How Rich Countries Got Rich

I’ve mentioned before what I see as the most important economic analysis for our times. This is “How Rich Countries Got Rich . . . and Why Poor Countries Stay Poor” by Eric Reinert. Several folks pointed out that it is an expensive book, so a few days ago I did an analysis of an earlier work which raised the same points. The main issue is that if a country wants to be rich, it needs to develop, defend, and maintain its manufacturing sector. Given that we have foolishly shipped our manufacturing sector overseas, these ideas are hugely critical for the US at this time in history.

This post continues the examination of Reinert’s work. In this case I’ve scanned and OCR’d a chunk of his introduction to the book, where he discusses his ideas chapter by chapter. I’ve interspersed some comments, and all emphasis is mine. He starts with an overview.

This book begins by describing different types of economic thinking and goes on to argue why the virtual world monopoly of the current dominant theory should be broken. English economist David Ricardo’s trade theory, dating from 1817 has become the linchpin of our world economic order. Even though we can see that free trade in some contexts makes people poorer, Western government are still complacently insisting on it and are offering more aid as an incentive for accepting it.

Ricardo’s theories of “comparative advantage” and “free trade” are unfortunately the gospel these days. I say unfortunately because Ricardo is wrong. In my post entitled “Why Free Trade Isn’t” I gave one of many examples of how free trade has made people poorer, this time in the Solomon Islands, in contradiction to Ricardo and just as Reinert says.

Thus, the good intentions of those who call for more aid obscure the folly of the current economic orthodoxy as it is carried out in real policies. In this way the dogma of global free trade survives, while idealism and generosity act to cover up a surreal and sometimes even criminal and corrupt reality. Understanding the problems underlying today’s ruling economic theory and resurrecting alternative approaches is a necessary starting point.

Foreign aid in general is NOT any kind of long-term help to a country. For example, if we ship free food as foreign aid to some area hit by famine, we wildly distort the local food market and we can and do put local farmers and food suppliers out of business … it’s hard for a farm or a business to compete with “free”.

Chapter 1 of this book explains the existence of different types of economic theory, and the gap that is frequently found between ‘high theory’ rhetoric and practical reality in terms of economic policy.

Theory says that NAFTA should have made everything much better. Instead, it has destroyed the US manufacturing sector.

Chapter 2 traces the evolution of today’s canonical sequence of authors from Physiocracy via Adam Smith and David Ricardo to standard textbook economics. This tradition ia contrasted with a much older and less abstract Other Canon of economics that provided the guidelines for economic policy when today’s presently wealthy nations made their historical transition from poverty to wealth; for example, England’s progression from 1485 through to the post-Second World War Marshall Plan.

Reinert distinguishes the current economic theories leading up to Ricardo’s defense of free trade, and contrasts them to earlier theories such as the one I discussed in True Wealth.

In Chapter 3 I argue that what Enlightenment economist called emulation, rather than ‘comparative advantage’ and ‘free trade’, lies at the heart of successful development. In this context emulation means imitating in order to equal or excel. If the tribe across the river has taken the step from the Stone Age to the Bronze Age, your own tribe is faced with the choice of either sticking to its comparative advantage in the Stone Age or trying to emulate the neighbouring tribe into the Bronze Age.

Before David Ricardo there was little doubt that emulation would be the best strategy, and historically the most important contribution of Ricardo’s trade theory was that, for the first time, it made colonialism morally defensible. Today we have totally dismissed the idea that a strategy of emulation was a mandatory passage point for all nations that are presently rich: we have outlawed the key tools needed for emulation. This chapter uses the history of economic policies – the knowledge of which policies created successful development in the past – in order to create a theory of uneven economic development. In today’s economics, neither of these is regarded as a legitimate academic field. Instead, in today’s trade theory, economic harmony is already built into its basic assumptions.

This is a key concept. It’s better to be a semi-successful Bronze Age tribe than a totally successful Stone Age tribe. Ricardo argues that each country should utilize its “comparative advantage”, what the country naturally has to offer. Reinert says no, you’re better off to be a poorly industrialized country than to be sentenced to eternal life as a supplier of raw materials. The Solomon Islands agrees.

