Counterpunch 16-31 January 2009

Originally published on Los Thunderlads, 15 February 2009:

From Paul Craig Roberts, part two of a three-part survey of economics. In Part One, published issue-before-last, Roberts had defended supply-side economics as the insight that reducing marginal tax rates increases the amount of goods available in the economy at every price range. In this original sense, Roberts asserted, supply-side had “nothing to do with trickle-down economics or the claim that tax cuts pay for themselves.” Roberts claimed that when inflation declined after the Reagan tax cuts of the 80s, the old Keynesian theory that loosening fiscal policy would raise prices was definitively refuted and supply-side just as definitively established. This article was essentially a synopsis of Roberts’ 1984 book The Supply-Side Revolution.

In this issue, Roberts argues that the doctrine of comparative advantage, for 200 years the cornerstone of the intellectual defense of free trade, does not apply to today’s world. Roberts says that comparative advantage, as originally laid out by David Ricardo and elaborated ever since, rests on two basic presuppositions. First, that the differing geographical, demographic, and climatic characteristics of countries would mean that in each country there would be different opportunity costs associated with choosing to make one product rather than another. Second, that “the natural disinclination which every man has to quit the country of his birth and connections” meant that capital and, to a lesser extent, labor would remain fixed within national boundaries.

Today, Roberts declares, both of these presuppositions are exploded. In our world, “most combinations of inputs that produce outputs are knowledge-based. The relative price ratios are the same in every country. Therefore, as opportunity costs do not differ across national boundaries, there is no basis for comparative advantage.” The second presupposition is even more thoroughly discredited. Not only do owners of capital routinely migrate from country to country, but in the era of multinational corporations and electronic communications owners of capital need not follow their investments abroad to supervise their operations.

Roberts cites many scholarly publications that challenge the doctrine of comparative advantage. Among them: Global Trade and Conflicting National Interests, by Ralph E. Gomory and William J. Baumol; The Predator State, by James K. Galbraith; Robert E. Prasch’s January 1996 article in The Review of Political Economy, ”Reassessing the Theory of Comparative Advantage“; and, from 1888, R. W. Thompson’s History of Protective Tariff Laws.

http://www.counterpunch.org/