It’s more difficult to understand than you think

The reasons are explicable but they are very difficult to understand without a thorough knowledge of how economies work.

From Instapundit

GLORIA ALVAREZ ON REASON TV: Socialism Fails Every Time (Video):

It certainly has a lot of bad luck associated with it, for some inexplicable reason.

For an explanation, you need to go to what is known as the Socialist Calculation Debate, and then be prepared to spend a long time thinking it through. You can easily see that all such experiments have failed in the past, but that is empirical, and never convinces since it is always different next time, at least when it all begins. The end point is always The Soviet Union, Cuba, North Korea and Venezuela, but why?

Getting Say’s Law right is hard

This is an article on the great economist, Leland Yeager, who has just passed away. And in this article in memoriam, Market Grandmaster by James A. Dorn, there is a discussion on Say’s Law which is dangerously off centre as has been virtually every discussion since the publication of The General Theory in 1936. Here is what is right taken directly from the article: “there can be no problem of deficiency of aggregate demand”. That is precisely what Say’s Law means. To this principle there are no exceptions. But what is said is that “fundamentally” there can be no deficiency of demand, but that it does occur on some occasions. To accept an exception, especially this, you might as well be a Keynesian.

Say’s Law did not rule out recessions. The idea that classical economists had some principle that made recessions impossible is so loony it’s hard to understand how such an idea could ever have established itself, yet that is what Keynes did. Therefore, to refute Keynes, one must begin by showing how untrue this was. Say’s Law rules out only one thing. It rules out, and rules out absolutely, demand deficiency as a cause of recession but nothing else, and most especially recessions due to monetary disturbances which were recognised by classical economists as frequent and often devastating. The classical theory of the cycle, stretching back to the start of the nineteenth century, discussed monetary breakdown and their effects. Monetary disturbances are not a deficiency of demand but a structural deformation. The GFC was not caused by a deficiency of demand but a monetary disturbance. Nor did a public sector stimulus in any economy lead to recovery, which might have occurred had demand deficiency been the problem. The contour and causes of the GFC were not just consistent with the classical theory of recession, but so too was the failure of any recovery to gather momentum anywhere in the world. This description mis-states the conclusions reached by classical economists, which we now bundle together under the heading of Say’s Law.

When the supply of and demand for money do not mesh, monetary disequilibrium can upset the smooth operation of the market mechanism and Say’s Law must be qualified. This is especially true when price and resource adjustments are sluggish.

To describe this as a qualification to Say’s Law is simply wrong, but worse, concedes almost all the ground that Keynesians need to drive public spending upwards, and not just during recessions but in every phase of the cycle.

Here is Dorn’s text on Say’s Law.

Say’s Law Is Fundamentally Right

According to Yeager (1979), “There has been too much aggregation in macroeconomics, theoretical and applied—too much of the notion of aggregate demand confronting aggregate supply. Fundamentally, Say’s Law is right: supply of some goods and services constitutes demand for other goods and services; fundamentally there can be no problem of deficiency of aggregate demand.” However, “the exchange of goods and services against goods and services takes place through money.” When the supply of and demand for money do not mesh, monetary disequilibrium can upset
the smooth operation of the market mechanism and Say’s Law must be qualified. This is especially true when price and resource adjustments are sluggish.

Consequently, Yeager emphasized that students need “to understand the tremendous importance of money in facilitating exchange and thus in facilitating the division of labor in producing
the goods to be exchanged.” In particular, they need to recognize that “money facilitates economic calculation and the comparison of costs and benefits and the signaling function of price and
profit” (ibid.).

Yeager: Market Grandmaster

Yeager goes on to argue that it is “precisely because money is so important to the working of the economic system [that] monetary disorders can have fateful consequences.” Thus, there is a “hitch in Say’s Law: Although ‘fundamentally’ goods and services exchange against goods and services, money is the intermediary in this process; and if the demand for and supply of money get out of balance, these fundamental exchanges are impeded” (ibid.).