There are plenty of good arguments for free trade, but Chapter 4 argues that David Ricardo’s is not one of them. Delving deeper into the economics of production reveals that the best arguments for globalization are also the best ones for preventing poor countries from prematurely entering the world economy. Ricardo’s theory appears to be right in many contexts, but is essentially right for the wrong reasons. However, aspects of Ricardian theory are deeply cherished both by the political left and the right, and criticizing it is problematic. On the political right, Ricardian trade theory provides the ‘proof’ that capitalism and instant unrestrained international trade are in the interests of all inhabitants of the planet. The proof of the benefits of free trade is based on what economists call the labour theory of value, i.e. that human labour is the sole source of all value, and the Marxist world-view is also based on this same theory.

As I see it, the labour theory of value was probably better suited to make nineteenth-century industrial workers take to the streets than to explain the wealth and poverty in today’s world. Polish mathematician Stanislaw Ulam once asked American economics Nobel prizewinner Paul Samuelson – who in 1949 theorized that free trade will tend to level out world wages – whether he could point to an idea in economics that was universally true but not obvious. Samuelson’s response was the ‘principle of comparative advantage” according to which two countries necessarily benefit from engaging in free trade with each other, provided their relative production costs are not identical. Thus, an attack on the philosophical basis of the free trade doctrine exposes one not only to attacks from both sides of the right-left axis, but also undermines the claim of economics to be a ‘hard science’. This book brings back traditions in which economics is not and never can be a ‘hard science’.

In Chapter 4 he discusses the many difficulties of trying to overthrow a theoretical framework that benefits both the right and the left … but does not benefit the poor.

Chapter 5 argues that today in many poor countries we can observe the opposite of development and progress, that is, retrogression and primitivization. The mechanisms causing this primitivization are explained, using Mongolia, Rwanda and Peru as examples. To go back to the example of the two tribes given above, logic in use only a few decades ago admitted that a higher standard of living could be achieved by entering into the Bronze Age, even though your own tribe might not be as advanced as the leading tribe. The logic that died with the Berlin Wall was that it is better to have an inefficient manufacturing sector than not to have a manufacturing sector at all, and such an approach has led to falling real wages in many countries in Eastern Europe, Asia, Africa and Latin America.

His examples are of interest, but you’ll have to read the book for that. The examples are again in support of the idea that you’re better off being a not-so-good Bronze Age society than you are staying in the Stone Age, even if you’re really good at stones and not so good at bronze.

The recent responses from mainstream economics to the challenges of poverty are discussed in Chapter 6. In order to find remedies, it is necessary to distinguish core aspects of economic development from what are collateral effects or even just symptoms. It is argued that by being unwilling to critically evaluate these core metaphors, assumptions and postulates of economics, economists have recently been distracted by a string of red herrings – they have looked everywhere but at the core issues in the realm of production. The same people who were in charge in the 1990s are still the ideological leaders of what is supposed to be a reconstruction. It is rather like asking Attila the Hun for advice on urban regeneration.

Chapter 6 is about the many misunderstandings of the mainstream economists, who are looking everywhere but at the idea of moving people from the Stone Age to the Bronze Age.

In Chapter 7 I argue that knowledge of the historical process of development can prevent us from adopting policies that seem logical but are in fact very damaging. In comparison to the free trade that is forced on poor countries, rich countries restrict imports of agricultural products from the Third World and subsidize their own agriculture. Intuitively the highest priority is put on rectifying these unfair practices, but, as we shall see from eighteenth-century examples, the removal of agricultural tariffs is a long-standing weapon in the colonial armoury. However unfair the practices may seem, focusing too much on them may lead us into the Panglossian trap of assuming that if we only had perfectly free trade and laissez-faire, the visions of economic harmony would actually become a reality. Present World Trade Organisation (WTO) rhetoric is that the South stays poor because the North protects its agriculture. I shall attempt to show that the world is not so constructed that the starving South would get rich if they were only allowed to sell their food to the North.

We cannot make the poor rich merely through our direct and naive kindness. The world is so complex now that we have to think through the systemic and long-term effects of our actions. It is natural that people who observe backward agriculture in Africa wish to help Africa by making that agriculture more efficient. Enlightenment philosopher and economist David Hume, however, suggested that the best way to improve agriculture is through the roundabout way of first improving manufacturing industry – and we now have half a millennium of historical data to back up Burne’s insight. Achieving an· optimum balance between different economic sectors in a nation used to be an important part of Enlightenment economics, but has become totally lost as a theme today.

