Now Richard Murphy branches out into trade economics

And, as you might imagine, manages to get it really rather wrong.

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He then says:

Productivity has risen because capital has sought out the cheapest labour possible to substitute for that bought in the US. That cheap labour – mainly Chinese in the US case – has forced down US labour rates. But the return to capital has grown enormously – reflected in the supposed productivity curve, which does actually reflect substitution of labour.

So, labour is much worse off as a result of free trade where capital can move and labour cannot.

Well, no, his chart does not show that labour is much worse off. It shows that of the gains which that capital mobility seems to have encouraged, much of the gains have gone to capital.  Not all of them, but much of them.

And, if we sidestep the known problems with US income statistics (household size has declined substantially over those decades, something not accounted for, meaning that income per person in the household has risen much more strongly than shown. Further, that the real hourly wages are cash compensation, not total compensation. Leaving out, crucially, medical insurance which is a substantial and major (and rising!) portion of total US labour compensation) we might leave it at that.

Mobility of capital is a bad thing for the labour in the places where the capital mobilises from.

But should we leave it like that? No, actually, we shouldn\’t.

What else has happened over that same time period?

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Hmm:

World poverty is falling. Between 1970 and 2006, the global poverty rate has been cut by nearly three quarters. The percentage of the world population living on less than $1 a day (in PPP-adjusted 2000 dollars) went from 26.8% in 1970 to 5.4% in 2006 (Figure 1).

The mobility of capital seems to be hugely beneficial to those people in places where the capital moves to.

So, which should we be rooting for? That globalisation means that the hard working labourers in our own country/ies don\’t get much of the benefit but that the poorest of the poor are brought up out of destitution in the greatest reduction of poverty in the history of our species?

Me, I\’ll go for the latter really.

But, there\’s one more thing!

A really rather important thing. Ritchie is assuming that capital has in fact left the US over this time period. Which is an interesting question: has it in fact done so?

Recall our basic stuff about trade economics. The balance of payments. If you run a trade deficit you must, by definition, be running a capital surplus. That is, that the balance must balance.Conversely, still in order to balance, if you are exporting capital, in aggregate, you must also be running a trade surplus.

So, what has the US trade balance been over this period? For that will be  the inverse of the capital account.

Hmm. What\’s that? The US trade balance has been in deficit since 1976 you say? That thus the US has been importing capital since 1976, definitionally?

That capital hasn\’t in fact left the US? Has, in fact, entered the US?

All of which really rather leaves Ritchie\’s argument in something of a mess. There hasn\’t been the capital flight which he assumes has led to the reduction in labour wages, he\’s grossly overstating said reduction (apologies, failure to rise) of such wages and finally, even if everything he said were in fact true it does seem a really rather national form of socialism to insist that the poorest of the poor foreigners getting richer is a bad idea if the incomes of the richest, but \”our\”, \”national\”, working class on the planet only rise slowly as a result.

My favouritest part of the whole thing though?

But they also have no innovation of investment base left either. Free riding the system has left them financially, intellectually, and socially bankrupt. France and especially Germany took a different route. And it’s paying dividends.

Germany has been running trade surpluses over these decades, meaning that Germany really has been exporting capital over these decades. And yet, Germany is used as the example of how much better things would be if the US hadn\’t been exporting capital (which it wasn\’t anyway).

Me, I put all this confusion down to the fact that Ritchie doesn\’t in fact know enough economics to realise that the balance of payments must balance.

7 thoughts on “Now Richard Murphy branches out into trade economics”

  1. You know most of the improvementy in poverty comes from China and India in the last two decades years? Countries with more liberal than before but far from liberalised capital accounts…

    Before that a lot of the reduction in poverty took place in the East Asian Tiger Economies, Malaysia, Thailand, S Korea, Taiwan, Philipines. Countries with more liberal than before but far from liberalised capital accounts…

    Below’s my reading list on Financialisation and Development for this week (got a lecture in 20 minutes). Liberalisation in finance is a good idea as an end point, but the benefits are marginal and liberalisation opens countries to massive financial crises. Liberalising finance should be way down the list of things a government should tackle.

    Globalising knowledge about health care, public health and basic infrastructure, now that is an unambiguous good. You know I know these things, you’ve seen the essay.

    B. Eichengreen & M.D. Bordo. ‘Crises Now and Then: What Lessons from the Last Era of Financial Globalization’, NBER Discussion Paper w8716, Jan.2002

    B. Eichengreen & D. Leblang, ‘Capital Account Liberalization and Growth: Was Mr. Mahathir Right?’, NBER Discussion Paper w9427, Jan.2003

    L. Neal & M. Weidenmier, ‘Crises in the Global Economy from Tulips to Today: Contagion and Consequences’, NBER Discussion Paper w9147, Sept.2002. Also appears in M.Bordo, A.M.Taylor & J.G. Williamson (eds), Globalisation in Historical Perspective (2003)

    M. Obstfeld & A.M. Taylor, ‘Globalization and Capital Markets’, NBER Discussion Paper w8846, Mar.2002 Also appears in M. Bordo, A.M. Taylor & J.G.W illiamson (eds), Globalisation in Historical Perspective (2003)

    B.Eichengreen & H.James.’Monetary and Financial Reform in Two Eras of Globalisation’, ch.11 of Bordo, Taylor & Williamson (eds) Globalisation in Historical Perspective (2003)

    F.S. Mishkin, ‘Why We Shouldn’t Turn Our Backs on Financial Globalization’, IMF Staff Papers (2009), 139-170.

  2. What you’re forgetting is that Richie is paid by the unions here in the UK to come up with this stuff. I don’t think they’d be very happy if he said that their members should have slowly reducing purchasing power so that poor people in India and China can have increases in theirs.

    Solidarity of labour only goes so far you see. Normally about as far as the Channel. Sometimes not even that far.

  3. However the capital the US has exported has gone into creating productive industries abroad (or moving them there) while the capital they have imported has gone into government bonds. The problem then seems to be US parasitic government.

    In fact history shows it is considerably easier for wealthy nations to grow than for poor ones. Other things being equal. If the advanced countries government’s are so much more parasitic & regulation bound they can overcome this advantage.

  4. Surely the relevant measure is not income or hourly wages, but purchasing power.

    Since so many things are cheaper in real terms today than a few decades ago, the amount I am earning is not really as important as how much I can buy with it. The number one exception to is of course is housing, but most other goods have fallen in price in real terms.

  5. Is reducing poverty in far off lands an entirely good thing. For the UK that is.
    They procreate more and die less and then comes the tide of their progeny to slowly replace the inhabitants of the UK etc.
    Very pc I expect but was that the reason the UK fought wars to keep people out.

  6. ..
    the US exports dollars (fiat tho theymay be) and gets imports
    that is called the balance of trade
    money for assets
    the US also has another import /export set of books
    US money in/US bonds out
    or
    money for debt..

  7. “Recall our basic stuff about trade economics. The balance of payments. If you run a trade deficit you must, by definition, be running a capital surplus. That is, that the balance must balance.Conversely, still in order to balance, if you are exporting capital, in aggregate, you must also be running a trade surplus.”

    “Ritchie doesn’t in fact know enough economics to realise that the balance of payments must balance.”

    Wrong, actually. Hence “BOP imabalances”. Basic stuff indeed!

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