Tuesday, January 6, 2009

Free Trade, 'Yes' - Mercantilism, 'No' - Why China Should be Shut Out

I have had several comments on the subject of free trade and protectionism, and thought the best way to answer this would be to dedicate a post to the subject. Much of the discussion revolved around some of the points that I made around the subject of China in the world trading system in recent posts, such as the notes at the end of my post on 'UK Bank Bailout - Round 2 Begins?'

The best way to start is to highlight my underlying principle, which is that free and fair trade is a good thing, and that such free and fair trade offers considerable benefits to all.

When I discuss fair trade, I would like to highlight that this is not the fair trade of 'fair trade coffee' and other such causes. I actually believe that such so called fair trade is grossly unfair and serves to create market distortion.

In the case of the coffee market, the reason for the fair trade movement was the collapse in coffee prices that was resultant from the decision by the government of Vietnam to expand the coffee business (yes another government distortion in the free market causing problems - see post here for an argument for free markets). The resultant glut in the coffee market caused considerable difficulties for other producers:
Apart from oversupply, there are two types of paradigm shifts underlying the current situation:

1. A structural change in the nature of supply, particularly increases in both the quantity and quality of Brazil and Vietnamese coffees.
2. Structural changes in demand, comprising increasing demand for high-end, differentiated products, new technology allowing greater flexibility in blending, and geographic-generational shifts in the appeal of different types of coffee products.

There are dramatic changes in the nature of this new supply. Of particular note is that global supply has become more concentrated. During the previous period of low prices in 1992, USDA data shows Colombia, Brazil, and Vietnam produced 44 percent of world production. In 2002-2003, 60 percent of world supply came from these three producers, and this figure is likely to increase unless production in other countries significantly reverses its decline. For some roasters, these three suppliers can provide almost everything they need, leaving them to buy only small amounts of coffee from other countries. (1)
The response to this shift in supply was to create the 'fair trade' coffee movement. At the heart of the movement were arguments about the immorality of the high prices charged for coffee in the West (Starbucks would often figure in these discussions), and the low prices achieved by farmers. This was apparently 'unfair'.

The result was that the fair trade movement instigated a system of guaranteed minimum wages for coffee farmers in particular regions, on a selective basis. In doing so, they offered prices for coffee that the market would not otherwise stand. This has created one central problem. If there is a glut in supply, and you guarantee prices, guarantee a living wage, you create a situation where a) you encourage otherwise inefficient producers to remain in the coffee market b) encourage new entrants into the market. In doing so, you are just prolonging the problem of oversupply in the market. Furthermore, on what basis do you award the guarantee to whom? Is it fair that farmer x gains a guarantee, even if he is an inefficient producer, but deny the same to farmer y, an efficient producer? What would be a fair basis to offer this guarantee? If farmer y is very hard working, very efficient, why would it be fair that he must compete in a market in which an artificial glut is maintained through price support for inefficient producers?

In this respect it is unfair trade. On the other hand, if we view it as a marketing tool, it is perfectly fair trade. If a company can persuade people to buy coffee on the basis of benefits to their sense of moral righteousness, then that is a good marketing ploy, and conveys a competitive advantage. They are no longer just selling coffee but a 'feel good', emotional benefit. However, that this is a genuinely moral activity is at the very least dubious. It is fair trade in the sense that a point of differentiation is created, but it is certainly not fair trade in the sense conveyed by the supporters of the fair trade movement.

The case of coffee illustrates my point of real fair trade perfectly. Real fair trade is about removing distortions from the market, but the coffee market has seen considerable distortions, including international agreements on quotas and all kinds of interventions (from the same report as above):
At the domestic level, state-managed governing bodies, such as the coffee boards, were often inefficient,and, under the ICO programs, their management of the export quotas gave them opportunities for rent seeking (Bohman and Jarvis 1999). When this rent seeking was combined with the inefficiencies, the marketing boards induced in their markets, it served to divert a significant share of the export value of these crops away from the producer toward either governments, the marketing boards themselves, or the export sector. even if they managed to smooth market signals and responses which most likely contributed to lower domestic volatility (Giovannucci, et al. 2002a). It was not surprising that, in many cases, the end of the ICO quota schemes led to both a dismantling of the coffee boards and a rise in the producers share of the export price.
Or:
Stabilization funds suffer from a number of structural weaknesses. As discussed above, the tendency of commodity prices to have short spikes and long troughs means that stabilization funds have a tendency to run out of money before a recovery can occur. In the case of Papua New Guinea, this led to the fund having to borrow from the government—loans that later had to be forgiven. There is also an assumption that the stabilization fund managers can better invest the levies received during periods of high prices than can individuals, and producer support for stabilization funds may, therefore, be indicative of a problem of lack of access to financial services.
I can not reproduce the entire paper here, but what you see is not a market of free and fair trade, but a market in which there are endless interventions both internationally and at national government level. If we just take the example of Papua New Guinea, the intervention meant that their coffee producers were given an unfair advantage in the market of a subsidy. Someone, somewhere, will lose from this subsidy because they will be faced with less efficient producers than themselves who are still in the market place due to subsidy. It is a classic case of 'beggar-thy-neighbour' policy. The end result of such policies is that everyone tries to manipulate the market, the gluts continue, and the problem of excess supply never goes away.

