Debate: Free Trade vs. Nationalism

[Applause] great thanks Richard so are we good back there guys yep okay um my name's Kevin Stewart I'm the executive director of the Austin Institute for the study of family and culture we are very proud to be prospon co-sponsors uh on this event um I want to introduce briefly the Austin Institute and then tell you a bit about how the debate tonight will work so the Austin Institute we have three major buckets of activity we do original social science research we also help package and translate good social science research for non-specialist public audiences so a debate like this is a great example of that and then additionally we sponsor and work on programming in and around the campus of the University of Texas at Austin to be good members of the campus community and help form students and form the intellectual Community here and so this debate is a good example of that as well debates like this events like this are really a team effort and I'm especially proud to be a part of the team here we are very proud to be co-sponsoring this debate with the Genera with generous support from The Institute for Humane studies and from the John Templeton Foundation we thank them for their generous support we are particularly proud of our growing tradition of working together on these debates with the Texas economics Association and I'd like to introduce the tea president rasar musaji and and have Richard say a bit about who and what tea are for those watching online so this debate is being live streamed and will be archived so if there's something a point you want to return to you'll be able to do that Richard thank you so much Kevin I appreciate it for those of you who don't know Texas economics Association is one of the oldest student economic organizations at the University of Texas at Austin campus we're founded on four pillars social professional philanthropic and academic and we have speakers from all around the nation and all different aspects come and visit us and speak about us so we help to give students a very well-rounded experience and we're particularly proud of that great thanks for shard um and now without too much further delay I want to introduce our debaters and we'll get started one note when we we will we will have the debate each debater will have a 10 minute opening followed by a seven minute response and then a five minute closing and then we've left plenty of time for Q a when we get to q a because it's being live streamed please wait for the mic do me a favor and wait for the mic when you raise your hand uh Dr Deanne Stewart here will have a microphone and she will come to you and just ask your question in the mic so the people who are watching can hear the question so now I'll introduce our debaters Dr Michael Hudson is president of the institute for the study of long-term economic Trends a Wall Street financial analyst distinguished research professor of Economics at the University of Missouri Kansas City and author of J is for Junk economics killing the host the bubble and Beyond super imperialism the economic strategy of American Empire trade development and foreign debt and the myth of Aid among many others Hudson acts as an economic advisor to governments worldwide including Iceland Latvia and China on finance and tax law Hudson received his PhD in economics from NYU in 1968. his dissertation was on American economic and technological thought in the 19th century he received his M.A also from NYU in 1963 in economics with a thesis on the world bank's philosophy of development and special reference to lending policies in the agricultural sector Farhad rossick is Professor of economics and Associate Dean in the Barney School of Business at the University of Hartford where he has been teaching since 1989. in 2007 he received the James E and Francis W bent award for scholarly and or artistic creativity he teaches courses in managerial economics and international economics his research areas include international trade and the history of economic thought he has published numerous articles in academic journals including in the American economic review review of economics and statistics economic inquiry review of international economics and the history of economic ideas he received his BS in economics at the National University of Iran in 1976 an M.A in economics from the University of North Texas in 1978 and his PhD in economics from the University of Houston in 1983. the proposition for tonight is resolved that the U.S government should support free trade agreements and Advance free trade policy so tonight in a bit of a turn because most academic economists if Greg manq surveys are to be believed are free trade free trade proponents so those are arguments that you may already have been exposed to at the request of of The Debaters the opponent will go first so Dr Hudson will go first and and then Dr rossick will respond in the closing arguments we will reverse that with Dr Dr rossick finishing finishing us up there so Dr Hudson will go first and Dr rostik will go last at the very end all right Dr Hudson [Applause] either one when you finish you're welcome to take a seat in one of these chairs okay well I had one advantage over any of you that economic students when I was taking my PhD there were no courses in international trade Theory at New York University so I uh all of my background had been as a balance of payments Economist for Chase Manhattan bank and a monetary Economist for other Banks and worked for the accounting firm on balance of payments of Arthur Anderson so when I went I was invited to teach at the new school for economic research in New York I elected to teach International Trade Theory because I I didn't know anything about it and I thought the best way to learn about something is to teach it and imagine my surprise when I actually began to read this literature the first thing that you read in Paul samuelson's textbooks or Bill Vickery's textbooks is that they're not talking about reality that they're talking uh the Criterion of excellence in economic theory is what whether the assumptions are consistent with each other so we're really talking about literary criticism how do you write a novel or a film script and have the audience suspend disbelief but not say wait a minute it couldn't have worked that way because here's what really happens here's how the world really works the whole trick is to get students to begin talking about assumptions and to enter a kind of parallel universe science fiction world that doesn't exist but might exist and the result is you distract attention from how other real world works so in the 10 minutes that I have I'm going to talk about 10 assumptions that you're taught those of you who are unfortunate enough to actually have to take a trade Theory course that are completely unrealistic and why you're being miseducated along these lines the first thing is that you find that almost all the free trade arguments say it's going to make the world better and free trade is going to improve Things No Country ever in the past adopted free trade because it was going to make the world better when England in 1846 adopted free trade and passed the Corn Laws it was to make a deal and as they argued in Parliament if we can get other countries especially the United States not to protect their industry but to export grain and be what the Americans called A Healer of wood and drawer of water is in the Bible and they will depend on us for manufacturers then we will crush them in the cradle and uh we can we will continue to build up our industrial power and other countries will continue supplying us for raw materials and they'll all end up dependent on us and if you uh look at the the Americans if America would have maintained free trade after the Civil War we never would have take off taken off and become an industrial power Germany would not have taken off Japan would not have taken uh off uh so every country that has become a world power has become that through protectionist policies at a time when protectionism was the ideal it was protectionism That was supposed to enable America Germany Japan and other countries to catch up with the most advanced countries by nurturing their own industry and especially their own agriculture which has always been one of the most highly protected Industries a second assumption is to say free trade