Yeager elaborated on this idea elsewhere, explaining that an

imbalance between the actual quantity of money and the total of desired cash balances cannot readily be forestalled or corrected through adjustment of the price of money on the market for money because money, in contrast with all other things, does not have a single price and single market of its own. Monetary imbalance has to be corrected through the roundabout and sluggish process of adjusting the prices of a great many individual goods and services (and securities). Because prices do not immediately absorb the full impact of the supply and demand imbalances for individual goods and services that are the counterpart of an overall monetary imbalance, quantities traded and produced are affected also. Thus, the deflationary process associated with an excess demand for money, in particular, can be painful [Yeager 1983: 307].

Oxford University Press from out of nowhere quotes Mill’s fourth proposition on capital

This is a tweet sent out by Oxford University Press Economics.

“Demand for commodities is not demand for labour.” – John Stuart Mill

<

.
From Oxford University Press with Mill’s fourth proposition on capital – demand for commodities is not demand for labour – just thrown out for comment. So I commented:

Replying to 

The statement is true, much to the shame of modern economics. I have written an article on just this: “Mill’s Fourth Proposition on Capital: a Paradox Explained”, published in the March 2015 JHET. Ever wonder why no stimulus has ever led to recovery? Mill explained it in 1848.

As I wrote to my friend and colleague who had spotted the OUPE tweet and forwarded it to me:

From out of nowhere, really, that OUP should suddenly bring forward that quote of all quotes from Mill. Wondrous that you even saw it and thank you for sending it along. I have now added my own tweet to the rest. The destructiveness of Keynesian economics ought to be perfectly evident everywhere except that it’s not. Sad and yet funny that virtually no one today can even work out what Mill had meant even though it had been the universal view of every economist right up to the publication date of the General Theory. And I don’t mean that people disagree with Mill. I mean that no one can even explain why Mill and all of his contemporaries thought this was true so just end up befuddled but leave it alone.

Need I add that Leslie Stephen thought that Mill’s Fourth Proposition was “the best test of a sound economist”? Well, of course I don’t need to, but I will, and also add that Stephen was right and it is.

LET ME ALSO ADD THIS: From The Oz today, via David Uren:

“Average household incomes have not improved significantly since the global financial crisis in 2008-09.”

We are talking about a decade in which real incomes have not risen and during which the unemployment rate has hardly budged. I wrote this in 2008 (and published Feb 2009).

What is potentially catastrophic would be to try to spend our way to recovery. The recession that will follow will be deep, prolonged and potentially take years to overcome.

Mill’s fourth proposition is pure macro (or theory of the business cycle if you want to think in classical terms). You cannot generate a recovery from the demand side is how you might say it today. In the 82 years since The General Theory was published there has not been a single instance where this has been shown to be untrue.

Mill and the marginalists

There was a list of papers put up on the History of Economics website this week dealing with the History and Philosophy of Economics, of which the first was this, from which I have also excerpted the relevant bits for what I comment on:

Sraffa’s Silenced Revival of the Classical Economists and of Marx.
Guglielmo Chiodi (Sapienza University of Rome (IT))

The standpoint of the old classical economists as well as of Marx “has been submerged and forgotten since the advent of the ‘marginal’ method” – to borrow Sraffa’s own words. The neoclassical (or ‘marginal’) paradigm, in fact, triumphantly dominated over the twentieth century (and is still dominating even now). A serious step towards the rehabilitation of the paradigm of the old classical economists was made by Sraffa (1951) with his remarkable ‘Introduction’ to Ricardo’s Principles, his seminal 1960 book Production of Commodities by Means of Commodities (PCMC) followed a few years later, as a logical completion of his long-standing work.

After long contemplating whether I should stir up this particular hornets’ nest, in a went with my own reply. Here then is what I wrote.

A very interesting list, but I was quite struck by the first of these on Sraffa since I have been attempting the same resurrection, except that I would replace Marx with John Stuart Mill and would write:

The standpoint of the old classical economists as well as of Mill has been submerged and forgotten since the advent of the ‘marginal’ method.