The end result of such distortions is that there is a lot of land devoted to producing a commodity that nobody really wants, and that means that potentially productive resource is actually not producing anything of value. At the local level, it is easy to make a case for intervention, but each intervention ripples through the market eventually hurting someone else.

As such, if you want true fair trade, then you need to make the markets as free and as fair as possible, which means that the most efficient producers survive, and the inefficient get out of the business. The problem with such a solution is that it meets with resistance in each of the countries that are unable to compete.

The coffee market is world trade writ large as, for some reason, farmers appear to have greater emotive appeal than, for example, a worker in a widget factory. For some reason a farmer going bust has greater emotive appeal than a widget factory worker being made redundant. In both cases they might be thrown into poverty, but for some reason the farmer's poverty counts for more. As such the distorting effects of intervention are particularly more apparent in markets such as coffee.

It is at this point it is worthwhile opening up the discussion of free trade to a broader frame of reference. No doubt, all of the readers will be aware of the bailout of the US automotive industry, and that similar bailouts are being proposed elsewhere (e.g. the UK). Even before the contraction of the world economy that we are now seeing, there has long been a glut in the supply capacity of cars, and the current contraction should have seen the end of the US automotive industry (or at least the end of one of the big three, possible two). Just as with the coffee market, we have a situation in which a government subsidy will create the same beggar-thy-neighbour effect as the intervention of Papua New Gunea in the coffee market. Someone else somewhere will pay the price of this intervention.

In the meantime, there is another problem. In intervening to prop up inefficient industry, it may appear that this is a good thing for the intervening country, but in some respects it will only cause them long term harm. In this case, the money for the car industry is being provided by central government, and that (one way or another) will be paid for elsewhere in the economy. There are several ways that this might cause hurt.

One is that, if it is funded out of borrowing, that money will need to be repaid, and that means that the efficient parts of the economy will have to pay for the inefficient parts of the economy, thereby removing capital from those efficient parts, and therefore constraining their growth potential. If the bailout is paid for by printing money, then it is paid for by a general tax on the economy as a whole, as the value of the existing money is transferred onto the printed money (the tax), and then transferred to the inefficient industry. In both cases, the efficient parts of the economy will be taxed to pay for the inefficient.

From this perspective, all seems very clear. Subsidy, it appears, hurts yourself. However, I have emphasised that it also has a beggar-thy-neighbour impact. The point here is that, if you subsidise an industry sufficiently, you have the potential to destroy the same industry in your neighbour. Having destroyed that industry, you remove the glut, and your inefficiently run industry can then achieve a position of profitability and market domination.

It is for this reason that governments intervene to support their industries. It is very rarely ever discussed in these terms, but the central idea behind subsidy is that of supporting an industry until it is the 'last man standing'. I do not mean this in the literal sense, as it is unlikely in most cases that it will be the last man standing, but rather if there are not many men left standing, then the industry can achieve profitability. I recently read an essay in a book (2) in which they discussed the 'rule of threes'. This is the idea that, over time, industries will whittle down to three major players, and that in an increasingly globalised system this is starting to apply internationally. Whilst not agreeing with their entire argument, the principle is roughly right. In such circumstances, whilst having some negative effects on your own economy, subsidy can pay.

From this starting point, we now come on to China. I have consistently argued that there are two fundamental problems with the rise of China. In particular the theft of intellectual property, and aggressive trading practices such as currency manipulation. I had the following to say in an earlier post on China (it is a little clearer in the original context, but the central point is clear enough);
I have suggested in a previous post that the world trading system needs to get tough with China. I did not have the time to dig up the articles that I had read, which caused me so much concern, so have previously not outlined this point of view. However, on reading the latest attempt by the Chinese government to manipulate trade, it seemed a good point in time to outline this problem. I am at heart a free trade advocate, but I also believe that trade should be free and use reciprocal rules should be binding and enforced. It is very clear that China intends to rise economically by any means, fair or foul. The crazy part is that the foul is unnecessary, and one then becomes very suspicious of the underlying motives for such methods.
In another post I concluded the following:
China poses a real and ongoing threat to the world economic order, and will continue to grow at the expense of the West, unless the West responds by restructuring of their economies through (real) improvements in education, lowering their cost base, and taking an aggressive approach to intellectual property and fair trade (for why, see here).
And in yet another post:
One of the key elements in the rise of the Chinese economy has been their very lax attitude to Intellectual Property, which is stolen at a rate that is truly astounding. For example, it is nearly impossible in most Chinese cities to buy genuine computer software for individuals, excepting that which is preloaded on new computers. If we just took the example of Microsoft Windows, we can take a reasonable guess that, at least, 100 million computers are running on the software, and the majority of these are illegal copies. At something like $100 retail per unit for Windows, it is not difficult to grasp the scale of the theft. This is just one example. Multiply this across all of the software, and the numbers start to look truly shocking.
I later go on to say the following:
Another problem has been the exchange rate in China. It has been fixed, then moved to a basket with a partial floating rate. In a free trade situation, this is unacceptable. However, the West congratulated China on holding firm on its exchange rate during the Asian financial crisis, thereby hobbling the ability to complain about the problem of the exchange rate later. Had the exchange rate been free, the RMB would have strengthened, making Chinese exports more expensive, and thereby avoided the degree of imbalance that has occurred.

