quantify the consumer surplus or gain from trade made by the operation of the principle of comparative advantage in international trade. He concluded that, in his words:

    The theory of international trade at its best can provide presumptions, but not demonstrations as to the benefit or injury to be expected from a particular disturbance in foreign trade. It deliberately abstracts from some of the considerations that can rationally be taken into account in the appraisal of policy. It never takes into account all the variables which it recognizes as significant and within its scope. This is because they are out of reach or to take them all into account would make the problem far too complex for a neat solution.

    Jacob Viner, Studies in the Theory of International Trade (New York and London: Harper, 1937) p. 593

    7. Fernand Braudel, The Structures of Everyday Life: the Limits of the Possible (New York: Harper and Row, 1981) p. 125-26 1b

    I.ii Prescription

    8. The notion that the market and therefore comparative advantage as a principle that guides international trade, is good because it is natural seems to have been advanced first by the French physiocrats in their doctrine of natural order. Adam Smith later adopted it. See Sir Eric Roll, A History of Economic Thought (London: Faber and Faber, 1973) p. 135-37, p. 144 ff.

    9. Sometimes a reliance on higher motives spells disaster. Karl Popper, criticizing the application of an ethic of love to politics and economics, thus, wrote: The attempt to make heaven on Earth invariably produces hell—The Open Society and its Enemies (Princeton, NJ: University Press, 1950) p. 422. Sometimes the problem with higher motives is that they are less reliable than self-interest, as Adam Smith wrote:

    It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.

    Adam Smith, The Wealth of Nations 1, 2. (various editions, first edition 1776)

    10. See Elie Halevy, The Growth of Philosophical Radicalism (New York: Macmillan, 1928)

    11. Jeremy Bentham was a classical proponent of the view that the purpose of life is pleasure and each person has both the necessary expertise and motivation to pursue pleasure well. Thus, the market rather than the government ought to be society's principal ruling institution. About that, Bentham wrote:

    The legislator and the minister of the interior have the power to increase wealth and population. But, that power is as nothing in comparison with what is done of course and without thinking of it, by the judge and his assistant, the minister of police. With the view of causing an increase to take place in the national wealth, or with a view to increase the means of subsistence or of enjoyment, without some special reason, the general rule is that nothing ought to be done or attempted by government. The motto or watchword of government on these occasions ought to be: Be quiet. Bentham—Manual of Political Economy in The Works of Jeremy Bentham: Vol. III. Edinburgh: William Tait, 1843, p. 33

    12. Jean-Jacques Rousseau, The Social Contract Book III, Part 9 (various eds., first in France 1762) As with all the thinkers associated with the rise of economics, Rousseau was in conscious rebellion against ancient and medieval philosophy and thus, he wrote:

    No people have ever been made into a nation of philosophers. However it is possible to make a happy people.—Rousseau

    Rousseau, Discourse on Political Economy. (published first in France as an article in the Encyclopedie edited by Denis Diderot, 1755) in Great Books of the Western World (Chicago: Encyclopedia Britannica, 1994: 35) p. 374

    13. John Stuart Mill, Utilitarianism (London: Longmans, 1879)

    14. Arthur Pigou, The Economics of Welfare (London: Macmillan, 4th ed., 1932) Professor Pigou wrote:

    Utility is increased, with all other factors staying the same, by transferring wealth from the rich to the poor.—Pigou

    15. William Baumol describes how economics became more scientific by avoiding its analyses based on an introspective utility, in "Towards Observeability: Revealed Preferences and Expenditure and Cost Functions," Chapter 14 of his Economic Theory and Operations Analysis (Englewood Cliffs, New Jersey: Prentice Hall, 4th ed,, 1977) The general idea was that economists should separate positive and empirical research from the utilitarian, the labor theory of value and any other ethical framework. With respect to the study of comparative advantages in international trade, Eli Heckscher and Bertil Ohlin pursued that general idea, among others. See also Bertil Ohlin, Interregional and International Trade (Cambridge: Harvard University Press, 1935)

    16. Hazel Henderson, Paradigms in Progress: Life beyond Economics (San Francisco: Bennett-Koehler, 1995) Hazel Henderson, The Politics of the Solar Age: Alternatives to Economics (Garden City, NY: Anchor Press/Doubleday, 1981) Hazel Henderson, Creating Alternative Futures: the End of Economics (New York: G. P. Putnam, 1980)

    17. Ludwig von Mises sees a great merit in the market that requires no consensus on ethics. About this Von Mises wrote:

    The market economy makes peaceful cooperation among people possible, in spite of the fact that they disagree with regard to their value judgments.—Mises

    Ludwig von Mises, Human Action: a Treatise on Economics (New Haven: Yale University Press, 1949 p. 689) Von Mises holds that, in addition to its practical defects, socialism is flawed in its ethics as socialism does not respect the rights of individuals to make their choices.