Just as we do not create more food in the Third World by eating less ourselves – at the moment famines are essentially caused by a lack of purchasing power rather than a lack of world supply – we do not create development in the Third World by closing down First World agriculture. This book argues that a deal should be struck by which the First World is allowed to protect its own agriculture (but prevented from dumping its surpluses on the world markets} while the Third World is allowed to protect its manufacturing and advanced service sectors. This is the only policy that can be consistent with successful development policy over the last 500 years.

We have collectively forgotten how to create wealthy nations – an art that was successfully employed as recently as fifty years ago – and so our responses to the challenges of poverty today, however well intentioned, amount to an attack on the symptoms of poverty rather than its deep causes. Chapter 7 focuses on the Millennium Development Goals that include worthy goals like reducing by half the number of people living on less than a dollar a day and the proportion of people who suffer from hunger, reducing diseases and child mortality, as well as educational and environmental goals. I argue that both the Millennium Goals and the campaign to ‘Make Poverty History’ are far too heavily biased towards palliative economics, aimed at easing the pains of poverty rather than at making the fundamental structural changes that result in true economic development.

Rather than creating democracy and development, this approach [free trade] – regardless of the nobility of the intentions – will produce a crippling welfare colonialism in which rich countries maintain their political power over poor countries. This is not to say we should not do what we can to relieve suffering through aid, but we must also take on the more important task of understanding how poor countries can become richer by themselves. Advocates of free trade often use similar rhetoric for their policies, but there is a crucial difference: while I argue for development over assistance as the priority for the world’s poor, I want to advocate development that serves the world’s poor, not passive transfers that in the end take the form of covert colonialism.

Not much I can say about that except that it certainly agrees with my experience from my years working in overseas development in Asia, Africa, Central and South America, and Oceania.

The concluding Chapter 8 charts how it is possible to create middle-income countries, where all inhabitants have a purpose and a claim on the necessities of life and at least some of its pleasures. In terms of theory and economic policy, this needs nothing more . radical than going back to the practices of trade and development as they were practised in the period immediately following the Second World War, as exemplified in the 1948 Havana Charter of the defunct International Trade Organization (ITO), that is, the subjugating of the goal of free trade to other goals directly involving human welfare.

To summarize: for centuries, we only had two ways to create wealth—agriculture and extraction (mining, logging, fishing, etc.). The invention of manufacturing was so huge we describe it as the “industrial revolution”. The yields from manufacturing are much larger than from either agriculture or extraction, in part because manufacturing can convert those raw materials into finished products of a much, much higher value, and in part because of manufacturing economies of scale.

For a nation to become rich, then, it needs to develop its manufacturing sector. As my previous discussion of the Honiara nail mill showed, free trade is antithetical to this process.

It gets worse. We had a vibrant manufacturing sector in the US, but in an act of unparalleled economic stupidity, we took down our trade barriers, signed on to NAFTA, and moved our manufacturing overseas … and of course, the jobs moved overseas as well.

The solution, of course, is obvious—trade barriers, just like we had before we became infatuated with the deadly siren of free trade.

trade-barriers

I know that many people have a knee-jerk reaction against protectionism, but one fact is clear—protectionism is how all of the rich countries got rich. The exporting of 70,000 factories and over a million jobs since NAFTA is clear evidence that we ignore the benefits of protectionism at our own peril.

Rain again today, and despite lots of water outside we have no water in the house. The shower control valve decided it wasn’t such a control freak after all and it was tired of having to be in control all the time, it wanted to get in touch with its feelings  … so an ongoing leaking shower has me abusing my big box of plumbers’ tools and saying bad words. Yeah, I could call in the man, he’s a good buddy of mine, but he charges one Benjamin per hour … my crystal ball sees me crawling under the house in the near future.

So … what’s not to like? Life is good.

w.

PS: Please … QUOTE THE EXACT WORDS THAT YOU ARE DISCUSSING in your comments so we can all understand the subject of your objection.

PPS: For more info without buying the book, check out the first review at the Amazon link above. It’s a very detailed concordance of Reinert’s main ideas.

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25 thoughts on “How Rich Countries Got Rich

  1. I’ve been reading your pieces on free trade with interest. It’s one of the few areas we genuinely disagree. But I learn a little bit each time … don’t give up, you may persuade me yet.

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  2. “Reinert says no, you’re better off to be a poorly industrialized country than to be sentenced to eternal life as a supplier of raw materials. ”

    Speaking from Australia, which has been systematically destroying it’s manufacturing sector, I agree. Decades ago, we had a royal commission which recommended destroying the tariffs that protected Australia’s manufacturers. The level of manufacturing in Australia entered a free fall from which it hasn’t recovered.

