mardi, novembre 29, 2005

Some thoughts on free trade

Most models in favor of free trade are stupidly static.
Get ricardo, it's very clear. There's a gain to international exchange. OK point granted. There's always a static gain to make.

Now we know of course that economies are to be seen more as ongoing processes, that change in a progressive manner. THere are paths, path dependance etc.

So here are my not so humble thoughts on international trade and the mess it led us in.

Even though international trade is good, international trade expansion is good, excessive international trade expansion is bad has it is fueld by excessive reliance on debt growth .
In the following allegory, we intend to show that rising debt is the only and last factor standing in the way of us and the oncoming major depression through debt deflation.

Figure it so there are two regions : the western rich sphere, and the asian developping sphere.
We will argue that debt allows to
1 boost spending, investment, profits, production, in both region
2 reduce the gap between the western wages and the asian wages, asian wages catches up.
3 reduce the gap between returns on capital in the western sphere and asian sphere (western returns catch up)
4 INCREASE THE SHARE OF CAPITAL IN PRODUCTION REVENUES


In the western sphere say in 1980
100 companies pay 100 workers 140 in wages and compensation, use 500 capital units paid 60, have a total production of 200and

Before 1980 the asian sphere does not exist (for the westerners).
Then because of falling trade barriers
We discover that in the asian sphere there are 1000 companies who pay 10000 workers 10 in wages and compensation, use 100 capital units paid 10, have a total productiction of 20.

Total production is 220

THe static law of supply and demand says that in the long run, price/productivity ratio will be equated. In a perfect market, there are no transaction costs and no merchants doing a profit on arbitraging, or this profit is very small. The equalising process goes super fast. Possibly the western sphere loses some share of the global production, but the boost in productivity compensates this.


Now in the real world there are transaction costs. Big holders of capital units do the arbitraging and make profit on it. They use the arbitraging to raise the pay of their capital units at the expanse of workers pay.


So we end up in 2005 and the equalisation is not over.
We are in an intermediary situation like this one:
in the western sphere 50 companies pay 90 workers 150 in wages and compensation, use 600 capital units paid 150, have a total production of 300

in the asian sphere 1000 companies pay 15000 workers 30 in wages and compensation, use 200 capital units paid 70, have a total productiction of 100.
Total global production is 400

Notice that global production is up and production is up in each sphere. Notice that wages are up globally and in each sphere. However there's a problem. Can you see it ?

Capital share of the production is rising. It gets more than half of the global production. (OK it's an exageration). It has risen in the western rich countries from 30 to 50%, it has risen from 50 to 70% in the asian country, and it has risen from 30 to more than 50% globally.

You may say, well, that's OK, capital is scarce in relation to workers, so its productivity as a factor rises.
So what ?

Well the question is : how is such a massive shift possible ? Usually the capital/labor share is fairly stable.

If wages have not risen in line with total productivity, how come there's demand for consuming goods ? WHo's buying those goods ?
Part of the answer of course is that much production has been redirected to investment goods ... The asian sphere may well be in an investment boom. Fisher applies.

But the real answer is : consumer DEBT.
The consumers in the rich countries have been told, expect little pay raise despite productivity growth, BUT enjoy the credit possibilities, and enjoy also the cheap production from abroad.

This is our situation in 2005.

The supply of debt to the consumer is not caused by lack of better investment opportunities, but as a short term way to boost profits, as a way of making profits twice, once by not rising wages despite productivity rises, and twice by the interest rates on the debt (see GM financial activities).

What's the idea on international trade then ?

Well, the arbitration process has been eased and accelerated by debt. Debt has been a grease.
It has boosted growth in the rich country through higher consumer demand and it has boosted export led growth in the developing country and it has boosted the catching up process.
The problem is that the initial gap was so wide and massive, the opening and subsequent catching up has been so brutal, that debt accumulation has been rising too fast and for too long. Debt is now to big.
Instead of some grease in a creaky old machinery, we now have a gigantic pile of debt trying to reach the sky as the modern form of the tower of babel (see prec. posts).
All we can hope is that Bernanke will push inflation unexpectedly to 10% or more level so as to raise the ground before the tower falls. My own bet though is that it's too late.

4 commentaires:

unlawflcombatnt a dit…

Francois,

Another outstanding post. Is there any way I can get a translation on your December post?

unlawflcombatnt a dit…

I'd like to post links to your blog at some of the discussion boards I post on. Will that be alright with you?

Epimethee a dit…

Please feel free to do so.
Thanks.

I just don't want to take the time to post right now on discussion boards. I've never done it. I bet it's easy and I'm sure, that once I'll have started to do it, I'll find it easy.
I'll check the french december post.

unlawflcombatnt a dit…

Francois,

Thanks for the translation. Again, I'd like to invite you to join and post at my own (relatively) new discussion board. I truly need more members and posts from knowledgeable economists such as yourself. If time is limited, you can repost some of what you've posted on this blog at my site. Again, your December 2005 post is excellent. The U.S. and the world need to hear from more economists such as yourself, who point out the error of current "free trade" policies. Your background in economics will lend more credibility to your postings than I have myself. Again, my newest forum is EconomicPatriotForum.

You don't have to sign up or become a member to post at my forum. And there are essentially no rules you must follow to post. It is a completely open forum. Any input from you would be appreciated.