What I am therefore saying is that there was always going to be some pain for the Western economies, but the foolishness/weakness of Western leaders contributed to the scale of the current problems. China always had the potential to grow, but the rise was boosted by two practices which might be described as 'unfair' trade practices. These have accelerated the growth and have contributed mightily to the degree of imbalance that we now see.
As you will note, my stance on free trade has been pretty consistent, and in particular with regards to China. My argument has always been that China has enough advantage without any subsidy, whether that is through the export subsidy and protectionism implicit in exchange rates or through the theft of intellectual property. I believe that, as a result of the implicit subsidy in the exchange rate, in conjunction with intellectual property theft, China has been in a position where it has been effectively been allowed to destroy industries in its competitors. The worst part of this is that China has always had the potential for strong growth without such measures. I have always believed that China deserves its place in the sun, but only on free and fair trade terms.

I should qualify this slightly, as I think that all countries indulge in some unfair practices to some degree or another. This is not to condone any such practices, but at least they should be minimal. The difference with China is that it has practiced two policies which have such a massive impact on the trading position of the country.

The real question in all of this is why the world trading system has not responded, and this is a difficult question. One part of the equation was detailed in one of the posts I have already cited as follows:
On a related subject, in an article a while ago the Telegraph, it was reported that senior Chinese officials were willing to use dollar sales as a way of exerting power over the US. In short, the Chinese have the power to destroy the $US by selling the currency, and therefore have huge economic power over the US. The Chinese government later denied the policy, but those familiar with Chinese culture will know that using such methods of presenting a threat is not unusual.
Another factor which is somewhat harder to summarise has been a divide and conquer, carrot and stick approach, in which the two major trading partners of China, the US and Europe, have been played off, one against the other. It has appeared to me that the Chinese government have long played this game, but it is hard to support such an allegation. The carrot has always been the access for each country's companies to the lucrative engineering and infrastructure projects, ease of access to the Chinese market and so forth. The stick is getting unfavourable treatment within the Chinese market. All the time there will be pressure from business on governments to keep China 'sweet', in order to secure the access.

In other words, what has been lacking is a unified stand against the unfair trade practices of China. I believe that, as the severity of the impact of the speed of growth of China's impact on US manufacturing gathered pace, the US would have acted, were it not for threat that China could destroy the $US. By the time the US woke up to the impact of China, it was too late to act, as they had already ceded economic power to China by allowing the massive accumulation of $US reserves.

My argument has always been that it is better to take the risk of economic damage now (the damage to the $US), rather than later. The longer it is left, the greater the accumulation of $US reserves by China, the greater the numbers of industries permanently destroyed, and the greater the long term pain. In other words, the longer that the confrontation with China is delayed, the less able the rest of the world will be to withstand the consequences. When I first wrote about this, the full impact of the economic crisis was just in my imagination, was just a prediction. Now that it is here, the weakness of the economies of West is such that the leverage of China is that much greater. I have long predicted the collapse of the $US, and mainstream thinking such as Willem Buiter, are coming around to the idea. In the situation of an already vulnerable currency......

At the end of this post, I can only conclude that it is time to face up to the mercantilism of China, and finally address the problems that are being caused by such practices. I do not, and will not agree with protectionism, but I do believe that, where a country is systemically mercantalist, then action should be taken, including raising trade barriers and tariffs. I would even countenance a complete embargo on trade.

The trouble is that, as I pointed out in a previous post, China has now placed itself in a position where too large a proportion of the economy is geared towards export. It is destroying the very customers that are supporting its economic growth. If the West were now to act to discipline China, it is a very dangerous proposition. In particular it will wreak even greater damage on the Chinese economy, which is already suffering from the contraction of its major markets. Regardless of the rights and wrongs of the situation, China will cry 'foul', and will proceed to stir up nationalist fervour within China. This will see attacks and boycotts on Western and foreign owned businesses. It will see even greater unrest in China, which is already seeing unrest as a result of world economic contraction, and the situation will potentially become explosive. In letting the nationalist genie out of the bottle, with legitimacy of the Chinese government founded on economic growth and nationalism, we have the makings of a heady cocktail. Where such a heady cocktail might lead can only be a matter of supposition, but it will certainly not be a good direction.

