Paul Craig Roberts’ statement before the US-China Economic and Security Review Commission (9-25-03) poses an interesting challenge: “I suggest for your consideration that comparative advantage, which permits free trade to create gains for trading partners, has been undermined by the international mobility of factors of production. Instead of sectorial adjustments from changes in competitive conditions, we might be experiencing the flight of factors of production to countries where their productivity is highest.” He then offers the non-solution of dividing the world into 1st, 2nd, and 3rd world trade zones, enforced by government.
As an economist with strong ties to and appreciation for the work of scholars working in the tradition of Carl Menger, my response is: “Lions and Tigers and Bears, Oh My! Wait! They’re just Halloween costumes.”
It is a shame to see someone like Roberts, who ought to know, better sign on to Goldsmith’s misapprehensions.
He’s right about Ricardo: goods flows take the place of factor flows when political and transactions cost barriers exist between political entities and geographical areas. The principle of comparative advantage shows the value-increasing results of specializing according to relative opportunity costs, given those barriers.
But, this is hardly the optimal situation. What would produce far more value would be free flows of factors and goods to areas of absolute and comparative advantage.
It’s the political element that messes things up. Jingoists seize on this and use it as an argument for freezing political units in place and condition. “China and India might end up eating...” the lunch of the “free” nations like the U.S. and U.K.
What is forgotten here is the argument for the inherent inefficiency of socialism. Resources will be ill-used unless the economy in which they are employed is a market one. China and India could “eat our lunch” in only two ways: 1.) If they become free market economies; or 2.) If they grind up their populations and resources to make soup for the rest of the world. In the first case, we are all better off. In the second, they will eventually run out of ingredients.
Turning the first, second and third worlds into concentration camps that trade with each other doesn’t seem to address the real problems of freeing up the world economy for the benefit of all mankind in my humble opinion.