    18. In regards to Pareto optimality, see note 2, above

    19. Louis Dumont, From Mandeville to Marx: the Genesis and Triumph of Economic Ideology (Chicago, University of Chicago Press, 1977) See also, Dumont: Essays on Individualism: Modern Ideology in Anthropological Perspective (Chicago: University of Chicago Press, 1986)

    19b. Ibid.

    20. Dumont, From Mandeville to Marx. op. cit. p. 6. Some of the works to which Dumont refers are Karl Polanyi, The Great Transformation (Boston: Beacon Press, 1944) Maine, Sir Henry, Ancient Law: Its Connection with the Early History of Society and its Relation to Modern Ideas (London: Murray, 1897) Ferdinand Tonnies, Community and Association. a translation of his Gemeinschaft und Gesellschaft (London: Routledge and Kegan Paul, 1955)

    21. Charles Taylor, "Interpretation and the Sciences of Man" in Review of Metaphysics: XXV, p. 3-51, September, 1971. The essay is reprinted in several anthologies.

    22. Ludwig Wittgenstein, Philosophical Investigations (Oxford: Blackwell, 1956) Wittgenstein was a 20th century Austrian born philosopher and linguist.

    23. Irving Fisher, Mathematical Investigations in the theory of value and prices (New Haven: Yale University Press, 1925) Printed first as a doctoral dissertation, 1892, reprinted in the Reprints of Economic Classics. (New York: August M. Kelley, 1965) Professor Fisher wrote:

    Most writers on economics make a comparison between economics and mechanics. One speaks of a rough correspondence between the play of economic forces and mechanical equilibrium. Another compares the uniformity of price to the level seeking of water. Jevons compares his law of exchange to that of the lever. Edgeworth figures his economic system as that of connected lakes of various levels. Another compares society to a plastic mass such that a pressure in one region dissipates in all directions. Thus, economists have borrowed from and relied upon the vocabulary and ideas of mechanics.—Irving Fisher

    24. Ludwig Wittgenstein, op. cit. paragraph 193

    25. Samuel Huntington, The Clash of Civilizations and the remaking of World Order (New York: Simon and Schuster, 1996)

    26. Larry Naylor, Culture and Change (Westport, CT: Bergin and Garvey, 1996) p. 116.

    27. Howard Richards, A Philosophy of Peace and Justice: letters from Quebec. (San Francisco and London: International Scholars Press, 1993) Letter 16.

    28. Frances Moore Lappé and Joseph Collins, Food First: beyond the Myth of Scarcity (Boston: Houghton-Mifflin, 1977)

    Review

    1. As an economic theory, comparative advantage is used to support the idea of a global economy. Unrestricted access to cheap productive labor, land and natural resources are the criteria of comparative advantage in the global market. As you see it, compare this interpretation of the theory with the early theory of Ricardo, Smith and others. p. 3, p. 6

    b. In your sense of it, what is implied by the comparative advantage of one country over another that makes it an argument in favor of the global economy?

    2. Consider that the premise of the utilitarian ethic—an ethical practice is defined by what brings the most happiness to the most people—supports the global economy, even though it is a false premise. In your sense of it, to what extent (if any) is that premise used to support globalization? p. 7 

    b. As or if you see it, how might this utilitarian premise argue against the global economy?

    c. How would you rewrite the premise to make it a valid ethical premise? In your view, how would the valid ethics change the behavior of the global economy?

    d. The ethical/moral case in favor of free trade relies less on a theory about what is good for people and more on an appeal to freedom—regardless of its consequences. Suppose this trend applies to your personal relationships. For example, either your parents, your employer, or your partner (in business, family or friend) has informed you that they no longer care about your happiness in terms of your needs, one of which is sense of happiness about your material security. As you see it, how would that differ from the (your) economic system, which makes it clear that the freedom, property and contractual relations of the producing actors in the economy are the (their) main or only consideration? As you see it, is your relation to the economy any less primary to your sense of the value, meaning and dignity in personal your relationships?

    3. In your view, what is the value of an economist recording the revealed preferences of consumers? Can you cite and describe an examples of how the practice has directly helped you or, if possible, harmed you as a consumer? Could it harmful, in your view?  p. 7

    b. Do you consider the monitoring of your purchases via store cards and credit purchases as more of an intrusion of privacy or is it a necessary economic function in which all economic actors: consumers, the market and planet Earth all win?