The latter half of the nineteenth century was, in my view, the high point of economic theory, which is why Marx still attracts so many since he constructed his theories on the framework that had been crafted by the classical economists of his time. But much more acute was Mill whose economics may never have been surpassed. The “marginal method” shifted economics from the supply side to the demand side, bad enough in itself since it set up the advent of the Keynesian Revolution, but beyond that, removed the moral and ethical side of economic theory from the way economics was taught and understood and replaced it with a mathematical approach based on an unmeasureable and largely mythical entity called utility. The entrepreneur disappears and everything ends up determined by the relative addition to utility of increased units of particular forms of output. The human, moral and philosophical dimensions of life have vanished. Thus, if the aim is to provide “a genuine alternative perspective and a radically different representation of the economy, compared with that provided by neoclassical theory” you have no need to go to Marx, but can do it in a more sure-footed way by going to Mill.

As an example of what we might find in such a change in direction, let me provide this quote from Volume II of The Growth of English Industry and Commerce in Modern Times by W. Cunningham. Volume II is titled “Laissez-Faire” and at pages 745-46 of my copy (CUP 1912 but written much earlier) we find this:

“The economist of the early part of last century was ready to explain how the greatest amount of material wealth might be produced but not to discuss the uses to which it might be applied; he was prepared to show on what principles it was distributed among the various individuals who formed the nation, and to leave the question of consumption to each personally. But philanthropic sentiment and religious enthusiasm were not content to leave the matter there, and public opinion was gradually roused to demand that practical statesmen and their expert advisers should look farther ahead. Under the influence of these larger views, John Stua

The question really comes down to what questions a modern economist can answer that a classical economist could not, and I cannot think of any at all. As for the questions that a classical economist tried and did answer, there were many that no modern economist is able to answer, at least not within the confines of economic theory as it now is.rt Mill gave a new turn to economic study. He was not satisfied with discussing mere material progress. He could contemplate a stationary state with calmness; he could not but dwell with bitterness on the great misery which accompanied increasing wealth; and he tried to formulate an ideal of human welfare in his chapter On the Probably Futurity of the Working Classes. In this way he succeeded in indicating an end towards which the new material resources might be directed, and thus restored to Economics that practical side, w

hich it had been in danger of losing since the time of Ricardo. It is important that we should have a method of isolating economic phenomena and analysing them as accurately as may be, and this Ricardo has given us; but it is also desirable that we should be able to turn that knowledge to account, – to see some end at which it is worthwhile to aim, and to choose the means which will conduce towards it; this we can do better, not merely intuitively and by haphazard, but on the reasoned grounds, since the attempt was first made by Mill.

The question really comes down to what questions a modern economist can answer that a classical economist could not, and I cannot think of any at all. As for the questions that a classical economist tried and did answer, there were many that no modern economist is able to answer, at least not within the confines of economic theory as it now is.

It is possible that economics could once again become useful

The entrepreneur is the missing ingredient in economics about which I have written. What cannot be linked is the paper I did on “The Absence of the Entrepreneur in the Economic Theories of the English-Speaking World”. What there is a link for is Origin and Evolution of the Term “Entrepreneur” in English, unpublished alas but available online.

But when it comes to the study of entrepreneurship, the names that matter are William Baumol and Israel Kirzner. Baumol has unfortunately gone to his reward, but Kirzner, bless him, at 88 has now been formally recognised by the American History of Economics Association. The citation below virtually leaves out his work on the entrepreneur but still does focus on his Austrian perspective. But even in awarding him the Distinguished Fellow Award, they also added, “our recommendation is, of course, based on his scholarly contributions and not on his political views”. Heaven forfend that that anyone should think that his political beliefs should matter, but you may be sure that they did. Nevertheless, here we are. There is also finally recognition that mainstream economics has no penetration in allowing us to understand how an economy works. A straw in the wind, but a good sign all the same.