is going to make everyone equal Paul Samuelson got the Nobel Prize for what must be the worst economic idea ever promoted the fact that price Equalization period uh uh theorem the fact is if you look around you for the last 100 years you can see that the world is not becoming more equal it's becoming more unequal more dependent more polarized now I would have thought that the job of international economics was to explain why is the world becoming more unequal why is it polarizing and instead you're taught to make these false unrealistic assumptions that if they were free trade the world would become more and more equal and there are a number of uh then specific economic models especially as they become financialized that produce this it's all of these games from trade are trade within the status quo it's a trade of haves versus have-nots it's doing a deal but the whole purpose of protective tariffs is to change the status quo to put in place a industry that's going to have increasing returns instead of diminishing returns in agriculture culture to accumulate High productivity the trade theories all look at Labor and capital as sort of antitheses and the distribution of Labor and capital is supposed to make labor intensive countries that have a lot of Labor and not much Capital efficient in labor-intensive things like Haitian sowing baseballs and countries with a lot of capital good at doing what they're doing there is nothing about how other countries that don't have Capital to accumulate it that's the objective of protectionist policy in every country to actually do it so either you have you have free trade Theory based on the status quo which perpetualizes it a status quo in a world that is becoming more and more unequal or you have economic polarization you can take their pick most of the models of trade Theory and equilibrium are all based on diminishing returns and the reality in every industry history of the world from agriculture to mining to to in manufacturing has increasing returns and [Music] the objective of most countries has been to achieve High productivity with increasing returns which they have there's also another problem with the trade uh models that you get in Academia they're all based on barter as if the world is based on barter there's no money and there's no debt and already in the mercantilist period of the 18th century you have English economists such as James Stewart and our Hosea Tucker and even Hume acknowledge that if you can get other countries dependent on you for trade you will run a balance of payment Surplus they will be in deficit and once you can push them in deficit far enough then they end up like Greece is today having to sell off their domestic resources to foreign investors just as America was forced to sell off many of its resources to English landlords to English investors in the 19th century uh the tie-in between investment and trade is left out of account of the economic models that you're taught there's also nothing about tax policy or government policy when they talk about what are the endowments a country has as if countries are endowed with labor and endowed with a high machinery and factories instead of self-endowing themselves there's no talk about government policy in endowing and creating a a these endowments by tax policy protective tariffs educational system public services such as you have here there's also an idea that the advantage of labor-intensive countries is that they have low wages and can undersell labor well already throughout the 19th century you had in the United States protectionists saying there's uh the economy of high wages doctrine that high-wage labor undersells low its labor because it's it's more efficient there are no gun boats there's no war in the theory and there's also no externalities uh one of the big problem debates over protectionism in the United States in the 1840s already was about soil depletion uh that they said if America continues to export cotton and tobacco and other agricultural Goods to England we're going to have we're mining the soil and all throughout the south from uh the the Atlantic coast all the way west you you forced the western migration and spread of slavery because the soil was being depleted in these countries uh justice uh today in Ecuador you have the case of oil companies coming in uh producing oil which is supposed to be there comparative advantage and you have oil spills that pollute the water that uh destroy the environment uh all the everything real really important environmental considerations government policy is are considered exogenous that's the word economies economists don't like to use exogenous means reality everything that is exogenous doesn't appear in the model and if you can get students to have the tunnel vision to do the mathematics of these trade series that you're taught in the textbooks then they're going to become very abstract many of you many of the professors that teach this may be very smart but they don't know what to be smart about and being smart doesn't include being smart about our reality so the result is you have a kind of fictitious Theory that's trotted out and the only way this this Theory can succeed is by not teaching economic history not teaching the fact that there's been an alternative to free trade theory that guided American policy from the end of the Civil War through uh the 1930s and was responsible for America building up its industrial and especially its agricultural productivity so uh if there's any discussion of abstract trade Theory those are the assumptions that you want to look out for [Applause] thank you [Applause] well for sure put the arrow key and it will take right here okay no um all right well hello everyone um I'm not sure how to top that um everything that I'm going to present here the professor Hudson already rejected so let's see how this will Shape Up um I'm going to start off with some Theory some some basic uh trade theories but then I will quickly move on to empirical evidence and this is the reason that I titled my presentation and empirical uh presentation my is an empirical um evidence provided with regard to the impact of trade on various countries and then at the end I'll get actually to the United States now I'm not quite sure I do my presentation now and then respond to his comments or his okay let me also say a few um opening remarks here thanking everyone Kevin for inviting me and it's it's an honor to be on this stage with uh Professor Hudson even though we disagree on many things um well as you know I'm going to defend the uh the free trade position and I have reached this conclusion based on the evidence and again uh I'll share the evidence with you as as much as the time will permit but I would like to stress the point that free trade doesn't necessarily lead to free everything in other words it doesn't necessarily mean free immigration it doesn't necessarily mean even free flow of capital across countries I'm going to exclusively focus on the free flow of goods and services across countries um and um and there are of course here there are some related or seemingly related issues that I will address the chances are that I will not have time to go through my entire PowerPoints so they they come up during the Q a for example of the related issues would be Outsourcing of jobs um and uh the issue of the environment that Professor Hudson mentioned the loss of manufacturing jobs a Hot Topic because of globalization or free trade and these are the issues that I have some some evidence to share with you now speaking of disagreeing with each other I must say that there is nothing new here there is nothing new Under the Sun go back 2500 years ago Aristotle and Plato believed in self-sufficiency and you had other philosophers of the time democracies for example who was for uh free markets so and that has continued to our time so when we are talking about disagreements among economists even on the trade issue or including the trade issue it has always been the case so maybe it's just the nature of the Beast it is my my punches that is just the nature of Economics as a subject as a social science is not the same as physics as much as we apply more or less the same techniques more or less the same differential equations and difference equations you know all kinds of mathematical tricks that we play in our economic models economics is