    4. An intergalactic market would increase efficiency as productivity, trade and profit far beyond that of a global market. Market growth is the quasi-mechanism that makes this true. In your view, describe the aspect of market growth that is the mechanism. As you see it, describe a (or the) sustainable activity into which you would re-direct the human aspect of market growth.  p. 1

    b. Describe your sense of the concept of economic efficiency. What is the main distinction, in your view, between how global free trade defines the idea and how Gandhi's ideal of self-suficiency and Henderson's measures define efficiency as using resources wisely, to their optimal output as quality of life indicators for the minimal input of expense for all things, systems and people. p. 1, p. 8

    5. Describe the potential risks and actual consequences that you see in the practice of a trade theory that is a tautology: perceived as true or presumed as true in every scenario? p. 2p. 3

    6. Disinformation made Poland's grain export in the 16th century an example of the deceptive use of the theory of comparative advantage as a rationale for trade. As you see it, how does Poland's imposed export compare to the textile export in El Salvador, today? Describe any contrasts that you see between the two that you see in terms of the ethics of freedom, ethics of property and contract. p. 4

    7. What, if any, basic difference do you see between the neoclassical measure of economic performance and the realist approaches that the Hendersonians discovered and uses in place of GDP or per capita income?  p. 8

    8. Describe your view as to whether or not you consider Kant's ethic of economic liberty within the law as a moral obligation as the primary basis for free and global trade today. Describe your sense of economic liberty in terms of its goals and its consequences.

    b. Describe in your words how the philosophical support for liberty and/or the other ethics of the market as might be spoken in the words of a global capitalist. p. 9

    9. In what academic format did the sociologist Dumont expresses his economic ideology, in you view and interpretation? p. 10, p. 11

    b.  In what context do you see metaphysics as more useful nd apropos than Dumont's comprehensive system based on ideology and in what context would you expect to see Dumont's system?

    Project 1: Describe if or as you see it, your personal process of the creation of a metaphysics, e.g., I / we hope that ..., I/we need and want to see and know that ..., I / we care about this so that I... I / we imagine that by way of ... I wonder if ... I / we believe that ...I / we have faith that...I / we trust that ...I / we live by that ... I / we want to change this or that because the risk of the status quo is greater than the risk of change and I consider all the factors, the relationships they share and stay open to new factors as they appear.

    a. Describe your view of one or more historical examples of this, your favorite and explain.

    b. Describe your sense of or experience of a metaphysical shift becoming strong enough in a person’s life that it affects the lives and actions of others.

    c. Have you ever made a shift in your mentality that is the way that you think about life? Did you reverse your thinking by your sudden shift in how you see the world: your worldview? Or, did you gradually shift your mentality through practices and eventually create the shift of you worldview? Practices may include, e.g., using only public transport/ carpool, eating just from the vegetable kingdom, giving up TV, telephone and/or other commercial media in favor of live entertainment and in-person messages, buying only locally produced foods and goods, among others. p. 11 through p. 13

    10. Consider the statement—The Japanese economy does not follow Western logic. Japanese economic behavior might reveal a number of facts about an economic metaphysics. What facts about Japan’s economic model are most significant to you in terms of its lead in technology production and trade? p. 12

    11. The advocates of free trade no longer try to prove that a nation specializing in its comparative advantages (as perceived, false, or factual) brings prosperity to all of its people. To what extent would you see this as the advocates of free trade conceding to a flaw or general failure of free trade? p. 9

    12. Free trade advocates argue that consumers are better off with more access to cheap foreign goods even though it does not make consumers happier. Describe your sense of a paradox in that statement, if you see one. As you see it, explain the logic of the statement from the perspective of an economist. p. 9

    Keywords: anomie, capitalism, causal, comparative advantage, competition, deontic ethics, economic growth, economic ideology, economic theory, effective demand, efficiency, ethics, freedom, free trade, global economy, globalization, human action, Hendersonian scientists, international trade, language-game, labor, metaphysics, natural law, natural resources, neoclassical economics (mainstream ~), Pareto optimality, political economy, poverty, profit, property, revealed preference, social science, social structure, subsidy, supply and demand, sustainability, tautology, tariff, trade surplus, utilitarianism

    Description: Does the theory of comparative advantage as neoclassical economics, explain the rise and rule of the global economy? Part I deals with as the starting point in Understanding the Global Economy, an expose of free trade as enforced by trade laws in pacts between corporations and central governments.
     

    Part II: Globalization of ProductionTOC Cover pagetop

    © 2013

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