David Ricardo: comparative advantage

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pages: 330 words: 77,729

Big Three in Economics: Adam Smith, Karl Marx, and John Maynard Keynes by Mark Skousen

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Smith's favorable remarks toward American independence may have been due to Franklin (Smith 1965 [1776], 557-606). From Smith to Marx The Rise and Fall of Classical Economics That able but wrong-headed man, David Ricardo, shunted the car of economic science on to a wrong line—a line, however, on which it was further urged toward confusion by his equally able and wrong-headed admirer, John Stuart Mill. —William Stanley Jevons (1965, li) The time between Adam Smith and Karl Marx was marked by the thrill of victory and the agony of defeat. The French laissez-faire school of Jean-Baptiste Say and Frederic Bastiat advanced the Smithian model to new heights, but it was not to last, as the classical model of Thomas Robert Malthus, David Ricardo, and John Stuart Mill took economics down into desperate straits. This chapter tells an ominous story. Upon the publication of Adam Smith's Wealth of Nations in 1776, a new era of optimism swept Europe.

The classical gold/silver standard restrains the state from depreciating the currency and provides a stable monetary environment in which the economy may flourish. As we shall see, the classical model of Adam Smith would repeatedly come under attack over the centuries by friends and foes alike. Adam Smith and the Age of Economists Adam Smith was not perfect by any means. He led disciples David Ricardo and Thomas Malthus down the wrong road with his crude labor theory of value, his critique of landlords, his strange distinction between "productive" and "unproductive" labor, and his failure to recognize the fundamental principle of subjective marginal utility in price theory. But these are parenthetical deviations that were unfortunately magnified by the classical economists and distort his overwhelming positive contribution to economic science.

The Great Optimist Adam Smith, a child of the Scottish Enlightenment, was above all an optimist about the future of the world. His principal focus throughout his economic magnum opus was the "improvement" of the individual through "frugality and good conduct," saving and investing, exchange and the division of labor, education and capital formation, and new technology. He was more interested in increasing wealth than dividing it (in sharp contrast to his disciple David Ricardo). According to Adam Smith, even a powerful, sinister government cannot stop progress: "The uniform, constant, and uninterrupted effort of every man to better his condition ... is frequently powerful enough to maintain the natural progress of things toward improvement, in spite both of the extravagance of government, and of the greatest errors of administration" (1965 [1776], 326; cf. 508). Adam Smith Makes a Famous Remark During the American Revolution, Adam Smith was approached by a citizen who was alarmed by the defeat of the British at Saratoga in 1777.


pages: 389 words: 98,487

The Undercover Economist: Exposing Why the Rich Are Rich, the Poor Are Poor, and Why You Can Never Buy a Decent Used Car by Tim Harford

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His chapter on social science was written after interviewing some of the world’s greatest economists; the result was an insightful explanation, which introduced me to plenty of things I didn’t know about economics. The truth is that E. O. Wilson is probably a better economist than I am. So I know when I’m beaten. Why write a book about economics when Professor Wilson could write a better one? The answer is comparative advantage. Because of comparative advantage, Professor Wilson hasn’t written a book about economics, and I’m fairly confident he never will. • 204 • B E E R , F R I E S , A N D G L O B A L I Z A T I O N We owe the idea of comparative advantage to the star of chapter one, David Ricardo. If Wilson and I shared David Ricardo as an agent, he might advise us as follows: “Tim, if you write biology books you are unlikely to get more than one sale per year of writing—the one your wife buys. But your economics is passable, and we predict sales of twenty-five thousand books for every year you spend writing.

Wilson’s promising career as an economic journalist never got off the ground in the face of his superior skills as scientist. This certainly makes us look at trade barriers in a new light. But it doesn’t prove that trade barriers cause any harm: after all, mightn’t the benefit of trade barriers to the American television manufacturing industry outweigh the harm to the American machine drill industry? David Ricardo’s theory of comparative advantage tells us that the answer is no. As we know, under free trade, both Chinese and American workers can quit work earlier than they could under restricted trade, having produced the same amount as before. The commonsense answer based on practical experience is also no: compare North Korea with South Korea, or Austria with Hungary. To take a very rough guide to how much better it is to have an open, liberal economy than a closed one, simply note that in 1990, just after the fall of the Berlin wall, the average Austrian was between two and six times richer than the average Hungarian (depending on how you measure it).

If tariffs on agricultural and industrial goods, and services, were reduced by a third, there would be a further gain of $600 billion—about 2 percent of world income. Removal of all trade barriers would deliver over 6 percent of world income. These are surely underestimates of the benefits, because they include only the most straightforward gains of bringing cheaper goods from world markets into protected markets: ergo, the straightforward application of David Ricardo’s theory of comparative advantage. Other advantages are likely, since, contrary to popular belief that trade is the friend of the multinational, free trade also destroys the scarcity power of big firms by subjecting them to international competition. It encourages the use of new ways of working and better technology. Some people even think it promotes peace by giving trading nations powerful reasons not to go to war with each other.


pages: 270 words: 73,485

Hubris: Why Economists Failed to Predict the Crisis and How to Avoid the Next One by Meghnad Desai

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Had the Bank Issued Excess Currency? It fell to David Ricardo to open the debate on the causes of the depreciation of the pound. In a pamphlet called “On the High Price of Bullion,” the first that he wrote, he showed that the best way to measure how much excess paper currency the Bank of England had issued would be to work out the percentage depreciation of the pound on the foreign exchange from the time when the link with gold was broken. Ricardo’s pamphlet created controversy and Parliament appointed a committee to examine the problem. The report of the Parliamentary committee, called the Bullion Report, confirmed Ricardo’s calculation. After all, they were just confirming the basic truth of John Locke’s theory on inflation but expanded to include an international context. David Ricardo (1772–1823) was a most unusual man.

His ideas were forceful – that there was a coordinating mechanism which worked without anyone driving it, that the best results were obtained by leaving people alone to follow their pursuits, and that the wealth of a country lay in the abundance of the goods and services that its people could afford to consume thanks to the productivity of its workers and the enterprise of the employers – and his advice was adopted by the government of the day. William Pitt the Younger, then Prime Minister, invited him to Downing Street and insisted that out of respect for Smith, the Cabinet stood while Smith sat and gave them advice. Smith established the usefulness of political economy, as the subject came to be called; it was a combination of philosophy, history, economic theory and some practical economic policy advice. The Certainties of David Ricardo The years which followed Adam Smith’s death in 1790 were turbulent for Europe. Britain had already lost its colonies in North America. The Rebels had issued a Declaration of Independence in the same year the Wealth of Nations was published and defeated the mother country in a series of decisive battles. They had established the first republic in many centuries in 1789, the same year the French Revolution broke out.

Ricardo was born into a Jewish family which had originally been Spanish-Portuguese but had been driven out by the persecution of Jews during the Inquisition, and his ancestors had settled in Holland and carried on the trade of stockbrokers. His father, Abraham Israel Ricardo, was a member of the Amsterdam Stock Exchange where he dealt in government debt and options. He later moved to England, where David Ricardo was born. Ricardo had no university education, having been inducted into his father’s business at 14. At the age of 21, he fell in love with a Quaker woman and renounced Judaism to become a Christian. While visiting his convalescing wife in Bath one day, he happened to come across Adam Smith’s Wealth of Nations in the local library, and immediately thought that he could make many of its propositions logically much tighter.


pages: 565 words: 164,405

A Splendid Exchange: How Trade Shaped the World by William J. Bernstein

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David Sassoon, a Jewish merchant from Bombay whose ancestors hailed from Baghdad, seized the China opium trade from his larger English rivals in the wake of the legalization forced by the Second Opium War. His descendants would achieve distinction in the arts and business in England. From the Jewish Encsrlopedia. The issue of a wealthy Portuguese Jewish merchant family. David Ricardo formulated the law of comparative advantage, which demonstrated how all nations could benefit from trade. Richard Cobden, a textile printer by trade, became the foremost opponent of the corn laws. His exploitation of the transport and communication advances of the day-the railroad, telegraph, and penny post-finally led to repeal in 1846. Tory prime minister Sir Robert Peel eventually saw the wisdom of corn law repeal, famously commenting to his deputy, Sidney Herbert, in response to a speech by Richard Cobden, "You must answer this, for I cannot."

These scribbles formed the basis of his famous Principles of Political Economy and Taxation, published in 1817. Principles proved a worthy successor to Wealth of Nations; in the words of the historian David Weatherall, "Adam Smith explained what the capitalist system was. David Ricardo explained how the capitalist system works."6; Ricardo's famous chapter on foreign trade begins with this forthright statement, which turns mercantilism on its head: "We should have no greater value if, by the discovery of new markets, we obtained double the quantity of foreign goods in exchange for a given quantity of ours." Ricardo proceeded to describe the law of comparative advantage, in which he poses the following hypothetical situation. Imagine that it takes 120 Englishmen to produce a given quantity of wine and 100 to produce a given quantity of cloth, whereas it takes only eighty and ninety Portuguese, respectively, to produce the same quantities of wine and cloth.