The 2018 HES Distinguished Fellow Award was presented to Israel Kirzner at the recent HES conference at Loyola University, Chicago. Several strong candidates were proposed by the membership this year. The nominating committee, formed by Robert Leonard, Jeff Biddle and Mauro Boianovsky (chair), unanimously agreed that the most deserving of these candidates was Israel Kirzner and recommended to the HES Executive Committee that he should be the recipient of the HES Distinguished Fellow Award in 2018. The nominating letter was submitted by Peter Boettke, together with supporting letters by Bruce Caldwell, Karen Vaughn and Mario Rizzo. Our recommendation resulted from our consideration of several aspects of Kirzner’s work and career.

Born in 1930, Kirzner is well known as a leading scholar in the Austrian economic tradition. His work forcefully illustrates how the history of economics can be used as an important heuristic tool to cast light on current economic research. In that sense, Kirzner shares with members (e.g. Stigler, Robbins, Dobb, Viner, Galbraith, Schumpeter, Hayek, Patinkin and Sraffa) of what Craufurd Goodwin used to call the “Golden Age” of the history of economic thought (HET) a commitment to understanding economic problems through the use of HET as an analytical device instead of a separate sub-discipline. As put by Bruce Caldwell, “precisely because he works within the Austrian tradition, Kirzner often draws on history to make comparisons between the view he endorses and those he criticizes, and often the criticisms are methodological”. This shows especially in his main books The Economic Point of View (1960), Essay on Capital (1966) and Competition and Entrepreneurship (1973).

The highlights of Kirzner’s specific contributions to the history of economics are his 1994 edition of Classics in Austrian Economics (which includes a number of essential translations) and several essays on Von Mises and particularly Carl Menger. As pointed out by Karen Vaughn, Kirzner has been instrumental not only in explaining Menger’s ideas as the founder of Austrian economics, but also in encouraging a revival of interest in his writings. Moreover, as observed by Mario Rizzo, Kirzner is not just a historian of Austrian economics – for instance, in his works on the theories of profit and capital, Kirzner discusses carefully contributions by J.B. Clark, F.B. Hawley, F. Knight, I. Fisher, J. Schumpeter and others.

Kirzner has produced a body of work deeply imbued with a historical-philosophical sensibility. Although our recommendation is, of course, based on his scholarly contributions and not on his political views, it should be noted that Kirzner has shown that it is possible to combine political beliefs and scholarly scruple, and that this has been a source of inspiration for his followers, in whom we see that same attitude perpetuated.

The economic role of saving

There are two ways to understand the word “saving”. It is either:

(1) deferring the use of one’s purchasing power to a later date

OR

(2) that part of the capital, labour and other existing resources of a community that are used to maintain and extend the productive apparatus of an economy.

If you confuse (1) with (2) you will never understand how an economy works. (1) is of course modern and Keynesian, while (2) is classical and Austrian.

But these things are very very difficult to keep straight in the midst of analysis unless you really have the distinction absolutely clear.

Let me therefore take you to a sad example of how these issues became muddled in the midst of an interview with an Austrian economist who was trying to explain (2) to someone who thinks only in terms of (1). This is the title, Our Obsession with Consumption — while Ignoring Saving and Investment — Is a Big Problem. I have adopted his explanation from his Austrian treatment and translated into how things would be looked at from a classical perspective.

In economics today very little attention is given to the role of savings. This is a very curious situation.

There can be no production without prior saving.

Nature on its own provides us with only very few consumer goods eg apples on a tree.

For anything more, we must first produce the goods that we then afterwards can consume.

But to produce these goods we must first devise and construct tools, instruments or machines.

But to devise and construct tools, instruments or machines we already need a stock of already existing tools, instruments or machines. This stock is what is meant by “saving”.

Without prior savings no increase of future consumption is possible.

But then the interviewer asks this question, which transfers the issue from (2) to (1).

Do the current saving systems for retirement in the West work? If not, with what should they be replaced?

Suddenly the issue is about the future real potential purchasing power that lies behind money saving in the present. And from there the conversation never gets back to the need to widen and deepen our productive capabilities. They do go on to discuss who should make the decisions on what capital to build but by then it is too late.