should should not be viewed as a science such as as physics is closer to biology actually than anything else now here is an economics Department the the campus guide is uh showing the uh the various departments to the prospective parents and and students and get to the economics department and she is saying this is our brilliant economics department and as you can see in This brilliant economics Department every faculty is pointing to a different direction now the one that actually caught my attention is the one at that end um that is pointing to different directions so I hope at the UT Austin you don't have such a faculty on your staff um now the origin of modern trade Theory we have to go back about 300 317 or 16 years to be exact Henry Martin 1701 published a uh A Treatise actually it was published anonymously and it was only in 1983 that economic historians discovered that the author of that treaty is 300 years earlier was Henry Martin what did he do in that small pamphlet and that was the time when Britain was highly protectionist five years earlier in ninth in um 1696 1696. the British Parliament had passed the major piece of legislation prohibiting all kinds of goods from a lot of countries around the world now Henry Martin except um in that small pamphlet uh Martin uh demonstrated that and I'm using this this word deliberately demonstrated that trade expands the productive capacity of the economy he presented a simple model with some numbers just some numbers and showed that uh trade allows an important country to produce the same amount of output with fewer resources uh this is known as the 18th century rule because many thinkers of the time such as Adam Smith applied this now David Hume in 1758 published an important essay called jealousy of trade and this was a an essay in which Hume demolished the doctrine of mercantilism the doctor in that export is good and import is bad that was essentially what mercantilus believed in that you should try to export as much as you can and import as little as you can so you can develop Trade Surplus in um only five years or six years earlier in 1752 he had published four remarkable essays in which he showed the error of mercantilism the uh the wrong-headedness and the fallacy in in mercantile's ideas of accumulating as much as you can trade surplus he showed that is an impossible impossibility to do so in 1758 he tackled another issue in trade and he showed that trade is a positive sum gain so just as two individuals trading with each other both benefit from it because if they didn't they wouldn't engage in the trade or exchange in the first place two countries as well benefit from trade but he also argued that uh trade is serves as a channel through which the prosperity of one trading country spills over to another one in fact his uh essential argument was that low-income countries trading with high income countries will benefit more and they see their income rising and converging on the high income countries I'll get to that later because of some empirical studies um validating that that claim so where am I uh Adam Smith 1776 well he wrote more than anybody else in that Century about trade uh arguing about the benefits and the gains from trade and the advantage of trade and so forth but he began his famous book The Wealth of Nations with the notion of division of labor because division of labor specialization increases productivity but then division of labor he argued and he pointed out that these limited to the extent of the market so by international trade you expand the market and therefore the division of labor becomes more extensive and therefore productivity Rises and he reached the same conclusion as Henry Martin but in a different way and the conclusion was that trade increases the um productive capacity of of the economy now here he comes Ricardo with the theory of comparative advantage and this is the most insightful theory in in uh in trade and that is a country can gain from Imports even if it's able to produce the imported good more efficiently now you use a simple model if you take a course in just the econ 101 they generally show that to you but the implication of this theory is profound it says every country every country means regardless of their size their wealth their productivity and their endowment of Natural Resources or or technology a technological Advance regardless of any of those every country regardless of his circumstances can benefit can produce something at a lower cost than other countries this is something hard to believe I know it's counter-intuitive the theory of comparative advantage is still not understood or accepted by a lot of people especially intellectuals this is the reason that Paul Krugman published an essay in 1998 you can easily find it on the Internet it's called Ricardo's difficult idea this is just couple of sentences from the essay Ricardo's idea that is the comparative advantage is Truly Madly Deeply difficult it's not an easy subject it is not something that you can just take a course in your first trade Theory and you think you understand it I hope you will I did not it took me a long time to understand what the theory of comparative advantage is all about as well as being utterly true immensely sophisticated now we're talking about just four numbers that Ricardo had in his model immensely sophisticated and extremely relevant to the modern world yes is esoteric it's all based on assumptions but is relevant as you will see in a lot of um evidence that I'm going to present to you tonight John sword Mill presented us with another insight under free trade small countries reap most of the gains from Trading with large countries this is the opposite of what most most people think well under free trade if you have restricted trade then the equation just reverses itself or the gains reverses itself meaning the large country would receive most of the benefits under restricted trade but on their free trade smaller countries now again in your first course in trade Theory you can you can learn that and again we'll get to the empirical evidence my time is up and I'm not sure what should I do now just sit down or respond to his comments one more minute okay the foregoing or the steady gains there are also Dynamic gains from trade now the ones that we just said you know Martin Hume Smith and all and Ricardo they were talking about static gains meaning that if you are a restricted if you're a country that would restricted trade move towards free trade you gain all of that there are gains from trade um but then what once you have free trade there are no more gains to be had right so those are static they don't continue but then economies uh develop the idea that there are Dynamic gains that allow a country to grow now we're talking about trade leading to economic growth probably the best book on this to read and and this is rather a a difficult book to read uh Grossman and helpman 1991 they have a lot of economic models in there but if I can summarize it in one sentence I would say trade transmits knowledge and Technology across countries and causes economic growth okay just one more sentence and then I then I sit down this is what economic theory or three or theory in any academic discipline does it provides guidance it provides a theoretical framework a conceptual framework helping us understanding an extremely complex economic world foreign [Applause] is quite right economic theory is designed to provide guidance we call that propaganda it's it's uh it's uh to convince you to act in a way that is not in your self-interest but is diametrically opposed to it and to think that somehow you're helping yourself uh I want to talk about uh quickly the seven points that you made start with self-sufficiency not only Aristotle and Plato but the United States The Guiding policy of the United States for over 150 years has been self-sufficiency in Essentials starting with Agriculture and extending to oil the converse of you're becoming self-sufficient is to make other countries dependent on you to make them dependent on you because once they can become dependent on you you can suddenly uh stop exporting food to countries that have stopped providing their own food the United States tried to do that to China in the 1950s fortunately Canada stepped in to fill the breach and China was very grateful to Canada regarding the gains of trade uh if you