The real answer is that the question of the rise of China should have been dealt with long ago. However, the situation as it stands does need to be confronted. Saying that it should have been dealt with long ago is not very helpful. The trouble is that, because it was not dealt with, a situation has arisen in which the costs of dealing with China have exploded. One commentator mentioned that it seemed that the world trading system appears to be fragile, if China's rise can have so much impact. It is only fragile because the impact was not addressed earlier, at a time when the impact of China could have been the emergence of a strong economy in a (in very loose terms) free trade world.

In short, we have a very, very serious problem at the heart of the world trade system. Not only that, but it is a problem whose resolution can only be painful. However, the problem must be resolved, one way or another.


(1) Lewin, Bryan, Giovannucci, Daniele and Varangis, Panos,Coffee Markets: New Paradigms in Global Supply and Demand(March 2004). World Bank Agriculture and Rural Development Discussion Paper No. 3 .

(2) Sheth, Uslay C, and Sisodia, R, (2008) The Globalisation of Markets and the Rule of Three, in Marketing Metaphors and Metamorphosis, ed Kitchen, P

18 comments:

  1. I will just make a comment on my article. I neglected to mention that the 'fair trade' coffee movement might be an example of an attempt to correct imbalances caused by other interventions. This is the problem of intervention, which is that it leads to more interventions, which in turn lead to more interventions and so on. The real answer is to ensure the maintenance of a level playing field in the first place....where those in the best position to produce efficiently are allowed to do so.

    As such the fair trade movement should be running a campaign against any further intervention. In this way, there really will be fair trade.

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  2. This comment has been removed by a blog administrator.

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  3. A second note: Lord Keynes offered the following link to highlight the growing protectionism in the US:

    http://buchanan.org/blog/2008/11/pjb-chinas-path-to-power/

    I agree with the analysis in the article in part, but the remedy offered in the article is to disappear behind a wall of protection. My answer is different in that it is punitive action to force reform in China, such that China rejoins the trade system on fairer terms.

    There are many dangers to the approach of Buchanon.

    One result of Buchanon's approach would be to restrict competition, and that, in the long run would leave the US economy trailing behind. Quite simply, if not exposed to external competition, companies become complacent and rely on tariffs to protect them.

    Meanwhile, in the harsh world of competition outside, the greater rigour of competition forces companies to fight harder for their position, driving innovation and efficiency. I think New Zealand illustrates this example well, as it saw its GDP decline under a system of import controls (I will admit here that I am using an example of which I am only slightly familiar, so am open to correction).

    Another point is that the period of growth that Buchanon refers to was a time in which the US could create huge growth due to the 'youth' of its markets, allowing for internal growth, based upon a surplus of internal resources. He also ignores the massive international expansion of US business which continued their economic growth, in particular during the post-war period. He ignores that the US no longer has the option of autarchy, as it needs resource from the rest of the world, such as oil.It is not the same period of time, and the US is no longer the same 'size' of country/economy or the same level of maturity, and the world has changed.

    Yes, in the US, protectionism will help for a while, but only at the cost of falling further behind in the long term and creating future difficulties in access to resources for economic activity.

    For countries like the UK, essentially it **must** be a trading nation, as autarchy is completely impossible whilst maintaining any good standard of living, so that even short term protectionism would be a disaster (excepting punitive action, such as against China).

    As such, in one sense Buchanon is right, that China's rise has been driven in part by their 'China First policy of economic nationalism', and this needs to be addressed. However, retreating behind a wall of tariffs is not the solution to the long term economic health of the US.

    However, there is an even more fundamental reason why protectionism is a bad thing. It is a philosophy which will see the rivalry between countries intensify.

    If we look at Iraq, few would disagree that the underlying reason for the war was oil. However, one of the unacknowledged principles of the war was that the war to ensure a free oil supply to the world. By free, I do not mean without cost, but freedom of access to the resource of oil.

    This is a very important point. For the massive expenditure in life and money in the war, the US still allows all oil to be sold to all countries, including China, on a free access basis.

    The answer to why this is the case is the belief of the US (broadly) in free trade.

    If we think of a world of countries hiding behind tariff barriers, it becomes advantageous to capture supply because, if you cease to trade by raising tariffs, you need to ensure supply of resource through means other than trade. After all, when everyone hides behind trade barriers, with what will you trade in exchange for the resources that you need? Those resources take on a different kind of value.

    Essentially, this is the world of the land and resource 'grab'. It is a world in which it becomes advantageous to capture supply as the only surety of cost effective supply. This is the stuff of which national rivalry is built, and the foundations of aggressive nationalism.

    If you doubt this, ask yourself why, having expended so much money and effort, the US would do so only to leave the oil they secured available to all.

    If they were hunkered down behind their tariff walls, they would still need access to the oil, still need to have conducted the same war to secure the supply...but, if they were hiding behind walls of protection, why on earth would they expend so much, then allow access to all?

    It is a fundamental question, and one which can only be answered through the underlying belief that free trade is of benefit to all. A belief in free trade is the only answer that can explain why the Iraq war was not a resource grab.

    I would therefore argue that protectionism is a very dangerous course indeed....