The real problem for me is that even the interviewer, who was trying to provide soft questions so that the issues could be explained clearly, was too muddled himself and never allowed the interview to go where it needed to go, so another opportunity to make things clear disappeared.

The ongoing scandal of modern economic theory

Here’s the sub-head: Economists show increased research efforts are yielding decreasing returns. And if they mean negative returns, then I am with them all the way. Economic theory is at a lower level of competence today than in the 1850s. It is such a scandal, but once a subject matter falls into a hole the way economic theory has done, it is near on impossible for it to find its way out. The conclusions drawn from modern theory are literally classical fallacies. An economist raised any time between say 1776 and the 1930s would look at a modern text and disagree with almost every word. There would be almost no overlap between anything found in a modern text and a text written before 1930.

I wrote a paper, published by the skin of its teeth in 2015, on John Stuart Mill’s Fourth Proposition on Capital: “demand for commodities is not demand for labour”. You cannot increase the level of employment by increasing aggregate demand. Everyone once knew this. No one now does. Not one economist in a thousand can any longer understand what was plain as day for a century and a half. We keep growing because we keep inventing things. But the generation that is following behind us will find their living standards falling into a great pit, and the last place anyone will be able to find out why will be from economists.

I have mentioned this already, but perhaps another look might be of interest: What is the difference between Keynesian and classical economics? which is a reply I put up on Quora. Go have a look.

Then there’s this I did not so long ago on marginal analysis which, as presented in a modern text, is as near to empty of content as a theoretical demonstration can be. This is how I look at it which is also classical to its bootstraps.

The diagram represents my own version of the marginal revenue and marginal cost diagram. The traditional version has a series of lines many of which can never be realistically drawn (such as the demand curve), with the ultimate point to show the price-quantity configuration for the sale of a single product. The conclusion is that if a firm wishes to maximise profitability on the sale of some good or service, it will price the product just exactly where a lower or higher price would lead to a lower return over cost. Fatuous and useless, with many bits of the real world left out, such as the actual ability to work out the effect on revenue of changing a price. Modern micro truly is as useless as modern macro.

The above diagram – discussed fully in my Free Market Economics – brings in a number of crucial factors:

  • it is about whether some decision should be made rather than deciding on what price to charge
  • it is about trying to make a decision in the face of a future that can never be foretold but is filled with endless uncertainties
  • it recognises that there are costs that almost invariably must be borne before there is a return [Area A]
  • costs continue even after revenues commence and only eventually, in a profitable venture, will revenues exceed costs [when B = A]
  • the point of origin is the present moment when some decision must be made – all of the lines drawn are the expectations of the decision maker
  • reality may turn out to be much different, with losses instead of a net positive return
  • only when total revenue and total costs are equal – that is, when the expected addition to revenues is equal to the expected addition to costs (when MR=MC at the moment the decision is made) does the firm go ahead with the venture

This is the way a business, or anyone else for that matter, makes a decision: in the present with only one’s own conjectures as a guide.

I will lastly mention a very nice note I received the other day:

Steve

Just finished reading your book Free Market Economics and wanted to congratulate you.

I have read plenty of economic texts, but yours is the best by far and helped crystalize a number of things that have been swirling around in my mind.

Great work.

It was truly appreciated. You can get a copy for yourself right here. I didn’t make any of it up myself. It is just a distillation of classical theory, the economics of John Stuart Mill and his contemporaries. It’s never been improved on and I doubt it ever will be. But so what. It is a massive improvement on that junk science we go around teaching today.

Me – a different me – in 1968

Where was Jordan Peterson then to tell me what I needed to know:

“It’s what I tell 18 year olds. Six years ago you were twelve. What the hell do you know? You’re under the care of the family or the state, you haven’t established an independent existence, you haven’t had children, you haven’t started a business, you haven’t taken responsibility for anything, you don’t have a degree, you haven’t finished your course, you don’t know how to read, you can’t think, you don’t know how to present yourself, well Jesus, it’s not right to tell people in that situation that they should go out and change the world.”

