Neoliberalism explained 3 - Free trade and comparative advantage

[Lumpenproletariat]

Why is Wacko-Babble Economics the only source for debunking Comparative Advantage and Free Trade?

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This is why the Ricardo stretch has to assume full employment and full capacity in the whole economy, because this is the only situation that forces company [A] and all of the companies in the economy to use another company's production of factors.

But Ricardo's theory does not need any such "situation that forces company [A] and all of the companies in the economy to use another company's production of factors." You are hallucinating such a need in Ricardo or in comparative advantage theory.

Where did you get these "4 assumptions" such as the requirement for full employment and full capacity? Where does Ricardo assume any such thing?

You never give any source for this. Yet some such incoherent babble does exist, but it's hard to find. I found one, by searching "comparative advantage 'full capacity'" and the main result which shows up is this very thread in this TalkFreeThought message board, which shows that these ideas are in the extreme fringe wacko category. I.e., virtually no one takes this kind of critique of "comparative advantage" seriously

But there is a source saying something like this, and presumably there are some other wacko websites saying this nonsense if one searches for it. The following lists 5 "assumptions" made by the theory, and suggests that somehow the trade has no benefit unless all these conditions hold true for the nations engaged in trade. Does this show how the trade between two companies (in separate nations) cannot serve any benefit to those two companies? If there's no benefit to them, why are they trading? If the condition for full capacity is not being met and thus prevents any benefit to them, why do the two companies want to engage in the trade? The following is about the condition requiring full capacity and full employment:

http://wer.worldeconomicsassociation.org/files/WEA-WER2-Schumacher.pdf

Full employment of capital and labour

The fourth assumption that is indispensable to the theory of comparative advantage is full employment of both labour and capital. Neoclassical models generally use this assumption. It is necessary for the concept of opportunity costs. If unemployment (or underutilised resources) exists, there are no opportunity costs, because the production of one good can be increased without decreasing the production of the other good. In this case relative costs of a commodity would stay undefined because the commodity could “be produced at no social cost” (Prasch 1996, p. 42). Since comparative advantages are determined by opportunity costs in the neoclassical formulation, these could not be calculated and this formulation would lose its logical basis. Ricardo and later classical economists assume that labour has a tendency towards full employment and that capital is always fully employed in a liberalised economy, because no capital owner will leave his or her capital idle but will always be trying to earn a profit from it. That there is no limit to the employment of capital is a consequence of Say’s law which presumes that production is only constraint by resources and which is also adopted by neoclassical economists.

From a theoretical point of view, the theory of comparative advantage has to assume that either labour or capital is used at full capacity and resources constrain the production. There are two reasons, the realisation of gains from international trade and the adjustment mechanism. The theory of comparative advantage assumes static gains in form of a more effective resource allocation which can be seen as a consequence of the resource constraint approach. This cannot be reached unless employment of resources has the highest possible level domestically (Felipe and Vernengo 2002, pp. 54-55). If a nation’s resources would not be fully employed, production and consumption could be increased domestically without participating in international trade. The whole rationale for the existence of international trade would vanish as well as the possible gains. In this case, a state could even gain more by abstaining from international trade and boosting domestic production because more labour and capital would then be employed and the national income would be increased. Furthermore, if unemployment is theoretically possible, it will also be possibly that international trade leads to job losses. In the case of job losses gains could not be unambiguously specified, because job losses might outweigh the gains (Shaikh 2007, p. 52).

Full employment (of labour) is also a necessary condition for the adjustment mechanism. If changing unemployment levels are allowed for, income can alter. Once income and thus demand can alter, the current account balance will rather be influenced by them than by price level or exchange rate changes.

Demand effects are neither included in the quantity theory of money nor in the exchange rate adjustment approach. Turnell concludes that “with unemployment allowed to exist in the model, the effect of the initial trade imbalance of the higher cost country is not to bring about price changes, but changes in income (employment) and/or real interest rates” (2001, p. 7). Thus, any adjustment mechanism that underlies the theory of comparative advantage no longer operates if unemployment exists (see also Çağatay 1994; Milberg 2002).

Theoretically, this assumption is problematic. Once it is allowed that money can also be used as storage of wealth (and not just as a means of exchange) one has to conclude that there is no tendency towards full employment of capital and of labour. The possibility of saving “creates the possibility of […] underemployment” (Milberg 2002, p. 242). Hence, there is no theoretical justification for this assumption.