    Then we got the Renewable Energy Target and the “price on carbon”, which has made energy very expensive, and often not there. This has driven manufacturing out of South Australia and Victoria. I see no way that Australian manufacturing can recover from these two nails in it’s coffin.

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  3. Hi Willis, again there are a few things here that don’t make sense to me.

    1. The conflation of manufacturing jobs and factories with being rich (“exporting of 70,000 factories and over a million jobs”). They are not equivalent. Automation increases the amount of wealth created per worker. That’s the very reason Reinert loves manufacturing: it scales so well. The key number to look at is total output, which continues to rise for America.

    It’s misleading to look at manufacturing as a percentage of the economy, because as Reinert explains, a strong manufacturing sector boosts earnings in other sectors through synergies (better equipment) and local supply and demand (e.g. a barber in a rich country gets paid much more than a barber in a poor country).

    2. The conflation of what is good for poor countries vs what is good for rich countries. I agree that poor countries benefit from protectionism, because it allows them to develop their industry. But rich countries benefit from free trade because of economies of scale. They can sell much more product for only a little more effort – especially now that so much value is embodied in things that are hard to make and trivial to scale, like software and design (but in essence this is just an extension of the natural progress since the industrial revolution).

    3. I don’t understand who you think would benefit from American protectionism in particular. Surely not the poor countries you’ve listed!

    I hope you’d agree that if America imposes tariffs, that’s bad for other countries that want to grow their industries. For example China would be most upset if America imposed tariffs on their goods, because exporting is their route to wealth.

    And the natural consequence of one side imposing tariffs is retaliation. It’s a Prisoner’s Dilemma situation where both sides defect. You lose the benefits of scale that make manufacturing so wonderful. The natural consequence is a world with “self-sufficient” countries that look a lot like North Korea or Cuba, or in other words another Great Depression. It’s been tried before!

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    • Tom (Perth) December 23, 2016 at 3:38 pm

      Hi Willis, again there are a few things here that don’t make sense to me.

      1. The conflation of manufacturing jobs and factories with being rich (“exporting of 70,000 factories and over a million jobs”). They are not equivalent. Automation increases the amount of wealth created per worker. That’s the very reason Reinert loves manufacturing: it scales so well. The key number to look at is total output, which continues to rise for America.

      It’s misleading to look at manufacturing as a percentage of the economy, because as Reinert explains, a strong manufacturing sector boosts earnings in other sectors through synergies (better equipment) and local supply and demand (e.g. a barber in a rich country gets paid much more than a barber in a poor country).

      You seem to be saying that the reason 70,000 factories moved overseas is because of automation … and that is the important number to look at, not “total output”.

      2. The conflation of what is good for poor countries vs what is good for rich countries. I agree that poor countries benefit from protectionism, because it allows them to develop their industry. But rich countries benefit from free trade because of economies of scale. They can sell much more product for only a little more effort – especially now that so much value is embodied in things that are hard to make and trivial to scale, like software and design (but in essence this is just an extension of the natural progress since the industrial revolution).

      Rich countries do NOT benefit from free trade if they let their manufacturing move overseas. They only benefit if they simply import cheap raw materials and process them for the value added.

      This is very clearly laid out in my post “True Wealth” using the rules from 1684, one of which was:

      Seventh, such foreign commodities should in this case be imported in unfinished form, and worked up within the country, thus earning the wages of manufacturing there.

      Instead, we’re stupidly buying the finished products, often made in factories moved overseas from the US. Sure, the owners of the corporations get rich … while the workers have no jobs.

      3. I don’t understand who you think would benefit from American protectionism in particular. Surely not the poor countries you’ve listed!

      Of course not. AMERICA benefits from American protectionism, we’re not going to do it for altruistic reasons.

      I hope you’d agree that if America imposes tariffs, that’s bad for other countries that want to grow their industries. For example China would be most upset if America imposed tariffs on their goods, because exporting is their route to wealth.

      Cry me a river. Why should America do what is not good for itself, simply because it’s good for China?

      And the natural consequence of one side imposing tariffs is retaliation. It’s a Prisoner’s Dilemma situation where both sides defect. You lose the benefits of scale that make manufacturing so wonderful.

