Economics, and Criticism of David Ricardo’s Theories

This first appeared in a conversation on Facebook. My correspondent is a professor of economics who is also the author of a textbook on that subject. He favors Free Trade, and cites the theories of David Ricardo. The following is my reply:

I consider the following criticisms of Ricardo’s ideas, which seem germane to me. Note that I came up with my own criticism independently, based on my analysis of current conditions in the US.
“As Joan Robinson subsequently pointed out in reality following an opening of free trade with England, Portugal endured centuries of economic underdevelopment: “the imposition of free trade on Portugal killed off a promising textile industry and left her with a slow-growing export market for wine, while for England, exports of cotton cloth led to accumulation, mechanisation and the whole spiralling growth of the industrial revolution”. Robinson argued that Ricardo’s example required that economies were in static equilibrium positions with full employment and that there could not be a trade deficit or a trade surplus. These conditions, she wrote, were not relevant to the real world. She also argued that Ricardo’s theory did not take into account that some countries may be at different levels of development and that this raised the prospect of ‘unequal exchange’ which might hamper a country’s development, as we saw in the case of Portugal.[16]”
“The development economist Ha-Joon Chang challenges the argument that free trade benefits every country:
Ricardo’s theory is absolutely right—within its narrow confines. His theory correctly says that, accepting their current levels of technology as given, it is better for countries to specialize in things that they are relatively better at. One cannot argue with that. His theory fails when a country wants to acquire more advanced technologies—that is, when it wants to develop its economy. It takes time and experience to absorb new technologies, so technologically backward producers need a period of protection from international competition during this period of learning. Such protection is costly, because the country is giving up the chance to import better and cheaper products. However, it is a price that has to be paid if it wants to develop advanced industries. Ricardo’s theory is, thus seen, for those who accept the status quo but not for those who want to change it.[20]”
Ha-Joon Chang’s comment implies stasis in economics, which may an analytical ideal but is rarely if ever seen in the real world. Natural conditions change, market needs change, labor influences change, rates of exchange change, political influence changes, international relationships change. Some of the changes cannot be predicted, nor can they be prevented.
Instead of free trade, I advocate a mix of free trade, but with critical national industries protected. Note the part about international relationships; simply put, handing our manufacturing sector over to foreigners who might be friendly today, less so tomorrow, is dangerous. It’s not manpower that wins wars now, it’s technology and equipment. Note how readily the IS militants, even though outnumbered, manage to kick the butts of Iraqi government forces. Technology takes time; manufacturing complex systems, then training people to use them effectively, can take years. Handing a capability over to benefit a few in the short run is madness in the long run. Stability is not guaranteed.
I also suggest that part of a mature economy must be turned inward instead of outward. To this end I believe making socialism part of the national mix, in which the government becomes the employer of last resort in a downturn. I advocate Quantitative Easing not to protect banks but to strengthen the nation by investing in infrastructure. Note that China is using her temporary advantage in balance of trade to do just that.
Bottom line: I think that overall Ricardo was wrong, and that overreliance on his theories now is economically damaging and dangerous from a security standpoint.


Tags: , ,

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: