Damned Models and Cutting off the Chinese

I have a good eye for what ought to be there but isn’t. Don’t congratulate me; it’s a natural talent. I am retired so, I usually spend hours listening to the radio, reading newspapers and, watching television and, (Oops) on the internet. Nowadays, I do more of the same.

Today’s lecture is going to be a little longer than usual, on the one hand. On the other hand, there will not be a test. Bear with me; it’s going to be worth it (if I say so myself).

The first thing that’s missing from the endless and frankly a little sickening commentary on the C-virus epidemic is a good explanation of what’s a “model.” I mean the kind of models that are being blamed a little bit everywhere and especially in the conservative media for seemingly wildly inflated predictions (of infections, of deaths, of anything connected to this illness). Just from listening to talk radio, I think that some, or many, believe that with “computer models,” computers actually do the thinking instead of people. It’s not so.

The second thing missing is a clear description of the downside of national economic self-sufficency that appears so tempting now that we are extra-sensitive to both the comparative incompetence of our China-based suppliers, and to the possible ill-will of the Chinese Communist authorities.

First, first: a model is logically pretty much the same thing as we do when we say, ” On the one hand, on the other hand.” That’s as in, “One the on hand, If have saved $20, I will buy a nice cake; on the other hand, if I manage to save $200, I will look for a good used bike.”

The problems are: 1 that we have only so many hands; if we had one hundred each, and remembered each, we could produce mental models that cover more possibilities; 2 that we are not agile at combining possibilities, like this: “If the third hand and the fortieth hand are combined with the fifty-first then, this will happen.”

Models – designed by humans working slowly – can be entered into computers with many values and many combinations of values to tell us what would (WOULD) happen if… That’s all, folks.

Don’t blame the models, don’t blame those who build the models, in this capacity, rather, blame those who don’t do the needful to explain to decision-makers what actual models do and don’t do. (It’s true that they are often the same as those who actually construct the models but in a different role.)

Also, blame American universities and colleges that should have been in the business of teaching this stuff to all students since the late sixties and that have only done it for a tiny elite minority. A big missed opportunity. Even high school students could learn, I believe.

Second undiscussed issue. Under normal circumstances, self-sufficiency has a certain intuitive appeal: Let’s not count on others because they might fail, or fail us and, at any rate, distance makes the best linkages vulnerable. Now that we worry about running out of essential medical supplies made in China, now that we fear a shortage of the raw materials that go into our medical drugs, our intuition seems broadly vindicated. It did not help that a highly placed Chinese Communist official actually threatened the US aloud, about a month ago, with withholding medications. (I am guessing he is not going to have a happy retirement.)

Much about our intuition is correct, of course. As I never tire of stating (wittily, if you ask me), we should not count on steel deliveries from China to build the naval ships we would use in a war with China. The steel deliveries might be too late.

That’s on the one hand. On the other hand, there is a downside to national self-sufficiency. It violates the general principle that specialization makes for efficiency. Just imagine that you had to grow all your own grain, harvest it, mill it, raise your own cattle, slaughter it, butcher it, skin it, preserve the meat, treat the skins (and cut and sew clothes out of them). You would do a bad job of some of these tasks, at least, possibly of all. You would have much less to consume than is true now. You would be poor.

And that’s the downside: National self sufficiency is a sure path to poverty. I am not speaking of small differences but of big ones. I remember clearly when the cheapest hammer at the hardware store cost $20, five years later, the cheapest hammer cost only $5. What happened in between was expanded imports from China. (Don’t even begin to talk about quality; the difference among the cheapest items of a kind is largely illusory anyway, or much exaggerated.) And if you think this is a special case, ask your self if the Canadians – who love bananas – should grow their own in the name of self-sufficiency.* (For an expanded view of international trade, see my series of articulated short essays beginning here: “Protectionism; Free Trade, Step-by-Step.”)

Here again, American colleges and universities deserve strong blame. First, many don’t even require a course in economics to graduate. One of the best undergraduates I have known personally, an honors students who is now very successful in her career, never heard a single lecture on anything pertaining to economics. Second, economics professors, by and large, do a piss-poor job of teaching international trade. Across 25 years of teaching in a business school, I have met a fair number of good MBA students who had taken three courses in international trade and still did not see the possible downside of self-sufficiency. So, this simple idea is not widespread among the educated populace. It’s not well anchored enough in the opinion media for many to push back intelligently against the wave of demands that the US minimize its dependency on what we obtain from abroad in general. (A national policy designed to induce American companies to source in Vietnam, for example, rather than in China is a different and defensible proposition.)

So, here you have it: Models are not to blame, confusion about them is; economic self-sufficiency is the road to poverty though it might be worth it. Knowing these two things does not prevent us from taking action collectively. It makes for more rational action in these irrational times.

* Those of you who received a decent education in economics might wonder here if I have just dealt improperly with the topic of Comparative Advantage. I haven’t, I have not even begun.

Nightcap

  1. The first Great Powers: Babylon & Assyria John Butler, ARB
  2. We don’t want economic growth Chris Dillow, Stumbling & Mumbling
  3. Comparative disadvantage Oren Cass, Law & Liberty
  4. The Nazification of the Ku Klux Klan Assael & Keating, Politico

Twelve Things Worth Knowing According to Jacques Delacroix, PhD, Plus a Very Few Brain Food Items.

Note: I wish you all a prosperous, healthy, and writerly year 2019. (No wishes for happiness, it will come from all the above.)

