Economic question on comparative advantage +...

[K. A. Pital]

I wouldn't call Argentina a "nationwide failure". Despite its issues with inflation and macro-economic stability, the country still has one of the highest household incomes in South America, and does have a well-developed manufacturing sector (even if most of its exports are commodities).

Moreover, Argentina's issues with development have more to do with a long history of political instability in the twentieth century than with the fact that its exports were and are primarily commodities (Australia is an example of an industrialized, first world country where the main exports are natural resources and products like wool). After the Great Depression and before the 1990s, its many regimes tended to be piss-poor at managing inflation in particular, particularly since they were constantly running up debts trying to buy civil peace with spending.

It's quite simple really. Between 1870 and 1900, Argentina had the highest per capita GDP growth in the world. It was reaching the First World nations of Europe by wealth. During the XX century, it transitioned from a First World nation wealth level to a Third World one. And that's it. Wealth is relative.

China's sheer size and population allowed it to diversify even with very low labor productivity in the 1970s and 1980s, although it was already a diverse nation in terms of what it produced before then. That doesn't work with small countries, not unless their labor productivity is really high. Just look at "Foxconn City", with its 200,000+ workers. That's a tiny fraction of China's labor force, but it would be a huge fraction of the labor force of a country with only a few million people.

And yet, Finland with merely a few million people is extremely adept in shipbuilding, has a sizeable electronics industry, it also exports machine tools and chemicals. That's lots of core industrial competencies (in addition to the commonly present agriculture, construction, etc.).

What makes you think it was illusory? I notice you mentioned the share of poor was the same as that of the early 1970s, which is not the same as them being as poor as they were in the early 1970s in terms of income.

That's actually the case - they were as poor as in the early 1970, since the government used a consistent MCB-based approach which was centered around real material consumption. If we'd apply the international poverty standard to Indonesia, its poverty rate wouldn't be anywhere as low as the government claims.

In any case, the case example was an obviously simplified comparative advantage and trade model assuming the production of only two goods, and even in that, it's unlikely that the two countries would produce and trade one good to the complete exclusion of the other good. You just find a trade mix that will likely be wheat-heavy on the island side and tractor-heavy on the big country side.

Heh, but you're already building in actual inefficiencies to make sure the example wouldn't lead the complete ruin of a deeply specialized economy in case of external trade shocks. In fact, this whole discussion exemplifies the problem - the actual market situation is haphazardly changing; it is subject to volatile shocks of different nature including the permanent technological progress change which may render entire industries (and in case your nation specialized in just that industry, entire nations) obsolete and useless.

We were just discussing that in another thread. Deeply specialized companies have a high turnover and exist for around 30-25 years on the average. The Japanese conglomerates like Sumitomo and a few other zaibatsu-turned-keiretsu, having a diverse array of industries under their command, manage to survive and thrive for many decades, if not for centuries.

Diversification is a chance for survival. Extreme specialization is a sure recipe for certain death. And while we find the constant death of companies acceptable (new companies devour the remains and reform on the ruins using newer technologies), you just can't treat nation-states like corporations. Bankrupcy of nation-states? Reallocation of the entire nation-state labour? Sure, sure. I think you understand what I'm talking about.

This whole comparative advantage talk is the application of enterprise logic to nation-states, which are fixed territorial entities, often with poor and highly immobile labour and, of course, no possibility of easy "bankrupcy" and sending their "workers" (subjects) to apply for work elsewhere.

[Surlethe]

So: the stagnation was the 1980s, not the 1970s, and the USSR's economy grew on average 0.6%/yr, not 1% the entire decade.

Actually the stagnation sort of started in the 70s, growth rates in 1973-1980 declined heavily compared to the excellent 1950-1965 or even the rather good 1966-1973. But they weren't negative for sure.

Definitely. The USSR was a failure, but it wasn't that big of a failure.

If the big country starts making wheat more efficiently, then the island's economy will deteriorate until it can build a factory and start making tractors to trade for wheat, or until it copies the big country's wheat-making techniques and regains a comparative advantage in wheat. The process of specializing isn't always easy, but at the end of the day every nation is wealthier when it has specialized.

Most real-world examples demonstrate that only very small nations (e.g. Saudi Arabia, Norway) can somehow progress having extreme specialization and little to none diversification (and even then with Norway the question is moot). And that for a certain period, which might sooner or later end. Larger nations that fail to diversify - fail overall. Argentina is a prime example of a nationwide failure where one of the key reasons the spectacular late-XIX century growth from agriculture and meat couldn't be sustained in the XX century, since Argentina failed to diversify and develop a heavy industry core.

Let's look at China, <snip>

Either you diversify, or your one-shot wonder economy is not going to last. <snip>

At the end, however, all wealthy nations are heavily diversified economies deeply involved in the production of capital goods and most poor nations are primitive one-export-good economies or worse yet, primitive agriculture-only economies, failing to produce capital goods on their own.

I'd argue that the larger a country is, the more it should experience regional and local specialization, based on both intrinsic factors (US Midwest --> corn) and accidents (Silicon Valley), as its economy grows and diversifies. So you're right when you point out that large nations don't experience a single specialization, but that's because they're so big they encompass diverse regional specializations. If you're too small to significantly diversify - say, Lichtenstein - then you simply pick what you're best at, export it, and hope the world likes what you've got. Another reason free flow of people is as important as free flows of goods and capital: if the world economy changes, people should be able to go where their labor is valued.

So if a large country tries to specialize and ends up failing, then it's probably "doing it wrong" - large countries should be diversifying their regional specializations as their economies develop and integrate into the world economy. As you point out, this is what all modern success stories, from Korea to Japan to China, have done.

