Ritchie on economics

I believe that the free flow of capital is harmful – and has impoverished billions of people.

That\’s interesting, isn\’t it? Not actually according with any of the facts but interesting all the same.

I believe that green means reducing wasteful energy spent on transport.

Indeed, it does, but the method of working out what is wasteful spending on transport does need to be considered. Like, you know, using trade to do so, as Ol\’ Adam Smith pointed out about wine and Scottish grapes?

And I happen to think Ricardo did not get comparative advantage right: he forgot the forgot the fact that physical capital is not mobile, and nor are many people. Therefore there does not to be allowance for that ‘stickiness’ in world trade.

My word, how unlike Ritchie not to understand the only theory in all the social sciences which is not obvious nor trivial…..

The debate on what is and is not appropriate in trade is only now really beginning. What I do know is that the idea that it’s a free for all is profoundly wrong.

I think that\’s another sighting of Kip Esquire\’s Lawe, don\’t you? For if it isn\’t going to be a free for all then it must be regulated and who do we think is going to be doing the regulating?

16 comments on “Ritchie on economics

  1. “And I happen to think Ricardo did not get comparative advantage right”

    Its a tough call as to whether his stupidity is greater than his arrogance, or vice versa.

  2. he’ll soon be redefining physics – Newton, Einstein et al were just a load of capitalist jerks. And when he invents the theory of the humours, he can reinvent medicine too.

  3. He should have gone into sociology. Reinventing the foundations of the field but using different words isn’t only accepted, it’s the primary mode of “research”.

  4. “Ricardo … forgot the forgot the fact that physical capital is not mobile”

    where did he get that idea from?

  5. Luis – he invented it. he has no clue what the theory of comparative advantage says nor how easily verifiable it is

  6. Dear, oh dear, this is very embarrassing.

    For a long time I have viewed Murphy as an intelligent and skilled con-man. It is now clear that I am utterly wrong.

    He is a con-man, but he is a dolt. Happily for him he is marginally more intelligent than the union idiots and politicos who pay him. But that is a compliment as back-handed as is possible.

    So Tim, isn’t it time to admit your utter folly about AGW and prostrate yourself before us?

  7. I’ve commented on RM’s blog about Ricardo’s theory of comparative advantage, because it seemed that RM was conflating capital mobility with comparative advantage, which is impossible. His response was that Ricardo ignored the cost of capital writeoff when comparative advantage changes. I assume he had in mind the fact that physical capital such as plant & machinery can’t easily be redeployed. Comments, anyone?

  8. Frances, to be honest I cannot see the relevance of capital mobility or labour mobility to the theory of comparative advantage. His point about capital write-offs is also totally irrelevant. He is probably making a fundamental mistake and confusing comparative with competitive advantage. By definition, you expect the level of comparative advantage to change constantly. That does not mean that you stop doing what it is you are best at. As long as you can do something needed by other people, you should continue to do what you are best at, rather than something you are not so good at. Capital write-offs only enter your thinking when no one requires what you can do.

    John Kay captures it well in his book “The Truth about Markets”:

    People, areas of the world, regions exist, and have rights and values, independently of their economic function. Businesses exist only for their economic function: and if they have no economic function they have no reason to exist. So households and countries must do what they are best at, whether or not they do it better than other households and countries. Businesses should only do what they can do better than others. So we speak of comparative advantage for people and for states, competitive advantage for companies.

  9. my dim and distant memory from teaching these models is that it is assumed factors are immobile across countries, quite the opposite of “forgetting” it.

    lots of things are ignored, as in all simple models, and “capital writeoff when comparative advantage changes” is one of them, whatever that means.

    it’s incredible how bad people are at dealing with stories (models) that are intentionally simplified to highlight a particular mechanism. The list of things that are excluded from a simple static model of trade is very very long. If you included all of them, you’d just have an incomprehensible mess. This does not mean that those people who use simple models have “forgotten” all the things they have excluded.

  10. Frances,

    Capital immobility is clearly an impedement to the establishment of ‘pure form’ comparitive advantage. If I was daft enough to set up a car component supplies business in Scotland, I would soon realise I need to be in the midlands. But my capital investment becomes a source of friction to realising my new strategy ‘cos I would need to write some of it off (potentially).

    So in theory His Very Richardness is correct. Except. Except. In practice that doesn’t happen. Empirically what we see is that clusters of excellence *do* exist in communities and nations. Car making, pharma, FS, etc etc out in the wild. So the strongest possible statement we can make it *not* that Ricardo and comparitive advantage is wrong because of capital immobility, but that it is deferred and dissapated to the extent that capital is immobilile in some industries. And given that comparative advantage exists for high capex industries such as car making and pharma, the impact of capital immobility must be very weak indeed.

    A trivially true conclusion.

  11. Gary,

    No, I don’t think that’s right. Ricardo himself said that if capital was completely mobile then there could be no comparative advantage:

    ” … if capital freely flowed towards those countries where it could be most profitably employed, there could be no difference in the rate of profit, and no other difference in the real or labour price of commodities, than the additional quantity of labour required to convey them to the various markets where they were to be sold.”

    Some degree of capital immobility is therefore necessary for comparative advantage. Capital immobility is an impediment to COMPETITIVE advantage, though.

    Tim adds: Here’s why it’s wrong. And I do agree that Ricardo said that.

    Because we don’t actually care about the rate of profit in different countries or places. After all, Smith pointed out that there is a “natural” rate of profit to which all profits tend as a result of compeition. Smith also pointed out that we’ll never have perfect mobility of capital (and this is where “invisible hand” is mentioned for the only time in WON) just for purely social reasons.

    But the real point is that we don’t give a damn about producers: it is consumers, consumption, which is our interest. Who gives a toss that the profit rates of wine and coton cloth makers in England and Portugal are the same? What we want to know is what arrangement gives us the maximum of cotton and wine that can be consumed?

    At which point comparative advantage still works and equal profit rates be damned. Because it is stioll ture that if we use resources in hte combinations at which they are least bad at we still get the maximum we can consume from the use of those resources.

  12. If this anencephalic fuckwit didn’t have the ear of some marginally influential people, then there would be little point in commenting on every example of his crippling Dunning-Kruger cognitive deficit except for amusement’s sake. But he is sufficiently dangerous that simply pointing out his numerous betises is not enough. He needs to be actively combated.

  13. Tim – your last obiter dictum is what I was attempting to get across. I think that Ricardo’s statement of the theory is ok but it does not really describe how nations/households should act in a world where capital and labour can shift. The exceptions and conditions that Luis and Frances describe help the theory to come alive but are not really germane.

    after all, there are many cases of Western capital financing factories in Africa and Asia that never produced anything that anyone wanted to buy. But Nike and co have achieved profits, because they have identified the comparative advantage. And similarly, the bespoke shoe-makers in Piccadilly are still there….comparative advantage.

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