And while this was taken in Toronto well before I came out to Oz, the hat I am wearing was an Australian soldier’s slouch hat which I wore for many years!

The difference between Keynesian and classical economics

Just posted on Quora in answer to the question: What is the difference between Keynesian and classical economics? There are 13 other replies which not much more than prove to me that no one without a truly specialist knowledge of classical theory would have the slightest idea what an economist between the late eighteenth and nineteenth centuries would have understood about anything in relation to the operation of an economy. Their ignorance of what classical economists believed is matched by their ignorance of how an economy actually works. Anyway, this is what I wrote.

The differences between classical and Keynesian economics are so vast that to accept one version of how an economy works means you must reject the other. Classical economic theory is the theory that was developed between let us say 1776 and the 1870s, almost entirely by philosophers and business people who were actually looking at the economy. Modern economic theory has almost entirely been developed within universities by people who have neither a philosophical training nor have ever run a business as their primary mode of earning a living.

Here’s the difference. Classical economic theory begins from the existence of a market economy in which, on one side of the equation, there is a mass of people who would like to buy goods and services, and on the other side there are people who would like to earn their living by producing and selling things to others. The producers continually try to work out what to produce that others will buy, and do it by trying to decide what buyers will pay enough for in total to cover their production costs. These producers hire employees and the combined incomes of producers and wage earners become the purchasing power of the community.

Classical economic theory is thus entirely supply-side driven. And what is particularly interesting about reading the classical literature is that government regulation was an important part of how the economic system worked. The very first Factory Act in Great Britain was introduced in 1802, and there were many others that came after. The notion that classical economics was simply leave everything to the market is 100% wrong. If you look at the greatest economics text of the era, John Stuart Mill’s 1848 Principles of Political Economy, the final 200 pages are devoted to discussing the role of government in ensuring that economic activity was carried out in a morally acceptable way to the benefit of the entire community.

But crucially, classical theory assumes the role of the independent entrepreneur as the linchpin in making an economy work. Try to find a modern economic text that starts from there. Other than my own – Free Market Economics, Third Edition – none of the major mainstream texts starts from the supply side and none – as in zero – feature the role of the entrepreneur.

Keynesian economics assumes economies are driven from the demand side. That is, it is buying goods and services that makes an economy grow and employ, not their production. It is based on the total confusion between the demand for a single product – the greater the demand for shoes the greater the production of shoes will be along with the greater the level of employment for shoemakers. Demand affects individual products; demand in aggregate does not affect the level of output in total. The more that is produced, the higher the level of demand, for the obvious reason that the more that is produced, the more there is that buyers are able to demand. But if you are a Keynesian, you will go on believing that the cause of higher output is higher demand, whereas the reason more can be demanded is that more output is being produced. Public spending may have many benefits, but increasing the level of income and speeding up the rate of economic growth is not one of them. If anything, higher levels of public spending slow things down and lower real incomes below levels that otherwise would have been reached.

Keynesian economics is based on the fallacious belief that buyers will not buy as much as an economy can produce, and therefore demand must be stimulated to ensure everything produced is bought and that everyone who wants to work is employed. A great theory if you are in government and need a justification for taking as much money as you can get away with from income-earning citizens and spending it yourself. But a pernicious theory if you are interested in raising living standards as rapidly as possible.

 

A lesson in trade theory

“Every economic answer is a political question.”

Here then is a question for all you experts on international trade, taken directly from my Free Market Economics [pp. 248-249]. Picture two countries, A and C.

Suppose in Country A, in one hour it can produce either one car or 1000 shirts. [It’s also the same answer if Country A can produce ten cars and 10,000 shirts per hour!]

Meanwhile in Country C, in two hours it can produce either one car or 500 shirts.

According to the economic theory of comparative advantage, how many cars will Country A produce? OK, once you’ve worked that out, now tell me if you get the same answer using common sense. As chrisl said, “economic theory is all right in theory”. Personally, I’m not even sure of that, but you get the idea.