In practise, the “world is characterized by unemployment” (Felipe and Vernengo 2002, p. 54). Un- and underemployment of capital and labour is not a short run phenomenon but it is common and widespread. In the last decade between 175 and 200 million workers have been unemployed worldwide (ILO 2012). If underemployment is added, this figure rises to a much higher number. Even in the fifteen most economically liberalised nations, unemployment rates have ranged between 1.0% and 16.6% in the last two decades. Similar, a nation has usually “productive capacity for more output than it can sell” (Robinson 1973, p. 15). It has to be concluded that unemployment and idle resources are rather the rule than the exception.

The assumption of full employment is, as was shown above, crucial to the theory of comparative advantage. Without this assumption, the supposed gains from international trade, namely a higher amount of available products that the population can consume, can be achieved without engaging in international trade.

This means, that the explanation of the theory of comparative advantage why international trade takes place is itself invalid if unemployment to exist. Though it might be reasonable to use this assumption in other economic models, it is inappropriate for the theory of comparative advantage because the whole motive of international trade collapses if this unrealistic assumption is given up.

Most of the above, if it has any meaning other than blabber, is just false. Hopefully someone will decipher some of it and give an intelligible explanation.



The Demand for Perfect or IDEAL Conditions

But there might be a legitimate point, which is similar to the principle that competition is necessary in order for the free market to function, and yet competition is not perfect and is even very poor in some cases.

There is usually an element of cooperation between the producers, such as price-fixing in one form or another, and other anticompetitive practices. So, realistically, there is no way to produce perfect competition, and so the ideal of total competition is not possible.

Likewise there might be some conditions which make trade more advantageous, so that mobility of labor and capital, high utilization of labor and capital, a good system of offsetting a trade imbalance, etc., are conditions which arguably would make trade serve consumers better. But these are only ideal conditions, at best, and are not required in order for trade to benefit the traders and consumers. And the above false presentation of "comparative advantage" might be making some such point about trade, i.e., that the perfect conditions demanded do not exist.

The classical models might assume something like full employment as necessary to produce the maximum possible benefit from the market, but not as a condition necessary to produce good practical outcomes in the real conditions. It misses the point to insist on perfect conditions in order for something to work.

None of the market works at the optimum benefit possible or imaginable with all the conditions being met perfectly. What we need is a system which works well even if the conditions are less than perfect, or are working partially. Even if some desired conditions are totally absent, the market can still function well under the imperfect conditions, serving consumers as best as can be done under those limited conditions, though it might work better still if the conditions were more ideal.

This is the most that can be said about trade being dependent on "full capacity" and the other conditions or "assumptions" of comparative advantage. These are only ideal conditions at best, which if met would make the trade serve its function at the highest conceivable level of efficiency. But the "comparative" and "absolute" advantage are only imperfect cost-saving factors which promote the specialization that improves the production within the non-ideal conditions, so that the well-being of consumers is increased, but there are always even further changes one could imagine which would make the production even better still.

This answers your statement that full employment and full capacity utilization aren't required by Richardo's Stretch.

No, your explanation answers nothing. You are the only one demanding that "absolute advantage" is somehow not part of the "comparative advantage" theory of trade. Your incoherent argument is nothing but an obsession on the difference between "comparative" vs. "absolute" advantage, which is pointless.

You only pretend to know anything about Ricardo. You're the only one who uses the term "Ricardo stretch" and cannot explain what this means or what connection there is between your "stretch" babble and anything Ricardo said.

They are.

They are not required in order for comparative advantage theory to explain how trade benefits nations or companies or consumers. The above Schumacher quote, "Full employment of capital and labour," is a rare source saying anything like this, and the reason given why "full capacity" or "full employment" are necessary conditions have no resemblance to what you're saying. All you're doing is obsessing on the semantics of "comparative" vs. "absolute" advantage, as though somehow the advantage is cancelled if it's the "absolute" rather than "comparative" category, which misses the point of the basic theory, as I've cited it in serveral sources, which I'll give here again:

http://www.econlib.org/library/Topics/Details/comparativeadvantage.html

https://en.wikipedia.org/wiki/Comparative_advantage

https://www.khanacademy.org/economi.../comparative-advantage-and-absolute-advantage

Ravi Batra, The Myth of Free Trade, p. 154-157.

These all emphasize the benefit of specialization, resulting from either "comparative" or "absolute" advantage. Both are part of the basic theory, and both cause the benefits of trade, as it's explained in the "Comparative Advantage" theory.

And none of these rule out other benefits or cost-saving types than the "comparative" and "absolute" advantage types of benefit. No one presenting the theory says there are not also other form of benefit than "comparative" and "absolute" advantage which also make trade beneficial and good for consumers.

And of course, full employment and full capacity utilization in the economy are an extremely rare situations.