can convince people that they actually gain from trade by becoming dependent and following a course that's going to make them poor and poor and you richer and richer then you've won the international economics game that's why you're taught International Trade Theory uh we mentioned uh David Hume what you heard of Hume is a travesty it is true that David Hume did say the argument for free Tade that you've just heard he then his friends begin to write him letters the letters have all been published in the correspondence of David Hume he admitted it was wrong that our trade will make countries poor not richer he pointed he agreed that a country following free trade is going to suffer emigration and in the wake of hume's writing for a generation Stuart Tucker Oswald other people all said uh the the key is that if there aren't enough jobs in manufacture if a country is not a balanced economy and they're not jobs there's going to be heavy immigration Adam Smith did pick this up he said we've got in England all of that high technology people from Italy because they're Roman Catholic and uh and uh autocratic and you need a politically free country in order to get the immigration of skilled labor so that we can have high technology Industries and the autocratic countries cannot have high technology Industries and then we get to Ricardo with his wonderful theory of comparative advantage that uh Paul Krugman likes so much and Ricardo's great mathematical example and I go over it in detail in my chapter on trade development and foreign debt uh Ricardo's example was England trading manufacturers to Portugal in exchange for wine who would you rather be today would you rather be England or Portugal or I should say in the 19th century England pulled way ahead Portugal didn't pull out way ahead and Ricardo was very patronizing to Portugal he actually had Portugal making a mathematical gain even higher than England we know that that's just fiction and that's what made a Ricardo's Theory a parallel universe theory you can read it about it in other books the question is why aren't you why aren't you pointed taught when you study International Trade theory that you don't want to be Portugal you want to be England uh you want to be protectionist England not free trade Portugal because what do you do besides growing wine and tramping on the grapes in the uh in in the fall finally mentioned John Stewart Mill again this is a travesty John Stuart Mill's main contribution to trade theory was talking about what happens when countries run trade deficits their currency depreciates and he discussed the whole effective running a trade deficit of not protecting your economy and it's going to be your currency is going to go down and down and so you're going to get even less and less Fair Labor less for Capital if you don't balance your economy sufficiently to have not only a trade balance but a overall balance of payments balance and investment profit military spending uh and the rest and he had great difficulty publishing this article he's finally published it in 1844 in his unsettled questions on political economy he'd written it I think in 1828 he had problems getting it published just like today if uh if you're an economics graduate you're going to be trying to get a job in the university and you're going to be judged on whether you can publish in the refereed journals the the Chicago boys uh the free Traders and free marketers have gained such control of the refereed journals that unless you tow their line uh you cannot get any discussion of any alternatives because uh the Chicago boys uh were not mentioned here but they had the Capstone of free trade Theory you cannot convince the country to follow free trade unless you close down every University uh in the country that doesn't teach it that's what the Chicago boys did in Chile as soon as they took over uh uh with the revolution uh putting in power uh Pinochet they closed every University in the country except the Catholic University that had a Chicago free trade Theory they also started an assassination campaign and said you cannot wean Shelly away from uh protectionism unless you kill the land reformers and unless you assassinate the labor leaders you can't leave the gunboats out of the picture if you're not willing to kill everyone who disagrees with you you can control and censor in a totalitarian in way the refereed journals of Economics you cannot promote free trade Theory I thought I'd better say it right out blunt most of my graduates uh in the most imaginative graduates at the new school withdrew from economics because they couldn't fit reality into they they into the curriculum they couldn't reform the world because what they found and it's even more today with graduates of monetary Theory at Kansas City it's almost impossible to break through the uh the ABS I want it yes it really could be called intellectual totalitarianism of preventing any discussion of the alternative so you don't read what Mill wrote you don't read what David Hume wrote in his correspondence you don't read the criticism of Ricardo you don't realize that there was a whole other school that ended up guiding American policy German policy and uh Japanese policy and others that actually led to their development year led to actually believe that uh by pursuing dependency and a policy that leads to Chronic trade deficits you're going to be better off that's the trick of modern economics thank you [Applause] well um I must say that I have some alternative facts to share with you yeah I do not only some alternative facts some alternative charts and graphs and and numbers um but let me address some of the points that Professor Hudson mentioned um some of the assertions are true are facts and nobody should ever deny facts if you ever get to that point then then we're really in in trouble if we if yeah if we deny reality it is true for example that the United States in the 19th century was protectionist but the implication from this that the United States became the world economic superpower because of protectionism that implication is wrong that did not cause the rise of the United States the United States Rose because of its Economic Institutions because of its political and also legal institutions because of the U.S Constitution because of granting individual liberty it because allowed individuals to pursue entrepreneurial Ambitions that they had that was the reason now did the protectionism help perhaps how much is hard to know but but if protectionism where a cause of economic growth the main superpower in the 20th century should have been Brazil and Argentina and what happened to them well let me take you back to history here you go around 1900. Argentina and Brazil were among the economic superpowers of the time in fact Argentina was about the same had about the same Economic Development as Canada and Brazil was not all that far behind the United States then what happened then both of them chose protectionist policies and look where they are now okay you can investigate that yourself you cannot find let me go to my presentation now you cannot find even one country in the 20th century that became protectionist and also developed you cannot this is a fact let me show it to you now I'm going here two economic historians Peter lindert and Jeffrey Williamson okay 2003 you can find a uh their essay is published in an edited book if you cannot find it email me and I will send you the reference all right what did they do they point out that they did not find even one country that chose to be less open to trade and Factor Flows In the 1990s than in the 1960s and Rose in the global living standard ranks at the same time as far as we can tell there are no anti-global victories to report for the post-war third war we infer that this is because Freer trade stimulates growth in third world economies okay I'm I'm just presenting you the finding of two distinguished economic historians now um let me go back to the original comments that Professor Hudson make made um Factor price Equalization again we are talking about uh he's being right saying that factor price Equalization if you read it and then the follow-up article that Samuelson published and another one series of Articles he published and others did or mathematical they are very restrictive in the model two countries two factors of production two goods you know free trade