Heterodox, Trespasser, Malthusian and other economist labels

I discussed long ago what it means to be heterodox in economics. Bob Kuttner, who I once saw giving a talk at the New School (in the 1990s), a very sharp journalist that knows quite a bit about economics, sings the praises of Dani Rodrik as an heterodox economist. I discussed Rodrik before, in particular his notion that there is only one economics (neoclassical, of course as in the title of his book One Economics, Many Recipes). And he is not subtle about it either. As I noted back then, in his Has Globalization Gone Too Far, that in spite of Kuttner's review is not particularly critical and is indeed mildly for globalization, Rodrik says that: “when I mention ‘economists’ here, I am, of course, referring to mainstream economics, as represented by neoclassical economists (of which I count myself as one).”

Rodrik is, or was a few years ago at least, in what Colander, Holt and Rosser refer to as the cutting edge of the profession (my views on that here), which is to say he is heterodox in the same way that Joe Stiglitz or Paul Krugman are heterodox. They are willing to suggest that some imperfections make the laissez-faire dream of the most fundamentalist neoclassical authors somewhat overstated. But as much as Krugman and Stiglitz accept the conventional macro model, with the natural rate hypothesis, the same is true for Rodrik, which essentially accepts the basic Heckscher-Ohlin-Samuelson trade model (for a critique go here). He is a moderate neoclassical economist; a potty trained one if you will, but certainly not heterodox.

Don't get me wrong, in many policy issues Rodrik, like Krugman and Stiglitz, is on the right side, even if he gets there in ways that I would suggest are contradictory, and can be seen as an ally of heterodox economists on these policy issues. But I think it is a bit much to call him a critic of globalization, in particular because it underplays the role of true critics, that often paid a steep professional price, in terms of prestige and money, to defend their views. For example, his critique of the Washington Consensus was that the policies (essentially austerity cum deregulation, trade liberalization and privatization, or what you would call neoliberal policies) were incomplete and more institutional reforms were needed to make them work. So Rodrik was basically playing the Douglas North New Institutional imperfection card (now used very effectively by Acemoglu, Robinson and co-authors). Summarizing his work I said back then:

"Rodrik (1999b) suggested that five types of institutions, defined as behavioral rules that govern the interaction between economic agents, are relevant to explain successful development experiences: property rights, regulatory institutions, institutions for macroeconomic stabilization, institutions for social insurance, and institutions for conflict management."

The problem, as I noticed back then, was that the institutions he was pushing for (note that property rights are in the original Williamson consensus decalogue) were more harmful than good. They reduced the ability to promote state intervention in the economy and the scope for industrial policy, they were geared for macro stability narrowly focused on price stability (he probably wouldn't disagree with the idea of the natural rate in macro), and even when he was for social insurance policies, didn't seem to notice that his macro policies would make more social spending almost by definition impossible.

I should say that I find it very apropos that Kuttner compares him with Albert Hirschman, and calls the latter one of Rodrik's heroes, even if I think Rodrik is a different kind of trespasser, not interested in interdisciplinarity per se, but in using economics concepts for insights into other social sciences. More like a social science imperialist (for my take on Hirschman's interdisciplinarity go here). Hirschman was a development economists that was against planning, and that thought that there was something relevant about Hayek's Road to Serfdom (a book that says that any intervention by the state ends up in a slippery slope towards fascism*; the same argument Reagan made about Medicare in the 1960s). Hirschman had a serious debate with Currie on the issue of planning, regarding the latter's World Bank mission to Colombia, and was generally seen as friendly critic of the mainstream (see Roger Sandilands views, which are, correctly I would add, very critical of Hirschman). Like Rodrik, Hirschman got hired by Harvard, which is hardly known for hiring controversial lefties that go against the grain, which he only left to the Institute of Advanced Studies because he was a terrible teacher. Also, like with Hirschman's contributions, many heterodox and progressive intellectuals tend to overplay the critical aspects of Rodrik's work.

In my view, the problem with the friendly critic, that accepts all of the main tenets of mainstream marginalism, without taking seriously the heterodox critiques of the internal logic of neoclassical economics, is that they end up validating some of this illogical ideas, and the foundation for the neoliberal policies people like Rodrik supposedly abhor.