Interpolated from Maddison, The World Economy, 95. 59. Ibid., 299-300; and S. Fairlie, "The Corn Laws Reconsidered," Economic History Review 18, no. 3 (1965): 563. 60. Barnes, 72-73. This is not very different from the refusal of twenty-firstcentury Americans to drive fuel-efficient vehicles. 61. Ibid., 5-89. 62. David Weatherall, David Ricardo, A Biography (The Hague: Martinus Nijhoff. 1976), 1-3. 63. Ibid., 38-39; see also 69-71 for Waterloo loan. 64. David Ricardo, Principles of Political Economy and Taxation (London: Dutton, 1911), 77-93; quotation, 77. 65. In fact, John Stuart Mill described the principle much more clearly in his similarly titled Principles of Political Economy, published a generation later; and earlier writers of the seventeenth and eighteenth centuries, including Smith, Robert Torrens, and Henry Martyn, had described the concept in general terms.


pages: 226 words: 59,080

Economics Rules: The Rights and Wrongs of the Dismal Science by Dani Rodrik

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.‡ Let’s turn now to another important example of how economic modeling helps clarify arguments that may be somewhat counterintuitive. In 1938, a young Paul Samuelson was challenged by Stanislaw Ulam, the Polish-American mathematician, to state one proposition in the social sciences that is both true and nontrivial. Samuelson’s answer was David Ricardo’s Principle of Comparative Advantage. “Using four numbers, as if by magic, it shows that there is indeed a free lunch—a free lunch that comes with international trade.”5 Ricardo’s demonstration, back in 1817, that specialization according to comparative advantage produces economic gains for all countries was as simple as it is powerful.6 The nontrivial nature of the principle is obvious by how often it is misunderstood, even among sophisticated commentators. The antitrade sentiment attributed to Abraham Lincoln—“when we buy manufactured goods from abroad, we get the goods and the foreigner gets the money; when we buy the manufactured goods at home, we get the goods and we keep the money”—may be apocryphal, but not many can see easily through its illogic.

Neyman (Berkeley: University of California Press, 1951), 507–32; Gerard Debreu, “The Coefficient of Resource Utilization,” Econometrica 19 (July 1951): 273–92. 5. Paul Samuelson, “The Past and Future of International Trade Theory,” in New Directions in Trade Theory, eds. A. Deardorff, J. Levinsohn, and R. M. Stern (Ann Arbor, MI: University of Michigan Press, 1995), 22. 6. David Ricardo, On the Principles of Political Economy and Taxation (London: John Murray, 1817), chap. 7. 7. Dani Rodrik, The Globalization Paradox: Democracy and the Future of the World Economy (New York: W. W. Norton, 2011), chap. 3. 8. David Ricardo, On the Principles of Political Economy and Taxation, 3rd ed. (London: John Murray, 1821), chap. 7, para. 7.17, http://www.econlib.org/library/Ricardo/ricP2a.html. 9. David Card, “The Impact of the Mariel Boatlift on the Miami Labor Market,” Industrial and Labor Relations Review 43, no. 2 (January 1990): 245–57; George J.

For an economist, this means: What explains the prices of different goods and services in a market economy? The “theory of value” in economics is essentially a theory about price formation. If this question no longer seems foundational—or particularly interesting—for the contemporary reader, it is because it has been demystified by theoretical developments that cut through a thicket of confusion surrounding it. Classical economists such as Adam Smith, David Ricardo, and Karl Marx subscribed to the view that the costs of production determined value. If something costs more to produce, its price must be higher. Costs of production were, in turn, traced to wage payments made to workers, either directly in the activity in question or indirectly when labor was employed to produce the machines that were being used. This was dubbed the “labor theory of value,” to be distinguished from earlier theories, like that of the French physiocrats, who viewed land as the ultimate source of value.


pages: 356 words: 103,944

The Globalization Paradox: Democracy and the Future of the World Economy by Dani Rodrik

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There is one loose thread in Martyn’s argument: even though it clarifies why trade benefits England, it fails to demonstrate why it should also benefit India. Why would India want to sell textiles to England in return for British manufactures if India’s textiles in fact take more labor to produce and would cost India more than what it was buying in exchange? The hole in the argument was not filled until David Ricardo produced his famous example of trade between England and Portugal in cloth and wine in 1817, and conclusively established the principle of comparative advantage. It is unlikely that Indian producers face identical conditions to those that prevail in England. If, compared to England, Indian producers are more productive in textiles than they are in the types of goods that English manufacturers produce, textiles will cost less in India than those English goods. Both countries will end up buying what is cheap abroad and expensive at home, economizing on the use of their labor in the way Martyn suggested.

Values, identities, and attachments matter.8 It is too facile to attribute anti-trade views to naked self-interest or sheer ignorance. Could it be that ordinary people have a better intuitive sense of the complexity of the case for free trade than we give them credit for? In fact, powerful and elegant as it may be, the argument presented by Henry Martyn, David Ricardo, and others is not the whole story. Life as a trade economist would be pretty boring if it were so. Okay, maybe it’s not as much fun as being Mick Jagger, but I can assure you that doing international economics as a living entails a lot more than reaffirming the wonders of comparative advantage day after day. Every advanced student of trade learns that there are a lot of interesting twists and turns to the tale of gains from trade. A long list of requirements needs to be in place before we can reasonably be satisfied that free trade improves a society’s overall well-being.

Standard accounts identify three important changes in this period. First, new technologies in the form of steamships, railroads, canals, and the telegraph revolutionized international transport and communications and greatly reduced trade costs starting in the early part of the nineteenth century. Second, the economic narrative changed as the ideas of free market economists like Adam Smith and David Ricardo finally got some traction. This led the governments of the world’s major economies to substantially relax the restrictions they placed on trade in the form of import taxes (tariffs) and explicit prohibitions. Finally, from the 1870s on, the widespread adoption of the gold standard enabled capital to move internationally without fear of arbitrary changes in currency values or other financial hiccups.


pages: 403 words: 111,119

Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist by Kate Raworth

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Banks take people’s savings and dutifully turn them into profitable investments. Furthermore, according to Eugene Fama’s influential ‘efficient-market hypothesis’ of 1970, the price of financial assets always fully reflects all relevant information.9 Hence financial markets are ever adjusting but always ‘right’ – and their smooth operation should not be distorted by regulation. TRADE, which is win–win – so open your borders. David Ricardo’s nineteenth-century theory of comparative advantage demonstrates that countries should focus on what they are relatively good at doing and then trade: if they do, both parties will gain from it, no matter how unequal they are.10 Hence trade barriers should be dismantled because they only distort the efficient workings of the international market. THE STATE, which is incompetent – so don’t let it meddle. When government tries to intervene in the market, it usually makes things worse, distorting incentives and picking white elephants instead of winners.

Scripting the play In 1947, the year before Samuelson published his iconic Circular Flow diagram, a small laissez-faire band of wannabe economic scriptwriters – including Friedrich Hayek, Milton Friedman, Ludwig von Mises and Frank Knight – gathered in the Swiss resort of Mont Pèlerin to start drafting what they hoped would one day become the dominant economic story. Inspired by the pro-market writings of classical liberals such as Adam Smith and David Ricardo they established what they called a ‘neoliberal’ agenda. Its aim, they said, was to push back hard against the threat of state totalitarianism, which was spreading fast thanks to the growing reach of the Soviet Union. But that aim gradually morphed into a hard push for market fundamentalism, and the meaning of ‘neoliberal’ morphed along with it. What’s more, when Paul Samuelson’s diagram appeared – depicting which actors were at the heart of the economy and which were pushed into the wings – it provided the perfect setting for their play.

Yes, these early economists based their ecological thinking narrowly on agricultural land alone, but at least the living world got a mention. From there, however, things began to go awry, and there are many theories as to why. Adam Smith, father of classical economic thinking, drew on the Physiocrats’ work, believing that a nation’s potential for wealth ultimately depended upon its climate and soil. But he also thought that the secret to productivity lay in the division of labour and so focused his attention on that. David Ricardo likewise believed that the ‘original and indestructible powers of the soil’ made scarce agricultural land a key determinant of economic value.17 But as new lands were cultivated in Britain’s colonies, he decided that land scarcity was no longer such a threat and so, like Smith, switched his attention to labour instead. John Stuart Mill also clearly saw the importance of Earth’s materials and energy in all economic production, but he wanted to distinguish social science from natural science and so (rather unhelpfully) proposed that the field of political economy focus on the laws of the mind, not the laws of matter.18 In the 1870s the radical American thinker Henry George pointed out that land gained value for its owners even if they did nothing to improve it, and so he advocated a land-value tax – prompting his influential (and land-owning) opponents to downplay the importance of land in economic theory from then on.19 The upshot of all this?


pages: 561 words: 87,892

Losing Control: The Emerging Threats to Western Prosperity by Stephen D. King

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America’s Big Three didn’t do too well either. With the competitive pressures unleashed by globalization, unprofitable, poorly managed companies have no place to hide. COMPARATIVE ADVANTAGE AND ECONOMIC DISADVANTAGE Political arrangements can get in the way of economic opportunity and preserve economic rents for the lucky few. They create barriers to free trade, migration and capital flows. Since the 1980s, those barriers have slowly come down. The developed world is now trading with countries that, only a few years ago, were treated as strange lands. In analysing these new patterns of trade, economists routinely resort to the principles of comparative advantage famously described by David Ricardo in On the Principles of Political Economy and Taxation, published in 1817. Today’s trade patterns, however, are much more a story about outsourcing, off-shoring, upscaling and downsizing.