and so forth unrealistic assumptions all right those are true but the inference from those facts that the model is junk that implication is wrong because what factor price Equalization says contrary to what we heard earlier it doesn't say that it makes countries equal it doesn't say that at all you can you can read that for yourself what it does say is that under certain conditions what will happen is that a worker doing similar work in a country with the same productivity and another uh worker in another country but with similar productivity if free trade establishes between the two the wages of these two will converge at the limit become equal in 1971 Samuelson published an article called Olene was right Orlean was in Swedish economist so that was the title of the uh the article 1971. in that article Samuelson argued that the implication of his Factor price Equalization is that if countries trade with each other their wages converge and that has been established I did not know that Professor Hudson would bring this up otherwise I would have brought here and will show you would have shown you the literature that shows clearly there was an article now that we are added I must I might as well mention it I did one of those work myself published it in 1989 in the review of economics and statistics which is a premier Journal published by Harvard University I don't mention this to Bragg rather to mention that when you submit an article to a premier Journal it goes through a very intense review process if you are writing junk you are not going to publish it okay you can check that out he's a co-authored publisher I had a co-author for that article you can see that in that article we showed trade among European countries caused the wages in the manufacturing wages in Europe to converge we show the graphs we have the equations we have the estimation and everything okay you can check it out for yourself now my time is up right one a few seconds good I'll take it whatever I have now diminishing returns and increasing returns that Professor Hudson mentioned well I I don't know whether with the professor Hudson has followed up with the literature Beyond the time that he taught International Trade there is a tremendous amount of literature in international trade under the condition of increasing returns yeah time my time is up but I would just mention one more thing in fact Paul Krugman was give was received his Nobel prize in economics in 2005 or 2008 because of his contributions to trade Theory under increasing returns so saying that everything is based on diminishing returns is just not true okay so I have a lot here to say with regard to Hume that he mentioned is a travesty I have something to say about that but hopefully I'll get a chance [Applause] well I'm glad that you're bringing up political facts because that really is what it's all going to come down to it all comes down to politics uh and uh you'd mentioned uh that the strength of the United States uh was its Democratic institutions I think that it's not uh Democratic institutions that cause productivity or economic uh take off but they are indeed a precondition and the countries that are unsuccessfully protectionist uh that you mentioned quite correctly Argentina and Brazil why didn't protectionism work for them why didn't they take off in the same way that the United States took off or Britain took off or Germany and the reason is absolutely right political they are oligarchies and the question is if you're going to be protectionist what are you going to protect the idea in the United States was that you protect what you don't you protect an industry that you want to create there were not that many manufacturers in the United States because under British rule when we were colonies they uh they prevented any kind of industry here you couldn't make hats you couldn't make clothes you couldn't make anything that would compete with Britain and the ultimate uh application of this is what England did from India you could have cited India is being way way ahead of England in the 17th century that was the richest country in the world that was producing the textiles and uh British control wrecked uh in India and left India so that even today the corruption that you have is uh is certainly blocking it so this what we're really talking about is the inability of economic models to be realistic if they do not take into account the political structure of the country uh and uh the oligarchy or the aristocracy and what do you predict effect it of course if you look at the countries and compared 1990s to the 1960s uh you're going uh that that statement is a kind of tunnel vision statement that's peer trickery uh look at what happened in the 1990s to the Soviet Union they invite invited American neoliberals over and uh you thought what happened it was uh president uh Putin said quite correctly that adopting neo-liberal economics killed more Russians and the Germans killed in World War II that the Russian population plunged life expectancy plunged immigration Rose uh drug addiction Rose uh it was uh absolute disaster of dismantling privatizing natural resources dismantling industry and becoming a uh a raw materials exporter which I think some American Diplomat said it's just a gas station with an atom bomb compare that to Korea and most of all to China look at what they've done with a balanced economy look at how they've pulled ahead uh and I can assure you when I talk to uh students in in China the feeling that they have that they can actually change the country that they can get rid of the corruption that exists uh that they can clean things out uh it's it's uh remarkably here in Latin America you're protecting your vested interests uh the the United States didn't protect the vested interests the vested interest uh at the time that we begin protectionism with the Civil War was the southern slave economy we didn't protect them we created new interests that in time of course became protectionists of course we're protecting their rent that's why America took the lead in creating anti-monopoly regulation in preventing uh protectionism from uh simply protecting uh Revenue without work and without investment the idea of protectionism was not only to increase capital investment but to be pro-labor by realizing that you needed to have a prosperity of enough labor so that as Henry Ford said they could afford to buy the cars that they produced uh that wasn't the case in Latin America it was the case in the successfully protectionist countries such as America Germany uh and most of all China today for Krugman uh what what can one say uh I hate to say it but the Nobel Prize is a public relations prize it's the public relations for free enterprise quite frankly it's public relations for mainly junk economics that's why the Chicago boys that are on the Nobel Prize committee keep giving it uh the prize to each other it's for people that share the body of unrealistic assumptions that if you take it it will lead to economic suicide that unfortunately is what the Nobel prize is for let me address the very last Point first for anyone knowing Paul Krugman reading uh his uh twice weekly Collins In The New York Times don't know that he is not a friend of free markets everyone should know that if you look at the he's not a friend of free markets he's not a free market Economist he actually has written quite extensively against the Chicago economics you're talking about okay he doesn't like them he disagrees with their Viewpoint he is highly interventionist except in international trade even in a national trade that he's a free Trader he also believes that government should help workers who are displaced by Imports um so that was the last Point let me um let me also say that I completely agree with Professor Watson on the importance of political institutions in fact I highly recommend the book that came out about four years ago I'm I'm sure many of you have heard of it perhaps even read it by Daron uh esemaglu and James Robinson the title of the book is why Nations fail the book now you can get a paperback for maybe like 10 12 from Amazon is a highly readable book and highly intelligent and informative book because they they make the argument that political institutions are just as important as Economic Institutions and they actually uh criticize the economics profession just as Professor Watson did