    A rushed answer, but I hope that it suffices.

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  4. I have just deleted a comment from MC Shalom P Hamou. I have followed the link, and it appears to be some kind of investment scheme. I will be happy to republish a discussion of the economic principles, the 'why' of the scheme, but will now allow any publication of links that sell the scheme. I view any links selling anything as spam.

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  5. Thank you for your interesting and useful response. I find it interesting that you think the UK absolutely cannot 'go it alone' without destroying any decent standard of living but I dont have the facts and figures to question your assumption. Beyond that, your reasoning seems sound, as usual.

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  6. Mark

    Another excellent post. Did you see this piece by Pat Buchanan who makes absolutely no apologies for supporting protectionism against China:

    http://buchanan.org/blog/2008/11/
    pjb-chinas-path-to-power/

    But I'm slightly worried that this idea - that it is only government interventions that prevent the markets from behaving 'perfectly' - spells 'the end of the conversation', if you see what I mean.

    I would like to explore what, if anything, would be wrong in principle with the markets even if there were no artificial distortions at all. For example, I don't think you have yet really addressed the finite resources vs. infinite growth question. In one way, it's marvellous that we can throw away a perfectly good car and buy a new model every year, but in another way it is obscene. Some people feel that work gives them a sense of purpose, but others would rather work far less than 40 hours a week but have no choice, because they are competing in a mindless race to produce rubbish to be bought by people looking to spend money they've made by producing rubbish. Why was it never on the cards that the invention of the microprocessor would reduce the average working week *at all*?

    And it's easy to dismiss conspiracy theories, but it would be interesting to explore who benefits the most from the existence of the 'rat race'.

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  7. Oops, ignore my mention of the Pat Buchanan article - I couldn't remember how I came across it, but it was through this very blog. Apologies to Lord Keynes!

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  8. It's a nicely written article as usual, Mark, but I have to disagree with it in every way.

    Personally, I think "free trade" is a naive, hippyish idea, like "peace and love". Going into the global economy expecting everyone to trade fairly is like going into a bar brawl and expecting everyone to only use their fists.

    The recent furore over Gazprom shows the way the global economy is increasingly going to work - countries cynically (realistically?) using their trading advantages to leverage power. The UK and USA's adherence to fair trade principles has been a disaster - it has seen them de-industrialised, squandering their energy reserves, and in the UK's case even handing strategic utilities to foreign owned (sometimes state-owned e.g. EDF!!!)companies.

    Quite simply the UK and USA need to shake themselves out of their free-trade and globalisaton torpor as soon as possible, and get back to the dirty world of realpolitik. Protectionism and its ilk may heighten global tensions, but continued adherence to free trade will only bring serfdom.

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  9. We need to first define what Free Trade is and fair trade can mean different things to different people. Fair trade is coupled with the Free Enterprise system as opposed to the Free Market system. The Free Enterprise system is about owners making or growing something and enjoying a decent living from their efforts and being able to make enough to have all their employees enjoy the same.

    Free Trade should not be called trade since the major commodities being traded are workers and labor who are put on a world trading block to compete with one another for the same jobs. This was never considered as trade in history. The closest thing to it in history was slavery.
    We do have a essence of Plantation Owner mentality in the process of Globalization and its tool - so called Free Trade where elite grouping think they know what is best for the masses. It is obvious, workers have no voice in the process and it is alos obvious that Free Trade and Globalization have not evolved in any normal economic pattern but are driven by third party powers outside the will of the people.
    Lech Walesa, leader of the Solidarity movement and former leader of Poland ( The Solidarity movement was credited with playing a major role in the downfall of Communism ) says this - I do not know that much about business or economics, but I do know something is very wrong when ten percent of the population controls 100 percent of the wealth.

    Protectionism - history shows that it was an intermittent process. Free traders point to the 1930s as an example of protectionism but the high tariff laws were passed in 1930 after the stock market crash in 1929. Then Roosevelt was elected in 1932 and a new trade agreement giving Roosevelt the power to lower or raise tariffs came in 1934. Very few in the world had money at this time to conduct business. With the drums of war beating, Roosevelt said he was not going to let the dollar sign stand in his way and initiated "real Free Trade" with the Lend Lease Act. This ramped up the most awesome industrial might and agriculutural power, the world has ever known and it was not about trade or protectionism, it was about getting around the problem of money and having a war to get everthing going.
    See Lend Lease Act was real Free Trade and not Chop Liver as in the Globalist Free Trade world at http://ezinearticles.com/?expert=Ray_Tapajna and explore the lost worlds in the globalist free traders Flat World at http://tapsearch.com/flatworld/
    Our economy based on making money on money instead of making things is burning out. It was always a problem of money and not tariffs, trade or protectionism.

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  10. I have to chime in with the two posts above, but maybe for different reasons. Having been a socialist worker while in secondary school I am very sceptical of economic systems which seem perfect on paper etc, but (like utopian socialism) have never been successfully implemented among the pesky human population with it’s endless interventions, foibles and irrational behaviours.

