I missed this post by Lumpenproletariat.
The trade deficit is not a problem, is not a debt, and needs no solution.
Where do you get these ideas? They are crazy enough and so far from reality to be Austrian/Libertarian ones.
Of course, the trade deficit is debt and it adds the US national debt. The clearance, settlement, of foreign exchange--
- Lumpenproletariat buys a cellphone manufactured in China.
- The store buys the phone from the Chinese manufacturer for $100.
- The Chinese manufacturer needs yuan to pay his workers and to buy raw materials, parts and sub-assemblies.
- He goes to his local Chinese bank and exchanges the $100 for ¥800. (Or whatever the exchange rate is.)
- The local bank has no use for dollars so they exchange them for yuan, in their equal to a member bank, a bank's bank.
- The dollars eventually end up in the Bank of China, the Chinese central bank.
- Periodically the BoC goes to the Federal Reserve in the US to convert its dollars into the yuan that the Chinese economy needs.
- The Federal Reserve exchanges any of the yuan that it has for the dollars with the BoC.
- If China has a absolute advantage in trade over the US, the Fed will run out of yuan before the BoC runs out of dollars.
- This is known as a trade deficit, (or a current account deficit, more properly.)
- The question is if the Fed can't exchange yuan for the dollars that China needs, what will the Fed use to exchange for the BoC held dollars?
- The answer is that the US Treasury will issue brand new Treasury Bills to the BoC for the dollars that they hold.
- The value of the T-Bills allows the BoC to create 8 yuan for each dollar in T-Bills that they hold.
- And what are T-Bills?
- They are the national debt of the US. QED.
If you still believe that the trade deficit isn't new national debt, then please explain how you think that the countries settle up the imbalance in currencies created by the trade deficit.
The only explanation that I remember that made the same claim that you did, that the trade deficit isn't debt, was an article on fee.org by an Austrian economics professor at George Mason University who claimed that the T-Bills that China receives for their dollars to settle our trade deficit with them are actually investments in America, not American national debt. I am not sure if the Austrian economics professor would consider federal government budget deficit, financed with T-Bills, to be investments in America and therefore, not debt.
You have to read Austrian/Libertarian economics if only for the entertainment value. They are so clueless that it is funny.
I am sorry if this is the argument that you were going to make. If so at least I saved you from embarrassing yourself.
(continued from previous Wall of Text)
Neoliberalism explained 3 - Free trade and comparative advantage]
4. It [comparative advantage theory] assumes away returns to scale.
It is important to understand that the theory of comparative advantage relates to what economists call opportunity costs, not to absolute costs. The opportunity cost of two mutually exclusive alternatives is the benefit that would have been gained from the alternative that is not chosen. Investopedia has examples of this.
Returns to scale is the driver of the industrial revolution. The natural and desirable course is for the most efficient, lowest cost producers to grow larger, providing them profits to become even more efficient, squeezing out less efficient competitors. We are referring to absolute, not opportunity costs here.
There's really no difference between the two. The term "opportunity cost" is redundant, even though it has some usefulness. There's no such thing as "absolute cost" vs. "opportunity cost" which applies to choices about the economy or business -- ALL the choices, including those which produced the industrial revolution, were "opportunity cost" choices.
You can't give an example where an "opportunity cost" choice was not the "natural and desirable course" assuming that it was based on correct information.
That is easy. The only time that a company will take the choice based on the comparative advantage between nations is if they are forced to because of limited resources available in the economy that is running at full capacity utilization and at full employment. In general the only time that a company will take the comparative advantage option is when the company is resource bound.
I gave you a link to investopedia that gives examples. You edited out the url from the paragraph that starts "It is important to understand ..." It is
http://www.investopedia.com/terms/o/opportunitycost.asp
Opportunity costs are different than absolute costs. Comparative advantage does rely on comparative costs. According to the way that you debate this is all that I have to say. With no explanation, because you never explain your declarations.