On a slightly different note, and I guess once we are in the topic of who should be considered heterodox and who is a follower of Hirschman, here is another question of labels. Dietrich Vollrath comes out of the closet as a Malthusian. That's a bit funny. I know neoclassical economists, in particular, after Clark's A Farewell to Alms, have come to embrace the epithet, but in all fairness, for a reasonably educated person Malthusian is sort of an insult (btw, on my views on some of the mistakes with the ideas of demographic transitions and Malthusian traps see this).

* On this, Jeremy Adelman tells us in his biography of Hirschman that: "when he found a copy of Friedrich von Hayek’s recently published (in London, in March 1944) The Road to Serfdom in a Rome bookstore, a nerve was struck. 'Reading this book is very useful for someone like me who grew up in a ‘collectivist’ climate—it makes you rethink many things and has shown me in how many important points I have moved away from the beliefs I had when I was 18 years old.'" Those would be his more progressive, Marxist, convictions. Hirschman had lived in Germany, not the Soviet Union, by the way.

Free trade and Portuguese decline

Last weekend, as a result of Brad DeLong's post on free trade, we had a brief Twitter exchange. He had suggested that the Heckscher-Ohlin (HO) model* implies gains from trade associated to comparative advantage. He went further and suggested, after I implied that the Methuen Treaty between England and Portugal had not been favorable to the latter, that Portugal had indeed benefited greatly from free trade.

It is important to note, before we get to Portugal, that the HO model, which is a direct application of marginalist theory of value to international trade, arguing that specialization depends on relative scarcity, with countries exporting the goods that use intensively the factor of production that is abundant, is open to the capital debates critique, as shown by Ian Steedman long ago. So the HO model results lack generality, and it is NOT possible to guarantee gains of trade, as suggested by Brad. Actually, there should be no surprise that one finds paradoxes and problems, like the famous Leontief Paradox.

That does not mean that comparative advantage is conceptually wrong. The old Ricardian model does not have the problems of the HO model (Brad would have been on more solid logical grounds using this model). It is open to critiques of its use of the labor theory of value (LTV), but those can be dealt by the Sraffian reinterpretation of the LTV (for that, although not related to trade, go here). Note, however, that Ricardo's model presumes fixed levels of employment (not full employment, but given or constant) and no capital mobility. Anthony Brewer showed (subscription required) that in the Ricardian model, with capital mobility, producers would move to the country with lower costs, basically lower wages (exogenously given by classical authors), and absolute advantage would dominate trade patterns.

So what about trade between England and Portugal, you may ask. In part, the reason why Ricardo, a descendant of Portuguese jews that emigrated to Italy, the Netherlands and then to England, used the cloth-wine/England-Portugal example in his Principles, is because of the Methuen Treaty of 1703, a sort of free trade agreement. If one looks at income per capita (Table below using the Maddison data), one finds that Portugal was, by the time that follows its control of the trade routes to Asia (after Vasco da Gama reached India in 1498), slightly ahead of England, but by 1700, on the eve of the Treaty, it was considerably behind. Yet, by 1750, it seems that Portugal caugth up a bit, only to fall inexorably behind after that. By 1820, the income per capita in Portugal is less than half of the English.

So is there any truth to Brad's view that Portugal benefited from the free trade agreement, you may ask again. The point is that, the Iberian Union (1580-1640), when Portugal was governed by Spanish kings, and the loss of the Asian Empire (but not Brazil) was behind the Portuguese long term decline, which started way before the Methuen Treaty. Guns (and sails, Carlo Cipolla would add), not comparative advantage, were behind the rise and fall of the Portuguese empire in Asia.  The Dutch and then the English would come to dominate those trade routes. And the improvement in income per capita in the 18th century in Portugal can be ascribed to the discovery of gold in Brazil (a little aside, it is the combination of Brazilian gold, the Methuen Treaty, and the infamous mistake in the pricing of silver by Sir Isaac Newton that, arguably, put England on a Gold Standard). Free trade did not explain that.