    “but what you see is not a market of free and fair trade” Can you give examples of where free trade has existed between nations and remained stable and free from manipulation /distortion /use of coercion etc over a period of time?

    “The coffee market is world trade writ large as, for some reason, farmers appear to have greater emotive appeal than, for example, a worker in a widget factory.”
    That ‘some reason’ is choice. Farmers are pretty near the bottom rung. Widget makers are one step up that ladder. The widget maker can (to a degree) follow the movement of capital investments to other centres of widget making excellence or can be retrained to make biro-lids without too much difficulty. The coffee growers are generally uneducated; and are stuck on plots of land up the side of the mountain that may not be amendable to a sudden switch to other crops as global market efficiency demands.
    The Fair Trade movement movement itself maybe cosmetic and ineffectual, but it is a response to a genuine problem; the fixing of wild instabilities in the global economy that pitches coffee farmers in Vietnam into competition with those in Brazil. This seems to be of little true, sustainable benefit to anyone except those at the top of the industry, who have had the ability to intervene, and control the price of coffee since the 1963 (not, in my view the Vietnamese govt. but the International Coffee Agreement, an import/ export cartel).

    “the efficient parts of the economy will have to pay for the inefficient parts of the economy, thereby removing capital from those efficient parts“
    Is total efficiency an ideal or possible state for human to live in?
    For example let’s say Pareto’s Rule is true; that 20% of the workforce meet 80% of world’s consumption needs. Is it right to let our old testament god of a free markets impoverish those who falls outside the 20% (and within that 20% we naturally will want to exclude the least productive 80%, and there will be another 20% in that remaining 80% and so on)?
    Another example; CE appears to have another job, and often comments that he hadn’t enough time to address Y or Z. This I guess would puts you outside the most efficient bloggers or is efficiency only demanded of those in industrial/agricultural processes?

    I find your analysis mostly astoundingly good, however your espousal of what Ambrose E-P called "the free trade church" I find a lot less convincing (where the ideology shows through?). The feeling I got while reading this post is of ideology being rationalised, of fitting arguments to conclusions you had long ago reached and accepted as true. However that is my gut-reaction and fairly easily dismissed as wishy-washy I suppose.

    “ “I should qualify this slightly, as I think that all countries indulge in some unfair practices to some degree or another”
    Then--
    “ “I can only conclude that it is time to face up to the mercantilism of China, and finally address the problems that are being caused by such practices. I do not, and will not agree with protectionism”
    Your analysis provides a good argument that whether you agree with or not protectionism is and has been ever-present where ever humans do business.
    Okay.
    So the free market is distorted by interventions which have thus far seem inevitable and the only solution is more interventions, which makes matters worse? What a mess!

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  11. A regular poster (with a good Irish surname) Steve Tierney previously wrote;
    “Where I differ from Lord Sidcup is in his apparent belief that in times of crisis we should let our ideologies go and just 'knuckle down' to solve the problems. A time of crisis, in my humble opinion, is exactly the time to stand firm for what you believe is the 'right way'.”
    Then--
    “We'll see the Conservatives win government in a landslide because of it. And then we'll (I very much hope) see some light at the end of the tunnel. . . The system is flawed and needs work, but at its core its a good system. It can deliver if it gets the chance”
    And most recently—
    “let me be the first to admit that although I know almost every economist on Earth thinks protectionism is a mortal sin (and I respect their greater knowledge), I find it kind-of attractive. . . ”

    I don’t mean anything negatively, personal as I generally like S.T’s input, but I think he provides a very accurate summary of what happens and is happening all over the western world and beyond; free-market ideologies collapse when ‘we’ have something to protect.

    karl Popper made a method out of scepticism, I suggest we would do well to do the same, when dealing with politics and economics.
    Like the man says " I just don't buy it. . . "

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  12. I don't understand what 'free trade' is meant to be. As long as trade is carried out by people living in societies, there will be laws governing their behaviour. If trade is to be free then what is wrong with IP theft? Drug running (for sure there is a thriving international recreational drug market, but it is heavily regulated - is that a bad thing?) Similarly with human trafficking and sex slavery of poor foreigners.

    No, 'the markets' have always been regulated 'for the good of society' because otherwise they destroy society, harming the majority for the benefit of the wealthy minority.

    The discussion has to be HOW do we regulate the markets. Letting them 'go free' is a naive impossible fantasy

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  13. VeryCynicalNonEconymistJanuary 8, 2009 at 3:15 AM

    http://www.guardian.co.uk/business/2009/jan/08/gas-crisis-export-europe

    So gas prices to go up again, pensioners and other vulnerable people at risk of freezing, while the energy companies owned by European companies export British gas to the continent.

    Great example of Free Trade CE? I bet you are happy in China while we freeze.

    I am not going to get angry at you however, but I have long been distrustful of free market zealots. I don't know which is worse, those who spout the rhetoric, while cynically using it as an excuse to exploit the system by fighting against the regulations that stop them scamming others, or those like yourself that really believe it, can argue with conviction about the injustices of interference, yet are still have the delusion that free trade would work.

