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The self-styled Cogent Provocateur is once again being deliberately disingenuous. In his article for 14 May 2002 (permalinks not now working), he offers the Stolper-Samuelson theorem as showing the reason why free (international) trade must be disadvantageous to the vast majority of people, and offers as a corrective "a liberal dose of socialism" (actually of fascism, since the nominal ownership of property -- and thereby the legal and moral responsibility for its misuse -- is left private, whilst he proposes to skim off the wealth that it creates). Now, I'm not Megan McArdle (I'm not as tall, I'm not as young, and I'm not as cute -- oh, yes, nor do I have her background in economics), but still, I'll take first crack at exposing the Provocateur's half-truths and distortions. The Stolper-Samuelson theorem assumes the existence of zero profit in the industries analyzed and full employment in the economies. Both of these conditions have economics meaning not readily apparent to the layman, so first I'll explain them. "Profit" is, of course, the excess of revenues over costs. However, in the macroeconomic sphere, it is assumed that such thing as return on capital at the market rate (which "should" be equal to the secular growth of the economy plus the inflation rate), taxes, and amortization of equipment ("real" amortization, not the accounting construct which is driven more by the tax code and accounting standards), are included in costs. Thus, a "zero profit" industry is one in which dividends, taxes, and sinking fund payments are covered by prices. Economic "zero profit" is not the same as accounting "zero profits". This is a serious flaw in the Provocateur's argument. "Full employment" is not the same as everyone having a job; it is everyone having a job who wants one. At a full employment equilibrium, there will be unemployment -- but it conceived of as being "frictional unemployment" (essentially, those who have quit, been fired, or been laid off and who have not yet found another job) and "voluntary unemployment" -- comprised of those who have chosen not work at the prevailing wage rate in jobs for which they are qualified. Now, of course, "full employment" does not exist throughout most of the world. There are people outside the market economy (e.g., people engaged in subsistence agriculture in the Third World, or on the dole in Europe). Even in the U.S. (particularly in light of recent economic conditions), we have seldom reached a full employment equilibrium. So, one of the conditions needed for the Stolper-Samuelson theorem to hold is immediately violated in terms of any real-world discussion. (I note, incidentally, that zero profit and full employment are the conditions created by perfect competition in both the labor and capital markets. Although the Provocateur attempts to disparage laissez faire capitalism in favor of a big government/fascist economic regime, assuming its existence is necessary for his argument.) The Stolper-Samuelson theorem tells us that, from a pre-existing equilibrium, if the price of a given good rises with respect to other goods, the wage rate of the more abundant factor (as between labor and capital) will rise, and the wage rate of the less abundant factor will fall. The Provocateur calls this "counterintuitive", but of course it is not. A rise in price implies a greater demand for that good relative to others; both capital and labor will be attracted preferentially to production of that good. The factor used more abundantly in its production will of course itself be in relatively greater demand, and thus command a higher price (wage rate, return) than the other. The Provocateur's argument assumes that, international trade being initiated, the prices of goods which are capital-intensive will rise relative to those that are labor-intensive (he does not specify why this should be so; perhaps it is an implicit acknowledgement, in view of the gross unemployment and underemployment existing throughout in the unindustrialized world, of the violation of one of the Stolper-Samuelson theorem's conditions for validity). The wage rate of (or return on) capital will increase; the wage rate of labor will decrease. (Note that this is an absolute, not a relative, decrease). Of course, such usual economic weapons as tariffs will also cause the price of the capital-intensive good to increase, etc. The only condition that can be supposed to work is autarky, where markets are removed for that good, and its price then falls. Now, of course, it's readily seen that the Provocateur's preferred solution of fascism is no solution at all. Zero profit industries are the other condition for the Stolper-Samuelson theorem to be valid, and "zero profit", in economic terms, means that prices must cover taxes on accounting profits. If taxes on the capital-intensive industries are raised, then either those industries must be driven to negative profits (with disastrous results in future years), or else prices must be raised, resulting in a "death spiral" as wages are continually driven downwards, and prices of capital-intensive goods continue to rise. It is to be noted here that the rise of prices consequent to the opening of international trade will not be universally true. A rise in the price of a good will only come about if there is a new (to the producers) market that is served inefficiently. If capital-intensive goods are exported to that market, their price relative to labor-intensive goods (and often absolutely) will fall, the wage rate of labor in that market will rise, and living standards will increase. If there is free movement of people (labor), as well as capital and goods, between the two markets, it will naturally flow in the direction of that one with the higher real wage rates (non-market economic theorists like to assume that people's feet are nailed to the ground, since that's the preferred position, in their view, for people to be in). The Provocateur's argument is the typical social-fascist argument that assumes that the State should absorb as much capital as possible, simultaneously absolutely and relatively enriching the nomenklatura with respect to the population as large, whilst setting up the conditions to steal more in the future. It may -- it should -- be mocked in political and ideological terms, whilst safely ignored in economic ones.
John "Akatsukami" Braue Friday, May 17, 2002 |
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