Brazil and Russia are doing little better, with incomes per capita around 12 to 15 per cent of those in the US in recent times; in relative terms, this still leaves them in the position last held by Japan in 1960. India, meanwhile, remains extremely poor, with per-capita incomes less than 2 per cent of the US average.9 In previous centuries, workers in these countries had no access to global capital. Now they do. David Ricardo’s theory of comparative advantage no longer applies. His arguments were based on the assumption that factors of production could not travel across borders. The rapid growth of the emerging economies, however, depends critically on the ability of capital, in particular, to hop across borders with impunity. And so it has proved to be. The motivation for companies, domestic or multinational, to invest in these countries is not so much because their investments provide access to billions of new consumers who might buy their products (although there are plenty of eager emerging consumers keen to be seen with Gucci loafers, Louis Vuitton handbags or Cartier trinkets) but, rather, because factories can recruit cheap labour.

Even if the economic cake grows bigger as a result of globalization, those who enjoyed big slices before may suddenly find themselves on an unwanted diet. The ‘enlightened’ political response to these challenges has been twofold. Economies in the developed world should become more ‘flexible’ and, therefore, more easily able to adapt to changing economic circumstances, consistent with the flexibility required by David Ricardo’s theory of comparative advantage. Meanwhile, investment in education should be increased, both in an attempt to produce more graduates and, also, to allow people to acquire new skills later in life. There’s nothing particularly wrong with these ideas, but it’s likely they promise too much. Flexibility is all very well, but, as argued in Chapter 5, it can just as easily mean pay cuts as pay increases. Education is desirable in its own right, but with millions of graduates now pouring out of Chinese and Indian universities, it’s not obvious that education alone will safeguard the living standards of those living in the developed world, even if the quality of US and European graduates may, for the time being, still be higher.


pages: 258 words: 83,303

Why Your World Is About to Get a Whole Lot Smaller: Oil and the End of Globalization by Jeff Rubin

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air freight, banking crisis, big-box store, BRICs, carbon footprint, collateralized debt obligation, collective bargaining, creative destruction, credit crunch, David Ricardo: comparative advantage, decarbonisation, energy security, food miles, hydrogen economy, illegal immigration, immigration reform, Intergovernmental Panel on Climate Change (IPCC), invisible hand, James Watt: steam engine, Just-in-time delivery, market clearing, megacity, North Sea oil, oil shale / tar sands, oil shock, peak oil, profit maximization, reserve currency, South Sea Bubble, the market place, The Wealth of Nations by Adam Smith, trade liberalization, zero-sum game

But as David Ricardo showed nearly two hundred years ago, the developed world does not have to be absolutely cleaner than their competitors to reclaim comparative advantage. They just have to exploit their lead in carbon management—in just the same way that the British exploited their lead in coal use. And the way to do that is by charging a tariff. It is surely one of the great ironies of the smaller world on the horizon that someone like Ricardo, whose name is often invoked in support of free trade, should furnish us with the idea of charging tariffs on imports, but the world has changed since the days when the items that dominated trade were cloth and wine. Tariffs distort comparative advantage by protecting domestic industries—but a country’s energy mix distorts comparative advantage in a similar way.

And what’s even better, it’s economics that can be wrapped in a very green label. What is the point of shutting down a coal-fired plant at home if another is opening up on the other side of the same planet? The answer to that question takes us back to David Ricardo’s theory of comparative advantage. Countries should do what they are best at. Just as everyone was better off when Portugal, rather than England, focused on turning grapes and sunlight into wine, the whole planet will be in better shape when the countries that are most efficient in burning carbon get to burn the most. That is where their comparative advantage lies in a world where emitting carbon carries an economic cost. What the Kyoto Accord failed to recognize is that in a world where greenhouse gas emissions are unevenly controlled, the right to emit suddenly becomes a source of huge comparative economic advantage.

If you were rich enough, you just set up a laboratory wherever you could find the space (perhaps at your country home) and got to work classifying frogs. Money is generally more difficult to come by than frogs, so it was probably not a coincidence that the preeminent nineteenth-century economic theorist was a millionaire (in today’s dollars). David Ricardo had already made his fortune on the London Stock Exchange when he read Adam Smith’s The Wealth of Nations and became interested in the study of where wealth comes from. Ricardo’s idea of comparative advantage is very simple, and very persuasive. It goes something like this: if everybody does what they are best at, rather than what they are just good at, and does only that, everybody will be better off. You don’t have to be the very best at anything. In fact, you don’t even have to be better than your trading partner at anything.


pages: 334 words: 98,950

Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism by Ha-Joon Chang

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affirmative action, Albert Einstein, Big bang: deregulation of the City of London, bilateral investment treaty, borderless world, Bretton Woods, British Empire, Brownian motion, call centre, capital controls, central bank independence, colonial rule, Corn Laws, corporate governance, David Ricardo: comparative advantage, Deng Xiaoping, Doha Development Round, en.wikipedia.org, falling living standards, Fellow of the Royal Society, financial deregulation, fixed income, Francis Fukuyama: the end of history, income inequality, income per capita, industrial robot, Isaac Newton, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, labour mobility, land reform, liberal world order, liberation theology, low skilled workers, market bubble, market fundamentalism, Martin Wolf, means of production, mega-rich, moral hazard, offshore financial centre, oil shock, price stability, principal–agent problem, Ronald Reagan, South Sea Bubble, structural adjustment programs, The Wealth of Nations by Adam Smith, trade liberalization, transfer pricing, urban sprawl, World Values Survey

Modern free trade argument is based on the so-called Heckscher-Ohlin-Samuelson theory (or the HOS theory).* The HOS theory derives from David Ricardo’s theory, which I outlined in chapter 2, but it differs from Ricardo’s theory in one crucial respect. It assumes that comparative advantage arises from international differences in the relative endowments of ‘factors of production’ (capital and labour), rather than international differences in technology, as in Ricardian theory.9 According to free trade theory, be it Ricardian or the HOS version, every country has a comparative advantage in some products, as it is, by definition, relatively better at producing some things than others.† In the HOS theory, a country has comparative advantage in products that more intensively use the factor of production with which it is relatively more richly endowed.

British manufacturers correctly perceived that free trade was now in their interest and started campaigning for it (having said that, they naturally remained quite happy to restrict trade when it suited them, as the cotton manufacturers did when it came to the export of textile machinery that might help foreign competitors). In particular, the manufacturers agitated for the abolition of the Corn Laws that limited the country’s ability to import cheap grains. Cheaper food was important to them because it could lower wages and raise profits. The anti-Corn Law campaign was crucially helped by the economist, politician and stock-market player, David Ricardo.Ricardo came up with the theory of comparative advantage that still forms the core of free trade theory. Before Ricardo, people thought foreign trade makes sense only when a country can make something more cheaply than its trading partner. Ricardo, in a brilliant inversion of this commonsensical observation, argued that trade between two countries makes sense even when one country can produce everything more cheaply than another.

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. The big change in British trade policy came in 1846, when the Corn Laws were repealed and tariffs on many manufacturing goods were abolished. Free trade economists today like to portray the repeal of the Corn Laws as the ultimate victory of Adam Smith’s and David Ricardo’s wisdom over wrong-headed mercantilism.19 The leading free trade economist of our time, Jagdish Bhagwati of Columbia University, calls this a ‘historic transition’.20 However, many historians familiar with the period point out that making food cheaper was only one aim of the anti-Corn Law campaigners. It was also an act of ‘free trade imperialism’ intended to ‘halt the move to industrialisation on the Continent by enlarging the market for agricultural produce and primary materials’.21 By opening its domestic agricultural market wider, Britain wanted to lure its competitors back into agriculture.


pages: 347 words: 99,317

Bad Samaritans: The Guilty Secrets of Rich Nations and the Threat to Global Prosperity by Ha-Joon Chang

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affirmative action, Albert Einstein, banking crisis, Big bang: deregulation of the City of London, bilateral investment treaty, borderless world, Bretton Woods, British Empire, Brownian motion, call centre, capital controls, central bank independence, colonial rule, Corn Laws, corporate governance, David Ricardo: comparative advantage, Deng Xiaoping, Doha Development Round, en.wikipedia.org, falling living standards, Fellow of the Royal Society, financial deregulation, fixed income, Francis Fukuyama: the end of history, income inequality, income per capita, industrial robot, Isaac Newton, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, labour mobility, land reform, liberal world order, liberation theology, low skilled workers, market bubble, market fundamentalism, Martin Wolf, means of production, mega-rich, moral hazard, offshore financial centre, oil shock, price stability, principal–agent problem, Ronald Reagan, South Sea Bubble, structural adjustment programs, The Wealth of Nations by Adam Smith, trade liberalization, transfer pricing, urban sprawl, World Values Survey

Modern free trade argument is based on the so-called Heckscher-Ohlin-Samuelson theory (or the HOS theory).i The HOS theory derives from David Ricardo’s theory, which I outlined in chapter 2, but it differs from Ricardo’s theory in one crucial respect. It assumes that comparative advantage arises from international differences in the relative endowments of ‘factors of production’ (capital and labour), rather than international differences in technology, as in Ricardian theory.9 According to free trade theory, be it Ricardian or the HOS version, every country has a comparative advantage in some products, as it is, by definition, relatively better at producing some things than others.ii In the HOS theory, a country has comparative advantage in products that more intensively use the factor of production with which it is relatively more richly endowed.

British manufacturers correctly perceived that free trade was now in their interest and started campaigning for it (having said that, they naturally remained quite happy to restrict trade when it suited them, as the cotton manufacturers did when it came to the export of textile machinery that might help foreign competitors). In particular, the manufacturers agitated for the abolition of the Corn Laws that limited the country’s ability to import cheap grains. Cheaper food was important to them because it could lower wages and raise profits. The anti-Corn Law campaign was crucially helped by the economist, politician and stock-market player, David Ricardo. Ricardo came up with the theory of comparative advantage that still forms the core of free trade theory. Before Ricardo, people thought foreign trade makes sense only when a country can make something more cheaply than its trading partner. Ricardo, in a brilliant inversion of this commonsensical observation, argued that trade between two countries makes sense even when one country can produce everything more cheaply than another.