Maybe even non-existent. But the benefits of free trade, from comparative advantage, are very common and have been repeated throughout history, back to the Phoenicians who also operated during conditions of under-utilization and unemployment. Obviously these are not necessary conditions in order for free trade to benefit people.

Of course virtually any system of economics might perform better if "full capacity" or "full employment" are added to it as a condition. But this doesn't mean everything fails to operate until this condition is first met.

If there's no gain for the companies, i.e., company [A] and company , then why are they trading? If there is some gain, some profit, then why doesn't that profit translate into savings for consumers who buy the product? Even if you can prove that it's really "absolute" rather than "comparative" advantage at work, you still need to prove that there's no benefit to the companies doing the trade.

If you admit that the companies are gaining some profit from it, then you're admitting that consumers also gain in lower price, or in better service. They must be choosing the product for some reason, or else how could companies [A] and make a profit from the trading and offering the imported product? How can the consumers not benefit from the increased competition and increased supply? You have to answer this to prove that there is no benefit to the consumers in one or both nations, regardless of your babble about why there can be no "comparative" advantage according to your pretended critique of Ricardo.



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[Lumpenproletariat]

To disprove COMPARATIVE ADVANTAGE, you must cut out the babble nonsense and . . .

show that specialization does not improve production.


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But even this isn't sufficient to guarantee that free trade is beneficial to all. Further assumptions have to be made.

No they don't. You are imagining all this. You have no source to cite which can make sense out of any of the following.

The stretch also requires that company [A]'s skilled workers and their machines and their purpose built factories that are currently making factors [f1] can be retrained and converted easily to making product [p1] instead.

It doesn't matter whether they can be retrained and converted or not. If they can be, that does not contradict Comparative Advantage. But if they canNOT be, that also does not contradict Comparative Advantage. You are hallucinating some flaw in Comparative Advantage with this wacko analysis.

If this isn't true, if it is too expensive in money, manpower or time to re-purpose their resources they won't select the comparative advantage choice.

The theory does not say that "the comparative advantage choice" has to be constantly made in all imaginable cases. When it's profitable to do the changes they will be done, but when it's not profitable, who's claiming they have to still be done somehow? In that case the change in production will not take place. Obviously any changes have to be affordable or cost-effective, and where not then those changes do not take place.

Whether it's "the comparative advantage" choice or some other choice, it isn't done if it's not profitable.

In many cases it is cost-effective and profitable for company [A] to change its production because of comparative advantage, and in those cases there is a benefit to the new trade which is now more efficient and beneficial to consumers, and society, and the world. That's all comparative advantage is claiming. It doesn't deny that in some cases trade is not beneficial, or trade outside the local community. In some cases it's not beneficial to trade with a company 5 miles away, but rather to trade with the local store.

"Comparative Advantage" is not insisting that everyone has to do all their trading with someone 1000 miles away. Only that there are some cases where this is beneficial.

At this point I would hope that even the less perceptive among us would see where this is going, but we are here on page 19+ because either I have apparently over estimated the ability of this group to connect the dots to see the obvious, or I have over estimated my ability to explain simple to understand but difficult to explain ideas. Either way, I will plod on.

Company [A] is in an arbitrarily delineated region [a] and company is in a different region . Yes, these regions could be nations, states, provinces, counties, townships, cities, blocks, etc. as you say, but for Ricardo's Stretch to work it has to be nations. We have to assume that the comparative advantage trade is between nations so that the mutual benefits that free trade bestows go to the nations involved because that is the promise of Ricardo's Stretch. So our example mode adds this, l becomes,

Company [A] is in nation [a] and company is in a different nation. Furthermore there is a company [C] in nation that also makes product [p1], to supply the demand in nation for product [p1], but at a higher (absolute) cost than company [A]. Company [C] will now lose business to company [A] as company [A] is able to produce more of product [p1] because company [A] is buying factors [f1] from company . Company [C] is therefore at risk to go bankrupt.

What is company [C] to do? It shouldn't surprise you that they too, or their resources if company [C] goes out of business, will be re-purposed to making factors [f1]. Not because they are more efficient at making factors [f1], they aren't. But because like company they can produce factors [f1] at a lower opportunity cost to company [A]. Why will company [CE] have to produce factors [f1]? Because the economy is going full bore and this is only business available to them.

That the trade has to be between nations is now hopefully obvious. If company [A] and company are in the same nation comparative advantage can still occur but it won't provide the mutual benefit between the nations and in fact will increase the absolute advantage that nation [a] has over nation setting the possibility of comparative advantage between the nations even further behind.

