Category: Economics
Free trade fallacies

Grosse Arbeitslosigkeit auch in England ! Im Monat Juli wurden in England über 2 Millionen Arbeitslose gezählt. Es ist eine Ziffer, wie sie England noch nicht aufzuweisen hatte. Arbeitslose vor dem Gewerkschaftshaus in London auf Arbeit wartend.

Steve Kates explains why Trump’s attitude to trade may conform to Ricardo’s theory of comparative advantage:

The free trade argument concludes that nations jointly maximize their levels of consumption to their mutual benefit when firms within the nations are allowed to engage in trade unhindered by arbitrary interventions by government especially those intended to shield some industries from foreign competition. Hindering such trade through the imposition of tariffs or quotas is called protectionism. His principle and approach have been the basis for subsequent expansion and development of the free trade idea, and are still taught in principles textbooks.

This is true enough but it is built on a foundation which no longer holds:

The major prerequisite for the benefits of free trade to hold: it is assumed that capital and labor stay within each country. They are reallocated within a country, but not between them. That means that outsourcing of, say labor, is not an example illustrating free trade nor are those who object to outsourcing promoting protectionism. In short, maintaining the Ricardian prerequisite is not anti-free trade.

The key concept which drives this conclusion is the distinction between comparative and absolute cost advantages. A country may be able in absolute cost terms to produce something more cheaply than its trading partner (using fewer workers, for example). However, it still may find it advantageous to let its trading partner produce this good, if its own alternative uses of (labor) resources allows it to be still more productive. Subsequent trade between the two countries will be to their mutual benefit. The essence of the free trade principle then is comparative not absolute advantage. Yet when corporations scan the globe for the cheapest labor to move their factories to or hire their services from, they are looking for absolute not comparative advantage–a situation that goes beyond the bounds of the free trade principle. It is not a tenet of free market economics that losing one’s productive assets is beneficial for the nation, however much it may benefit a particular corporation. Current US experience makes the point very clear: the middle class continues to shrink while paupers and billionaires continue to grow. This is not the hallmark of a healthy economy.

Armed with this distinction we are liberated to adjust policy (within limits) without losing our economic integrity to free markets. We can, for instance, admit that there are situations where a complete free trade or laissez-faire approach is unwise. These are situations not considered in the Ricardian analysis but which subsequent work has shown complicate the picture of benefits and costs arising from international trade and which do call for prudent policy interventions.

Ideologues have thrown the free trade baby benefits out with the bathwater.

The coalition signed up to the Trans Pacific Partnership. If anything marks them as unfit to govern, that does.

Too many economists, public servants and politicians have substituted mouthing slogans and repeating received notions, for thinking. Sometimes a little bit of knowledge is a dangerous thing. It creates fertile ground for the growth of the Dunning-Kruger Effect:

Incompetent people are significantly less able to recognise their own lack of skill, the extent of their inadequacy, and even to gauge the skill of others. Furthermore, they are only able to acknowledge their own incompetence after they have been exposed to training in that skill.

Dunning-Kruger Effect is running out of control. It appears to be particularly widespread among those who should know better. This may be an  unforeseen consequences of the rampant expansion of the university sector. It has not just wasted time and money, but has actually undermined the competence of those exposed to it.

Our governing class may not be too dumb for their own good. But they certainly are for ours. Over educated group thinking mouthpieces. Lacking in the breadth of experience necessary to spot BS when we are up to our necks in it. They are fine, floating along on their perks and privilege. Complaining of the stink from those they deem beneath them. Blissfully unaware of the sewer they are turning society into.

 
The Culture Principle

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Ray Dalio and Bridgewater have built a competitive advantage through their systematizing the use of radical truth and radical transparency. They have mitigated some of our cognitive biases. They have also developed a way to use and combine the outputs of multiple different mental models:

Bridgewater have a created a system which will generate better outcomes than their competitors. It will also increase the growth rate of people working in that environment. They identify everyone’s strengths and weaknesses. There is constant feedback, the effectiveness of strategies to address them will be continually rated and able to be subject to improvement. Someone working in that environment will soon leave their peers elsewhere behind. This in turn will improve the performance of the organization as whole.

In effect they have built a process for using multiple mental models/conceptual frameworks and of combining different perspectives:

We all have slightly different conceptual frameworks or mental models and they are all a mix of what is useful and what is not.  This means that we can improve our understanding by incorporating other peoples. This is one of the reasons why having a diverse team working on problems can be better than having one rigid perspective.

Try and have multiple different mental models, made up of components which can be mixed and matched. Use them as different spectacles or filters to view reality or the problems you are working on. While even this will not let you see reality as it is, it may give you a better understanding than those you are competing with. It may help you see what they do not”

Ray’s principals are well worth reading. Its caliber can be judged by its start:

Principles are concepts that can be applied over and over again in similar circumstances as distinct from narrow answers to specific questions. Every game has principles that successful players master to achieve winning results. So does life. Principles are ways of successfully dealing with the laws of nature or the laws of life. Those who understand more of them and understand them well know how to interact with the world more effectively than those who know fewer of them or know them less well. Different principles apply to different aspects of life—e.g., there are “skiing principles” for skiing, “parenting principles” for parenting, “management principles” for managing, “investment principles” for investing, etc and there are over-arching “life principles” that influence our approaches to all things. And, of course, different people subscribe to different principles that they believe work best.

 

Read the Principles, read up on Mental models. Then incorporate your conclusions into your life. Action it.

 
Doing over our kids

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The ever rising house prices in Australia show how stupid our policy makers have been.

We have increased our productivity. We have increased our wages. We have used the increase to buy our houses off each other at higher prices. Bankers made out like bandits. Now it is debt servitude or the rentiers life for our kids.

Australia borrows money from overseas. We’ve stuck it to our kids to benefit foreign financiers. It has also increased the cost of production in Australia. The land component costs more than it needs to. This is built into our cost of goods or services sold. We’ve undermined our international competitiveness as well as our kids future.

It did not have to be that way. It does not have to be that way.

Group think by incompetent politicians and public servants created this mess. They don’t have the nous to get us out.

Who will end our socialist left versus free market right stale fight?  Who will end the reflex rhetoric?

Nature abhors a vacuum. There will be a change candiate. There will be a party of change. It will not be one of the big four political parties. They are caught in their in their own credibility trap:

““A credibility trap is a condition wherein the financial, political and informational functions of a society have been compromised by corruption and fraud, so that the leadership cannot effectively reform, or even honestly address, the problems of that system without impairing and implicating, at least incidentally, a broad swath of the power structure, including themselves.

The status quo tolerates the corruption and the fraud because they have profited at least indirectly from it, and would like to continue to do so. Even the impulse to reform within the power structure is susceptible to various forms of soft blackmail and coercion by the system that maintains and rewards.”

Probably best to think of them as a rotting carcass, good for fertilizing new more vibrant political life. The best thing they can do for the country now is to wither and die. Escaping their traps are, I believe, beyond them.

They will not. They’ll desperately cling to their power, prestige and pay packets. As for the national interest or greater purpose for their being in politics. What’s that?

Is this really what you want for your kids:

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