      You’re not following the story. WE’VE LOST A HUGE PART OF OUR MANUFACTURING ALREADY! The benefits of scale are GONE with the 70,000 factories that were moved overseas. I’m trying to get them back, and you say we might lose them? Say what?

      The natural consequence is a world with “self-sufficient” countries that look a lot like North Korea or Cuba, or in other words another Great Depression. It’s been tried before!

      Indeed it has been tried before, and very successfully, because protectionism is how the rich countries got rich. And giving up protectionism is why middle class wages have not gone up in a quarter century—the ongoing loss of manufacturing jobs has continually added workers to the labor pool, with the labor oversupply putting constant downward pressure on the wages.

      w.

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      • “The benefits of scale are GONE with the 70,000 factories that were moved overseas. I’m trying to get them back, and you say we might lose them? Say what?”

        This pretty much sums it up. The outcome of scale is PRECISELY that manufacturing output can be ever higher with fewer factories and fewer jobs. Manufacturing hasn’t gone away, it has grown and it looks different. More capital-intensive, less labour-intensive.

        Let me be clear. I DO think there is value in gainful employment, both for the individual and society. I DO think there is value in industries that produce vast wealth and scale well.

        But I don’t agree that the way forward is a return to labour-intensive manufacturing. And even if I did, I think a protectionist trade war is more likely to kill off successful industries (due to retaliation) than revive dead ones (which at best would come back as automated factories, not new jobs).

        In the end, regardless of trade policy, your nemesis is automation. The trend is inevitably towards more productivity per worker.

        The solution is not to go backwards but forwards. Like all successful economies, invest in education so workers can do the high-skill, high-leverage jobs of now and the future. Appreciate that service jobs are often much nicer than manufacturing jobs. If the manufacturing sector is producing enough wealth as a whole then it all comes down to distribution, and the service sector could fill that role very nicely with the right incentives.

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      • Willis, I’ve now read the book, and don’t have much to add to your analysis, well done. I will say that it’s rare for a book to completely overhaul some long-held ideas, but that’s the case here.

        Economics is not something I’ve studied beyond a few undergraduate courses in the 70’s, but all I’ve heard ‘til now is “free trade is good – open all markets and everyone benefits”, and I never looked beyond this. Reinert’s book has changed that completely.

        My only criticism of the book is the repetition – same examples over and over. And over. And over…I would have like more examples and more depth.

        Also, this didn’t appear until the last chapter (as I recall), but Reinert seems to be in favor of minimum wages. I’d have to re-read the book to see if there was some better explanation of WHY he favors them (and couldn’t look it up in the index – see below), but what I got from the rest of the book was that wages for everyone went up with improvements in industry. No need to set minimum wages there, and I’ve never heard of a study that showed any benefits to the practice. Might have missed it though.

        My criticism of the index: almost entirely names and places. No way to search for concepts, acronyms, examples etc. No way to look up golf balls and baseballs, or minimum wage…

        Thanks for recommending this book.

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        • Thanks, Roy. Like you I’d uncritically accepted free trade as gospel until I read that.

          My theory on minimum wage is if a little rise in minimum wage is good, a big raise must be great. So clearly, all we need to do to lift the entire country out of poverty and ensure nationwide prosperity is to set a $75 minimum wage … what’s not to like?

          And if you know what is not to like, you know what’s wrong with minimum wages.

          Best to you,

          w.

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  4. Tom (Perth) December 23, 2016 at 5:16 pm

    “The benefits of scale are GONE with the 70,000 factories that were moved overseas. I’m trying to get them back, and you say we might lose them? Say what?”

    This pretty much sums it up. The outcome of scale is PRECISELY that manufacturing output can be ever higher with fewer factories and fewer jobs. Manufacturing hasn’t gone away, it has grown and it looks different. More capital-intensive, less labour-intensive.

    Tom, the 70000 factories did not move overseas because of automation or because they could do it with fewer jobs. Look at Carrier for the most recent example. Carrier was going to move their production overseas because they can hire workers for three bucks an hour in Mexico! Nothing to do with automation, nothing to do with “fewer factories and fewer jobs”, nothing to do with efficiency. The reason was three buck an hour workers.

    So please, stop trying to convince me that the problem is automation or the change is due to “efficiency”. Yes, that’s a problem, but Carrier was neither automating nor becoming more efficient.

    It was simply migrating to the bottom, to the huge detriment of the US.

    w.