So the Methuen Treaty by itself did not cause the ruin of Portugal. But it added to the problems associated to the loss of the Asian empire, and created patterns of specialization that did not lead to further technical change and economic development. Trade matters, because what one country produces and exports matters. Complex products with higher value added are more likely to lead to the incremental innovations that are behind the wealth of nations. You may call that increasing returns or cumulative causation. Trade agreements that ossify the production structure in sectors with low levels of technological dynamism lead to lower growth, and, as in any process with path dependency, failure breeds failure. Portugal, like England, needed managed trade, not 'free' trade.

* The model is often referred to as Heckscher-Ohlin-Samuelson (HOS), since Paul Samuelson was instrumental in formalizing the HO theorem and extending some of its results. Also, less frequently the model is referred to as Heckscher-Ohlin-Vanek (HOV), as done by Brad, since Jaroslav Vanek noted that trade of goods is indirect trade of factors of production, providing further extensions to the model.

Comparative Advantage and Capitalism

From CAPITALISM the documentary by Ilan Ziv. In this short clip a discussion of comparative advantage and its limitations, with Pascal Lamy, Robert Boyer and yours truly (many others in this chapter, including Geoff Hodgson and Ha-Joon Chang).

The Mexican secretary of finance that appears in the video is actually NOT talking about the Ricardian model of trade, which at least given its assumptions is logically correct, but about the neoclassical or Heckscher-Ohlin-Samuelson (HOS) model that has significant problems (see here).

I should note also that in my view Ricardo should not be seen as Robert Boyer suggests (not shown in the video above) as a precursor of mainstream neoclassical economics for his role in the development of formal models. Formal models can be marginalist or not, and actually Ricardo's ideas led to Marx. As I noted in my interview (in parts that do not appear in he documentary), Ricardo was the first economist to formalize the idea of a distributive conflict between capital and labor, once the Smithian notion of the adding up theory was criticized. I joke that contrary to Samuelson's view according to which Marx was a minor Ricardian, one should think of him as a major Ricardian. And in many other ways Ricardo's legacy has been misunderstood (without even discussing  Barro's Ricardian Equivalence).

Trans Pacific Partnership and the argument for Free Trade

The final agreement on the Trans Pacific Partnership was reached yesterday. Now it must be approved in Congress. I had noticed before (here, here and here) the bi-partisan support for TPP (not all bipartisanship is good after all) and the limitations of the agreement itself. Will write something later this week on the specifics revealed by the agreement (no big surprise, btw).

If you need a crash course on the limitations of 'free' trade based on Ricardian or Heckscher-Ohlin-Samuelson (HOS) models see the posts below, which include also a response to Mankiw's defense of TPP and Free Trade and an older discussion of the Free Trade Agreement (FTA) with Colombia:

On 'free' and managed trade (Ricardian model)

More on "free" trade (HOS model)

On free trade and economics consensus: a response to Mankiw

The Colombia FTA: Only Corporations Win

You can also read my paper "What do undergrads really need to know about trade and finance." It was a response to Krugman's "What do undergrads need to know about trade." He used to say comparative advantage and specie-flow mechanism (which means the balance of payments is self-adjusting; so his argument is about trade and finance really). I suggest that absolute advantage and unstable capital flows might matter too. Krugman seems to have wised up on this, and is not for TPP (even if his reasons are weird; if I have time I'll discuss that too).

On free trade and economics consensus: a response to Mankiw

Mankiw tells us in his most recent NYTimes column that economists agree that Free Trade is good. He links to a poll in which, essentially, mainstream economists of different persuasions, some Keynesian and some not, and different political views, some liberal and some conservative, say that trade agreements are good. He backs his argument by suggesting that theoretically the argument is at the heart of the economics profession since the beginning; I guess an argument of authority.

And no better authority than Adam Smith. Mankiw says:

"The economic argument for free trade dates back to Adam Smith, the 18th-century author of 'The Wealth of Nations' and the grandfather of modern economics. Smith recognized that the case for trading with other nations was no different from the case for trading with other individuals within a society."

And it is true, Adam Smith was for laissez-faire, in general, and thought that less intervention in trade would be good. But there is in Mankiw's argument an implication that does not follow from careful analysis of Smith's doctrines, namely: that Adam Smith can be seen as a forerunner of modern neoclassical trade theory based on the Heckscher-Ohlin-Samuelson (HOS) comparative advantage argument (for the limitations of that theory go here).