If what you're saying makes any sense, which is doubtful, all you're doing here is complaining that company loses some additional competitive edge to company [A], and so the "inequality" as it were increases between them. And you're saying the nation experiences a loss as a result of this change, if [A] and are in separate nations, i.e., the nation experiences a setback. But if so, this negative consequence is not a result of trade between the 2 nations, but rather it's a result of the change in companies [C] or , which made either or both less competitive.

Given that this negative change took place, the best result for the nation is for the trade to continue, or increase, in order to salvage the best possible outcome, given the negative change resulting in the loss. The loss was going to occur anyway, having nothing to do with the trade, but letting trade take place will minimize the loss, bringing the benefits of comparative (or absolute) advantage and thus reducing the damage which would have occurred if the benefits of trade were not allowed.

Just because you can imagine a scenario in which there is trade and something bad happens does not prove that the trade caused the bad thing to happen. That's the fallacy you're committing in your example. You're only showing that bad things happen, and trade is also happening, but the bad part would have been even worse if trade between the nations was not allowed.

I have no idea what the Ricardo stretch's mechanism is to force companies to utilize cross border comparative advantage . . .

This string of words is babble. There is never any need to force companies to do whatever you are hallucinating here. Nothing about free trade or comparative advantage ever required any mechanism to force companies to utilize "comparative advantage" instead of something else. The theory does not insist that every decision is a "comparative advantage" decision as you are imagining.

. . . utilize cross border comparative advantage instead of pursuing comparative advantage within a single nation.

Can't you ask a coherent question? You can't mean literally what these words are saying, because the answer is too obvious. If 2 companies needing each other want to trade and they happen to be in separate nations, how can they trade within a single nation? They pursue their trading advantage by trading across that border because there's no other way for them to trade.

I.e., if company A wants to gain a benefit by trading with company B and they are in 2 separate nations, how are they to engage in this trade without trading across that border?

I have never seen this addressed except in the most unsatisfactory way that . . .

There's nothing to address. You are not formulating any intelligible question, but only stringing meaningless words.

. . . free trade enthusiasts seem to rely on when they can't think of anything concrete to say, faith and sweeping generalizations.

But first you must present something coherent for them to address. There is no need to "force companies" to choose cross-border comparative advantage.

Do you understand how to quote an expert who knows the topic? There is no one saying any of this babble you're spewing out. Your meaningless jargon makes no sense, and you can't quote anyone saying it. You are running a train of words you imagine have some meaning. There is no "Ricardo Stretch" which has any need to "force companies" to do these things you're hallucinating.

For example,

No, it works in virtually ALL cases with virtually no exceptions. There's virtually no nation which does not benefit from Comparative Advantage, as long as there is something it does a little better than it does other things.

I must say that this a combination of an appeal to surrender to the faith of the awesome power of comparative advantage and an incorrect understanding of what comparative advantage is. I am forced to belabor the obvious, comparative advantage is based on the comparison between the advantages of two different companies, not what one nation "does a little better than it does other things."

Again, you're just engaging in the "trade between nations" semantics. To say one nation does something better than another means that someone WITHIN that nation, some company, some individual, some group, etc., does it better than someone in the other nation. We all know that the real production or business or trade is between some party here (in this nation) and some other party over there, and not some abstract entity called "nation." It is so petty to pounce on the words, when we all know what it means.

You have to make your point without just playing word-games. Stop quibbling over whether it's "nations" or "companies" or "individuals" which do the trading. We all know that "trade between nations" means trade between someone in this nation and someone in the other nation.

Perhaps it is the use of capitalization of the words that is suppose to convince us.

Do you have anything to offer other than this pettiness? Commas and semicolons and em dashes are used in text for legitimate reasons.

Once again, trade is initiated and carried out between companies, not nations, to benefit the companies involved, not the nations.

You continue to rely on word games and semantics to make your point. Is this the best you can do? We all know -- everyone knows -- that "between nations" means "between parties in this nation and parties in the other nation." Everyone knows, and it is assumed except only by a fool, that this is what we're talking about -- it's trade going on between the groups or individuals or sellers/buyers in this nation and those in the other nation. We should have gotten beyond the word-game pettiness and be sticking to the substance.

The companies involved must see a greater advantage to international comparative advantage than there is to satisfying comparative advantage inside their own country.

They see an advantage in dealing with the party with whom they can gain the greatest benefit, or profit, and this happens to be with a company in that other nation. You deny that ever happens? The increased specialization, due to comparative advantage, might be the explanation for the increased profit or advantage or cost-saving.

We now know certain facts about nations [a] and . These facts lead to the following conclusion.