I have a French nephew who is super-smart. Not long after graduating from the best school in France, he moved to Morocco where he married a super-smart Moroccan woman. He is so smart that he asked me for my intellectual will before I depart for another planet. It’s below.

Here are my qualifications: I taught in universities for thirty years, including twenty-five years in a business school in Silicon Valley. My doctorate is in sociology. (Please, don’t judge me.) My fields of specialization are Organizational Theory and the Sociology of Economic Development. My degree is from a very good university although I am a French high school dropout. My vita is linked here (pdf). Its academic part is respectable from a scholarly standpoint, no more. There is much additional info in my book: I Used to Be French: an Immature Autobiography, available from me, and on Amazon Kindle, and in my electronic book of memoirs in French: “Les Pumas de grande-banlieue: histoires d’émigration”, also on Amazon Kindle.

1. When the facts don’t fit your perspective you should change …. ? (Complete sentence.)

2. One basic complex idea worth knowing that resists learning: natural selection.

Note: the effective mechanism involved is multi-generational differential reproduction. You don’t understand natural selection until you can put a meaning on all three words.

3. Another basic idea worth knowing, a counter-intuitive one, that also resists learning: the principle of Comparative Advantage: If you are not working at what you do the very best, you are impoverishing me. There is a ten-lesson quick course on my blog to explain this. Look for short essays with the word “protectionism” in the title. A longform version can also be found, here.

4. Taking from the poor is a stupid way to try to become rich when you can invent a new world – like Steve Jobs – and be immensely rewarded for it. Or open a decent restaurant and be well rewarded, or learn welding. There isn’t much you can take from the poor anyway because they are poor. Plus, the bastards often resist!

5. Culture is in the heads (plural). Everything else isn’t “culture.”

6. How a body of people act is not simply the addition of the thinking of its individual human members. (There is a sociology!)

7. Beware those pesky fractions. Quick test: Five years ago, my income was 40% of yours. Now, my income is only 20% of yours. Am I earning less than I did five years ago?

8. Correlation is not causation but there is no causation without some sort of correlation.

9. Statistical significance is significant even if you don’t quite know what it signifies. Find out. It’s not hard.

10. Use statistical estimation methods even if you don’t understand them well. It will improve your reasoning rigor by confronting you brutally with the wrongness of your guesses. And you can only become better at it with practice.

11. There is not text that’s not improved by extirpating from it half of all adjectives and adverbs.

12. Reading is still the most efficient way to improve your comprehension of the world.

It seems to me that if you understand these twelve points inside out, you are well above average in general culture; that’s even true on a global scale.

Below are some intellectual anchoring points of my life. They are subjectively chosen, of course. Don’t lend them too much credence.

My favorite singer-composers: Jacques Brel; the Argentinean Communist Atahualpa Yupanqui. (I can’t help it.)

My favorite instrumental musics: baroque music, the blues.

My favorite painters: Caravaggio (link); Delacroix (Eugene); Delacroix (Krishna).

I don’t have a favorite book because I read all the time without trying to rank books. These three books have made a lasting impression, changed my brain pathways forever, I suspect: Daniel Defoe, Robinson Crusoe; George R. Stewart, Earth Abides; Eric Hoffer, The True Believer: Thoughts on the Nature of Mass Movements.

The only two intelligent things I have said in my life:

“Once you know a woman well vertically, you know nothing about her horizontally.”

“There is not bad book.”

A response to a student

Each week I assign some reading or video. Recently I assigned a series of videos where Bryan Caplan discusses common biases, including the anti-foreign bias

One student questioned the benefits of expanded immigration, wondering if the costs to American workers might be too great. Below is my response:

My understanding of the evidence is that immigrants to the US are almost always complementary to US labor (e.g. Indian doctors that keep American designers healthy, or Salvadorian cooks who feed American engineers). The area where your suspicion is true (again, based on my limited understanding of the data) is with high school dropouts.

High school dropouts face competition from immigrants (who are often unable to apply their skills due to regulations or attempts to avoid being caught by immigration authorities) because relatively low-skilled immigrants face similar disadvantages in labor markets (i.e. they have a similar comparative advantage but their alternative options are even worse).

Trade: Is Obama Right This Time?

I was hoping to sit this one out. I mean the multiple discords about the new Pacific trade treaty proposed by President Obama. I feel I need to lend a hand because there are good reasons to be confused. Plus, I taught international business for twenty-five years. My voice just might be useful this time. Here is my brief but adequate road map to the problem. I am deliberately staying away from nouns and initials because they do more harm than good.

Pres. Obama has an early draft of an international trade agreement with a large number of Pacific countries. Such agreements eliminate or lower trade barriers. So, first, they make it easier for economic actors from one country to buy a and sell things to economic actors from another country. That’s because all trade barriers are hidden taxes on consumers. They all raise prices above where they should be. Get rid of them, have more real income.

Second, the lowering or the elimination of trade barriers ultimately result in something almost magical: Economic actors stop doing what they are doing badly and start focusing on what they do well. Most items become less expensive and of better quality. Everyone benefits from this. I mean everyone in the world.*

International trade agreements do cause some to lose their jobs. They create many more jobs than they cause to disappear, however. But the loss is certain: After all, as soon as central American bananas are allowed into Canada, Canadian banana growers must lose their jobs, by and large. Incidentally, there have not been Canadian banana growers, as far as I know but you see what I mean: Canadians ought to concentrate on producing lumber, or refrigerators, or iron ore, almost anything but bananas.