that economists have left out the politics out of their economics model what they bring it in now they don't have any mathematical model they have done it in some some of their other uh published Works in economic journals you can easily find them in American economic reviews has published a series of articles by smoglu and uh and Robinson uh on this very issue we are talking about okay now that if you I have a few minutes and lots of issues to talk about with regard to Russia that actually illustrates the point Russia did not succeed in the transition to uh neoliberal if you can call it that economics because they didn't have the right political system in place uh so uh the economies who advise them ignore that point perhaps they should have they should have kept it um in mind now with regard to Hume that was mentioned um all of hume's writings and correspondence are collected in one volume it was published in 1955 and anyone interested you can you can read uh Humes writings uh for yourself okay and judge with regard to what he says whether he recanted his views later on or not I must say that Hume as much as uh promoted trade among countries was not an absolute free trade it he did recommend that the Great Britain imposed on tariffs on some Goods coming into Terror into England especially from from France um now with regard to externality that Professor Hudson mentioned uh externality has also been included in trade models in trade Theory they have taken that into account of Columbia University back in the 19 mid 1950s did publish articles addressing the issue okay so those are all out there for anyone um uh for anyone to read now Portugal and England the two countries that Ricardo used in his theory of comparative advantage model well um Portugal was not a free Trader England did become a free Trader after the repeal of the Corn Laws In in 1846 well Portugal did not Portugal continued a different path and that then that's the reason just as Brazil and Argentina and a host of other countries chose a different path and they ended up being underdeveloped okay do what 30 seconds that's great thank you um now let me also point out with regard to economic journals they are not published by uh there is only one Journal that University of Chicago publishes and that's journal or political economy that's it all other journals we're talking about American Economic Review which is the Premier journal in economics is published by American economic Association and they go by day by the validity of the argument by the consistency and the empirical results and so forth it goes through a rigorous review process and then you have the review of economics and statistics by Harvard University and a host of others so Chicago yes they are free market most of them not all of them not all economies in Chicago are free markets but then what happens is that what they do not control the economic profession in fact the vast majority of economists in Ivy League schools are not really free market economies they believe in economic in government intervention I think I went over my time I'm sorry about that [Applause] have some time for Q a um so I'll ask both Debaters to yeah if you want to take a seat here just so you can both respond when you when you want just a reminder raise your hand for a question and then the other Dr Stewart will bring the microphone over thank you uh this is for Mr Dr Hudson uh how do you think uh the US would benefit from Trump's protectionist policies do I stand up yeah you can just stand wherever you want we were indeed supposed to talk about what America's compare Advantage is and it's significant uh uh we just pointed out that England did turn into a free Trader what every country once it is achieved an advantage through protectionism always promotes free trade for other countries they want to pull up the ladder they want to say do what we say not what we did so now the United States is a free Trader now that we have the advantage to undersell other countries and uh so many things uh and especially where for free financial flows so look at the uh uh Trump I think was quite right in criticizing uh the NAFTA policy which was a disaster certainly for Mexico uh because the the effect on Mexico of NAFTA was uh to flood their agricultural Market with subsidized inexpensive American food exports that ended up putting the Mexican Farmers out of work that's why so many of of them were forced to come to America to work on American agricultural land the objective one of the objectives already in the Carter Administration when NAFTA was being talked about and planned was to have maquiladoras the very low wage factories right along the border the northern border of Mexico using very low wage non-unionized labor without pension rights and without social services so uh the idea was to use the Mexican labor to drive down wages in the South so NAFTA was indeed a a disaster As Trump said regarding what his policy is I don't have a clue as to what it is it I can't figure out uh nobody I've talked to has a clue of what it is he did talk about infrastructure and uh building something like a high-speed railroad along the east coast I don't know I live on the east coast I live in uh New York City and go back to Washington you don't want Railway crossing gates for a school bus to get stuck you know right in the way in a hit by a 350. there's no way that they can get the right-of-way there is no way that America can have a high-speed Railroad on the East Coast it may be on Inland California if you want to go through all of the uh Rich fertile lands of the Inland place there but I just don't I don't see what uh Trump's policy uh really is is criticism of policy is very good and people think that because uh you can criticize a bad policy you're somehow on the side of the good guys he hasn't shown me he's on the side of the good guys um this gives me an opportunity uh not with regard to Trump I'm not going to talk about him rather with regard to the development yes but but you made some comments that uh leads me to some of the uh PowerPoints here I have um yes let's see here now let me share with you David dollar an economist a senior Economist at the World Bank 2004 divided countries into three groups developing countries that abandon autarky autarky being restrictive or no trade or little trade and globalized in the 1990s that means they Embrace export promotion rich oecd countries that were already like the us more or less globalized and the rest of the developing world that remain on target and they said no we don't want to globalized we don't want to trade with with the U.S and Europe and all that we want to produce our own Goods such as Argentina and Brazil well dollar found that globalizers grew at the rate of five percent a year the rich countries which are already globalized at the rate of two percent a year and their rest the rest of the developing world that refused to globalize actually suffered one percent negative growth rate okay now where did all the gains go I know if girls goals to the rich and so forth and so on so he and his um his co-author in 2003 hey this is an extensive study in the Journal of economic growth I really recommend every student to read this article this is the conclusion I got this actually from the from the text of the article itself itself average income the poorest quantite that's the 20 percent rise proportionately with average incomes which means that if the average income Rose at five percent the bottom 20 percent in a sample of 92 countries spanning the last four decades a few days or a few a few years or a few countries 92 countries over 40 years what happened the 20 the 20 in the bottom of the income distribution saw their income Rising as much as the average now I don't know how much time I have I can go on and on should I all right I'll pose this to both of you in every economics course I've ever taken what I've been generally told about protectionism is that it leads to retaliatory actions that you know if we have our own protection measures another country will have their protectionist measures and then everyone's made worse off to both of you would you argue that's a falsehood would you argue that's a real consequence of how would you characterize that criticism I can assure you if you're a bully and hit a little guy the little guy is not going to retaliate America has broken has been