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    • It’s a story as old as the industrial revolution: one country moves up to higher-leverage production, while other countries fill the gap with cheap labour. Britain went from textiles to engines to heavy machinery to shipbuilding to chemicals to pharmaceuticals. The Asian tigers went quickly from textiles to engines to cars to electronics.

      This is disruptive and distressing to those affected directly, but the overall trend is positive. It’s the only route to sustained growth and wealth.

      The US is going from cars and air conditioners to aerospace, pharmaceuticals and software. If you look at the total value of US manufacturing, it is much higher than it was 25 years ago.

      http://data.worldbank.org/indicator/NV.IND.MANF.CD

      It is far more important to continue up the curve, to create and dominate markets for the higher-value industries, than to hold on to the old ones.

      I don’t think you have shown that this process, over the last 25 years, has been “of huge detriment to the US.” It is hard on some people but there are better ways of helping them than turning back the clock.

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  5. In 1989 Bill Fisher from the Texas Bureau of Economic Geology wrote this about the loss of jobs in our industrial sector:

    “It won’t be long before we’ll all be scratching each others backs and brushing each others teeth”

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  6. Willis:

    I recommend you read Deirdre McCloskey’s Bourgeois Era books. (I have blogged on them at http://americanmanifestobook.blogspot.com/2010/12/mccloskey-week-conservatisms-big.html).

    Her point is that the name of the game of the last two centuries of the Great Enrichment is bourgeois values — virtue, dignity — plus innovation. Innovation means that nobodies like Willis Eschenbach can invent and market things and make a fortune from things without the ruling class stopping them. Or looting them.

    Think the store clerk John D. Rockefeller or the telegraph messenger Andrew Carnegie.

    Capitalism is not accumulation. It is innovation, as in textiles, steam power, railways, steamships, Otto cycles and Chevrolets, electricity and Maxwell equations, quantum mechanics and electronics, information systems and internets, etc. Jeff Bezos did not make his money from accumulation or from comparative advantage. He made it with an idea — lots of ideas — and the idea is now worth hundreds of billions.

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  7. I see your points but I’m going to have to read the book. My problem is that I keep thinking of examples that don’t seem to fit. Let’s take Russia and Japan. Russia under Stalin tried to jump from an agrarian society to an industrialized one. Japan did the same with the Meiji Restoration. Russia had, and has, great natural resources while Japan is rather bereft of same. Prior to WWII neither was doing that well except maybe militarily. Russia never developed a modern industrial economy even with it’s resources and it’s economic survival is based on exporting oil and gas. After the war, Japan did go the protectionist route but was able to sell abroad and by the late seventies was cleaning our clocks in cars and electronics. We had the jump on them in those areas but rested on our laurels. Not because we couldn’t innovate but because bean counters took over our industries. The point is that they had to sell abroad because they had to import raw materials (the lack being a major cause of the war). If everyone else had not allowed their products to be sold abroad how would Japan have created it’s wealth? I’m guessing the Solomons fall in the same category as Japan. What natural resources do they have? Japan did have a workforce that could be utilized but I doubt if the Solomon Islanders would have to same cultural work ethic. Or do they? You would obviously know better than I.

    Your nail making machine example has me wondering. Did the owner attempt to improve his operation before he was wiped out by imports or was he just making do? Just making a mediocre product doesn’t justify protecting his operation. It only provides a few jobs and profit for him. It in no way is jumpstarting an economy for the overall islanders. The question is what can they do locally that is more economical than importation and can also be sold to others to bring in imports (both raw and manufactured) that are uneconomical to produce locally?

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    • I have hesitated to post here on this, having been on the front lines for now over 35 years. The issues are much more complex than portrayed by WE. Nail making machines in the Pacific are a simple example of a complex reality that does not exist except perhaps in the Solomons. I have lived and fought first world (only) trade wars and provided expert witness for most of my now long and mostly concluded career. Free trade was a US ideal, not a fact, that almost always disadvantaged the US in the 20th century. A Harley MC example v. ‘Free trade’ Japan given in a previous comment.
      So, in general I think Ricardo’s comparative advantage was right– amongst ‘equals’ and only if ‘equally’ applied. Almost never is. Therefore, so is protectionist $2 internal dollars better than $1 external ‘free trade’. It is a matter of who wins and who loses by how much, because the laws of economics are not and never were ‘fair’. The correct answer is always the net societal positive.