    I'm sorry CE, but it IS a delusion in my, and many others eyes, for the simple reason that a "free" market has never existed, and never will.

    From my perspective you believe that a free market without any interference will somehow invisibly guide and self correct itself, and yet interference is impossible, as every player is out to increase their wealth, and by the very nature of the game, take the wealth from others.

    You have pointed out the problems of regulation, without confronting the REASON for regulation. The base fact is without some rules in place the sharks are free to steal with impunity. Even a lessening of regs left enough rope for the banks to hang themselves through stupidity and greed, and because they deluded themselves, and were held up to be financial wizards (the whole of finance seems to be the product of magical thinking, its no wonder the terms are the same), they fooled the public and the politicians.

    Frankly the whole system of growth is a dangerous delusion. Simple elementary school mathematics shows that exponential growth in a closed system is impossible, in the end will use up all our resources and the decline of civilization is inevitable, we can only hope to slow it down. But unfortunately those who have wealth and comforts are unwilling to give it up, and are often in denial that the party is over, and seem to want to trash the place.

    As far as the market, it is unsustainable, over complicated, and completely corrupt. That cannot change unless every country, every individual agreed to a simple, watertight set of rules to ensure everyone is treated fairly. Self interest will make this impossible.

    If enough people rise up and demand that protections are put in place to stop them going hungry or without fuel, then the politicians either have to concede or bring out the troops. So some form of interference is going to break up your "free" market no matter what you believe.

    This is one mistake, or deliberate avoidance that free market zealots make. Markets are not just to make people money, they are there to make sure people can survive. When a group or individual feels secure for food, fuel and housing, then they can spend on luxuries, but the fear and fact of poverty will always be there. In rich countries were the general standard of living is high, people can forget the basics and look down on the poor, leading to callous behavior, and making money for the sake of money, and loosening vital regulation for the sake of more profit.

    But at the heart of it every country, every individual is struggling to survive, to make sure there is food on the table, a roof over their heads, and fuel for heating and cooking. Those are the basics, and every other thing is built on those, and if they are threatened people will fight back.

    For that reason alone a "free" market cannot exist, as everyone will seek to protect themselves in one way or another. In gangs on one end, though tribes, other organizations, up to countries, empires etc. As the complexity increases, people become more detached from the mechanisms keeping them safe but at some level, there will be a barrier against a competing entity, protections built up and the free market dream crumbles as the protections clash and trade is manipulated.


    So rules and regulations are needed to protect against competing groups. But every individual is competing in one way or another. Without laws there is chaos, why else did tribal leaders promote superstitions and eventually organized religion as a form of social control. Civil laws are a natural common ground progression, and are needed or we go back to the stone age socially. How can it be any other in finance which is just another extension of social dynamics.

    There is a case to be made for simplifying regulations and bringing them into a more communal (not communist!) basis.

    Making them less subject to interference from a government getting bribes, or simply wanting votes to stay in power is a good idea, but to do that would require a change in the form of government as it is easily shown how they loath giving up any power once it has attained it. That is another discussion however.

    CE. I have read a lot of your posts, and while I respect your analysis on what has gone wrong, please leave your utopian hobby horse in its stable, and help us work on regulations we can all agree on that could work.

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  14. Have not seen this on this site, so thought should post it as it offers an insight of the scale of the crisis from a real world perspective devoid of political machinations.

    The Baltic Dry Index "provides "an assessment of the price of moving the major raw materials by sea," according to The Baltic, "... it provides both a rare window into the highly opaque and diffuse shipping market and an accurate barometer of the volume of global trade -- devoid of political and other agenda concerns""

    http://en.wikipedia.org/wiki/Baltic_Dry_Index

    http://www.investmenttools.com/futures/bdi_baltic_dry_index.htm

    Note the complete collapse from the high in July 2007, meaning that global shipping has gone to a virtual standstill due to not having the money to move goods. Several shipping companies are close to or already filing for bankruptcy.

    The dream of Globalisation is now showing its fatal yet obvious flaw - tie all trade together, and when one thing fails, they all come toppling down.

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  15. Lord Sidcup,

    The quotes you referenced from my previous posts were a little out of context, though I can tell it wasn't deliberate, so I forgive you : )

    My "protectionism" post was deliberately provocative, because I was interested in the people who post here's take on it. I did point out that it was mostly Devil's Advocate at the time.

    I really enjoy the original articles by Cynicus but also the contributions made by yourself and other regulars. I suspect we are all, basically, on the same wavelength (give or take.)

    In your own post you said
    I am very sceptical of economic systems which seem perfect on paper etc, but (like utopian socialism) have never been successfully implemented

    I agree with all that. But...

    I would point out that you should therefore be skeptical of absolute free trade too, since that has also never been successfully implemented. Mostly because governments wont let it operate freely, but whatever the reason, I doubt there's ever been a time where free trade operated without forms of intervention skewing the picture.