One could argue that if the world economy was a stable mechanism which always has growing demand for the comparative advantage good, and if it had a mechanism of compensation to certain nations for maldevelopment which could occur due to misdirected world market demand for a resource... then "every nation is wealthier when it has specialised".

I don't think you even need a compensation mechanism or a a stably growing world economy with growing demand for the comparative advantage good in order to conclude that (regional, perhaps not national) specialization and greater international trade increase wealth. You just need free flows of goods, capital, and people across international borders, and market pressures will ensure that industries in a region's comparative advantage grow more than industries in a region's comparative advantage shrink, leaving it on net better off.

[Surlethe]

As far as international demand shocks, aren't we assuming floating currencies? That for sure cushions domestic industries.

Diversification is a chance for survival. Extreme specialization is a sure recipe for certain death. And while we find the constant death of companies acceptable (new companies devour the remains and reform on the ruins using newer technologies), you just can't treat nation-states like corporations. Bankrupcy of nation-states? Reallocation of the entire nation-state labour? Sure, sure. I think you understand what I'm talking about.

This whole comparative advantage talk is the application of enterprise logic to nation-states, which are fixed territorial entities, often with poor and highly immobile labour and, of course, no possibility of easy "bankrupcy" and sending their "workers" (subjects) to apply for work elsewhere.

Why not? Labor should be as free to move about the world as capital - even more so, because we're talking about people's livelihoods, not about digits on a wealthy person's brokerage account. Of course, labor in wealthy countries does its best to prevent free labor flows because the smelly foreign brown people don't deserve to pursue first-world living standards, since they're poor and lazy and anyway they just come here to steal our jobs.

I'd also distinguish between "comparative advantage, the prescription" and "comparative advantage, the description." The former is the argument that countries should open up to international investment, trade, and let their economies specialize. The latter is the well-established observation that countries with a comparative advantage in X over Y will tend to produce more X than Y, export X, import Y, and become wealthier as a result. ("Comparative advantage, the description" also does a good job in predicting which domestic factions will take which sides in disputes related to international economics.)

[Blayne]

Movement of labour also doesn't quite work in reverse either, people in the United States who do have training qualifications have an equally hard time finding work in say, Japan for the industry they are skilled in.

I think if we had globally open borders and standardization of certification/degrees and a U.N passport where 1 passport works for all countries for 5 years working increments we would see a massive change in how the global economy would function. educated qualified people could go wherever, hard working skilled/unskilled labour could go wherever and no bureaucratic hassle. Just pick a country with a job opening through the internet and go.

And maybe some kind of international health insurance plan for migrant workers that's paid through your wage instead of local taxes; sales tax countries I imagine would benefit a lot from this framework, doesn't the eurozone operate on something similar?

[Guardsman Bass]

It's quite simple really. Between 1870 and 1900, Argentina had the highest per capita GDP growth in the world. It was reaching the First World nations of Europe by wealth. During the XX century, it transitioned from a First World nation wealth level to a Third World one. And that's it. Wealth is relative.

But that chart is measuring its per capita income as a percentage of the US's. That alone doesn't mean that Argentina fucked up - it could just as easily mean that the US's per capita income simply grew much faster than Argentina's over the same period (which wouldn't be surprising).

And yet, Finland with merely a few million people is extremely adept in shipbuilding, has a sizeable electronics industry, it also exports machine tools and chemicals. That's lots of core industrial competencies (in addition to the commonly present agriculture, construction, etc.).

Re-read my point about high labor productivity. Finland can get away with that because its labor productivity is high, although not as high as some other First World countries. Since they don't need as many workers in any particular industry to produce a ton of goods and services, their workers can diversify into a whole range of different businesses, including those that require significant amounts of education.

That's actually the case - they were as poor as in the early 1970, since the government used a consistent MCB-based approach which was centered around real material consumption. If we'd apply the international poverty standard to Indonesia, its poverty rate wouldn't be anywhere as low as the government claims.

Conceded.

Heh, but you're already building in actual inefficiencies to make sure the example wouldn't lead the complete ruin of a deeply specialized economy in case of external trade shocks. In fact, this whole discussion exemplifies the problem - the actual market situation is haphazardly changing; it is subject to volatile shocks of different nature including the permanent technological progress change which may render entire industries (and in case your nation specialized in just that industry, entire nations) obsolete and useless.

It's not really building in inefficiencies to say that the traded "basket of goods" is unlikely to result in countries completely specializing in one good or another in that particular scenario (which is, obviously, a simplification - as I mentioned above).

We were just discussing that in another thread. Deeply specialized companies have a high turnover and exist for around 30-25 years on the average. The Japanese conglomerates like Sumitomo and a few other zaibatsu-turned-keiretsu, having a diverse array of industries under their command, manage to survive and thrive for many decades, if not for centuries.

Diversification is a chance for survival. Extreme specialization is a sure recipe for certain death. And while we find the constant death of companies acceptable (new companies devour the remains and reform on the ruins using newer technologies), you just can't treat nation-states like corporations. Bankrupcy of nation-states? Reallocation of the entire nation-state labour? Sure, sure. I think you understand what I'm talking about.

This whole comparative advantage talk is the application of enterprise logic to nation-states, which are fixed territorial entities, often with poor and highly immobile labour and, of course, no possibility of easy "bankrupcy" and sending their "workers" (subjects) to apply for work elsewhere.

The scenario in question actually does assume that labor is immobile and incapable of moving between the two countries.

Side-note, but the Japanese conglomerates survive being broken up and/or going bankrupt because of protectionism and the oftentimes incestuous relationship they have with the Japanese banking system (something that Korea and China as well, particularly the latter with state-owned enterprises). Even that's not enough to save them completely from conglomerate-wide pain, like in the case of Sony. Sony's had 3-4 years of losses, and just laid off 6% of their workforce.

EDIT: I'm not sure what we're actually arguing about anymore. The relevance of the scenario to trade? Whether countries should intervene in their markets to try and promote diversification?

Why not? Labor should be as free to move about the world as capital - even more so, because we're talking about people's livelihoods, not about digits on a wealthy person's brokerage account. Of course, labor in wealthy countries does its best to prevent free labor flows because the smelly foreign brown people don't deserve to pursue first-world living standards, since they're poor and lazy and anyway they just come here to steal our jobs.

More specifically, it would increase labor's "exit power" in an economy, since countries with dysfunctional governance and economic policy-making suddenly find all their most productive and wealthiest citizens leaving for areas where they can do better. Of course, it would also tend to push wages towards a new international set of equilibrium, which in the First World would usually mean that their wages are adjusted downward. That in of itself isn't a problem if costs of living fall faster than wages, but that tends to be less visible to workers than the falling wages.

[K. A. Pital]

Definitely. The USSR was a failure, but it wasn't that big of a failure.

The good examples of rags-to-riches nations that I can see are the Asian export-oriented model industrialization (Japan, China, RK), and I wouldn't want to pay the cost they paid (and still are paying) to get where they are, actually. Also most of them are diversified, even small ones like RK.

I'd argue that the larger a country is, the more it should experience regional and local specialization, based on both intrinsic factors (US Midwest --> corn) and accidents (Silicon Valley), as its economy grows and diversifies. So you're right when you point out that large nations don't experience a single specialization, but that's because they're so big they encompass diverse regional specializations. If you're too small to significantly diversify - say, Lichtenstein - then you simply pick what you're best at, export it, and hope the world likes what you've got.

My example of Finland is perfectly valid here.

Another reason free flow of people is as important as free flows of goods and capital: if the world economy changes, people should be able to go where their labor is valued.

That's not so, alas. Even inside nations the free flow of people isn't so free. Labour is highly immobile, compared to capital. Of course capital strives to make the more qualified labour more mobile. But the rest? No. Import just enough immigrants to make cheap housing, but don't open the borders so that everyone can get citizenship - that'd ruin First World living standards in an instant, poof, the great equalization! And the "American dream" is gone.

In the future world I'd like to see all nation-state borders are smashed and national governments don't exist, so that the movement of people is truly free.

So if a large country tries to specialize and ends up failing, then it's probably "doing it wrong" - large countries should be diversifying their regional specializations as their economies develop and integrate into the world economy. As you point out, this is what all modern success stories, from Korea to Japan to China, have done.

The listed nations diversified global, not regional, specializations. Japan had global supply contacts, as did later RK and China. They competed with First World products in heavy industry and electronics and metallury; not ignored this in favor of selling clothes or repairing cars until kingdom come.

I don't think you even need a compensation mechanism or a a stably growing world economy with growing demand for the comparative advantage good in order to conclude that (regional, perhaps not national) specialization and greater international trade increase wealth. You just need free flows of goods, capital, and people across international borders, and market pressures will ensure that industries in a region's comparative advantage grow more than industries in a region's comparative advantage shrink, leaving it on net better off.

Market pressures may ensure the growth of absolutely useless (if not harmful) industries which will be abandoned in a few years or so leaving the economy crippled, or subject the nation to a chronic version of the Dutch disease. I agree that people should move freely and so should capital allocation be universal, but not "across international borders" - rather, without any borders.

As far as international demand shocks, aren't we assuming floating currencies? That for sure cushions domestic industries.

It does cushion industries, but it doesn't cushion people (or at least not in an immediate fashion). Indonesia's currency collapsed for good and never again saw the same overvalued figures it had in the early 90s, but it did not really "cushion" the social shock for the working masses. A more diverse economy is better poised to deal with an external shock.

Why not? Labor should be as free to move about the world as capital - even more so, because we're talking about people's livelihoods, not about digits on a wealthy person's brokerage account. Of course, labor in wealthy countries does its best to prevent free labor flows because the smelly foreign brown people don't deserve to pursue first-world living standards, since they're poor and lazy and anyway they just come here to steal our jobs.

"Labour" is guilty here? Come on. The capitalists in wealthy countries need only a certain amount of cheap labour to perform smelly or physically challenging tasks that White Misters don't like doing (construction, cleaning sewers, packing crates of goods like nothing but a biological machine - I saw people doing that, yup). They don't need all the billions of poor, needy and even the not-so-well off to just stream across the border and destroy the capitalist welfare state. Since when this happens, the capitalists will find themselves in a rather bad position. The newcomers won't get the life level of the worker aristocracy that used to dwell there, and the worker aristocracy will riot looking at how standards of living, payment, et cetera just collapse. No, they must be kept separate for the sake of stability. Even the current modest migration levels are provoking enough tension as it is.

And I didn't see the USA giving out citizenship to any Indonesian person coming to the USA after the 1997 crisis. Or anything like that. At all. Because that's the equivalent thing. When companies collapse, you still enjoy citizenship rights - the movement inside the nation, perhaps some welfare support rights. In case of a nation-state, you don't get a "citizen of the world" card when your nation collapses due to market pressure creating perverse incentives.

The latter is the well-established observation that countries with a comparative advantage in X over Y will tend to produce more X than Y, export X, import Y, and become wealthier as a result.

[/quote]
This begs the question why, despite having comparative advantage in bananas, none of the banana republics became wealthier as a result. Perhaps the precise nature of X and Y matter far more than whether you have comparative advantage in producing X or Y or not. After all, the Europeriphery exchanged their "inferior" industry for German goods and cheap credit (which was used to fund construction booms). Now they're close to insolvency on a nationwide scale. But isn't that logical, I mean Germans do make better industrial equipment than Spain does?