one of the most protectionist countries in the world uh I wrote a book Global fracture after uh in the 1970s showing how America imposed steel tariffs uh against all the international trade rules when they came in America has always broken the international rules and nobody can do anything at all there's no retaliation if you're a little country and do something America likes it'll send in the hit squads or put sanctions against you so it all depends uh who you are who's doing what to whom well I actually have a PowerPoint I'll get to these graphs later okay where are you where are you okay here please look at look at this very last one okay why not protecting domestic Industries well the first answer is what you had been told in the trade Theory or your economics course the retaliation with story Jaws in the export sector but let's assume that the other country is even too little to retaliate or too afraid maybe to retaliate or they are very nice guys and they don't retaliate they want to play by the rules okay what happens but even without retaliation less Imports leads to lower supply of Dollar on world markets that means higher value of dollar and that means less exports and therefore job destruction in the export sector so there is no way out of this you import less by restrictive policies you're going to end up exporting less save jobs in the import competing Industries lose job Industries that's not what America did or England or Japan or Germany they protected Industries they didn't have but that they want to create if you protected a existing industry you're you're enabling uh its owners to extract Monopoly especially if they're owned by American investors by the way the Americans love to protect foreign monopolies that they own uh but uh the countries that had successful protectionism used it to create Capital to change the distribution between capital and labor to change the comparative advantage not to work within the existing comparative advantage between uh Haves and have-nots the idea is to change the world not to work within it actually as you can guess yeah I have I I can't resist it I have to share with you these graphs because they were even they were even amazing to me all right does globalization reduce poverty we're talking about Little Guys small countries low-income countries well it asked um Jeffrey sass sacks sax in his book The End of poverty 2005. very good book to read easy book to read actually and that's unusual for an economist to write an easy book to read globalization more than anything else has reduced the number of extreme poor in India by 200 million and in China by 300 million since 1990. now this this actually is already over over a decade of 1990 so his data ends in 2000 in the year 2000 so since that time in the last 15 16 years the poverty rate in those countries has gone down well I decided to look into this so what I did was I took China okay my data actually ends in 2005. the blue line is this blue does that look blue to you the blue line is the trade ratio trade ratio is import plus export divided by the GDP of the country okay as you can see this is uh this one is in the uh going up the poverty right going down the same you can see for China but even more dramatically look at Brazil Enrique Chile okay I decided two countries in in um in South America now you can you can see that as Traders even in Brazil with this protectionist policies even with its bigger economic growth uh trade more you cannot really do better than this this looks like too good to be true the correlation between the two is almost perfect for for Brazil and for for chile and you think I'm picking on these two countries look at the two countries in Africa we have Kenya and Rwanda you can still see that where whenever trade ratio goes a trade War your poverty rate goes down okay now in order to make sure that this this is not a biased sample I ran some regression analysis or regression equations here and as you can see the percentage change in trade ratio percentage change in economic growth well as you learn in your econometrics course uh if you see a correlation it doesn't mean that one is causing the other one maybe something else is causing both of them maybe something causing both poverty to go down and trade ratio to go up and that's why I threw in the percentage change in economic growth and lo and behold both are negative and actual equal size and and statistically significant meaning different from zero sample size 76 countries over the period of 1980 to 2005. I wonder if uh you could go back to the David dollar slide here I want to speak as a I served as the chief technical advisor to the state Planning Commission of the People's Republic of China for macroeconomic reform for four years in the 1990s so I learned something about that economy uh one thing I can tell you is that those trade numbers uh the trade Shares are utterly unrealistic you're talking about a country of 1.3 billion people it is not possible for a country of that scale to be exporting and importing 70 percent of their GDP in any reasonable volume constructions if that your numbers right up there on the on the on the chart you were just showing I looked at them you go go look at what your trade ratios are for China it's a Preposterous number even if it's 50 it's much too high right there China I have 80 percent trade ratio there that is utterly preposterous no you know Swaziland or Rwanda or Belgium might have a number like that a country the scale of China it is absolutely not possible now wait I I understand that the what the figures are I'm just telling you that they rep they cannot they do not represent any reasonable construction of production volumes in China uh but let's go back to the David dollar Point slide because I want to make a point about that and get your comment on it could we go to that one no well my main point has to do with David dollar uh the this this uh yeah he divides the world into three categories a category that grew very fast called globalizers and a category that uh was the rich countries leave them out and the rest are negative one percent and you already identified Argentina Brazil the so-called non-globalizers but if you think about the relationship of these countries to the world financial sector it's absolutely the Reversed Argentina Brazil much of Africa Southern southeast Asia were entirely open to Global Finance in the 1970s and accumulated enormous debts on which they were obliged largely to default in the early 1980s and they suffered two decades of negative growth China India also to a certain extent were substantially insulated from the global financial sector one of the things the Chinese did not do in the middle 1990s thanks to the recommendation and part of this of a distinguished American Economist Robert Eisner was to liberalize their their Capital account and and open up to Global Finance so I wonder if we talk about globalization and financial rather than in these rather I think strained trade terms we get exactly the opposite characterization from that which David dollar is offering Here China and India appear as less globalized and the countries that did poorly appear as far more globalized and open to Commercial Banking and Financial disaster than the countries that or less so and I wonder if you could comment on that that may very well be true about um no as I said before facts are facts and you know I'm not going to deny that or uh or argue about them what I can what I can say about dollar work is that you know it was a published work when I read it I was actually surprised by the by the these results he's not he as far as I recall he does not talk about the financial liberalization he talks about the only liberalization in goods and services now you have a legitimate point I guess that can get published and with it it will refute his results or will confirm it I don't know I haven't looked at the financial liberalization or just just for goods and cigar to China um the the graph that you mentioned um that these appear to be too high yeah well what's going on in Mobile terms is for much smaller volumes and anybody who knows the Chinese economy knows let me say that for many countries that ratio is actually over a hundred percent and the reason is and here is the reason that the trade ratio adds export to the Imports it's not export minus Imports which you have in your