Comparative advantage implies that countries should specialize on the production of commodities for which they have a lower opportunity cost. Specialization would increase productivity domestically, and importation of goods for which other countries have a lower opportunity cost would lead to mutual advantageous trade to all parties involved. This was actually first noted by Ricardo and Torrens more than 40 years after the publication of the Wealth of Nations. Smith believed that absolute advantage, meaning lower costs of production, not comparative advantage determined trade patterns.

Smith thought that free trade was a better policy than protectionism, since he believed that trade would expand the potential markets for home producers, which would lead to more division of labor, that is, higher productivity, leading to lower costs, more access to external markets and additional growth. A cumulative process of export growth and higher labor productivity, referred to as the vent-for-surplus model, was behind Smith trade optimism. It is important to note, however, that Smith's vent-for-surplus works in both directions. Higher costs (e.g. higher real wages) may lead to loss of external markets, no incentives for additional division of labor, and stagnation of domestic industry. In his model, success breeds success, but failure breeds failure.

There were very good reasons for Smith to think that free trade would be good for England in the late 18th century, and there even might be good reasons in the United States now, or at least for American corporations that would gain access to markets abroad. But the argument is far from universal, and the dressing of Smith's theory in modern garb is dangerous (for a classic explanation of Smith views on trade go here; subscription required; or here; also needs subscription).

The idea of absolute advantage, used by Smith, suggests that there is space for managing trade. I noted before that the opposite of Free Trade is not Protectionism, but Managed Trade. Nobody really wants to be in a completely closed economy, probably not even North Koreans. And once you admit a certain amount of management, say for sanitary rules to avoid importing poisoned toys, for example, or for security reasons to preclude defense secrets to leak out, you are discussing what are the good reasons for managing trade. Perhaps employment should be one of the reasons for managing trade. Free trade versus protectionism is a false dichotomy. The question is: how much management and for the benefit of whom (and who bears the costs of more or less trade as a result).

Note that comparative advantage theorems assume that employment is fixed, in the Ricardian system perhaps below full employment, and in the modern neoclassical HOS theory at full employment. Not surprisingly, on employment Mankiw tells us:

"Economists respond that full employment is possible with any pattern of trade. The main issue is not the number of jobs, but which jobs. Americans should work in those industries in which we have an advantage compared with other nations, and we should import from abroad those goods that can be produced more cheaply there."

That full employment is possible with any pattern of trade is theoretically true. But from that does not follow that comparative advantage should guide trade. That is a theoretical non-sequitur and is simply wrong. The US could pursue using macroeconomic policies (not the lower taxes for the rich that Mankiw advocates, but that is another story) full employment.* That would lead to high current account deficits, which for the US, because of the privileged position of the dollar, are sustainable. But that is not true for most countries.

In that case, if free trade is pursued, absolute advantage might determine trade specialization, and lead to large current account deficits that would be unsustainable and lead to a balance of payments crisis, the need for austerity, with lower growth and unemployment following. Even in the US, patterns of trade integration might lead to the elimination of good manufacturing jobs being substituted by low paying service jobs, something that has led to trade unions' reasonable rejection of Free Trade Agreements (FTAs). In other words, "which jobs" one can get if one "import[s] from abroad those goods that can be produced more cheaply there [sic; that's actually absolute not comparative advantage]" might end up leading to lower wages at home.

For that reason it is hard to agree with Mankiw when he says that:

"People tend to underestimate the benefit from conserving on labor and thus worry that imports will destroy jobs in import-competing industries. Yet long-run economic progress comes from finding ways to reduce labor input and redeploying workers to new, growing industries."

And there is evidence for that. The most famous FTA signed by the US with Mexico, has not favored workers in Mexico or the US, the North American Free Trade Agreement (NAFTA), even if corporations and wealthy individuals have benefited in both countries as shown in these reviews of the evidence by Robert Blecker and Mark Weisbrot and co-authors. So if mainstream economists agree on this, once again it is because they ignore logic (that does no require for trade to be determined by comparative advantage) or evidence (which suggests that FTAs might hurt workers).

* And also there is not tendency to a natural rate of unemployment, which Mankiw, of course, also defends.