[Simon_Jester]

Why not? Labor should be as free to move about the world as capital - even more so, because we're talking about people's livelihoods, not about digits on a wealthy person's brokerage account. Of course, labor in wealthy countries does its best to prevent free labor flows because the smelly foreign brown people don't deserve to pursue first-world living standards, since they're poor and lazy and anyway they just come here to steal our jobs.

Surlethe, that's a recipe for misery.

Money teleports around the world these days; machinery can be uprooted from Germany and plunked down in Korea without knowing or caring what's happened to it. Human beings can't do either. We're social animals; we like having neighbors, we learn new languages, cultures, and geography at a finite rate. Plus, people need physical services and infrastructure to live in, which doesn't pop out of nowhere as fast as the financial system can shuffle money.

If I really care more about people than brokerage accounts, I'll be trying to figure out a way to make money flow so people can live in one place, not figure out how to get all the people jumping around like fleas on a griddle.

[K. A. Pital]

But that chart is measuring its per capita income as a percentage of the US's. That alone doesn't mean that Argentina fucked up - it could just as easily mean that the US's per capita income simply grew much faster than Argentina's over the same period (which wouldn't be surprising).

It does mean that country X fucked up if it could not keep up with the growth of the already-industrialized nations during the XX century. That actually preordained the decline or fall of many nations that seemed to have a big potential.

Re-read my point about high labor productivity. Finland can get away with that because its labor productivity is high, although not as high as some other First World countries. Since they don't need as many workers in any particular industry to produce a ton of goods and services, their workers can diversify into a whole range of different businesses, including those that require significant amounts of education.

Labour productivity is a function of the tech level of your economy's productive sectors. If you buy equipment and tools abroad and sell just wheat or fruit... or oil, I doubt you're on a way to raise the productivity of labour. This is the problem with comparative advantage. To make tractors which you sell in exchange for fruit you need to make your workers understand basic engineering. You will have to also have to manufacture a whole subset of tools necessary to produce tractors - like lathes, et cetera. You will need to develop metallurgy. Whereas to collect wheat with import machinery or fruit, or oil isn't going to require anything of your workers than just learning to use it. So it is obvious which nation is going to win in the end. This happened tons of times before. Nations which had a complex production chain forced the rest of their industries to develop as well. They also used the newfound knowledge to create empires. Building tractors also helps if you're constructing tanks or cars. Selling wheat... not so much.

It's not really building in inefficiencies to say that the traded "basket of goods" is unlikely to result in countries completely specializing in one good or another in that particular scenario (which is, obviously, a simplification - as I mentioned above).

The simple scenarios (guns and butter choice, agriculture or machinery choice) are actually good, even if primitive. Because in reality the basket isn't 100% one good, but let's say it's 75% or even 90% one-good. That stuff happens with export, you know. And many nations suffer from their economies being like 80% agriculture without any industry, even though it is clear they don't have an industrial comparative advantage. Success stories all follow the same narrative about a nation starting with the construction of industry. There isn't a story about a nation which kept selling like 75% agricultural products and somehow that turned it to a First World nation, not that I know of.

The scenario in question actually does assume that labor is immobile and incapable of moving between the two countries.

90% of labour is immobile when we're talking about nation-state scale. Have you ever seen more than 10% of a nations' population pack up and leave? Even that happens under extreme duress, e.g. civil war, agression, invasion, economic collapse - like the Irish famine, like the Yugoslav civil wars or the brutal ethnic cleansing in Central Africa. Are these examples good? So I'm speaking about the factual reality. As Simon noted, people are socializing in their place of living and most of them aren't of the "lone traveller" variety. You can't just take and relocate an entire country.

Side-note, but the Japanese conglomerates survive being broken up and/or going bankrupt because of protectionism and the oftentimes incestuous relationship they have with the Japanese banking system (something that Korea and China as well, particularly the latter with state-owned enterprises). Even that's not enough to save them completely from conglomerate-wide pain, like in the case of Sony. Sony's had 3-4 years of losses, and just laid off 6% of their workforce.

If this proves anything, this demonstrates that the three success stories about nations changing their status to powerful industrial countries all rest on instances of often-corrupt protectionism. However, these nations are still treated as success stories.

I'm not sure what we're actually arguing about anymore. The relevance of the scenario to trade? Whether countries should intervene in their markets to try and promote diversification?

The latter of course. If diversification is not comparatively advantageous (and most of the time it is not), nations should still promote it. In fact, that's what the First World has been doing with agriculture and it seriously hurts the Third World, but the First World remains powerful and also food secure that way.

More specifically, it would increase labor's "exit power" in an economy, since countries with dysfunctional governance and economic policy-making suddenly find all their most productive and wealthiest citizens leaving for areas where they can do better. Of course, it would also tend to push wages towards a new international set of equilibrium, which in the First World would usually mean that their wages are adjusted downward. That in of itself isn't a problem if costs of living fall faster than wages, but that tends to be less visible to workers than the falling wages.

The stagnation of inflation-adjusted real wages in the years past 1970 is a bit hard to explain under that paradigm. There was lots of cheap migrant labour, but it did not cause the living standard of the workers to rise. Also, their "most productive and wealthiest citizens" aren't workers. They are capitalists. 90% of workers have no chance to leave. The 10% of the worker aristocracy that does of course worsens the situation for the country in question - they leave with their experience and knowledge, and brain drain further worsens the situation in "countries with dysfunctional governance", making the chances of economic recovery even more slim.

[Surlethe]

Stas- haven't forgotten about this. Will get back to it sooner or later.

