A well-known conservative economist introduced some fairly radical ideas at a Jan. 7 forum on US trade policy organized by the Brookings Institution. Is Paul Craig Roberts right to think that the principle of comparative advantage no longer holds, and that the US "will be a third-world country within 20 years"?
FREE TRADE'S FOUNDATIONS QUESTIONED AT FORUM ON US TRADE POLICY
By Mark Jensen
January 17, 2004
Is comparative advantage dead? Could be.
This was the most striking idea that emerged from a Jan. 7 forum on US trade policy, sponsored by the Brookings Institution and broadcast the same day on C-SPAN. On the panel were Sen. Charles Schumer (Dem.-NY), Paul Craig Roberts, senior research fellow at the Hoover Institution, Lael Brainard, a fellow in economic studies and foreign policy studies at the Brookings Institution, and Tom Donohue, president of the US Chamber of Commerce. Veteran jounalist Ron Nessen moderated.
What made the forum remarkable was the sustained questioning of "comparative advantage," the economic theory that underlies the US government's support for free trade.
Comparative advantage has been called by Ronald Findlay, an economics professor at Columbia University, the "deepest and most beautiful result in all of economics." The principle of comparative advantage was first stated and proved by David Ricardo in 1817, and for generations has been the basis for policymakers' belief that everybody gains from free trade.
Free trade has, of course, long been a pillar of US policy, a rarely questioned article of faith. It has, for example, been assumed those who are thrown out of work because of labor displacements caused by free trade policies are not a major social problem. According to the theory of free trade, these workers will in the normal course of events eventually find jobs just as good or better.
But at the Jan. 7 forum, Paul Craig Roberts, an economist of unquestionable credentials (see the note on Roberts's career below), asserted that technological changes due to the information revolution have destroyed free trade's foundations. The principle of comparative advantage no longer holds.
Roberts summed up his view succinctly, in a single sentence: "There is no basis for comparative advantage when factors of production are as mobile as traded goods."
In the theory of free trade as developed by Ricardo, Kindleberger, and others, Roberts explained, comparative advantage requires that factors of production (most importantly, labor) be less mobile than traded goods. But the technological developments of the information revolution -- Internet, broadband, and computing -- have made factors of production mobile in an unprecedented way.
For example, it is now possible to have the results of medical tests analyzed by technicians in India who are willing to work for $20,000 a year, instead of by technicians in New York, who have been earning $150,000 a year.
Because of the unprecedented mobility of the factors of production, said Roberts, the belief that jobs that are lost in the US due to the free trade policies of globalization will be replaced by others as good or better is simply unfounded. As a result, "the ladders of social mobility in the US are collapsing," though share prices on the US stock market, whose linkage to the US economy has been weakened by globalization, may very well continue to rise.
Eventually, Roberts predicted, such developments will lead to "real political instability." In addition, they will lead to the eventual collapse of the dollar, and a marked decline in living standards in the United States.
Policymakers are not seeking such results, obviously, but Roberts noted that policies often have unintended consequences. He quoted Karl Marx's observation that the enclosure movement was never intended to create a labor market that ultimately destroyed the feudal system. But it did anyway.
"The global economy is way out in front of the nation-state," said the conservative economist, visibly surprising his listeners. "It may be that we are creating a situation in which a world government is necessary. I keep saying that the US will be a third-world country in twenty years."
Sen. Charles Schumer, who has been questioning the wisdom of US trade policy of late, and who was involved in organizing the forum, echoed Roberts's concerns. A University of Maryland economist in the audience proposed that, at the very least, the US ought to consider a moratorium in its promotion of free trade around the world. Even Mr. Donohue, the president of the US Chamber of Commerce, agreed that the foundations of US trade policy need to be reexamined.
No doubt this is overdue. Shortly before his death, Roberts noted, John Maynard Keynes had already begun to question the theory of free trade, because he had come to doubt whether Ricardo's assumptions still held.
Will economists still be calling the principle of comparative advantage the "deepest and most beautiful result in all of economics" in twenty years? Time will tell.
Note on Paul Craig Roberts -- Dr. Roberts has held many academic appointments, and has published widely, both in professional journals like the Journal of Political Economy, Oxford Economic Papers, the Journal of Law and Economics, Studies in Banking and Finance, the Journal of Monetary Economics, Public Finance Quarterly, Public Choice, Classica et Mediaevalia, Ethics, the Slavic Review, Soviet Studies, and the Rivista Di Politica Economica, and to periodicals, including Commentary, the Public Interest, Harper's, the New York Times, the Washington Post, the Los Angeles Times, Fortune, Investor's Business Daily, the London Times, the Financial Times, the Spectator, the Times Literary Supplement, Il Sole 24 Ore, Le Figaro, LibÈration and the Nihon Keizai Shimbun. He is a former editor and columnist for the Wall Street Journal, and as a syndicated political and economic columnist, has won the Warren Brookes Award for Excellence in Journalism; the Forbes Media Guide ranked him as one of the top seven journalists in the US in 1993. He has served in government as a congressional staffer drafting the Kemp-Roth bill in the late 1970s, and he served as assistant secretary of the Treasury for economic policy in the first Reagan administration. He was awarded the Treasury Department's Meritorious Service Award for "his outstanding contributions to the formulation of United States economic policy." In 1987, the French government recognized him as "the artisan of a renewal in economic science and policy after half a century of state interventionism" and inducted him into the Legion of Honor. He has written many books, including The Supply-Side Revolution (Harvard UP, 1984) and Marx's Theory of Exchange, Alienation, and Crisis (1973; reissued 1983); his most recent book is The Tyranny of Good Intentions: How Prosecutors and Bureaucrats Are Trampling the Constitution in the Name of Justice (2000). Dr. Roberts was educated at the Georgia Institute of Technology, the University of Virginia, the University of California at Berkeley, and Oxford University, where he was a member of Merton College.