Just considering product [p1] and factors [f1] and the stretch's assumption that all of the companies making product [p1] in nation [a] enjoy the same absolute advantage in making product [p1] over the companies in nation that company [A] has, which is reasonable because they all have compete against company [A] domestically, the final result will be an increase in the net flow of money from nation to nation [a].

Is this where it's all going? Back to the trade imbalance? Is that the only point of this entire dissertation on full capacity or full employment?

We already know that there can be a trade imbalance, and so there can be a net flow of dollars/currency from nation to nation [a]. And there's no harm from this, except that nation [a] has to decide how long it will continue to subsidize consumers in nation .

Why? Because the costs for factors [f1] are less the costs for product [p1], because they are part of the costs of product [p1]. While company [A] is now paying companies & [C] for the factors that company [A] use to make themselves, the extra production this allowed company [A] to produce put company [C] out of the business of producing product [p1]. This is more money than the costs of the factors [f1] or company [A] wouldn't have done it.

There's no argument, and no point to what you're saying. If company [C] is uncompetitive it might go out of business. Yes. And so what? If it has any brains at all it will figure out how to salvage this situation and find something it can still do that is profitable. It's not necessary to use complicated nomenclature to express the simple point that if a company is less competitive it might go out of business.

Why are you wasting so many words and symbols saying something so basic? Companies less competitive don't do as well, and might go out of business. Why shouldn't they?

This means that for product [p1] nation [a] has an absolute advantage over nation . We can now add another fact to the model.

For comparative advantage to rain its benefits down on all of the nations participating in international free trade there must be at least another product [p2] where the companies making it in nation have an absolute advantage over the companies making it in nation [a], where companies in nation [a] are forced out of the business of making product [p2] and into the much less lucrative manufacturing of the factors [f2] that go into the production of product [p2].

No, it sounds like you mean "where companies making it in nation have a COMPARATIVE advantage" etc. Possibly that would make sense.

But even if your "there must be at least another product [p2]" etc. is correct, so what if this is the case? This at worst means that both companies are adjusting to producing what they have an advantage in, and so therefore the overall result is a higher proficiency in all the production and thus better service to consumers, which is a good result for everyone. Each company specializes more and relinquishes some of the production in which the other had the advantage. This is the best result, and it doesn't matter whether it's "comparative" or "absolute" advantage.

I have chosen to make my model for factors production. It could have been for commodities; metals, oil, food, etc. or for completed products imported and resold, it doesn't matter. Competitive advantage applies to all of them and all of them require the same questionable assumptions in order to stretch their trade to guarantee mutual benefits from the international trade of them.

Repeating the same falsehood over and over again does not make it so. You've shown no such "assumptions" from any source or from any reasoning. Babbling the same incoherent rhetoric over and over isn't enough.

For you to be correct it means consumers do NOT gain a benefit from buying Chinese-made shoes for only $14 at WalMart which would cost twice as much if American-made. You still have not proved that consumers do not gain a benefit from this. I.e., you have not given any reason to assume this cost-saving is bad for the country.

We now leave the Ricardo stretch because Ricardo and the other classical economists concerned themselves with a largely agrarian economy and the next additions to the model are about the unsuitability of applying Ricardo's stretch to industrial economies.

You keep repeating the name Ricardo as if you have a clue what he said. Why are you incapable of quoting anything he wrote and making an intelligent commentary on it? Why can't you give a source for ANYthing you're saying?

It is not right to blame this on David Ricardo because . . .

Blame WHAT on him? You haven't named anything wrong yet, so "blame" has no meaning -- something evil has to happen before there's anything to "blame" on someone.

Spinning your own garble and attributing it to Ricardo or others does not tell us why specialization is not beneficial in the economy. To refute comparative advantage theory you have to prove that specialization is bad, not good, for the economy, and that it would make us better off if we had to individually produce our own goods and services and not rely on trade. The main point of "comparative advantage" (and "absolute advantage") is the benefit of specializing.

. . . he missed almost all of the industrial revolution. Join me in my part 5,

The end of my part 4

continued below, Part 5 The Neoclassical Stretch​

There were economists and businesspeople long before Ricardo who made the same points he did, and all of it applies equally to today's industrial economy.

Your insistence on incoherent gobbledygook to prove your point, failure to quote one source, failure to explain simply how it's not good for consumers to pay lower prices, etc., can only mean that your REAL sentiment is a simplistic attachment to factories and factory "jobs" per se which you want to save as makework for victim job-seekers you think are inferior and need makework "jobs" to keep them out of mischief. That's the only way to translate your gibberish into anything intelligible.