[Surlethe]

Why not? Labor should be as free to move about the world as capital - even more so, because we're talking about people's livelihoods, not about digits on a wealthy person's brokerage account. Of course, labor in wealthy countries does its best to prevent free labor flows because the smelly foreign brown people don't deserve to pursue first-world living standards, since they're poor and lazy and anyway they just come here to steal our jobs.

Surlethe, that's a recipe for misery.

Money teleports around the world these days; machinery can be uprooted from Germany and plunked down in Korea without knowing or caring what's happened to it. Human beings can't do either. We're social animals; we like having neighbors, we learn new languages, cultures, and geography at a finite rate. Plus, people need physical services and infrastructure to live in, which doesn't pop out of nowhere as fast as the financial system can shuffle money.

If I really care more about people than brokerage accounts, I'll be trying to figure out a way to make money flow so people can live in one place, not figure out how to get all the people jumping around like fleas on a griddle.

Simon, I think that's a nice story, but it's not true. (It also misses my point, but that's less interesting!). All across the history of the world, people have been more than willing to uproot themselves to pursue opportunities. Millions of people immigrated to the Americas, well before communication technology existed as ubiquitously as it does now. The largest mass migration in human history is taking place right now, as hundreds of millions of Chinese peasants move to the cities. A recent Gallup poll shows that 630 million adults would, if given the opportunity, permanently relocate to another country, and 150 million of them would move - permanently! - to the United States. We do like having neighbors, we don't learn new languages, cultures, and geography really fast, but the evidence suggests that those obstacles aren't nearly enough to stop people from moving around.

But like I said, you also kind of missed my point. I'm not in favor of forcing people to move, I'm in favor of giving them the option of moving. You and I, sitting here in the first world, we can't know what's best for people mired in poverty we've never experienced. We can't know whether they'd be better off staying or leaving. The only people who could possibly know whether it's better to immigrate or stay are the people who would face the choice (and probably they wouldn't know, either) --- so let's give them the choice, and let them make it.

[K. A. Pital]

Uh, Surlethe, isn't the "630 million" figure pretty much in line with the 90% versus 10% figures that I put for immobile labour versus mobile? 630 million out of 7 billion.

As far as real history goes, the visa barriers were erected by the developed capitalist nations on their side, not by the Third World. At the end of the XIX century and the beginning of the XX century, one could freely travel in Europe with his national passport. It was far harder to leave your own nation than to enter another nation. Incidentally, most of the relocation to America happened before any formal barriers to settlement were erected. After the anti-immigrant hysteria in the USA and fascism in Europe the face of the First World changed slowly, but permanently and a great wall of separation was erected by governments to prevent "em stealing our jobs".

[Surlethe]

Yeah, it's pretty consistent with your 10% number. But I haven't gotten to your post yet; I was responding to Simon's assertion that permitting labor to be mobile is inhumane. I know that visa barriers were erected by developed nations, again consistent with my point that wealthy people don't want to share -- more precisely, labor keeping out competition. Ironically, capital's free movement has undermined the protection that immigration barriers gave to wages -- instead of people moving across borders to find fixed jobs, jobs and their attendant capital have moved across borders to find fixed people!* Hence, median (pre-tax) income stagnation all across the developed world.

* This is sort of like the movement of charges, I think; you can model it as positive charges zipping around a circuit or negative charges zipping in the opposite direction. As the law of one price acts by arbitrage, goods can move or prices can move.

[K. A. Pital]

That's not just labour keeping out competition. The capitalists likewise do not want a social explosion when First World life standards would drop to a world median. Besides, it is in the interest of a certain population to introduce more and more labour-saving technologies, since that (1) reduces working hours (2) allows to produce more and more stuff with less work, so here the interests coincide. The desire of the capitalists to find cheap labour instead of yet more labour-saving advanced production tech is understandable from a personal gain viewpoint, but for a given society it doesn't mean much good. The introduction of advanced machinery ceases, wages stagnate and working hours may increase.

Immigration barriers have given protection to the rise of extreme automation and self-sufficiency; but capital relocation has significantly slowed down this process.

[Surlethe]

Yes, but observe your reason for why capitalists don't like it: Social explosion. In other words - and to continue our simplistic "labor vs capital" model - labor dislikes it so much that capital compromises on the issue. In some sense, the bargain is, "We will support your immigration bans and you support free capital flows." More on labor-saving machinery later.

[Simon_Jester]

Simon, I think that's a nice story, but it's not true. (It also misses my point, but that's less interesting!). All across the history of the world, people have been more than willing to uproot themselves to pursue opportunities...

Yes, but they move there to stay. And when it comes to international migration, people usually move because they find political or economic conditions at home intolerable. Russian Jews moved to America because they were fleeing pogroms and because they heard rumors that in America the streets were paved with gold, for instance.

The 90% or so of the human race that would rather stay in the same country needs a way to live in those countries.

But like I said, you also kind of missed my point. I'm not in favor of forcing people to move, I'm in favor of giving them the option of moving. You and I, sitting here in the first world, we can't know what's best for people mired in poverty we've never experienced. We can't know whether they'd be better off staying or leaving. The only people who could possibly know whether it's better to immigrate or stay are the people who would face the choice (and probably they wouldn't know, either) --- so let's give them the choice, and let them make it.

If the population of the United States doubles in a period of twenty years because of rapid immigration, they may not end up with the result they chose...

More seriously, we can talk about the details of what kind of migration is good. To me it's a side issue. Please try to remember that I sometimes say things to people which are not direct refutations of their "points;" normal conversations work that way- "yes, and" rather than pure "no, because."

To me, the problem is that "labor should be as free as capital to move about the world" is simply unrealistic- dollar bills don't have any say in where they go and don't care if they move to another continent. People do. So trying to make the world more 'flat' in the Friedman sense of the word by making labor more free to move... it's good for the 10% or 20% who want to move about, but it's bad for the other 80% or 90% if they become expected to move in order to have a livelihood.