The current trade project presented by Obama contains a $500 million clause to retrain at public expense those Americans who might lose their job as a result of the new agreement. This is nothing new. Previous trade agreements contained similar arrangements.

President Obama wants what is known as “fast track authority.” That’s the privilege to have the Senate vote a simple “Yes” or “No” on the final draft of the agreement with those many other countries. This is pretty necessary because if each government of each signing country has to go home and gather amendments and often, amendments to amendments, in the end, no agreement sees the light of day. It’s a practical thing, not a sinister ploy.

On the one hand, practically all previous presidents who signed international trade agreements had fast track authority. On the other hand there is a sturdy reason to deny Mr Obama fast track authority: He is a proven, extremely bad negotiator. On the third hand, the negotiations of such agreements are almost completely done by technical personnel who know their business. And, how likely is Mr Obama actually to get involved?

As I write, elected Democrats are all against everything involved because the unions think that every international trade agreement makes them lose ground. I think their perception is correct. Republicans are torn between their understanding of the world (which is more or less like mine) and their wish to give the president a black eye.

This is a small digest of a complex and interesting issue. I deal with it at leisure and extensively in nine installments on this blog. Each had the words “protectionism” or “protectionist” in the title. Again, those are installments; you may want to look at them in order. No test!

* Paradoxically, one of the best, clearest scholarly explanations of this magic – called comparative advantage – is by Paul Krugman. It’s from the days when he was not yet crazy. Bret Stephens in the WSJ 6/16/15 jogged my memory on this strange fact. It’s worth looking up Krugman, for once.

The Chinese Get Richer, I Become Poorer. Right? Dreaded Percentages!

Elections season is on us again. On the talk shows, I hear more and more callers, and often hosts, grossly misusing percentages in the service of fallacious claims. Politicians won’t be far behind. Here we go again, I am thinking; I have been here before. Got to explain again.

This time, I am taking names. And there will be a quiz, and it will count toward the final grade.

Pay attention; slow down.

It’s 2000, I, JD, earn $60 as a machinist. My wife K earns $40 keeping accounts for others with the help of some sophisticate software. I am earning what percentage of our joint income?

60/60+40 = 60%

It’s 2010, I, JD, now earn $90 as a machinist, My wife K’s business has taken flight. She uses more sophisticated software. She has more customers than she can handle. She earns $120.

My share of our new joint income is now:

90/90+120 = 42%

The percentage of our joint income that I produce has declined. It has declined a lot; it has declined by almost 1/3.

Has the value of my production declined? Slow down!

The answer is clearly “no.” The value of my production has increased by half (from 60 to 90). That’s not bad at all. At any rate, it ‘s obviously an increase.

Think it through. Do the arithmetic yourself. There is no trick. It’s the simple math you did not learn in third grade because you hated the teacher.

In the simple example above, my income represents the value of American manufacturing. My wife’s income represents the value of the mysterious and illogical category “services.”

The percentage of the value of manufacturing relative to the total GDP of this country has been going down steadily because the value of US services has gone up even faster.

The absolute value of American manufacturing has only gone up and up, and going up. America has not become “de-industrialized,” contrary to a common but false perception.

The misperception has two main sources:

  1. Many media commentators and perhaps even more politicians don’t understand simple percentages. See above.
  2. The number of manufacturing jobs has declined even as the value of that which they manufacture has gone up.

Here is a solution to the drying up of manufacturing jobs: Take away machine tools from one metal worker in three; give him a hammer instead. You want even more manufacturing jobs, lots of them? Remove the software from textile weaving plants. Program their machines by hand as they did in 1910.

You don’t like the idea? Time for a serious discussion.

Now let’s go back up a little.

The quite good rise in the value of manufactures and the even greater rise in the value of whatever services produce, these two things are related. Better and better, more and more efficient manufacturing provides the resources for more services. We can afford more waiters, more surgeons, more teachers, more acupuncturists, more therapists, more life coaches, more “color advisers” (I live in Santa Cruz, California) because, collectively, we produce more hard necessities much more cheaply than our close ancestors did. Hard necessities include cars, soap, oatmeal, shovels, bricks and nails. Why, nails used to be forged by hand! I own some hand-forged nails from making repairs on my 1906 house.

When you hear, for example, that manufacturing now contributes only 30% of US GDP, it does not mean that there is less manufacturing being done in this country. To figure out the reality, you have to get out of percentages completely. Period!

If my income used to be $60 and it’s now $50 then, yes, it has declined. If it’s now $65, my income has risen. Period! That’s true irrespective of percentage contribution to anything.

Tech note: Don’t get tripped by the separate issue of the changing value of money. There are inflation/deflation calculators on the Internet that do a good enough job of dealing with this issue. I recommend that you consider one train of thought at a time.

Nearly everyone is overestimating himself. That’s the problem.

Speaking of GDP (Gross Domestic Product), a National Public Radio chickie announced breathlessly a couple of weeks ago that China would soon pass the US in GDP. I could hear fearful emotion in her voice, as if some bastard had threatened to cut up her credit card.

Here is the truth: We may soon see the day when 1,400 million Chinese produce as much together as…..314 million Americans.

Personally, I can’t wait for the Chinese to do better, to make their percentage of global joint production much higher.

Question: When the Chinese GDP reaches 60% of world joint GDP, will I be poorer?