I have somewhat lost your argument in the mass of your often contradictory verbiage. Denying the existence of opportunity cost, for example, isn't the best way to support the idea of comparative advantage. Are you defending comparative advantage as the explanation for providing mutual benefits for all of the nations involved in free trade or not?
Sometimes it seems that you are but at other times, not so much, you seem to fall back on the "free trade is good because free is good and not free is bad" type of argument. Or the often repeated argument that free trade is good because it lowers costs for those who still have jobs and can afford to buy things, so what if some people lose their jobs, we are only concerned about job losses if you try to raise the minimum wage. In the duplicity that is a hallmark of neoliberals every acceptable action is one that results in higher profits and the incomes of the rich and the only unacceptable actions are those that raise wages and lowers profits.
Comparative advantage with its focus on opportunity costs actually stops industrialization's path to efficiency and maximizing returns to scale.
No it does not. You can't give an example.
As we learned from the Galbraith quote comparative advantage requires constant returns to scale. I know that you are having problems with opposites right now, for example, "comparative" verses "absolute," but these are opposites.
From other comments that you made it is obvious that you didn't read the quote or that you didn't understand it so I will repeat the pertinent part of it here.
Comparative advantage operates on the assumption of unchanged technology and constant returns to scale. There are no economies of scale, no learning curve, no improvements in productivity as output increases. The only requirement is that conditions of production differ, so that one good in terms of the other is relatively more expensive in one country and relatively less so in the other. The only efficiency gained from trade stems from the reorganization of production and the reallocation of factors labor, capital, land to their best uses in the new, larger, common market.
In other words, if you have a situation in which you improve the efficiency in production it will defeat comparative advantage. Technology doesn't have any borders. Then, absent an absolute advantage, it becomes a simple race to determine who is the lowest cost producer, not any difference between nations.
For example, in the most obvious example of selecting the most advantageous opportunity cost instead of pursuing the lowest absolute cost, moving manufacturing to a low wage country stops the pursuit of more efficient manufacturing through say automation.
But "automation" is not "more efficient" if it costs more for the same output. There's nothing wrong or unnatural or undesirable about choosing cheap labor over automation, if the cheap labor is less costly. Eventually a new technology might be more cost-efficient, but before then it's better to do the production with cheap labor.
Whether you call it "opportunity" cost or "absolute" cost, the new technology is not "more efficient" if it costs more to produce the same output. If those machines are more costly than the cheap labor, then they are LESS efficient, regardless of the jargon.
You are correct, that no one will use automation to replace manpower if it is more expensive. But the development of automation will be delayed.
So you can't give any real example where "Comparative advantage with its focus on opportunity costs actually stops industrialization's path to efficiency and maximizing returns to scale."
Am I to take your example of providing support for your many conflicting ideas? If so, then like you I don't have to provide any, do I? I did provide the Galbraith quote, which you apparently didn't read. In any event, I explained the quote in relation to your point here already in this response, above.
It provides profits without forcing the capital gained from the profits having to "work" hard.
To "work hard" for what? Are the machines to run at maximum capacity even if they're not needed? or even if they cost twice as much?
No, are you a child? I mean that neoliberalism by intentionally suppressing wages in this country by exposing our workers to competition from low wage countries, i.e. through globalization, makes profits too easy to earn. That companies aren't forced to invest and innovate to earn profits.
So, to take the "natural and desirable course" the company must spend the profits on more machines instead of hiring people? and hiring people instead of building more costly machines is unnatural and undesirable? Even if the machines are less efficient and would mean higher prices to consumers, still the company should spend it on machines so the profits will "work hard"? So, making the profits "work hard" takes priority over any benefit to consumers or the welfare of the country?
This is childish babble. You are approaching becoming unhinged.
It leaves the additional profits with nothing to do.
So we need to build more machines, not to serve consumers but in order to provide something for the profits "to do"? So the machines are built not in order to produce something for consumers, but to provide an outlet for the profits? so these will "work hard"?
Seek professional help.
This is very dangerous, as we saw when some of this "lazy," excess capital found its way into the home mortgage market through unregulated financial derivatives. They triggered a financial market collapse that nearly destroyed the world's economy in 2008.