This is an issue for the skill-oriented workforce of the developed world already.

Yeah, it's pretty consistent with your 10% number. But I haven't gotten to your post yet; I was responding to Simon's assertion that permitting labor to be mobile is inhumane.

Not quite.

My assertion is that if we configure the global economy on the assumption that labor can be expected to teleport the way capital does, we will find far more people left out of the system than included into it. It's not just a 'developed vs. undeveloped' competition here, it's a simple question of what 80-90% of the human race wants for themselves.

The modern era has plenty of rewards. But it has been poor at providing for people who want to choose the rewards they'd get out of last century's lifestyle, including simple ones like "live in same town for ten years."

I know that visa barriers were erected by developed nations, again consistent with my point that wealthy people don't want to share -- more precisely, labor keeping out competition. Ironically, capital's free movement has undermined the protection that immigration barriers gave to wages -- instead of people moving across borders to find fixed jobs, jobs and their attendant capital have moved across borders to find fixed people!* Hence, median (pre-tax) income stagnation all across the developed world.

* This is sort of like the movement of charges, I think; you can model it as positive charges zipping around a circuit or negative charges zipping in the opposite direction. As the law of one price acts by arbitrage, goods can move or prices can move.

Capital is inherently going to be more mobile than labor, though, so I don't think we can avoid it.

[K. A. Pital]

Yes, but observe your reason for why capitalists don't like it: Social explosion. In other words - and to continue our simplistic "labor vs capital" model - labor dislikes it so much that capital compromises on the issue. In some sense, the bargain is, "We will support your immigration bans and you support free capital flows." More on labor-saving machinery later.

Actually my point was that capitalists dislike being forced to flee the nation or outright killed by their workers in a violent revolt due to the falling life standard. It is not a "compromise", it is self-interest, you know. A matter of class survival and prosperity. Keeping a part of the world's workers in walled-off Utopia Cities is a small price to pay for your continued global rule. Besides, capitalists also need places to live where they don't have to watch their back all the time - a city filled with worker aristocracy is so much more safe in that regard, so of course capitalists need enclaves of safety which are the First World nations. Otherwise their own life would become hell. I am not seeing a "compromise" here.

There was once a bargain between capitalists and labour, it was called the welfare state or the social-democratic consensus, born out of the discontent of the 1960s. This bargain fell apart long ago. Labour was crushed and atomized on a global scale during the last 50 years. There's no new bargain - even First World nations like European periphery are being bled dry with instances of mass poverty and mass unemployment mirroring that of the pre-consensus 1960s. Capitalists have the world now. They don't need to make "bargains" with their own populace, or any populace as such, they can always find new people for sweatshops in case something goes wrong.

[Sea Skimmer]

It's quite simple really. Between 1870 and 1900, Argentina had the highest per capita GDP growth in the world. It was reaching the First World nations of Europe by wealth. During the XX century, it transitioned from a First World nation wealth level to a Third World one. And that's it. Wealth is relative.

Yeah, really good of an economy going boom and bust based on a single commodity, beef. Argentina surged on the development of refrigerated transport for beef allowing its cattle to reach European markets. Once they hit the limits of that industry they never had anything equivalent to replace it. It should really be a warning to anyone making a fortune off oil right now, or microchips or any other single product for that matter but generally nobody gives a damn about history past+/- 10 years, if that. Also didn't help that at times the government was taking out loans equal to 50% of the GDP to buy warships.

[Surlethe]

[My example of Finland is perfectly valid here.

Yes, because it's a small country?

That's not so, alas. Even inside nations the free flow of people isn't so free. Labour is highly immobile, compared to capital. Of course capital strives to make the more qualified labour more mobile. But the rest? No. Import just enough immigrants to make cheap housing, but don't open the borders so that everyone can get citizenship - that'd ruin First World living standards in an instant, poof, the great equalization! And the "American dream" is gone.
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In the future world I'd like to see all nation-state borders are smashed and national governments don't exist, so that the movement of people is truly free.

Yes indeed, but in the near future let's move toward that by opening all the borders. And I don't think the "American dream" is gone; that's what the great equalization is all about!

The listed nations diversified global, not regional, specializations. Japan had global supply contacts, as did later RK and China. They competed with First World products in heavy industry and electronics and metallury; not ignored this in favor of selling clothes or repairing cars until kingdom come.

Yes, I'm not saying you have to pick a product and then stick with it. But these countries all got their start by exporting labor-intensive goods since they didn't have the capital or the infrastructure to compete with first world products. As they became wealthier, they copied and improved on Western techniques and imported capital to compete with first world countries. The broader point is, opening your economy to competition makes your nation better off.

Market pressures may ensure the growth of absolutely useless (if not harmful) industries which will be abandoned in a few years or so leaving the economy crippled, or subject the nation to a chronic version of the Dutch disease. I agree that people should move freely and so should capital allocation be universal, but not "across international borders" - rather, without any borders.

Opening international borders is maybe a little more realistic than abolishing all national governments It's true that market pressures may ensure the growth of industries that are useless or harmful in the long-run (c.f. ghost towns across the American West), but I think the key here is that nothing has enough information to predict which industries are going to be useful or harmless. Any guesses we make are going to be just that - guesses. The only way to know for sure is to try it and see what happens, and to do that we have to make sure that as soon as we know the industry is a failure, the economy is set up so that people and capital can quickly transition away from it.

As far as international demand shocks, aren't we assuming floating currencies? That for sure cushions domestic industries.

It does cushion industries, but it doesn't cushion people (or at least not in an immediate fashion). Indonesia's currency collapsed for good and never again saw the same overvalued figures it had in the early 90s, but it did not really "cushion" the social shock for the working masses. A more diverse economy is better poised to deal with an external shock.

