Ricardo and Morality

There is a nice Wikipedia article about "comparative advantage". It even cites one of the newest works by Economist Ha-Joon Chang where he argues that this idea worked adversely for developing countries.

I've decided, after seeing a lot of shoddy and self-serving economic research being passed off as science that we need to take a new approach. The era of the MBA and the bottom line has to come to an end.

Trade is based upon a theory that both parties will benefit if certain minimal conditions of fairness are maintained. These conditions are called the "free market". One of the bitterest areas of disagreement is over exactly how "free" this market is. There are three schools of thought on this:

1. The ideologues (especially the libertarians) who claim everything will work out for the best if government just gets out of the way. This is, of course, a utopian fantasy - the reality of this type of "free" market is anarchy and might makes right. Every human interaction needs rules of conduct and a way to enforce them. Those who make and enforce the rules are called "government". In the best case this government is democratic and reflects the will of the people.

2. The transnational companies who benefit from trade. Their operation depends upon obtain something below market value and then selling it elsewhere for more. If this wasn't so they wouldn't need to trade at all. Make the shoes in Detroit not China and sell them in Detroit. That's the way it used to be: small settlements had their own bakers, shoemakers, etc. Trade was generally restricted to raw materials that could only be obtained in special places, like spices. Because these traders are cheating one group for their own benefit it is important that they disguise this fact, so they adopt the rhetoric of the first group and claim that trade benefits everyone.

3. The realists. This group (which has been growing, especially in the developing countries) looks back at the history of trade and sees that they have consistently gotten the short end of the stick. Originally it was by coercion during the colonial and gunboat diplomacy days, but now the buzz word is "soft power". The fact that the old stories aren't been accepted any more is why the latest round of international trade negotiations have stalled.

So what about comparative advantage? If I buy from you and you gain ten cents while I gain a dollar Ricardo said this is to both our benefits, so we should do it. But what it really means is that I'm getting your labor for a price I couldn't get locally. This is where the moral issue comes in. Why should an hour of work in China be worth less than an hour in the US? Excuses about supply and demand or the standard of living or the degree of development are just that, excuses. They are a way to apply cost benefit to the golden rule and are immoral.

Even the most ardent supporter of "fair" trade isn't willing to go so far as to demand that people be treated as being worth the same everywhere. They are willing to allow large disparity as long as local standard of decency are maintained. So the Chinese shoemaker gets paid enough to live on (as long as he consumes mainly rice) and sits in an unheated or unventilated factory, while the corresponding American has a decent minimum wage and government enforced rules about workplace health and safety.

There are even studies which claim to show that paying local workers too much above the prevailing wage disrupts the local economy and makes things worse. Higher wages cause people to leave the land and cause local employers who don't get their income from trade to become uncompetitive. The higher wage earners can also buy more which tends to push up the cost of everything, creating inflation. The cure for this type of dislocation is more restriction on trade, not less.

If firms selling abroad can dislocate the local economy then export tariffs are needed with the income from them used to ameliorate the dislocations being caused by trade. This is the point made by Ha-Joon Chang who cites a number of historical examples where such policies were used by governments to foster overall development.

So what is to be done? We obviously can't make everyone as rich as those in the developed countries, especially over night. I think that the best that can be done over the short-term is to be honest about what is going on. Those who are distorting the benefits they will get from trade need to put in their place. Sunshine, ridicule and shame are the best approaches for this.

Then trade needs to be considered not only comparatively, but absolutely. Forcing growers in Africa to raise flowers for the European market makes them dependent on using money to buy the essentials for their own society from elsewhere, while the shoppers in Europe are getting a luxury in return. This sort of trade should be restricted as long as local economies are not self-sufficient (this is not the same as independent of imports - it means that their internal economic activity is large enough to sustain the society.)

In addition there needs to be an international agreement on the size to which firms can grow, not just their market share. There are too many firms that are now larger than most national governments. How can a small country get a fair deal when the firm it is negotiating with is bigger than it is? This should be a new role for the WTO. Even the idea of transnational firms might be reconsidered. If trade is such a good idea that Exxon USA can trade with Exxon Indonesia, there is no reason they have to be owned by the same entity. Many countries, especially the larger developing ones, like China and Russia put restrictions on foreign ownership. Why not make it a universal prohibition? There are lots of ways to participate in foreign deals without ownership.

When a transnational owns a subsidiary elsewhere whose interests are they pursuing, there own, the home countries, or the foreign state? They weren't called banana republics for nothing - the puppet regimes were run by United Fruit.

How can all this come about? As I frequently state, "might makes right" is the operative rule, especially in international relations. It seems that there may have already arisen enough of a counter force so that untrammeled trade is a thing of the past. The power of OPEC has been recognized for a long time, but the newly independent states in Latin America are flexing their muscles, as are those in China and India. It is time for the rest of the world to make the western powers an "offer they can't refuse". A combination of getting pushed out of existing areas (see BP in Russia and Shell in Iran) and buying assets from companies in distress has already shown the way.

Western governments need to wake up to the fact that they no longer call all the shots and stop being the thug enforcers for the interests of the transnationals. A bit of humility combined with some morality can go a long way.

Moral: The golden rule does not state "do unto others...as long as it is cost effective".

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If you have any comments or for further discussions email me at robert.feinman@gmail.com
Copyright © 2008 Robert D Feinman
Feel free to use the ideas, but the words are mine.