So the way to prevent another financial market collapse is to force companies to spend their profits on unneeded machines? because this gives those profits something "to do" to keep them out of mischief? -- always build more machines, no matter what? so if possible wear down the existing machines more quickly, or better, pay some terrorists to blow them up -- get rid of them somehow so additional profit can be spent on still more machines? because otherwise that profit is "lazy" or has "nothing to do"? So building excess unneeded machines in order to give the profits something "to do" instead of being "lazy" is what "returns to scale" means?
Tell the mental health professional of your choosing that you can no longer separate reality from your delusions.
The financial markets are inherently unstable. The more money that is put into them, the faster money is put into them and the more they are deregulated or not regulated, the more unstable they are. We learned this in 1876 and again in 1890 and again in 1921 and again in 1929 and yet again in 2008 and many more times than I can remember off of the top of my head.
Well it won't happen again -- because we'll make them build lots of new unneeded machines, and then blow them up so they have to build even more, and this will absorb all the excess profit so they can't put it into risky home mortgages.
Sounds like a plan!
Take a toothbrush with you to your first session, you will need it when take you away for your "rest."
There are many examples of Free Trade Enthusiasts, FTEs, on this board quoting comparative advantage . . .
But not necessarily your distorted version of comparative advantage.
. . . as the support in economics theory for free trade.
But it's NOT "the support in economics theory" for free trade, unless "free trade" simply means ALL trade that's permitted to take place -- i.e., this theory is also "the support" for ANY trade that goes on, such as buying from your neighborhood store. Comparative Advantage just explains the benefits of specialization or division of the work, for any kind of working or trading and marketing something. It's about the trade going on WITHIN the borders as well as ACROSS borders.
My version of comparative advantage is distorted and you don't believe that opportunity costs are any different than absolute costs? Are you trying to be funny or you can't help it?
I don't know when this was written by you. I have answered this before to you in other posts. I will summarize.
I agree with your definition of comparative advantage. I agree that it exists.
But comparative advantage is seen rarely in the real economy. Firms have to be forced into using it because they prefer having an absolute advantage. A firm might be forced into using it because they face limited resources for some reason, limited skilled manpower or capital and credit, for example.
What I disagree with is that comparative advantage exists between nations and that it justifies free trade between nations. For this to be true some degree of and some combinations of all of four questionable assumptions would have to be true.
No matter how "comparative advantage" is defined, there's nothing about it which says it's limited only to trade between nations. It's about ANY trade, locally as well as across long distances. It explains the advantage gained by each producer's role being limited to one specialty, or one part of the production, to get good at doing that role, and then reliance on others to do other parts, so each gets good at the particular work they specialize in.
Asked and answered. Summary: I do accept your definition of comparative advantage. It can be used between firms but it isn't common. It most certainly isn't used in every trade. That is you going off of the rails. It is about specialization but even specialized firms prefer to establish an absolute advantage, which is the opposite of a comparative advantage. The clue is that the words "absolute" and "comparative" are antonyms, opposites.
I would be willing to bet that the vast majority of the FTEs here didn't understand these assumptions that comparative advantage theory relies on, . . .
But it does NOT rely on these assumptions. The benefits of comparative advantage happen regardless whether the trading conditions conform to these 4 assumptions or not.
I understand your confusion on this point, but considering that you don't believe that there is any difference between comparative and absolute advantage, and that you obviously don't understand the difference between opportunity and absolute costs, even after these have been explained to you repeatedly, I don't know what more I can say. There must be some reason that you are intentionally not understanding these relatively easy to understand concepts.
At this point I am not sure if you are even attempting to make a coherent argument. It seems as if all you are doing is arguing with anything that I say utilizing the middle school approach of stomping your feet insisting that whatever absurdities come into your mind are correct, even if you contradict yourself in the next paragraph or post. I feel like I could say that the sun will come up tomorrow and you would argue that it won't.