From the Comments: Populism, Big Banks and the Tyranny of Ambiguity

Andrew takes time to elaborate upon his support for Senator Elizabeth Warren, a Native American law professor from Harvard who often pines for the “little guy” in public forums. I loathe populism/fascism precisely because it is short on specifics and very, very long on generalities and emotional appeal. This ambiguity is precisely why fascist/populist movements lead societies down the road to cultural, economic and political stagnation. Andrew begins his defense of populism/fascism with this:

For example, I still have more trust in Warren than in almost anyone else in Congress to hold banks accountable to the rule of law.

Banks have been following the rule of law. This is the problem libertarians have been trying to point out for hundreds of years. See Dr Gibson on bank regulations and Dr Gibson again, along with Dr Foldvaryon alternatives. This is why you see so few bankers in jail. Libertarians point to institutional barriers that are put in place by legislators at the behest of a myriad of lobbying groups. Populists/fascists decry the results of the legislation and seek a faction to blame.

If you wanted to be thought of as an open-minded, fairly intelligent individual, which framework would you present to those who you wished to impress: the institutional one that libertarians identify as the culprit for the 2008 financial crisis or the ambiguous one that the populists wield?

And populism=fascism=nationalism is a daft oversimplification. I’ll grant that there’s often overlap between the three, but it’s far from total or inevitable overlap. Populists target their own countries’ elites all the time.

Sometimes oversimplification is a good thing, especially if it helps to clarify something (see, for example, Dr Delacroix’s work on free trade and the Law of Comparative Advantage). One of the hallmarks of fascism is its anti-elitism. Fascists tend to target elites in their own countries because they are a) easy and highly visible targets, b) usually employed in professions that require a great amount of technical know-how or traditional education and c) very open to foreign cultures and as such are often perceived as being connected to elites of foreign societies.

The anti-elitism of fascists/populists is something that libertarians don’t think about enough. Anti-elitism is by its very nature anti-individualistic, anti-education and anti-cooperative. You can tell it is all of these “antis” not because of the historical results that populism/fascism has bred, but because of its ambiguous arguments. Ambiguity, of course, is a populist’s greatest weapon. There is never any substance to be found in the arguments of the populist. No details. No clarity. Only easily identifiable problems (at best) or ad hominem attacks (at worst). Senator Warren is telling in this regard. She is known for her very public attacks on banks and the rich, but when pressed for details she never elaborates. And why should she? To do so would expose her public attacks to argument. It would create a spectacle out of the sacred. For example, Andrew writes:

Still, I’d rather have people like Warren establish a fuzzy and imperfect starting point for reform than let courtiers to the wealthy and affluent dictate policy because there’s no remotely viable counterpoint to their stances […] These doctrinaire free-market orthodoxies are where the libertarian movement loses me. There are just too many untrustworthy characters attached to that ship for me to jump on board.

Ambiguity is a better alternative than plainly stated and publicly published goals simply because there are “untrustworthy characters” associated with the latter? Why not seek plainly stated and publicly published alternatives rather than “fuzzy and imperfect starting points for reform”?

Andrew quotes a man in the street that happens to be made entirely of straw:

“Social Security has gone into the red, but instead of increasing the contribution ceiling and thoughtfully trimming benefits, let’s privatize the whole thing and encourage people to invest in my company’s private retirement accounts.”

Does the libertarian really argue that phasing out a government program implemented in the 1930s is good because it would force people to invest in his company’s private retirement accounts? I’ve never heard of such an example, but I may just be reading all the wrong stuff. Andrew could prove me wrong with a lead or two. There is more:

This ilk of concern trolls (think Megan McArdle: somewhat different emphasis, same general worldview) is one that I find thoroughly disgusting and untrustworthy and that I want absolutely no part in engaging in civil debate. Their positions are just too corrupt and outlandish to dignify with direct responses; I consider it better to marginalize them and instead engage adversaries who aren’t pushing the Overton Window to extremes that I consider bizarre and self-serving. They’re often operating from premises that a supermajority of Americans would find absurd or unconscionable, so I see no point to inviting shills and nutters into a debate […].

Megan McArdle is so “disgusting and untrustworthy” that her arguments are not even worth discussing? Her name is worth bringing up, of course, but her arguments are not? Ambiguity is the weapon of the majority’s tyranny, and our readers deserve better. They are not idiots (our readership is still too small!), and I think they deserve an explanation for why McArdle is not worthy of their time (aside from being a shill for the rich, of course).

I think populism/fascism is often attractive to dissatisfied and otherwise intelligent individuals largely because its ambiguous nature seems to provide people with answers to tough questions that they cannot (or will not) answer themselves. Elizabeth Warren’s own tough questions, on the Senate Banking Committee, revolve around pestering banks for supposedly (supposedly) laundering money to drug lords and terrorists:

“What does it take, how many billions of dollars do you have to launder from drug lords and how many economic sanctions do you have to violate before someone will consider shutting down a financial institution?” Warren asked at a Banking Committee hearing on money laundering.

Notice how the populist/fascist simply takes the laws in place for granted (so long as they serve her desires)? The libertarian would ask not if the banks were doing something illegally, but why there are laws in place that prohibit individuals and organizations from making monetary transactions in the first place.

Senator Warren’s assumptions highlight well the difference between the ideologies of populism/fascism and libertarianism: One ideology thinks bludgeoning unpopular factions is perfectly acceptable. The other would defend an unpopular faction as if it were its own; indeed, as if its own freedom were tied up to the freedom of the faction under attack.