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. The big change in British trade policy came in 1846, when the Corn Laws were repealed and tariffs on many manufacturing goods were abolished. Free trade economists today like to portray the repeal of the Corn Laws as the ultimate victory of Adam Smith’s and David Ricardo’s wisdom over wrong-headed mercantilism.19 The leading free trade economist of our time, Jagdish Bhagwati of Columbia University, calls this a ‘historic transition’.20 However, many historians familiar with the period point out that making food cheaper was only one aim of the anti-Corn Law campaigners. It was also an act of ‘free trade imperialism’ intended to ‘halt the move to industrialisation on the Continent by enlarging the market for agricultural produce and primary materials’.21 By opening its domestic agricultural market wider, Britain wanted to lure its competitors back into agriculture.


pages: 484 words: 136,735

Capitalism 4.0: The Birth of a New Economy in the Aftermath of Crisis by Anatole Kaletsky

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bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Black Swan, bonus culture, Bretton Woods, BRICs, Carmen Reinhart, cognitive dissonance, collapse of Lehman Brothers, Corn Laws, correlation does not imply causation, creative destruction, credit crunch, currency manipulation / currency intervention, David Ricardo: comparative advantage, deglobalization, Deng Xiaoping, Edward Glaeser, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, F. W. de Klerk, failed state, Fall of the Berlin Wall, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, George Akerlof, global rebalancing, Hyman Minsky, income inequality, information asymmetry, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, laissez-faire capitalism, Long Term Capital Management, mandelbrot fractal, market design, market fundamentalism, Martin Wolf, money market fund, moral hazard, mortgage debt, new economy, Northern Rock, offshore financial centre, oil shock, paradox of thrift, Pareto efficiency, Paul Samuelson, peak oil, pets.com, Ponzi scheme, post-industrial society, price stability, profit maximization, profit motive, quantitative easing, Ralph Waldo Emerson, random walk, rent-seeking, reserve currency, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, statistical model, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, Vilfredo Pareto, Washington Consensus, zero-sum game

Raphael, Donald Winch, and Robert Skidelsky, Three Great Economists: Smith, Malthus, Keynes, 243. 7 See published speech: Gerard Debreu, “The Mathematization of Economic Theory,” American Economic Review 81:1 (March 1991): 1-7. 8 Also known as Knightian uncertainty after the American economist Frank Knight. See Frank Knight, Risk, Uncertainty, and Profit. 9 David Ricardo, “Essay on the Funding System,” in The Works of David Ricardo , 513-548. 10 David Viniar quoted in Emiko Terazono, “Bean in Barcelona,” Financial Times, August 26, 2009. 11 When asked by John Cassidy of the New Yorker how the theory of efficient markets had held up in the crisis, Chicago economist Eugene Fama responded, “I think it did quite well in this episode. . . . [This] was exactly what you would expect if markets are efficient.”

More specifically, market fundamentalism was behind the unforced errors of the Bush administration, especially of its treasury secretary, Henry Paulson, that were the proximate cause of financial catastrophe. How could the most powerful and best-resourced government in the world have made so many ruinous mistakes? Much of what went wrong could be attributed to a pernicious interaction between academic economics and political ideology, which magnified each other’s faults and biases, like a pair of distorting mirrors. As a result, the classical economics of Adam Smith and David Ricardo were turned into the ludicrously exaggerated doctrines of efficient markets, rational expectations, and monetarist central banking that monopolized economic thinking in governments, regulatory institutions, and financial businesses worldwide. Part III concludes with the argument that new forms of economics, moving beyond the mathematical pedantry and ideological assumptions of rational expectations and efficient markets, need to be urgently invented if a reformed model of capitalism is to succeed.

Barro asserted that consumers with rational expectations would view any increase in government borrowing as equivalent to an increase in their future taxes. He then derived conditions under which these rational consumers would cut back their spending immediately to prepare for their future tax bills—and then assumed that these conditions would apply in a rational world. Finally, in a public-relations coup characteristic of the new economic orthodoxy, Barro claimed support for his theory from David Ricardo, regarded by many academics as the greatest economist of all time. Ricardo had written a paper in 1820 in which he discussed whether a government involved in war would be better off raising £20 million in taxes or the same amount in perpetual bonds, on which it would have to pay interest of 5 percent, or £1m, every year in the future.9 “In point of economy,” he concluded, “there is no real difference in either of the modes, for £20 million in one payment and £1 million per annum forever . . . are precisely of the same value.”

Nuclear War and Environmental Catastrophe by Noam Chomksy

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American Legislative Exchange Council, British Empire, cuban missile crisis, David Ricardo: comparative advantage, energy security, Howard Zinn, interchangeable parts, invisible hand, Malacca Straits, mutually assured destruction, Naomi Klein, Occupy movement, oil shale / tar sands, Ralph Nader, Ronald Reagan, South China Sea, The Wealth of Nations by Adam Smith, trade route, University of East Anglia, uranium enrichment, WikiLeaks

It’s kind of interesting if you look back at the classical economists, Adam Smith and David Ricardo. They were sort of aware of this—they didn’t put it in precisely these terms—but if you take a look at Adam Smith’s The Wealth of Nations, the famous phrase “invisible hand” appears once. It appears essentially in a critique of what’s going on right now. What he pretty much says is that, in England, if merchants and manufacturers preferred to import from abroad and sell abroad, they might make profit, but it would be bad for England. He says they’re going to have what sometimes is called a home bias—they’ll prefer to do business at home, so as if by an invisible hand, England will be saved the ravages of a global market.82 David Ricardo was even stronger. He said that he knows perfectly well that his comparative advantage theories would collapse if English manufacturers, investors, and merchants did their business elsewhere, and he said he hopes very much that this will never happen—that they’ll have, perhaps, a sentimental commitment to the home country—and he hopes this attitude never disappears.

The Haves and the Have-Nots by Branko Milanovic

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Berlin Wall, Branko Milanovic, colonial rule, crony capitalism, David Ricardo: comparative advantage, deglobalization, Deng Xiaoping, endogenous growth, Fall of the Berlin Wall, financial deregulation, full employment, Gini coefficient, high net worth, illegal immigration, income inequality, income per capita, Joseph Schumpeter, means of production, open borders, Pareto efficiency, Plutocrats, plutocrats, purchasing power parity, Simon Kuznets, very high income, Vilfredo Pareto, Washington Consensus, zero-sum game

This is a delightful book, as commendable for vacations as for the classroom.” —THOMAS POGGE, Professor of Philosophy and International Affairs, Yale University, author of World Poverty and Human Rights: Cosmopolitan Responsibilities and Reforms For N. and G. “To determine the laws which regulate this distribution [into wages, profits and rent], is the principal problem in Political Economy.” David Ricardo, Principles of Political Economy (1817) “Of the tendencies that are harmful to sound economics, the most seductive, and ... the most poisonous, is to focus on questions of distribution.” Robert E. Lucas, “The Industrial Revolution: Past and Future” (2004) Preface This book is about income and wealth inequality in history and today. Inequality appeared as soon as human society was born, because distinctions of power and wealth accompany all human societies. 1 Inequality is by definition social, since it is a relational phenomenon (I can be unequal only if there is somebody else).

Society, under early capitalism of the nineteenth century, seemed normally to divide into several quite distinct social classes: workers, who were selling labor and earning wages, and were relatively poor; capitalists, who owned capital and were earning profits, and were relatively rich; and landlords, who owned land and received rents, and were also rich. The distribution of income among these three classes was considered of crucial importance for determining the future of a society. English economist David Ricardo, one of the founders of the discipline of political economy, believed that the share of landlords would increase as greater population required more food, which would bring ever less fertile land into cultivation and raise rents. Prices of “wage goods” (food) and landlord’s rents would skyrocket. He saw the eventual outcome as a stationary state where low profits, squeezed between the rising prices of food and rents, would provide little incentive to save and invest.2 Karl Marx saw greater mechanization, expressed in an increasing value of capital per worker, leading to lower returns to capital and over the long run to a tendency of the profit rate to diminish, eventually tending toward zero and choking off investment.