Sure, and a market-oriented economy naturally diversifies itself. (Just so we're clear, again, when I say "market-oriented", I mean in the sense of Western Europe and the Anglosphere, not in the sense of anarcho-libs.)

And I didn't see the USA giving out citizenship to any Indonesian person coming to the USA after the 1997 crisis. Or anything like that. At all. Because that's the equivalent thing. When companies collapse, you still enjoy citizenship rights - the movement inside the nation, perhaps some welfare support rights. In case of a nation-state, you don't get a "citizen of the world" card when your nation collapses due to market pressure creating perverse incentives.

Of course you didn't see the USA giving out citizenship willy nilly -- that's what I'm saying is the problem!

The latter is the well-established observation that countries with a comparative advantage in X over Y will tend to produce more X than Y, export X, import Y, and become wealthier as a result.

This begs the question why, despite having comparative advantage in bananas, none of the banana republics became wealthier as a result. Perhaps the precise nature of X and Y matter far more than whether you have comparative advantage in producing X or Y or not. After all, the Europeriphery exchanged their "inferior" industry for German goods and cheap credit (which was used to fund construction booms). Now they're close to insolvency on a nationwide scale. But isn't that logical, I mean Germans do make better industrial equipment than Spain does? [/quote]
Well, because they were banana republics: they focused on bananas, threw up barriers to emigration and modernization, and didn't actually let their economies adjust and grow. I'm reminded on the Gilded Age dichotomy between "coffee economies" and "cotton economies" - those developing economies that were based on goods which participated in markets that closely approximated free were much more prosperous than the developing economies based on goods which were organized around huge plantations. The owners of the plantations acted to enrich themselves in the short term at the expense of the entire country's development.

Actually my point was that capitalists dislike being forced to flee the nation or outright killed by their workers in a violent revolt due to the falling life standard. It is not a "compromise", it is self-interest, you know. A matter of class survival and prosperity. Keeping a part of the world's workers in walled-off Utopia Cities is a small price to pay for your continued global rule. Besides, capitalists also need places to live where they don't have to watch their back all the time - a city filled with worker aristocracy is so much more safe in that regard, so of course capitalists need enclaves of safety which are the First World nations. Otherwise their own life would become hell. I am not seeing a "compromise" here.

Right, what I'm saying is that if they could get away with it the capitalists would love for labor to be able to move from place to place. They benefit from the performance of the economy as a whole, and so any barriers to factor flow are impediments to their wealth. The reason they don't favor dropping immigration restrictions is that labor very strongly objects to competition and (in your conception) is holding a gun to the capitalists' heads. So, sure, the capitalists are going to go along with immigration restrictions, but only because of the implicit threat of labor unrest, not because they lose out on the economic deal. That's what I mean when I say that labor is the cause of barriers to entry into the First World nations.

Edit: Urg, quote tags.

[Surlethe]

Simon, I think that's a nice story, but it's not true. (It also misses my point, but that's less interesting!). All across the history of the world, people have been more than willing to uproot themselves to pursue opportunities...

Yes, but they move there to stay. And when it comes to international migration, people usually move because they find political or economic conditions at home intolerable. Russian Jews moved to America because they were fleeing pogroms and because they heard rumors that in America the streets were paved with gold, for instance. The 90% or so of the human race that would rather stay in the same country needs a way to live in those countries.

They seem to be doing a good job of figuring it out. If 10% of their population up and left, well, that makes things a little less crowded and wages a lot higher.

If the population of the United States doubles in a period of twenty years because of rapid immigration, they may not end up with the result they chose...

That's okay - they're still better off than they were before, and isn't that the point? After all, if it gets too bad, they can move back.

More seriously, we can talk about the details of what kind of migration is good. To me it's a side issue. Please try to remember that I sometimes say things to people which are not direct refutations of their "points;" normal conversations work that way- "yes, and" rather than pure "no, because."

Yes, yes, okay.

To me, the problem is that "labor should be as free as capital to move about the world" is simply unrealistic- dollar bills don't have any say in where they go and don't care if they move to another continent. People do. So trying to make the world more 'flat' in the Friedman sense of the word by making labor more free to move... it's good for the 10% or 20% who want to move about, but it's bad for the other 80% or 90% if they become expected to move in order to have a livelihood.

I don't know anything about "expectations." All I'm saying is that configuring the economy so that people can go where they want to in order to better themselves is a step in the right direction. For example, imagine if all of those farm kids in the Midwest who can't wait to go to college in a city couldn't move out of their states. We can talk about whether or not subsidizing rural life is good (I think it's not), but even the current system is better for those kids (and their parents!) than a US where labor has severely restricted interstate mobility.

Yeah, it's pretty consistent with your 10% number. But I haven't gotten to your post yet; I was responding to Simon's assertion that permitting labor to be mobile is inhumane.

My assertion is that if we configure the global economy on the assumption that labor can be expected to teleport the way capital does, we will find far more people left out of the system than included into it. It's not just a 'developed vs. undeveloped' competition here, it's a simple question of what 80-90% of the human race wants for themselves.

Note I don't mean we should expect labor to teleport. I mean that a world where labor can move across national borders would be superior to this world, where labor can't. I also don't think that permitting labor to move would cause labor to be expected to teleport (by whom?) immediately the way capital does.

The modern era has plenty of rewards. But it has been poor at providing for people who want to choose the rewards they'd get out of last century's lifestyle, including simple ones like "live in same town for ten years."

It's also been poor at providing for people who want to fly faster than the speed of light between star systems.