France Does not Export Wines, nor Mexico Guacamole, nor Does the US Import Cars, etc. “National Competitiveness” for the Intelligent Ignorant

It’s national election season again. As always happens in this season, in every developed country, the old battle horse of national competitiveness gets a new coat of shiny paint and is led out by its sparkle-strewn tether to support politicians misconceptions and mis-talks. There is a very widespread misconception that nourishes unreasonable thoughts and false notions on the economy.

Sorry but at this time, in this season, I feel a compulsion to resort to teaching, so, pay attention. There might be a quiz.

The misconception: Countries, (or “nation-states”) such as the US, Canada, Mexico, Belgium, or France don’t compete with each other like soccer teams, for example, compete against each other. In soccer, when one team wins a point, the other team loses a point. When the economy of one country picks up speed however, it is not (NOT) the case that the economy of another country (or of several countries) must slow down. The reverse is true. When the Mexican economy grows, some Mexicans are better able to buy American corn, or American video games, making some Americans richer than would be the case if the Mexican economy stagnated.

The confusion has three sources. The first source is simply ignoring that the producers of one country are also potential customers for the producers of all other countries. Those who compete with American workers, are often also buyers of American-made products. If they are not at the moment, the richer they become, the more likely they are to become buyers. One of the international functions of those who compete with American producers is thus to enrich American producers, perhaps different ones. The relationship may be more indirect. Foreign worker A competes with American worker B and he uses the money he gets from beating B to buy from American worker C. If I am C, my interests are not well lined up with those of my fellow American B. That’s a fact, no matter what politicians say in the language of football. However, if I am American worker C, in the long run, I am better off if fellow American worker B becomes richer than if he does not. For one thing, he will be able to support better equipments, such as schools, from which I will profit. Continue reading

Chocolate for Thought

There is a pervasive feeling among thinking people that this country is not just facing a severe economic crisis but that we are losing something exceptional. That something is American exceptionalism precisely. Lech Walesa, the blue-collar hero of Polish freedom from communism put it well in a recent piece in the Wall Street Journal. There is only one of America and if it ceases being itself, the world is left in the dark, goes the thinking. It’s not reasonable to count on the debt-ridden government pension-sucking Europeans to hold up the flashlight. The fact is that several European countries are disappearing because they don’t make enough babies to replenish themselves. That’s the ultimate form of pessimism. (And no, this is not a racist statement, I am completely pleased with the fact that brown-skinned Mexicans and their children are keeping the American population growing. They make good immigrants. See my article on Mexican immigration, with Nikiforov, in the Summer 2009 issue of the Independent Review.)

Unfortunately, there is an innate humility among Americans which makes it difficult for them to think aloud about American exceptionalism. If there were not, twenty years of cultural relativism in the schools would make the very thought difficult to formulate: “Everybody is equal. We are not any better than those who suck their grandmothers’ brain – but only after they die, or than those who practice horrendous sexual mutilation on little girls, or than those who still practice slavery. Only American slavery was atrocious. Slavery in exotic locales is kind of nice, actually, if you look at it in its proper cultural context.”

One way to overcome this shyness and diffuse sense of equality in order better to grasp what we are losing is to consider Swiss exceptionalism about which no one gives a damn, not even the SwissIt turns out that in the main respects, there is not one America, there are several. Switzerland is one. Continue reading

Protectionism and Job Loss: Part Nine of a Nine Steps Series (And Last, I Think.)

This is the last installment of a series of nine short essays in which I attempted to explain a topic that is both important and misunderstood by many intelligent people: protectionism and its obverse, free trade. 

[…]

When economic actors, people and organizations, switch from doing what they don’t do very well to what they do better, production increases everywhere, the pie gets bigger. There is no injustice involved, just a general rise in the standard of living.

For such virtuous change to achieve maximum effect, there must be economies of scope and scale. It’s not always obvious in big countries such as the US which has a large internal market (many people most of whom are rich by world standards.) It’s pretty clear when you think of small prosperous countries such as Switzerland. How efficient would Nestlé be if it made chocolate only for eight million Swiss rather than for hundreds of millions of consumers worldwide? And would the smelters of Luxembourg do a good job making steel only for the half-million Luxembourgers?

So, it stands to reason that any barrier to import limits severely the benefits of switching from mediocre to good or from good to excellent. But, the basic rule of international trade is reciprocity. (It’s a little more complicated than this in everyday life but the complications do not affect the basic soundness of my reasoning.) Countries’ governments say to each other: “ If you impede the entry on your territory of stuff made by my economic actors, I will impede access of my territory of stuff made by yours.” This is no bluff. So-called “trade wars” erupt frequently, involving different kinds of tit-for-tat. The most notable thing about every round of tit-for-tat is that it impoverishes everyone. See above.

Trade barriers, different ways of impeding access, come and go. Although it’s difficult to find a coherent argument in favor of any trade barrier, governments will often yield to interest groups and provide “protection” from imports for this or that good. They do so usually not because of some abstraction such as the “national interest,” but because of political necessity or to distribute political favors. Two interesting remarks about this poisonous practice. First, more democratic governments should be expected to be more likely to yield such favors. Second, by “protecting” domestic producers, they also lower the standard of living of domestic consumers. Naturally, the two categories of consumers and domestic producers overlap somewhat which only underscores the absurdity of protectionism. Incidentally, developing and enforcing trade barriers requires a large technical and inspection apparatus. The more trade barriers, the larger the government relative to the national economy.