This assumptions don't have to be true for comparative advantage to work for individuals, which, by the way, includes individual companies. But they do have to be true for comparative advantage to guarantee nations participating in free trade both benefit from the trade. For example, if the two economies involved in the trade aren't operating at full employment and full capital utilization there will nothing to force a company into accepting the lower profits from comparative advantage option. It has to assume nearly constant returns to scale because either returns to scale or diminishing returns doesn't produce the incentive to accept comparative advantage.
Speaking of your absurdities, read on.
. . . much less how easily those assumptions are shown to be unrealistic.
Then all specialization is unrealistic. To say comparative advantage is unrealistic means there is no benefit from people specializing, which is the whole point of comparative advantage. The work is divided among different specialized workers/producers who each is good at his/her specialty, meaning we don't each service our own car and grow our own food and build our own house and build our own roads and make our own furniture and appliances, etc., but each does one special work, getting good at that one specialty, and leaving other parts of the production to others.
So if comparative advantage theory is unrealistic, that has to mean it's unrealistic for us to specialize, and so the assignment of specialized jobs to different workers/producers in the economy is unrealistic, because of the 4 unrealistic assumptions.
These 4 assumptions of "comparative advantage" apply to ANY TRADE whatever, such as buying from the neighborhood store, and if they're unrealistic, that means there's no "support" for buying at that store, or for virtually any trading whatever and so there's no advantage to those buyers and sellers, because all trade "relies" on the unrealistic theory of comparative advantage as the "support" for it, meaning there is no advantage to doing any trade with anyone, not even the store down the street.
Here again are
the 4 assumptions of comparative advantage, said to be unrealistic -- And because these are unrealistic, you gain no advantage by shopping at that neighborhood store, because the following assumptions must be the case for there to be any advantage to you in shopping or trading there or trading with anyone anywhere:
assumption 1:
The theory assumes that the trade is between nations. . . . Like many things in economics what is true for individuals isn't true on a larger scale, in this case, for nations.
And also for that store down the street, which is a company, not an individual, so you can't trade with them, because there's no advantage to any trade between groups but only between one individual and one other individual.
assumption 2:
It assumes full employment and full capacity utilization in both nations.
So you can't shop at that store down the street because they have some un-utilized empty space they haven't put to use yet.
assumption 3:
It assumes the existence of an automatic mechanism to equalize the trade balances.
So you can't shop at that store down the street because that would increase the trade imbalance you have with that store (which sells to you and doesn't buy from you) and there's no "automatic mechanism" to equalize this trade imbalance.
assumption 4:
It assumes away returns to scale.
Meaning "absolute cost" overrides "opportunity cost" and so therefore it's always better to build new machines than to hire new workers.
So you can't shop at that store down the street because they hired new workers when they could have built new machines to do that job at twice the cost, i.e., when they should have put "absolute cost" over "opportunity cost" and built new machines instead.
. . . much less how easily those assumptions are shown to be unrealistic.
So all trading is unrealistic, not just trading across borders, but also trading within your state or town, or with a neighbor.
. . . unfortunately this they share with the majority of economists in the US.
So most economists don't know that it's unrealistic for people to trade, e.g., to shop at the local store, because they don't know the unrealistic assumptions which this shopping "relies" on for its "support" in economic theory. If those economists knew the Truth, they'd know, e.g., that it's always better to build new machines rather than hire new workers, even if the machines cost more in order to produce the same output, because hiring the lower-cost workers "assumes away returns to scale" and so is unrealistic and less important than saving on "absolute cost" by building more machines.
What's the point of wasting resources on serving consumers and raising the living standard, when instead you can invest those limited resources into building new unneeded machines? and blowing up the excess machines, if need be, to make room for more to be built, to increase the "returns to scale"?
Someone needs to enlighten these ignorant professional PhD economists -- maybe also give them something new to smoke -- so they can tune in to these bold new insights about how the economy really works.
So, what is the inspiration for these revolutionary new insights?
This is nothing but babbling. I never said any of these things. You are unhinged. Get help.
You didn't respond to the remaining section that listed my references, from, as you term them, "the ignorant PhD economists," so I deleted them from this response to you.