GDP equation is export plus input so when you add them up you could get a very large number now well I I got the num the numbers could be wrong but this is this is where I got them and I can I can share with you stand that there's a pricing problem yeah that could very well be there very well could be the case yes uh Dr Hudson uh I've done a lot of a little bit of research uh in the past on protection Theory versus um comparative advantage Theory there's a lot of literature on the internet that is pro comparative advantage Theory it uh almost seems like comparative advantage theory is the the popular opinion so can you give us an example from history or a situation where the benefits of protectionist theory are the most apparent I wrote a whole book about that America's protectionist trade-off has a whole list of economists that are probably not brought up in the courses you study in trade Theory uh the uh the United States is an example of uh setting uh probably the best example is agriculture in the 1930s uh the uh ideal of the Roosevelt administration was to make uh to revive American agriculture you had the parity pricing system and import quotas essentially it was very much like the British Corn Laws of the uh eight uh Napoleonic Wars and I'll give you an example of uh no matter how irrational uh the agricultural protectionism the extension services the educational services the seed Services the United States have been agriculture had uh in the United States since 19 from 1930 through the 1970s and maybe into the 80s had the highest productivity of any uh industry in history over that time amazing rise in productivity the the issue goes way back to the debate between Malthus and Ricardo and most of the trade Theory books that you get probably are not going to mention mouth us and Ricardo argued uh was the lobbyist for the bankers of his stay and the bankers made their profits on international trade and he said uh he was all for England importing cheap enough food so that its labor could be uh subsist at a low enough price that they could undersell manufacturers in other countries and therefore he said we've got to get rid of the Corn Laws that are producing uh economic rents for the landlords well Malthus who's not very popular for many good reasons uh said wait a minute the landlords are what are they going to use the rents for he said they're going to use uh because they can make so much profit on grain they're going to use the rents protected by the Corn Laws to invest in Agricultural modernization and developing the soil and uh that was why British agriculture was able to expand and feed the population during the Napoleonic Wars now here you had at the time of Ricardo wrote this idea he based the whole theory on diminishing returns and this isn't a time when you had the birth of agricultural chemistry you had you just as from liebig you had tear you had agricultural chemistry you had the mechanization of Agriculture and you had a sort of agribusiness developing the whole technological transformation of the 19th century that was happening in Ricardo's day was missed because he said don't look at reality look at my model it's going to pay us Bankers basically I'm summer I'm summarizing as politics there but how do you explain how America's protectionist agriculture that has been the base of all policy and you've cited uh policies uh by the World Bank probably the most anti-development the most detrimental organization in modern history has been the World Bank it has uh its job was to block self-sufficiency in food production by third world countries to make to subsidize Plantation export agriculture instead of feeding their own culture to only give foreign currency loans to develop roads and the infrastructure for an export Plantation infrastructure but not domestic currency loans which is what you need to modernize domestic agriculture so the World Bank promoted uh not microfundia not family-owned farming it ended up promoting Agricultural backwardness and doing more damage to the world than many world wars have done thank you um just just one quick point Ricardo's theory of comparative advantage is based on constant returns to escape not diminishing returns Professor Hudson is right that Ricardo wrote much of his economic analysis based on diminishing returns but not the theory of comparative advantage that was constant returns to escape um I have some concluding remarks um it will take a few minutes do we have a few minutes just a couple okay um all right I'm going to forego the first paragraph how about that okay consider the following the state of Connecticut where I live Imports petroleum products from Texas where you live and Texas Imports laser products from Connecticut and they do this without any barriers erected by state governments or without negotiating trade treaties but to exchange goods and services with Mexico Canada China or Germany or any other country we insist on trade treaties we insist on negotiation there is no rational basis for this just as there is no rational basis for uh negotiating trade treaties among states within the Union in fact the U.S Constitution has rendered that unconstitutional the economic case for free trade is unilateral meaning removal trade barriers on other countries goods and services regardless of what they do this is what the economics uh Theory as well as evidence shows us however the case for a free trade is not limited to economic gains John Stuart Mill stated quote the economical advantage of Commerce or surpassing importance by those of its effects which are intellectual and moral let me take you back a couple of thousand years Augustus the Roman Emperor said suppress Commerce and you tear apart the bonds of human race Montesquieu closer to our time said the spirit of Commerce unites Nations Benjamin Rush a signer of the U.S Declaration of Independence he said oh the me he he viewed Commerce as the means of uniting different nations of the world the European Union was established primarily not the only reason but primarily to create peace among European powers and today no one can imagine that the EU countries would be fighting with each other although they might fight non-members such as Russia last one okay only 30 seconds or less the fundamental question we must raise is whether the nation our nation other nations overall and the world overall is better off that's the question we should ask are we better off on their free trade or a restrictive and protection is one free trade is not a Panacea is not free trade is not going to cure all of our economic ills and trade is not about creating jobs uh unlike what we hear from our politicians the overwhelming evidence indicates that protectionism and isolationism result in corruption stagnation even negative economic growth poverty and international conflict to borrow from Winston Chelsea's characterization of democracy globalization is the worst system except for all others [Applause] we're out of time don't have the last one no he'll get he gets you got the first word he gets the he gets the last one but I want to thank you all for being a very good audience tonight and I um we both of these speakers gave us a lot to think about but they not only gave us a lot of Economics to think about but especially in an age where what characterizes debate especially as seen on television is just two people shouting at one another I really appreciate these two modeling mature civil disagreement the way grown-ups should disagree about things and so I I think we should give them our thanks for that a couple of last announcements um the Austin Institute has many other events both large in a scale like this one and smaller ones um Nick and Deanne over here will be outside the doors if you want to sign up for our email list so that you know about these sorts of debates and then other activities they will be there they will be there to get your your email address I also want to say that Professor Hudson has very generously brought some books so if if some of the ideas that he had piqued your interest come up to him afterwards and talk to him about his books that are here and maybe you can talk him out of one of them so um thank you all very much and we'll see you next time

Channel: Learn Liberty

Views: 16,244

Keywords: Learn Liberty, Birthday

Id: 6Xwptd-Z7i4

Length: 88min 30sec (5310 seconds)

Published: Thu Mar 23 2017