All this being said, it’s clear that the removal of trade barriers will cause job losses in the affected sectors of the economy. It’s also obvious that some of those who lose their jobs will not find equivalent or better jobs. Here, individual fates diverge in small but humanly significant ways from collective well-being.

Let’s take the case of Canadian vintners. Yes, they exist. Would I make up anything so absurd? Do I have sufficient imagination? As you might imagine, Canadian wine-producing firms exist inside a network of government protectionist measures. If they were left to their own devices, most would soon be swept away by the wines of thousands of producers from twenty different places, from California to South Africa. Now, imagine that the Canadian vintners lose their muscle with the Canadian federal government and that all the protective measures are withdrawn within one year.

Under such a scenario, two things would happen. First, as I have explained step by step, many Canadian resources, including labor would eventually be switched to more productive endeavors. Because of this switch, Canadians in general but also the whole world would be a tad richer. But no one would expect the switch to be instantaneous. There would be some social dislocation, for sure.

The second consequences would be, starkly, that some people working in wineries and in wine-related businesses would lose their jobs. The fifty-five year old wine-maker of a small British Columbia winery with thirty years experience in the same winery would almost certainly have to retire. It’s extremely unlikely that he would qualify for one of the many advanced jobs open in the new, and now marginally more productive Canadian economy. An old wine-maker will not become say, a software writer, under almost any imaginable circumstance. Instead, the middle-aged wine maker will either become unemployed or he will have to take one of the lower-end jobs freed by the escalators described before.

Free trade, and opposition to protectionism have acquired a bad name, I think in part because of economists’ reluctance to face squarely this particular human implication of such policies.

I defend free trade while recognizing the wine-maker’s painful problem by pointing to the overall, collective consequences of protectionism: It’s always an economic disaster. We know this from two different sets of observations, First, other things being equal, countries that follow national policies of free trade grow faster than those that don’t. That’s true equally for poor countries and for rich countries. Similarly, when countries that have implemented protectionist policies open up even a little, they experience a quick surge in their GDP. Second, there is no part of the world where unemployment figures track free trade’s ups and downs. As an example, the sudden upsurge of unemployment in the US 2007-2009 had nothing to do with any increase in imports. This tells me that the sad middle-aged Canadian vintner’s case does not account for much of unemployment.

Other things being equal, I think it’s better to be unemployed in a relatively more prosperous country that in a poor one. The benefits are more generous, and the next job opportunities richer and more varied. Training programs are also more common and more accessible in richer than in poorer countries. And capital to start one’s own business is normally cheaper and more accessible, the more prosperous the country. I will go further: Economically, it’s better to be unemployed in a rich country than employed in a poor country. (I understand there are non-economic downsides to unemployment. This is another topic I can’t deal with here. A single thread, the economic thread, is difficult enough to follow.)

In conclusion to this whole series on free trade and protectionism in nine small steps: protectionism remains the royal road to collective poverty and it does not do much for anyone, not even for those who stand to lose their jobs when national borders open.

[Editor’s note: Part 8 can be found here]

Economies of Scale and Economies of Scope, Bane of Protectionism. (Part Seven of Seven so Far. More Coming.)

Because I have decided to go one little step at a time, there are six previous installments of this series. All comprise the word “protectionism” somewhere in their titles.

Because, we are all richer, Luis, I , the Quebec farmer and Pierre are in a better position to buy German manufactured goods than we were before. In Pierre’s case, that could be a Mercedes (although what he really wants is a specific Japanese car). In the Canadian farmer’s case, it could also be a Mercedes, or a BMW motorcycle. In Luis’s case and in mine, it would be a small piece of either a Mercedes or a BMW motorcycle. All the same, it’s a start.

I, and Luis, and Hans, and Pierre are all more likely to buy a basket or two of organic raspberries than we were before.

If Pierre follows through with his intention to send his son to a pricey MBA program in the US, it could be in my area. The son will go to restaurants once in a while, on his newly rich father’s dime, of course. More dishes for Luis to wash.

It’s not obvious that my main occupation, selling at the flea market will improve at all, except through Luis, of course. Remember he earns more money. He might spend some of it buying a ten-dollar used bike from me at the flea market. Pierre’s son, studying for an American MBA, might buy a used desk from me at the flea market, making me richer.

Now, we need to make a small, very modest technical switch. Here is a generalization that is more often valid than not: The more you make or sell of something the lower the cost of making it or of selling it. A lower cost of something is equivalent to a pay raise for the consumer, or for the producer, or for both. The technical terms here are “economy of scale “ (production) and “economy of scope” (marketing defined broadly). Continue reading

Shipping Jobs Overseas: The Export of American Manufacturing Jobs and Lousy Education

I had a troubling encounter in the past few days. It was on Facebook and it was with a stranger. Here is how it went: I patronize several organizations’ and people’s Facebook pages, to stay informed and also to learn from them. There is a man, X, who is my Facebook “friend” and whose page I like because he is a libertarian, or a libertarian conservative like me, who knows useful things I don’t know. X has a talent for firing up debates on Facebook. In one debate a propos of I don’t remember what, one person, followed by several others, kept referring to the de-industrialization of America, its putative loss of manufacturing industries specifically.