    I'm a free trade advocate for the most part. Of course I am, or why would I post here? I do accept Cynicus' proposal that most of the current problems are caused by interference in the free market.

    But I do feel that, while other entities are tampering with markets for their own ends, to blindly enforce absolute free markets ourselves is dangerous, bordering on suicidal.

    I believe in peace and kindness too, but if somebody attacks me I'll defend myself rather than just take a beating and possibly be seriously injured.

    By all means lets work for bringing down trade barriers and encourage worldwide free trade. But lets remember that real people are involved and the consequences of ignoring their problems to be 'true' to one economic standard will be painful and in some cases tragic.

    Intellectuals get to do that in debate, but politicans have to deal with the fall-out and dont have the same liberty.

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  16. Mark - Further to my post above, The more I think about it, the more I think your argument doesn't stand up.

    In the first instance you are being a bit naughty by creating a straw man by calling protectionism "autarchy". But protectionism doesn't mean that you have to ban every foreign import over every industrial sector and become self-sufficient. What it does mean is using flexible policy to temporarily reign-in imports when they are start to threaten the existence of key sectors, giving those sectors a chance to recover and compete.

    How can you accuse protectionism of inhibiting product development and efficency, when we have seen free trade WIPE OUT entire sectors of UK industry? I would rather have (for example) a UK motorcycle industry that was a bit less efficient than the Japanese equivalent, but at least have a breathing space to get its act together, rather than be completely destroyed. Especially as the Japanese advantages were not only technical, but due to the (unfair) pricing advantages they gained from the low interest rates they gained from Japanese industrial banks.

    Let's also not forget that the destruction of UK industry had two very serious (though largely unconsidered) further consequences that we are still paying for:

    i) the squandering of North Sea Oil revenues on unemployment benefits, and

    ii) the (unremarked but extremely potent) sense of national demoralisation. To wit: if you think British cars are shit, it isn't much of a logical leap to start considering that the people who built them (i.e. us) are also shit.

    And the final observation to make is that the one and only UK industrial sector that HM Government did attempt to protect, which was (unfortunately) Defence, is now in rude health and makes great contributions to the nation's wealth. If only we had taken a similar strategy with our other key industries.....

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  17. As there's a bit of a Darwin thing going on in the news at the moment could I just make the following observation?

    It's a well known idea that the operation of the free market is in some way similar to Darwinian evolution, and I am sure this idea is correct. However, it seems that there are those who believe mistakenly that evolution has a purpose and that it is somehow there to produce constant 'progress' towards greater complexity, intelligence etc.

    I would contend that there is no guarantee of progress in any particular direction, but that man has flourished by using his consciousness to step outside evolution*, controlling the environment to suit his purposes and survival. Without that conscious effort to manipulate nature man would probably have been wiped out long ago, or still be living in caves. By stepping outside evolution we create our own direction of progress.

    I'm getting the feeling that the free market devotees similarly make the mistake of believing that their system is not only like evolution in that it is adaptable, efficient, capable of astoundingly innovative solutions to problems etc. but that it is somehow imbued with a purpose to produce 'progress'. To me, the completely free market does resemble Darwinian evolution in that it spontaneously produces amazing phenomena, but like evolution it also has no purpose or inherent direction of 'progress', and readily goes down blind alleys which threaten to wipe out all progress hitherto; I see no argument from anyone which can prove otherwise.

    Surely, to guarantee progress as we would wish it, we must apply some higher level control from outside the free markets, otherwise the economic landscape could end up populated only with cockroaches.

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  18. CynicusEconomicus

    You Said:

    "I have just deleted a comment from MC Shalom P Hamou. I have followed the link, and it appears to be some kind of investment scheme. I will be happy to republish a discussion of the economic principles, the 'why' of the scheme, but will now allow any publication of links that sell the scheme. I view any links selling anything as spam."

    First what exactly I am selling? Obviously you didn't read or understand the material.

    Second what is your other option?

    Third I believe that the fact of being the only one that did work since 1994 on the present crisis with no revenues and only expenses and did come up with a solution should command some respect.

    I am resenting both your words and you behavior:


    "At the present moment people are unusually expectant of a more fundamental diagnosis; more particularly ready to receive it; eager to try it out, if it should be even plausible.

    But apart from this contemporary mood, the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood.

    Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.

    Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. Emperors and armies come and go; but unless they leave new ideas in their wake, they are of passing historic consequence.

    I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas. Not, indeed, immediately, but after a certain interval;

    for in the field of economic and political philosophy there are not many who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest.

    But, soon or late, it is ideas, not vested interests, which are dangerous for good or evil."


    John Maynard Keynes,
    The General Theory of Employment, Interest, and Money,
    13 December 1935, p. 383.

    Quoted by Alan Greenspan
    Adam Smith
    at the Adam Smith Memorial Lecture, Kirkcaldy, Scotland
    February 6, 2005


    "So those are my principles. If you don't like them, I have many others."

    Groucho Marx

    ReplyDelete

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