If there is ever a danger to Chinese national unity, it is very likely to come from the economic split within the nation. Vignette 1.10 Two Students of Inequality: Vilfredo Pareto and Simon Kuznets It may surprise the reader that there are few theories or theoretical insights into the formation and evolution in time of income distribution among individuals.1 This is even odder when we know that one of the pioneers of modern economics, David Ricardo, in his enormously influential Principles of Political Economy published in 1817, placed distribution at the center stage of economics. How did this happen? There may be at least two reasons. First, the distribution with which Ricardo was concerned was the so-called functional distribution of income, that is, how national income was divided into the incomes of large classes: profits for capitalists, rents for landlords, wages for workers.


pages: 606 words: 87,358

The Great Convergence: Information Technology and the New Globalization by Richard Baldwin

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3D printing, additive manufacturing, Admiral Zheng, agricultural Revolution, air freight, Amazon Mechanical Turk, Berlin Wall, bilateral investment treaty, Branko Milanovic, buy low sell high, call centre, Columbian Exchange, commoditize, Commodity Super-Cycle, David Ricardo: comparative advantage, deindustrialization, domestication of the camel, Edward Glaeser, endogenous growth, Erik Brynjolfsson, financial intermediation, George Gilder, global supply chain, global value chain, Henri Poincaré, imperial preference, industrial cluster, industrial robot, intangible asset, invention of agriculture, invention of the telegraph, investor state dispute settlement, Isaac Newton, Islamic Golden Age, James Dyson, knowledge economy, knowledge worker, Lao Tzu, low skilled workers, market fragmentation, mass immigration, Metcalfe’s law, New Economic Geography, out of africa, paper trading, Paul Samuelson, Pax Mongolica, profit motive, rent-seeking, reshoring, Richard Florida, rising living standards, Robert Metcalfe, Second Machine Age, Simon Kuznets, Skype, Snapchat, Stephen Hawking, telepresence, telerobotics, The Wealth of Nations by Adam Smith, trade liberalization, trade route, Washington Consensus

A changed world demanded a new set of abstractions and simplified thought-patterns to understand the new complexities. As it turned out, the new mental model was provided by a wealthy stockbroker named David Ricardo. In his 1817 book On the Principles of Political Economy and Taxation, Ricardo presented a streamlined view of the world that proved so useful and so seductive that it is still at the heart of today’s traditional thinking about globalization. His core simplifications were to take nations as the proper unit of analysis, to conceptualize international commerce as consisting only of trade in goods, and to view the direction of trade as driven by what he called “comparative advantage” (often referred to as competitive advantage in popular writing).1 In plain English, “comparative advantage” means that some nations are better at making some things than others. If no trade were allowed, smugglers would buy products in the nations that were particularly good at making them and sell them in nations that were particularly bad at making them.

The first set, and the baseline for all the rest, is David Ricardo’s notion of comparative advantage. The next two logical toolkits stem from theoretical advances made in the 1990s. One of these was pioneered by Paul Krugman with Tony Venables, Masahisa Fujita, and others. It is called the “new economic geography”—even though some people are inclined to dispute whether it is really new and others whether it is really geography. The other 1990s logic set is the so-called endogenous growth theory, which is indisputably new and definitely about growth. The pathbreaker here is, among others, New York University economist Paul Romer. The last analytic framework helps organize thinking about the impact of information and communication technology (ICT) on offshoring. We begin with the logic of comparative advantage. Ricardo and the Gains and Pains of Trade Ricardo helps one think clearly about how even very uncompetitive nations can be competitive in something.

The innovation then strengthens the nation’s competitiveness in the sector (shown in northwest box, “Comparative advantage”). The next step—according to the principle of comparative advantage—is that the heightened comparative advantage leads to more exports and more production. The crank comes around full circle when this extra production generates additional industrial clustering. The basic Ricardian logic focuses on the “who exports what” question. The answer ultimately rests on its assumption of national competencies that are taken as given. The first addition is to pose a mental model where national competencies are both the outcome of and the cause of trade. It starts with a two-way link between industrial competencies and industrial agglomeration (Figure 39). In the competencies-cause-agglomeration direction, the vehicle is comparative advantage. According to the usual Ricardian logic, the nation with the greatest relative efficiency exports the good.


pages: 385 words: 111,807

A Pelican Introduction Economics: A User's Guide by Ha-Joon Chang

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Affordable Care Act / Obamacare, Albert Einstein, Asian financial crisis, asset-backed security, bank run, banking crisis, banks create money, Berlin Wall, bilateral investment treaty, borderless world, Bretton Woods, British Empire, call centre, capital controls, central bank independence, collateralized debt obligation, colonial rule, Corn Laws, corporate governance, corporate raider, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deindustrialization, discovery of the americas, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, Fall of the Berlin Wall, falling living standards, financial deregulation, financial innovation, Francis Fukuyama: the end of history, Frederick Winslow Taylor, full employment, George Akerlof, Gini coefficient, global value chain, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, Gunnar Myrdal, Haber-Bosch Process, happiness index / gross national happiness, high net worth, income inequality, income per capita, information asymmetry, intangible asset, interchangeable parts, interest rate swap, inventory management, invisible hand, Isaac Newton, James Watt: steam engine, Johann Wolfgang von Goethe, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, knowledge economy, laissez-faire capitalism, land reform, liberation theology, manufacturing employment, Mark Zuckerberg, market clearing, market fundamentalism, Martin Wolf, means of production, Mexican peso crisis / tequila crisis, Northern Rock, obamacare, offshore financial centre, oil shock, open borders, Pareto efficiency, Paul Samuelson, post-industrial society, precariat, principal–agent problem, profit maximization, profit motive, purchasing power parity, quantitative easing, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, savings glut, Scramble for Africa, shareholder value, Silicon Valley, Simon Kuznets, sovereign wealth fund, spinning jenny, structural adjustment programs, The Great Moderation, The Market for Lemons, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, trade liberalization, transaction costs, transfer pricing, trickle-down economics, Vilfredo Pareto, Washington Consensus, working-age population, World Values Survey

But it should – according to the theory of comparative advantage, invented by David Ricardo (see Chapter 4). According to this theory, a country can benefit from international trade with another country, even when it can produce everything more cheaply than the other, like China could, compared to Britain, in the late eighteenth century – at least according to Qianlong’s view. All that is needed is that it specializes in something in which its superiority is the greatest. Likewise, even if a country is rubbish at producing everything, it can benefit from trade if it specializes in things which it is least rubbish at. International trade benefits every country involved. The logic behind the theory of comparative advantage is impeccable – given its assumptions Since Ricardo invented it in the early nineteenth century, the theory of comparative advantage has provided a powerful argument in favour of free trade and trade liberalization, that is, reduction in government restrictions on trade.

A century of external invasions, civil war and national humiliation followed. David Ricardo challenges the Chinese Emperor – and Adam Smith: comparative vs. absolute advantages Given China’s eventual and ignominious adoption of free trade, people have made fun of Qianlong’s view on international trade; this backward despot simply didn’t understand that international trade is good. However, Qianlong’s view on international trade was actually in line with the mainstream view among European economists, including Adam Smith himself, at the time. His view of trade is known as the theory of absolute advantage; the idea that a country does not need to trade with another if it can produce everything more cheaply than can its potential trading partner. Indeed – our common sense tells us – why should it? But it should – according to the theory of comparative advantage, invented by David Ricardo (see Chapter 4).

As you will have guessed, there was Classical economics before Neoclassical economics, of which the latter is the supposed heir (although the Marxist school has an equally good claim to be its heir, as I shall explain). The Classical school of economics – or, rather the Classical school of political economy, as the subject was then called – emerged in the late eighteenth century and dominated the subject until the late nineteenth century. Its founder is Adam Smith (1723–90), who we have discussed already. Smith’s ideas were further developed in the early nineteenth century by three near-contemporaries – David Ricardo (1772–1823), Jean-Baptiste Say (1767–1832), and Robert Malthus (1766–1834). The invisible hand, Say’s Law and free trade: the key arguments of the Classical school According to the Classical school, the pursuit of self-interests by individual economic actors produces a socially beneficial outcome, in the form of maximum national wealth. This paradoxical outcome is made possible by the power of competition in the market.


pages: 377 words: 97,144

Singularity Rising: Surviving and Thriving in a Smarter, Richer, and More Dangerous World by James D. Miller

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23andMe, affirmative action, Albert Einstein, artificial general intelligence, Asperger Syndrome, barriers to entry, brain emulation, cloud computing, cognitive bias, correlation does not imply causation, crowdsourcing, Daniel Kahneman / Amos Tversky, David Brooks, David Ricardo: comparative advantage, Deng Xiaoping, en.wikipedia.org, feminist movement, Flynn Effect, friendly AI, hive mind, impulse control, indoor plumbing, invention of agriculture, Isaac Newton, John von Neumann, knowledge worker, Long Term Capital Management, low skilled workers, Netflix Prize, neurotypical, pattern recognition, Peter Thiel, phenotype, placebo effect, prisoner's dilemma, profit maximization, Ray Kurzweil, recommendation engine, reversible computing, Richard Feynman, Richard Feynman, Rodney Brooks, Silicon Valley, Singularitarianism, Skype, statistical model, Stephen Hawking, Steve Jobs, supervolcano, technological singularity, The Coming Technological Singularity, the scientific method, Thomas Malthus, transaction costs, Turing test, Vernor Vinge, Von Neumann architecture

If a Kurzweilian merger doesn’t occur, sentient AIs might compete directly with people in the labor market. Let’s now explore what happens to human wages if these AIs become better than humans at every task. COMPARATIVE ADVANTAGE Adam Smith, the great eighteenth-century economist, explained that everyone benefits from trade if each participant makes what he is best at. So, for example, if I’m better at making boots than you are, but you have more skill at making candles, then we would both become richer if I produced your boots and you made my candles. But what if you’re more skilled at making both boots and candles? What if, compared to you, I’m worse at doing everything? Adam Smith never answered this question, but nineteenth-century economist David Ricardo did. This question is highly relevant to our future, as an AI might be able to produce every good and service at a lower cost than any human could, and if we turn out to have no economic value to the advanced artificial intelligences, then they might (at best) ignore us, depriving humanity of any benefits of their superhuman skills.