I intervened calmly and politely to point out that there was no such thing. I remarked that the height of American industrial production was either 2008 or 2007, or maybe even 2006, not 1950 as they seemed to believe. I directed the debate participants to a couple of government sources. One woman responded almost insultingly, alleging that I was trying to send her on a wild goose chase. She appeared to think that I was referring her to the whole Census with its thousands of pages of documents. I took the trouble – obligingly, if I say so myself – to direct her through Facebook to a source I though was easy to read, NationMaster. In addition I summarized what NationMaster had to say on the topic.

Here is the summary: Continue reading

The De-Industrialization of the US: A String of Enlightening Fallacies. Essay on International Economics, in Plain English

About ten days ago, I began I lively exchange with a stranger, G., on the Facebook wall of the President of the Independent Institute, of all places. The I.I. is my favorite think-tank. It’s located in Oakland, California. It’s my favorite because it regularly performs, intelligently and usefully, the function of bringing libertarian thought (broadly defined) to all who are interested. It has been doing this for years and on a shoe-string budget. (Full disclosure: I have had two co-authored articles [here and here; both pdfs – BC] in The Independent Review, one of the journals associated with the Independent Institute.)

You can easily Google the Independent Institute’s website.

My interchange with G. begun when I noticed one of the most common fallacies on one of his Facebook messages: He expressed himself in a way that led me to believe that he thought the US had been de-industrializing for years, chiefly to the benefit of China. We were both referring only to manufacturing industries.

G.’s impression is correct only in the most trivial way. It’s wrong on the whole, very wrong.

What is true is that American manufacturing employment has declined steadily for the past forty years. That’s true in an absolute sense. Fewer Americans work in manufacturing than used to.

This would have happened if there had not been any China, Red or otherwise. I gave G. the following historical precedent to which he did not respond:

Around 1860, about 60% of the American workforce was in agriculture. Today, it’s around 3%. (Note: Don’t go on a television game show with those figures. They are close enough for my purpose; that’s all.)

Nevertheless, American agriculture produces more than it ever has, in every sense of the word, whatever measure you want to use.

American agriculture used so much of the country’s labor power because it had low productivity then. (That’s value of production per worker.) As productivity improves, farmers can produce as much with fewer workers. What happened in the American case (and in Canada, and in Australia, and in Western Europe) is that farmers produced more with fewer workers. This virtuous trend has not stopped. It’s going on as I write. Some reforms may slow it or even reverse it; so-called “organic agriculture” may be one.

What happened early in agriculture happened later in manufacturing. Here are the simple, hard to believe, but nevertheless real facts:

Productivity in American manufacturing had never stopped growing, except for lags of a year or two. So has total American manufacturing production.

The simplest, most general rule-of-thumb is:

The year in which American manufacturing output was the largest in value, was last year, or the year before.

This is true although American manufacturing employment is declining and declining fast. Remember the 1860, 60% precedent.

I suspect G. did not get this point, in part because I did not explain it so well on Facebook. In part it’s because he appears transfixed by his own experience. G. is an experienced executive with manufacturing responsibilities. He says he is in China often. G. argued with me that the evidence of his own eyes was that a lot of manufacturing that used to take place in the US is now done in China.

I have no doubt that he is right, well, sort of right. Thirty years ago, when I bought an ordinary gardening tool, it was invariably made in the US. Nowadays, it’s invariably made in China, or at least, not in America.

My garden tool is also cheaper, much cheaper than it used to be. I mean in constant dollars, I mean relative to everything, including the minimum wage and including the median wage. It’s true practically in any measure you want to use. My money goes a longer way. That’s what it means to be richer: Whatever money you have buys more. As a consumer, I have only gained by the fact that the production of garden tools is now very largely done in China.

That’s speaking as a consumer. If I had been employed in the American garden tool manufacturing industry say, twenty years ago, I might easily have lost my job. That would in fact have been a consequence of outsourcing.

This is not the whole story. The reality is more complicated. In brief, for every job lost to outsourcing, one or more are created by the after-effects of outsourcing. This is a factual but counter-intuitive observation I don’t want to discuss in this essay. Here is a brief way to deal with it: If you lost your job to outsourcing, nothing I will say will console you. I can only hope that the American economy is growing and flexible enough to provide another job soon. I hope it will be as a good as the one your lost. Looking at the past thirty years, there is a very good chance it will be a better job.

If the American economy does not offer an abundance of good new jobs, ask yourself why.

If you did not lose your job to outsourcing: see above; you are now richer than you were twenty or even ten years ago, the current crisis (circa 2009) notwithstanding. If you want to know the net effect on American employment, a crude but legitimate approach is simply to look at evolving unemployment figures: In spite of massive outsourcing, American employment was very high except from 2009-2014. (Note: Net effect = jobs added-jobs subtracted.) As long as unemployment is low or going down, it’s not likely that limiting outsourcing would do you any good.

Training exercise: The 60% of the work force who were in agriculture and who lost their jobs since 1860 evidently found something to do. The many manufacturing workers who lost their jobs in the past forty or fifty years ______ (Complete the sentence in your mind.)

G. seems to refuse to consider any of this because he thinks his own experience an appropriate substitute for the kind of stuff I am writing now.

His experience is called “anecdotal evidence.” It’s usually worse than no evidence at all to demonstrate anything. (It’s often useful to formulate hypotheses though.) Here is why it’s worse:

My wife beats me frequently. I deduce from this personal experience that wives originate much of or most conjugal violence. Furthermore, I know for a fact that my wife does not drink alcohol. So, I am pretty sure drunkenness does not play much of a role in domestic violence. (Ok. I am messing with your minds; my wife does not beat me, ever. She would like too though, and often.)