      My two cents, this discussion needs to evolve very substantially from its stasis perspective. High pay manufacturing jobs are never returning to economically advanced countries. Not because of free trade, because of robotics. Machines cheaper than labor. Happening at an increasing rate everywhere. That has been going on since shuttle looms replaced weavers at the beginning of the Industrial Revolution, inspiring the Luddites. And is accelerating. Ricardo may not be right, but technical innovation is not wrong.
      At my old school dairy farm, we just spent capital to replace the 40 year old milking barn (cows come in, two side stalls, they picked their own, locked down at neck, milking machines nippled down cow by cow) with a sunken milking parlor. Cows walk in in two files, one each side. Two operators attach the detach milking machines to each as they walk on. For ~150 milked cows, ~18 million pounds of milk per year, four farm hands went two, and ~ 3 hours/milking 2x/day went to 2. And that change does not include round hay bales. Distillers grain from corn via ethanol, or GMO no till.

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      • Previously, machines acted as productivity enhancers for the people using them so, while the number of workers decreased, the wages of the ones left increased due to the increase in per worker productivity. Robotics is at the point where science fiction is becoming fact. By that I mean that robots have reached a point where they can totally replace workers. The creation of self driving cars that can operate safely with both human operated cars and pedestrians had my jaw drop. I never thought I would see that in my lifetime. Who needs an Uber driver when I can just use my smartphone to call up a car that will take me where I want to go just as safely and probably more efficiently. Same thing with trucking. If driving a car is a reality then why would MacD’s need people to make their hamburgers? Push for $15 an hour and you’ll be replaced by robby the robot or at least one of his cousins. Even your milking machine example has a couple of people still working. If a robot can drive a car they can handle attaching and detaching a milking machine too.

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      • ristvan December 24, 2016 at 6:03 pm

        My two cents, this discussion needs to evolve very substantially from its stasis perspective. High pay manufacturing jobs are never returning to economically advanced countries. Not because of free trade, because of robotics. Machines cheaper than labor.

        I am so tired of this incorrect claim. Carrier is a perfect example. They decided to move high pay manufacturing jobs to Mexico. Not because “machines are cheaper than labor”. Not because of robotics. BECAUSE OF FREE TRADE.

        And as to whether those jobs “are never returning” to the US, THE CARRIER JOBS ALREADY HAVE RETURNED, and there is no reason that most of the other jobs cannot return.

        People keep making your foolish claim, that the reason we’re losing our factories to Mexico is “robotics” and “machines” … yeah, right, because Mexico is so advanced in robotics? Because Mexico has such great machines? Get real!

        Your claim is simply not true. Carrier is a perfect example. They said right out that the reason they were moving to Mexico was that they could hire people for $3 per hour. Not a word about your dang robotics and machines. And the same is true across America. NAFTA has been costing the US jobs for decades, and unless Mexico has been where robots secretly hung out for the last couple decades when they weren’t building cars in Japan, Mexico is not getting our factories because of your “robotics” claim.

        So please, Rud, stop trying to convince people that America is losing factories because of “robotics”. That is dangerous nonsense, because it will prevent people from seeing that America is losing factories because of free trade. Robotics and automation are indeed issues, and are absolutely worth discussing … but they are NOT the reason that the US lost 70,000 factories since NAFTA. That claim doesn’t even pass the laugh test.

        w.

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          • Thanks, Curious. Reminds me of the ancient mystical story of the Sufi sage Nasruddin. Nasruddin was a judge, and was hearing a quarrel between two men. First, one man put his case to him. Nasruddin listened and said “You’re right“.

            The lawyer said “Your honor, you can’t decide who is right yet! You have to listen to both sides.”

            So Nasruddin listened to the other man, who was also very persuasive, and at the end of the second man’s speech he said “You’re right!”.

            The lawyer jumped up in his excitement and said “Your Honor! Your Honor! They can’t both be right!”

            Nasruddin looked at the lawyer and said “You’re right!”

            Now, since this is a Sufi story, they say that it will have at least three levels of meaning. I would point out Godel’s Theorem as being relevant to one of the deeper levels, but there are more.

            My very best Christmas wishes to everyone, it is my great pleasure to hold this ongoing conversation with all of you.

            w.

            Liked by 1 person

        • I’ll address the Carrier case directly. It’s worth asking why Mexican workers are willing to work for $3 per hour while American workers would see that as far too low. It’s because America has a high-productivity manufacturing sector due to education, innovation, and (yes) automation.