* This is sort of like the movement of charges, I think; you can model it as positive charges zipping around a circuit or negative charges zipping in the opposite direction. As the law of one price acts by arbitrage, goods can move or prices can move.

Capital is inherently going to be more mobile than labor, though, so I don't think we can avoid it.[/quote]
Sure, and electrons are plenty more mobile than protons. Although electron:proton mobility ratio is much larger than capital:labor mobility.

[K. A. Pital]

Yes, because it's a small country?

Exactly. Small nations need not avoid diversification. They should pursue it.

Yes indeed, but in the near future let's move toward that by opening all the borders. And I don't think the "American dream" is gone; that's what the great equalization is all about!

I think most of the Americans here wouldn't like the average life level of a more well-off Chinese worker, which is pretty close to world median I believe. And of course let's do that - nothing would end the current order faster than this, but borders of the Third World nations are already open, it's the other borders which are closed.

The broader point is, opening your economy to competition makes your nation better off.

That's a very broad point however. Competition doesn't mean just sticking only to goods where you have a comparative advantage but also pursuing those where so far you have none. But may have in the future. It took Japan a while to surpass the American automotive industry. Competitiveness isn't some sort of an absolute given which makes certain nations grow plums while others make computers; it is something you forge yourself. I'm not against competition. But comparative advantage isn't about competing either, it is about sticking to things you (sort of) do best right now, ignoring the future possibilities for the current ones.

Opening international borders is maybe a little more realistic than abolishing all national governments It's true that market pressures may ensure the growth of industries that are useless or harmful in the long-run (c.f. ghost towns across the American West), but I think the key here is that nothing has enough information to predict which industries are going to be useful or harmless. Any guesses we make are going to be just that - guesses. The only way to know for sure is to try it and see what happens, and to do that we have to make sure that as soon as we know the industry is a failure, the economy is set up so that people and capital can quickly transition away from it.

I think that's not the point. Consider a nation or corporation which makes a mix of goods A and B and then one which makes ABCDEFGH. Obviously, if A and B happen to become obsolete due to tech progress or useless for some other reason, the first nation/corporation is instantly ruined. The second one, on the other hand, would survive this and shift towards its other activities, thereby also easing the transition for its labourers. That was my point. "No one has information" means market economies are giant bet games. But if they are, one should never place all his bets on one or two numbers, no matter how "good" these numbers seem right now. I thought my Argentina example was quite good. It is even more obvious on a nation-state scale. What if oil becomes obsolete? I bet Abu-Dhabi won't be seeing lots of people and will soon turn into a giant poorly supplied poor ghetto like Manila or Jakarta.

Sure, and a market-oriented economy naturally diversifies itself. (Just so we're clear, again, when I say "market-oriented", I mean in the sense of Western Europe and the Anglosphere, not in the sense of anarcho-libs.)

Um... that just does not seem to be true. Why didn't many of the Third World market economies "naturally diversify"? "Western Europe and Anglosphere" is a cultural definition which has little to do if anything with market economy - a market economy is defined by market pricing in most or all markets (including capital goods), not by English as a language or being a former British colony, you know.

Of course you didn't see the USA giving out citizenship willy nilly -- that's what I'm saying is the problem!

So you would support the US giving out citizenship to any Indonesian or Vietnamese or Philipino going to the USA to work? This does make sense, after all the US heavily... uh... intervened in the affairs of these nations, being partially complicit in the conditions that their populace "enjoys" now. However, that'd be a lone voice in the wilderness. No capitalist and not even a single social democrat would support that. And by support I mean actually enact such measures, as opposed to talking about how good and friendly and globalized we all now are.

Well, because they were banana republics: they focused on bananas, threw up barriers to emigration and modernization, and didn't actually let their economies adjust and grow. I'm reminded on the Gilded Age dichotomy between "coffee economies" and "cotton economies" - those developing economies that were based on goods which participated in markets that closely approximated free were much more prosperous than the developing economies based on goods which were organized around huge plantations. The owners of the plantations acted to enrich themselves in the short term at the expense of the entire country's development.

Third world nations "threw up barriers to emigration"? You can't be serious. What is that "setting up barriers to modernization" you're talking about? They concentrated on goods where they had a comparative advantage. Also, their economies were growing. Argentina was growing faster than all the world together with it's meat. And then it just stopped, and since there was nothing but meat, it fell from high to low. So their economies adjusted to what the world market wanted from them, enjoyed high growth (which might have been lower if they spent money on things they don't really have much experience with, like automobiles) and then enjoyed misery.

So, sure, the capitalists are going to go along with immigration restrictions, but only because of the implicit threat of labor unrest, not because they lose out on the economic deal. That's what I mean when I say that labor is the cause of barriers to entry into the First World nations.

What is First World labour but a product of First World capitalism? The welfare state arose as a concept of savvy politicians and smart capitalists - a way to prevent revolution that would destroy their power in the early XX century. So incomes in the First World skyrocketed, capitalists started sharing with their labour, reducing their working hours, et cetera. Now they face their own creation, a wealthy, opulent billion mouths working only 8 hours a day, eager for new "entertainment, for more consumption. They nurtured the First World into its current state, to keep their power, and now they need to keep it that way to maintain their power, with only a small amount of immigrant labour to do the worst jobs.

If 10% of their population up and left, well, that makes things a little less crowded and wages a lot higher.

If 10% of the most qualified labourers just leave the nation, which is what happens most of the time, economy collapses and wages of the uneducated workers who remain fall to even lower standards.

It's also been poor at providing for people who want to fly faster than the speed of light between star systems.

This is really cruel - comparing the idea that people can and actually should have a decent life in their own nation to something like FTL. Didn't expect that. Your US Midwest example is a bit dishonest - it completely ignores the cultural and language barriers which existed for centuries. Not something you can just remove at a whim.