What happened with the transfer to China of American garden tool production is complex and factually well-supported, both. Fortunately, if you are busy, or impatient, or simply if you have a life, there are valid short-cuts to help you get a grip.

China, now India, and many other countries that could barely keep alive in the fifties are now producing. They are now finally contributing. This is good for me, for two reasons: One, the more goods there are worldwide, the cheaper they are, in real terms. Second, rich neighbors may sometimes be rivals politically, and even militarily, economically, they are all potential customers. The richer they are, the more I can sell them and, the richer I become.

As compared to 1955 today, the world produces all the garden tools it used to produce, many garden tools it did not produce then, more food than it did, more of everything than ever plus, it produces things that no one had ever heard of in 1955. That would include the low-end but amazingly sophisticated computer I am using to type and to disseminate this essay. Incidentally, there were television sets in 1955. Everything about them was awful and they were more expensive than the sets we have now. (That’s by any measure you want to use.)

There remains the genuinely important question of what industries are going to be in what countries. That’s an important issue because acts of production are not born equal: Making concrete, or steel, generates less in earnings, including wages, than producing software.

The short-cuts to this important issue are these:

  1. Government seldom does anything right economically;
  2. The issue of production allocation among countries is well explained by the Doctrine of Comparative advantage. It’s almost 150 years old. It’s well tested. It’s not unfashionable just because it’s old. Old explanations should only be buried when they have been demonstrated dead.

My correspondent, G., is obviously worried about America’s place in the world and he seems impressed by solar technology. In support, I suppose, of what he would like our government to do, he sends me an article about China’s policies in this respect. It’s at:

(http://cleantechnica.com/2009/07/24/what-we-can-learn-from-chinas-heavy-investment-in-solar-energy/)

A sentence in the article caught my eye both because of its bad grammar and because it’s such a shining example of bad policy:

“China is telling their [sic] banks to support [solar energy industries] with strong loans…”

Two comments: 1) What reason is there to expect any national government, Chinese Communist or otherwise, to make good choices regarding what industries should be developed? The Communist Chinese are the same gang responsible for keeping China an underdeveloped country for forty years. We now know it did not have to be that way. Yes, they are reformed but we don’t know how thoroughly nor for how long. Thoroughly democratic Western European governments have a long record of failures in deciding national industrial priorities.

“How about the Airbus?” Two responses: To this day, the invoice for this multinational government venture has never been presented in a transparent fashion. Airbus looks like an economically viable venture but we don’t know for sure. If you invest $10,000 to earn ten dollars ten times and you have to spend eleven dollars each time, your venture may sell a lot but it’s not successful.

Second: The Airbus project benefited by the Concord experience, an extraordinarily costly apprenticeship and a rank economic failure from its first to its last day.

To my knowledge, the only large instance of a commercially successful government-prompted industrial venture is the Internet. It was done strictly on a cost-plus basis, as a defense project (another story), with hands-off by the federal government. (I would appreciate being corrected if there are other instances. Details and verifiable sources required.)

Examples in the negative abound. I will refer to what I know best. French governments have been sticking their noses into nearly all sectors of French industry since 1945. They had wide latitude to do so, because there were no intellectual defense of real, free-market capitalism in France until about ten years ago. French governments even intervene vigorously in the motion picture industry. French governments however never reached much into several industries, because they were too fragmented, or because industrial actors opposed a spirited defense against government intervention. Notable among those are the food transformation industry and the wine and spirits industry. Guess which French industries are more than holding their own, on the national market and internationally? (To begin, think Danon and think Gray Goose Vodka.)

G. also calls Chinese solar industry policies in a Facebook message developing “comparative advantage.”

It’s not comparative advantage. Like most college graduates and most MBAs (and deplorably, most university professors, I suspect), G. misunderstands the concept. His mistake is not small, it’s huge. I think you don’t understand the logic of international trade and investment if you don’t get comparative advantage. Let me try because my readers are, by definition, an elite group.

My comparative advantage is what I do best. Period. It’s not what I do better then the other guy. If I suck at everything I do, I still have a comparative advantage because I don’t do everything equally badly. That’s always true in the real world.

The doctrine of Comparative Advantage is the single most important rational underpinning of international trade, and indirectly of international investment.

It says clearly and absolutely that if every actor focuses his effort in what he does least badly, all the actors jointly produce more than would otherwise be the case. Period!

Logic test: Is there a difference between: “What I do least badly, “ and, “What I do best”?

Instant reminder: Once you know what I do least badly, in itself does this tell you anything about what I do better, or worse, than my neighbor Tom? This is a “yes” or “no” question. Don’t wimp out!

Below is a different approach to the same concept of Comparative Advantage. Select the approach that suits best your particular genius and stick with it.

My buddy John is an excellent, Mercedes-trained car mechanic. He is also an indifferent floor sweeper. Every time I catch him broom in hands, sweeping his shop floor, I bitch at him, “Stop, man; every time you sweep, you are impoverishing me.”

I am right? I insist you already have all the information you need to answer this question. Again, don’t wimp out on me.

Facts matter but thinking things through slowly is also important.

There is a Muslim saying attributed to the Prophet Muhammad:

“Ignorance is a sin.”