I hope that I have convinced you by this point that learning about intelligence enhancement is well worth your time. But why should you read this particular book, given that its author is an economist and not a scientist or an engineer? One reason is that I will use economic analysis to predict how probable changes in technology will affect society. For example, the theories of nineteenth-century economists David Ricardo and Thomas Malthus provide insights into whether robots might take all of our jobs (Ricardo) and why the creation of easy-to-copy emulations of human brains might throw mankind back into a horrible pre-Industrial Revolution trap (Malthus). Economics also sheds light on many less-significant economic effects of an advanced AI, such as the labor-market consequences if sexbots cause many men to forgo competing for flesh-and-blood women.

Anyone can now freely copy e-Robin, although it still costs something to buy enough computing power to run him on, say a hundred thousand dollars a year. A profit-maximizing business would employ an e-Robin if the e-Robin brought the business more than $100,000 a year in revenue. After Moore’s law pushes the annual hardware costs of an e-Robin down to a mere $1, then a company would hire e-Robins as long as each brought the business more than $1 per annum. What happens to the salary of bio-Robin if you can hire an e-Robin for only a dollar? David Ricardo implicitly knew the answer to that question. Ricardo wrote that if it costs 5,000 pounds to rent a machine, and this machine could do the work of 100 men, the total wages paid to 100 men will never be greater than 5,000 pounds because if the total wages were higher, manufacturers would fire the workers and rent the machine.296 Applying Ricardo’s theory to an economy with emulations tells us that, if an emulation can do whatever you can do, your wage will never be higher than what it costs to employ the emulation.


pages: 462 words: 150,129

The Rational Optimist: How Prosperity Evolves by Matt Ridley

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23andMe, agricultural Revolution, air freight, back-to-the-land, banking crisis, barriers to entry, Bernie Madoff, British Empire, call centre, carbon footprint, Cesare Marchetti: Marchetti’s constant, charter city, clean water, cloud computing, cognitive dissonance, collateralized debt obligation, colonial exploitation, colonial rule, Corn Laws, creative destruction, credit crunch, David Ricardo: comparative advantage, decarbonisation, dematerialisation, demographic dividend, demographic transition, double entry bookkeeping, Edward Glaeser, en.wikipedia.org, everywhere but in the productivity statistics, falling living standards, feminist movement, financial innovation, Flynn Effect, food miles, Gordon Gekko, greed is good, Hans Rosling, happiness index / gross national happiness, haute cuisine, Hernando de Soto, income inequality, income per capita, Indoor air pollution, informal economy, Intergovernmental Panel on Climate Change (IPCC), invention of agriculture, invisible hand, James Hargreaves, James Watt: steam engine, Jane Jacobs, John Nash: game theory, joint-stock limited liability company, Joseph Schumpeter, Kevin Kelly, knowledge worker, Kula ring, Mark Zuckerberg, meta analysis, meta-analysis, mutually assured destruction, Naomi Klein, Northern Rock, nuclear winter, oil shale / tar sands, out of africa, packet switching, patent troll, Pax Mongolica, Peter Thiel, phenotype, Plutocrats, plutocrats, Ponzi scheme, Productivity paradox, profit motive, purchasing power parity, race to the bottom, Ray Kurzweil, rent-seeking, rising living standards, Silicon Valley, spice trade, spinning jenny, stem cell, Steve Jobs, Steven Pinker, Stewart Brand, supervolcano, technological singularity, The Wealth of Nations by Adam Smith, Thorstein Veblen, trade route, transaction costs, ultimatum game, upwardly mobile, urban sprawl, Vernor Vinge, Vilfredo Pareto, wage slave, working poor, working-age population, Y2K, Yogi Berra, zero-sum game

So if each is self-sufficient, then Oz works for three hours (two to make the hook and one to catch the fish), while Adam works for seven hours (three to make the hook and four to catch a fish). If Oz catches two fish and swaps one for a hook from Adam, he only has to work two hours. If Adam makes two hooks and uses one to buy a fish from Oz, he only works for six hours. Both are better off than when they were self-sufficient. Both have gained an hour of leisure time. I have done nothing here but retell, in Stone Age terms, the notion of comparative advantage as defined by the stockbroker David Ricardo in 1817. He used the example of England trading cloth for Portuguese wine, but the argument is the same: England may be so circumstanced, that to produce the cloth may require the labour of 100 men for one year; and if she attempted to make the wine, it might require the labour of 120 men for the same time. England would therefore find it in her interest to import wine, and to purchase it by the exportation of cloth.

Until 1800 this was how every economic boom ended: with a partial return to self-sufficiency driven by predation by elites, or diminishing returns from agriculture. It is hard to be sure given the patchy information that this is what happened to Mesopotamia and Egypt after 1500 BC, or India and Rome after AD 500, but it is pretty clear that it happened to China and to Japan in later centuries. As Greg Clark puts it, ‘In the preindustrial world, sporadic technological advance produced people, not wealth.’ The medieval collapse Robert Malthus and David Ricardo, though they were good friends, disagreed on much. But in one respect they were entirely aligned – that unchecked population could drive down the standard of living. Malthus: ‘In some countries, the population appears to have been forced, that is, the people have been habituated by degrees to live upon the smallest possible quantity of food ... China seems to answer this description.’ Ricardo: ‘The land being limited in quantity, and differing in quality, with every increased portion of capital employed on it there will be a decreased rate of production.’

Indeed, the very opposite happens. The more people you tell about bicycles, the more people will come back with useful new features for bicycles – mudguards, lighter frames, racing tyres, child seats, electric motors. The dissemination of useful knowledge causes that useful knowledge to breed more useful knowledge. Nobody predicted this. The pioneers of political economy expected eventual stagnation. Adam Smith, David Ricardo and Robert Malthus all foresaw that diminishing returns would eventually set in, that the improvement in living standards they were seeing would peter out. ‘The discovery, and useful application of machinery, always leads to the increase of the net produce of the country, although it may not, and will not, after an inconsiderable interval, increase the value of that net produce,’ said Ricardo: all tends towards what he called a ‘stationary state’.


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Bourgeois Dignity: Why Economics Can't Explain the Modern World by Deirdre N. McCloskey

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Admiral Zheng, agricultural Revolution, Albert Einstein, BRICs, British Empire, butterfly effect, Carmen Reinhart, clockwork universe, computer age, Corn Laws, creative destruction, dark matter, David Ricardo: comparative advantage, Donald Trump, Edward Lorenz: Chaos theory, endogenous growth, European colonialism, experimental economics, financial innovation, Fractional reserve banking, full employment, George Akerlof, germ theory of disease, Gini coefficient, greed is good, Howard Zinn, income per capita, interchangeable parts, invention of agriculture, invention of air conditioning, invention of writing, invisible hand, Isaac Newton, James Watt: steam engine, John Maynard Keynes: technological unemployment, John Snow's cholera map, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, long peace, means of production, Naomi Klein, New Economic Geography, New Urbanism, Paul Samuelson, purchasing power parity, rent-seeking, road to serfdom, Robert Gordon, Ronald Coase, Ronald Reagan, sceptred isle, Scientific racism, Scramble for Africa, Shenzhen was a fishing village, Simon Kuznets, Slavoj Žižek, spinning jenny, Steven Pinker, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, total factor productivity, transaction costs, tulip mania, union organizing, Upton Sinclair, urban renewal, V2 rocket, very high income, working poor, World Values Survey, Yogi Berra

Howard Davies and Paul Ellis, though, put their finger on the central confusion underlying Porter’s book—it confuses “‘competitiveness’ construed as productivity and ‘competitiveness’ construed as the market share held by a sub-set of industries.”78 Being productive, producing a great deal with few inputs, is a good idea. No one would dispute that. It is called Getting Rich By Being Smart. But getting a large market share has little to do with Getting Rich, or Being Smart. Market share is determined by what economists since David Ricardo have called comparative advantage, not by absolute advantage. That India has a comparative advantage in outsourced computer advice, and a large market share, does not make India richer than the United States, which itself has in fact an absolute advantage in computer advice—merely better uses for its graduate engineers than answering hysterical calls from elderly lady professors of economics in Chicago about the wretched Microsoft product she has been condemned to use.

The dignity and liberty of ordinary people stands in the middle of such “technologies.” 78 Chapter 8: Britain Led Britain was first, and so Britain is a good place to go hunting for answers. The place also led in the study of economics—assisted by Spanish professors, Dutch merchants, French physicians, and Italian penologists—from the English political arithmeticians of the seventeenth century down through David Hume, Adam Smith, T. R. Malthus, David Ricardo, John Stuart Mill, and the British masters of the subject in the early twentieth century. The economy was conceived as separate from politics early in Britain (earlier still in Holland, and later in France, and much later in Germany), which is one bit of evidence that a bourgeois culture was emerging. Economics was for a long time a British and even disproportionately a Scottish subject. Only after the Second World War did it become, like many other fields of the intellect, dominantly American.