          As an example, the average American worker at Apple is worth $400k in profit every year. That’s the average; some people are worth much more. And this is a globally competitive market. It’s almost 100x what the global market says a Carrier worker’s labour is worth.

          The wealth created by that sector flows through the economy and affects local supply and demand such that the cost of living is much higher than in other places. It would be nearly impossible to live on $3 in America, while it would be a huge step up in other countries.

          Willis, you (and Trump) have Reinert’s prescription completely backwards. Reinert says a poor country should protect its new industries from existing high productivity competitors, to build scale and increase productivity, then open up to export to the world. You seem to want to a rich country to protect old industries from low-productivity competitors, see productivity (in the form as automation) as a problem, and through a protectionist trade war would see export markets shrink.

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  8. Tom (Perth) December 26, 2016 at 3:07 am

    Willis, you (and Trump) have Reinert’s prescription completely backwards. Reinert says a poor country should protect its new industries from existing high productivity competitors, to build scale and increase productivity, then open up to export to the world. You seem to want to a rich country to protect old industries from low-productivity competitors, see productivity (in the form as automation) as a problem, and through a protectionist trade war would see export markets shrink.

    I fear that actually you have Reinert backwards. As Reinert points out, his prescriptions are identical to those of Philipp von Hörnigk, who in 1684 was clear about the overriding importance of keeping manufacturing within the country even if it cost more than doing it out of country. His relevant points were (emphasis mine):

    Second, all commodities found in a country, which cannot be used in their natural state, should be worked up within the country; since the payment for manufacturing generally exceeds the value of the raw material by two, three, ten, twenty, and even a hundred-fold, and the neglect of this is an abomination to prudent managers.

    He is clear that the course of action you are prescribing is an “abomination to prudent managers”. He also says:

    Seventh, such foreign commodities should in this case be imported in unfinished form, and worked up within the country, thus earning the wages of manufacturing there.

    and finally:

    Ninth, except for important considerations, no importation should be allowed under any circumstances of commodities of which there is a sufficient supply of suitable quality at home; and in this matter neither sympathy nor compassion should be shown foreigners, be they friends, kinfolk, allies or enemies. For all friendship ceases, when it involves my own weakness and ruin. And this holds good, even if the domestic commodities are of poorer quality, or even higher priced. For it would be better to pay for an article two dollars which remain in the country than only one which goes out, however strange this may seem to the uninformed.

    In other words, both Reinert and von Hörnigk say the same thing—do not under any circumstances allow your country to lose its manufacturing base, even if it makes domestic products more expensive. Unfortunately, that is exactly what we’ve done … and that is the first thing we need to set right by any means available.

    Finally I don’t “see automation as a problem” as you claim. I see automation as immaterial to Carrier moving to Mexico. They’re not moving there because Mexico has better robots.

    w.

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    • I think you’re selling Reinert short; his book is much more than an expanded version of Hörnigk. But even Hörnigk recognises the inportance of exports, in his absolutist way: “..consumption, so to speak, must be sought in the farthest ends of the earth, and developed in every possible way.”

      And of course this is the reason the West has imposed free trade agreements on the rest of the world. Reinert says that that the “free trade that is forced on poor countries”, plus “palliative economics”, has lead to “crippling welfare colonialism in which rich countries maintain their political power over poor countries.” I don’t know how you can read that and think that Reinert is really saying that free trade is harming rich countries.

      This discussion is fun, but we won’t get anywhere if you keep repeating rebutted points and ignoring my main argument.

      1. The US has not “lost its manufacturing base”: it has grown and it looks different. Just like all countries do as they continue to develop. Output is much higher than before.

      2. Higher productivity is overall a good thing, even if it’s hard for some people. An innovative, new industry like software or pharma can create 100 times more value for a country than a mature, saturated industry like air conditioning.

      3. The reason for the potential Carrier move was not robotics in Mexico (who said that?), but high cost of living in America as a result of its high productivity, which includes automation. And overall this competition is a good thing because it forces increased productivity or redeployment of resources to more productive industries. This is the only path to ever higher wealth-creation.

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  9. If you are one of those to whom economics is the dismal science, I recommend P. J. O’Rourkes’ Eat the Rich. Especially the two chapters, “How to make everything from nothing” and “How to make nothing from everything”. Some good thoughts on why certain countries are rich and get richer, and on why others are poor and stay poor.

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