So here’s the thing. It is entirely possible that the US is tired of carrying most of the burden for the defence of the West and would like a bit of sharing the burden. It might also find some respite for itself in strengthening those parts of its economy which are more closely associated with its defence industries. And it might even wish for some kind of gratitude from others, supposedly on the same side, in trying to assist the US in resurrecting its strength. And then there are the straightforward economic issues, which are not the same as the political. So let us go to these.

And of course the issue economically is comparative advantage, and not pure let the most efficient producer produce each product. With comparative advantage, it is not always the most efficient low-cost producers who produce. If you don’t even understand that, you should keep right out of this debate.

Why encourage free trade:

  • competition is what drives improvement and growth – without competition most businesses would just coast along to the fullest extent they could
  • innovation is driven by competition – the way to take on an established business is to find a better way to do something
  • all other things being equal, free trade is best

Why “free trade” is not working for the US:

  • cheating is rife – try to sell an American car in Japan – not possible for all kinds of products in all kinds of countries
  • many countries subsidise exports while imposing non-tariff barriers to trade on imports along with tariffs themselves
  • currency manipulation – artificially holding exchange rate lower to discourage imports and encourage exports is not unknown
  • $US is world reserve currency it is unable to adjust to repair a balance of payments deficit
  • there are many forms of approved trade restrictions everywhere you look – the EU for example – such as:

Trading blocs

A regional trading bloc is a group of countries within a geographical region that protect themselves from imports from non-members. Trading blocs are a form of economic integration, and increasingly shape the pattern of world trade. There are several types of trading bloc:

Preferential Trade Area

Preferential Trade Areas (PTAs) exist when countries within a geographical region agree to reduce or eliminate tariff barriers on selected goods imported from other members of the area. This is often the first small step towards the creation of a trading bloc.

Free Trade Area

Free Trade Areas (FTAs) are created when two or more countries in a region agree to reduce or eliminate barriers to trade on all goods coming from other members.

Customs Union

A customs union involves the removal of tariff barriers between members, plus the acceptance of a common (unified) external tariff against non-members. This means that members may negotiate as a single bloc with 3rd parties, such as with other trading blocs, or with the WTO.

World Trade Organisation

There are then the WTO rules of trade engagement which are not designed to create a world where free trade is on the only answer. The rules were devised when the US economy was a lot more robust than it now is, and when the US was both willing and able to make sacrifices of all kinds to help others withstand the spread of communism. None of this is applicable today. The US is therefore no longer willing to watch others cheat their way into a stronger trade position, at the cost of its own national security, economic strength and domestic employment. Here is part of what the WTO is up to.

WTO Rules

1. Most-favoured-nation (MFN): treating other people equally Under the WTO agreements, countries cannot normally discriminate between their trading partners. Grant someone a special favour (such as a lower customs duty rate for one of their products) and you have to do the same for all other WTO members.

2. National treatment: Treating foreigners and locals equally Imported and locally-produced goods should be treated equally — at least after the foreign goods have entered the market. The same should apply to foreign and domestic services, and to foreign and local trademarks, copyrights and patents.

3. Developing countries have transition periods to adjust to the more unfamiliar and, perhaps, difficult WTO provisions — particularly so for the poorest, “least-developed” countries – so these basket case economies are allowed to whittle away at the economic strength of the developed world.

Meanwhile, economic ministers around the world increase unproductive public spending every chance they get, add new regulations on top of old, and increase business taxes at every turn, and then job on their chairs screaming, “Eek, a tariff!’

The quote at the top, by the way, is from Joan Robinson, who has quite a lot to say about free trade that ought to be read by the economic illiterates who populate the world, who are now found speaking on behalf of the status quo, as harmful as the status quo is to most of the lower half of the income distribution. Robinson was not just a Keynesian but also a big supporter of Mao, so I’d be very careful, but the above quote seems as accurate as anything else you are likely to hear about economics.