But they did not notice that the change to be explained, 1780-1860, was not 5 or 10 percent but 100 percent, and was on its way to that unprecedented 1,500 percent relative to what is was in the eighteenth century. Only recently, beginning in the 1950s, has the inquiry into the nature and causes of the wealth of nations begun to recognize the oversight. In the 1940s Joseph Schumpeter was already scornful of the classical economists for their failure to see what was happening. T. R. Malthus (1766-1834) and David Ricardo (1772-1823) “lived at the threshold of the most spectacular economic development ever witnessed. . . . [yet] saw nothing but cramped economies, struggling with ever-decreasing success for their daily bread.”1 Their student John Stuart Mill (1806-1873) even in 1871 “had no idea of what the capitalist engine was going to achieve.” What Mill lacked, and Schumpeter and a handful of later economists such as the American Frank Knight possessed, was an appreciation of how Romantic motivations in a business-oriented 79 civilization drove even the businessmen, and how creative such motivations were. 2 Knight observed acutely in 1923 that “economic activity is at the same time a means of want-satisfaction, an agency for want- and character-formation, a field of creative self-expression, and a competitive sport.


pages: 196 words: 53,627

Let Them In: The Case for Open Borders by Jason L. Riley

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affirmative action, creative destruction, David Ricardo: comparative advantage, declining real wages, deindustrialization, desegregation, guest worker program, hiring and firing, illegal immigration, immigration reform, income inequality, labor-force participation, labour market flexibility, low skilled workers, lump of labour, mass immigration, open borders, RAND corporation, Ronald Reagan, school choice, Silicon Valley, trade liberalization, War on Poverty, working poor, working-age population, zero-sum game

In 1798, at age thirty-two, Malthus published (anonymously) An Essay on the Principle of Population, in which he stated that “the power of population is indefinitely greater than the power of the earth to produce sustenance for man.” He further explained: “Population, when unchecked, increases in geometric ratio. Subsistence increases only in arithmetical ratio. A slight acquaintance with the numbers will show the immensity of the first power in comparison to the second.” Malthus’s limits theories were wrong, as contemporary economic giants like David Ricardo did not hesitate to tell him, and as Malthus himself acknowledged in later editions of his initial essay. During his own lifetime, his prediction that more people would tend to produce a drop in the standard of living was proved false. Population and living standards rose simultaneously, and continue to do so today. Malthus would later say that he overstated his case. He conceded that all sorts of things can postpone or prevent the collision of human numbers and resources, including technological progress and what he called “moral restraint,” or the rational decision by people to have fewer children.

Yet they’ve fallen over each other in condemnation of President Bush’s attempts to follow the Gipper’s lead on immigration reform. Makes you wonder. No self-respecting free-market adherent would ever dream of supporting laws that interrupt the free movement of goods and services across borders. But when it comes to laws that hamper the free movement of workers who produce those goods and services, too many conservatives today abandon their classical liberal principles. Adam Smith, J. C. L. Sismondi, David Ricardo, and John Stuart Mill give way to . . . Pat Buchanan. Some of us find this troubling. Among Democrats, there’s been much less restrictionist rhetoric, and not just because the political left tends to favor more liberal immigration policies. Strategically, the Democratic candidates have reasoned that it’s best to sit on the sidelines and let Republicans fight among themselves. Nevertheless, Hillary Clinton stumbled when she got careless and appeared to endorse a proposal by New York Governor Eliot Spitzer to give driver’s licenses to illegal aliens.

Without enough younger workers to replace retirees, health and pension costs can become debilitating. And as domestic markets shrink, so does capital investment. By contrast, younger growing populations expand the market for goods and services. They also spur research and development. Domestic policies that encourage immigration help keep our population not only youthful but vibrant. Immigrants are giving the United States a distinct comparative advantage in human capital, which is no small matter in an increasingly globalized economy. YOU HAVE TO ADMIT IT’S GETTING BETTER In 2006, the U.S. population hit the 300 million mark, some thirty-nine years after surpassing 200 million in 1967. Our numbers have swelled by 30 percent since 1975, the biggest growth spurt in our history. The Pew Hispanic Center estimates that about half of that increase is due to immigrants and their U.S.


pages: 356 words: 91,157

The New Urban Crisis: How Our Cities Are Increasing Inequality, Deepening Segregation, and Failing the Middle Class?and What We Can Do About It by Richard Florida

affirmative action, Airbnb, basic income, Bernie Sanders, blue-collar work, business climate, Capital in the Twenty-First Century by Thomas Piketty, clean water, Columbine, congestion charging, creative destruction, David Ricardo: comparative advantage, declining real wages, deindustrialization, Donald Trump, East Village, edge city, Edward Glaeser, failed state, Ferguson, Missouri, Gini coefficient, Google bus, high net worth, income inequality, income per capita, industrial cluster, informal economy, Jane Jacobs, jitney, Kitchen Debate, knowledge economy, knowledge worker, land value tax, low skilled workers, Lyft, megacity, Menlo Park, mortgage tax deduction, Nate Silver, New Economic Geography, new economy, New Urbanism, occupational segregation, Paul Graham, Plutocrats, plutocrats, RAND corporation, rent control, rent-seeking, Richard Florida, rising living standards, Ronald Reagan, secular stagnation, self-driving car, Silicon Valley, sovereign wealth fund, superstar cities, the built environment, The Chicago School, The Death and Life of Great American Cities, the High Line, The Wealth of Nations by Adam Smith, Thorstein Veblen, trickle-down economics, Uber and Lyft, universal basic income, upwardly mobile, urban decay, urban planning, urban renewal, urban sprawl, white flight, young professional

The most effective approach to spurring denser and more clustered development is to switch from our current local reliance on the property tax to a land value tax. Whereas the property tax taxes land and the structures on top of it, a land value tax taxes the underlying value of the land itself. In this way, it creates significant incentives for property owners to put that land to its most intensive use. The basic idea goes back to David Ricardo, who developed influential theories of free trade and comparative advantage in the early eighteenth century. Ricardo saw the unearned income that comes from land as pure waste. The most influential proponent of the land value tax was the late nineteenth-century economist Henry George. In his book Progress and Poverty, he argued that such a tax would not only make more effective use of land, but also raise wages, reduce inequality, and generate greater productivity.

Cantillon divided the economy into two groups or classes.21 On the one hand there were laborers, who traded their work for wages that they used to purchase life’s necessities. On the other hand, there were the members of an advantaged class, but instead of Marx’s capitalists, Cantillon’s advantaged class was made up of landlords, who made their money off the rent they charged for the use of their land. Later, David Ricardo developed his own “law of rent” to describe the economic windfall that accrues to landlords simply by virtue of their owning land, or, as he put it, “that portion of the produce of the earth which is paid to the landlord for the use of the original and indestructible powers of the soil.” In The Wealth of Nations, Adam Smith decried the selfish “indolence” of landlords. Today’s urban rentiers have more to gain from increasing the scarcity of usable land than from maximizing its productive and economically beneficial uses.

Richard Florida, “Bring on the Jets at Island Airport,” Toronto Star, December 17, 2013, www.thestar.com/opinion/commentary/2013/12/17/bring_on_the_jets_at_the_island_airport.html; Richard Florida, Charlotta Mellander, and Thomas Holgersson, “Up in the Air: The Role of Airports for Regional Economic Development,” Annals of Regional Science 54, no. 1 (2015): 197–214; Jordan Press, “Trudeau Government Says No to Expansion of Toronto Island Airport,” Toronto Star, November 21, 2015, www.thestar.com/news/canada/2015/11/27/trudeau-government-says-no-to-expansion-of-toronto-island-airport.html. 21. Hans Brems, “Cantillon Versus Marx: The Land Theory and the Labor Theory of Value,” History of Political Economy 10, no. 4 (1978): 669–678; Anthony Brewer, “Cantillon and the Land Theory of Value,” History of Political Economy 20, no. 1 (1988): 1–14; David Ricardo, “On Rent,” in On the Principles of Political Economy and Taxation (London: John Murray, 1821), chap. 2, available at www.econlib.org/library/Ricardo/ricP.html; Adam Smith, The Wealth of Nations, Bantam Classics Reprint (New York: Bantam, 2003 [1776]). 22. Ryan Avent, “The Parasitic City,” The Economist, June 3, 2013, www.economist.com/blogs/freeexchange/2013/06/london-house-prices; Noah Smith, “Piketty’s Three Big Mistakes,” Bloomberg View, March 27, 2015, www.bloombergview.com/articles/2015-03-27/piketty-s-three-big-mistakes-in-inequality-analysis.


pages: 497 words: 144,283

Connectography: Mapping the Future of Global Civilization by Parag Khanna

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1919 Motor Transport Corps convoy, 2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, 3D printing, 9 dash line, additive manufacturing, Admiral Zheng, affirmative action, agricultural Revolution, Airbnb, Albert Einstein, amateurs talk tactics, professionals talk logistics, Amazon Mechanical Turk, Asian financial crisis, asset allocation, autonomous vehicles, banking crisis, Basel III, Berlin Wall, bitcoin, Black Swan, blockchain, borderless world, Boycotts of Israel, Branko Milanovic, BRICs, British Empire, business intelligence, call centre, capital controls, charter city, clean water, cloud computing, collateralized debt obligation, commoditize, complexity theory, continuation of politics by other means, corporate governance, corporate social responsibility, credit crunch, crony capitalism, crowdsourcing, cryptocurrency, cuban missile crisis, data is the new oil, David Ricardo: comparative advantage, deglobalization, deindustrialization, dematerialisation, Deng Xiaoping, Detroit bankruptcy, digital map, diversification, Doha Development Round, edge city, Edward Snowden, Elon Musk, energy security, ethereum blockchain, European colonialism, eurozone crisis, failed state, Fall of the Berlin Wall, family office, Ferguson, Missouri, financial innovation, financial repression, fixed income, forward guidance, global supply chain, global value chain, global village, Google Earth, Hernando de Soto, high net worth, Hyperloop, ice-free Arctic, if you build it, they will come, illegal immigration, income inequality, income per capita, industrial cluster, industrial robot, informal economy, Infrastructure as a Service, interest rate swap, Intergovernmental Panel on Climate Change (IPCC), Internet of things, Isaac Newton, Jane Jacobs, Jaron Lanier, John von Neumann, Julian Assange, Just-in-time delivery, Kevin Kelly, Khyber Pass, Kibera, Kickstarter, labour market flexibility, labour mobility, LNG terminal, low cost carrier, manufacturing employment, mass affluent, mass immigration, megacity, Mercator projection, Metcalfe’s law, microcredit, mittelstand, Monroe Doctrine, mutually assured destruction, New Economic Geography, new economy, New Urbanism, off grid, offshore financial centre, oil rush, oil shale / tar sands, oil shock, openstreetmap, out of africa, Panamax, Parag Khanna, Peace of Westphalia, peak oil, Pearl River Delta, Peter Thiel, Philip Mirowski, Plutocrats, plutocrats, post-oil, post-Panamax, private military company, purchasing power parity, QWERTY keyboard, race to the bottom, Rana Plaza, rent-seeking, reserve currency, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Coase, Scramble for Africa, Second Machine Age, sharing economy, Shenzhen was a fishing village, Silicon Valley, Silicon Valley startup, six sigma, Skype, smart cities, Smart Cities: Big Data, Civic Hackers, and the Quest for a New Utopia, South China Sea, South Sea Bubble, sovereign wealth fund, special economic zone, spice trade, Stuxnet, supply-chain management, sustainable-tourism, TaskRabbit, telepresence, the built environment, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, Tim Cook: Apple, trade route, transaction costs, UNCLOS, uranium enrichment, urban planning, urban sprawl, WikiLeaks, young professional, zero day

The nineteenth and twentieth centuries brought trade interdependence; in the twenty-first century, we have complex supply chain dispersal as well. The growing depth of global cross-border trade and investment makes tug-of-war much more complex than in previous geopolitical eras. This evolution of economic integration from the nineteenth to the twenty-first century is best captured in the progression from the ideas of David Ricardo to those of Ricardo Hausmann. The English political economist David Ricardo is best known as the champion of comparative advantage over mercantilism, advocating industry specialization and free trade among nations. Today’s world economic structure goes far beyond Ricardo’s wildest imagination. As the Harvard economist Ricardo Hausmann maps out in his pathbreaking Atlas of Economic Complexity,*5 the global economy is like a game of Scrabble with millions of pieces (letters) distributed across countries (players) who work in teams to combine the pieces to make products (words).

And yet as universal as they are, supply chains are not things in themselves. They are a system of transactions. We do not see supply chains; rather, we see their participants and infrastructures—the things that connect supply to demand. What we can see, however, by tracing supply chains link by link is how these micro-interactions add up to large global shifts. We are witnessing the full consequences of Adam Smith’s free markets, David Ricardo’s comparative advantage, and Émile Durkheim’s division of labor: a world where capital, labor, and production shift to wherever is needed to efficiently connect supply and demand. If “the market” is the world’s most powerful force, supply chains bring markets to life. Supply chains and connectivity, not sovereignty and borders, are the organizing principles of humanity in the 21st century. Indeed, as globalization expands into every corner of the planet, supply chains have widened, deepened, and strengthened to such an extent that we must ask ourselves whether they represent a deeper organizing force in the world than states themselves.12 Supply chains are the original worldwide webs, enveloping our world like a ball of yarn.

They help to modernize weaker members, as the EU has done for eastern Europe and the Balkans through its more than $300 billion worth of funds for infrastructural upgrading, human capital investments, digital transformation, and other areas. Becoming EU members has made these countries investment grade and more attractive for supply chains through giving them clear and reliable laws. The same is now happening with the ASEAN Economic Community of Southeast Asia and the pan-Asian Regional Comprehensive Economic Partnership, where economies are opening at their own pace to protect their comparative advantages and boost employment. The infrastructural and market integration under way within regions today makes them far more significant building blocks of global order than nations. Importantly, the geographies not knitting themselves together into collective functional zones—the Near East and Central Asia—are also generally where one finds the most failed states. Mega-regions are not monolithic blocs but what scholars call “composite empires,” informal and transactional rather than formal and institutionalized.


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Race Against the Machine: How the Digital Revolution Is Accelerating Innovation, Driving Productivity, and Irreversibly Transforming Employment and the Economy by Erik Brynjolfsson

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Amazon Mechanical Turk, Any sufficiently advanced technology is indistinguishable from magic, autonomous vehicles, business process, call centre, combinatorial explosion, corporate governance, creative destruction, crowdsourcing, David Ricardo: comparative advantage, easy for humans, difficult for computers, Erik Brynjolfsson, factory automation, first square of the chessboard, first square of the chessboard / second half of the chessboard, Frank Levy and Richard Murnane: The New Division of Labor, hiring and firing, income inequality, intangible asset, job automation, John Markoff, John Maynard Keynes: technological unemployment, Joseph Schumpeter, Khan Academy, Kickstarter, knowledge worker, labour mobility, Loebner Prize, low skilled workers, minimum wage unemployment, patent troll, pattern recognition, Paul Samuelson, Ray Kurzweil, rising living standards, Robert Gordon, self-driving car, shareholder value, Skype, too big to fail, Turing test, Tyler Cowen: Great Stagnation, Watson beat the top human players on Jeopardy!, wealth creators, winner-take-all economy, zero-sum game

And the losers are not necessarily some small segment of the labor force like buggy whip manufacturers. In principle, they can be a majority or even 90% or more of the population. If wages can freely adjust, then the losers keep their jobs in exchange for accepting ever-lower compensation as technology continues to improve. But there’s a limit to this adjustment. Shortly after the Luddites began smashing the machinery that they thought threatened their jobs, the economist David Ricardo, who initially thought that advances in technology would benefit all, developed an abstract model that showed the possibility of technological unemployment. The basic idea was that at some point, the equilibrium wages for workers might fall below the level needed for subsistence. A rational human would see no point in taking a job at a wage that low, so the worker would go unemployed and the work would be done by a machine instead.

In 1995, for example, 2.08 people were employed in “sales and related” occupations for every $1 million of real GDP generated that year. By 2002 (the last year for which consistent data are available), that number had fallen to 1.79, a decline of nearly 14 percent. If, as these examples indicate, both pattern recognition and complex communication are now so amenable to automation, are any human skills immune? Do people have any sustainable comparative advantage as we head ever deeper into the second half of the chessboard? In the physical domain, it seems that we do for the time being. Humanoid robots are still quite primitive, with poor fine motor skills and a habit of falling down stairs. So it doesn’t appear that gardeners and restaurant busboys are in danger of being replaced by machines any time soon. And many physical jobs also require advanced mental abilities; plumbers and nurses engage in a great deal of pattern recognition and problem solving throughout the day, and nurses also do a lot of complex communication with colleagues and patients.


pages: 395 words: 116,675

The Evolution of Everything: How New Ideas Emerge by Matt Ridley

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affirmative action, Affordable Care Act / Obamacare, Albert Einstein, Alfred Russel Wallace, altcoin, anthropic principle, anti-communist, bank run, banking crisis, barriers to entry, bitcoin, blockchain, British Empire, Broken windows theory, Columbian Exchange, computer age, Corn Laws, cosmological constant, creative destruction, Credit Default Swap, crony capitalism, crowdsourcing, cryptocurrency, David Ricardo: comparative advantage, demographic transition, Deng Xiaoping, discovery of DNA, Donald Davies, double helix, Downton Abbey, Edward Glaeser, Edward Lorenz: Chaos theory, Edward Snowden, endogenous growth, epigenetics, ethereum blockchain, facts on the ground, falling living standards, Ferguson, Missouri, financial deregulation, financial innovation, Frederick Winslow Taylor, Geoffrey West, Santa Fe Institute, George Gilder, George Santayana, Gunnar Myrdal, Henri Poincaré, hydraulic fracturing, imperial preference, income per capita, indoor plumbing, interchangeable parts, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Isaac Newton, Jane Jacobs, Jeff Bezos, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kevin Kelly, Khan Academy, knowledge economy, land reform, Lao Tzu, long peace, Lyft, M-Pesa, Mahatma Gandhi, Mark Zuckerberg, means of production, meta analysis, meta-analysis, mobile money, money: store of value / unit of account / medium of exchange, Mont Pelerin Society, moral hazard, Necker cube, obamacare, out of africa, packet switching, peer-to-peer, phenotype, Pierre-Simon Laplace, price mechanism, profit motive, RAND corporation, random walk, Ray Kurzweil, rent-seeking, reserve currency, Richard Feynman, Richard Feynman, rising living standards, road to serfdom, Ronald Coase, Ronald Reagan, Satoshi Nakamoto, Second Machine Age, sharing economy, smart contracts, South Sea Bubble, Steve Jobs, Steven Pinker, The Wealth of Nations by Adam Smith, Thorstein Veblen, transaction costs, women in the workforce

As Deirdre McCloskey puts it, in the great enrichment of the past two hundred years average income in Britain went from about $3 a day to about $100 a day in real terms. That simply cannot be achieved by capital accumulation, which is why she (and I) refuse to use the misleading, Marxist word ‘capitalism’ for the free market. They are fundamentally different things. Adam Smith is no paragon. He got plenty wrong, including his clumsy labour theory of value, and he missed David Ricardo’s insight about comparative advantage, which explains why even a country (or person) that is worse than its trading partner at making everything will still be asked to supply something, the thing it or he is least bad at making. But the core insight that he had, that most of what we see in society is (in Adam Ferguson’s words) the result of human action but not of human design, remains true to this day – and under-appreciated.

Yet he embraced free trade as the best possible means for achieving both peace and prosperity for all. ‘Peace will come to earth when the people have more to do with each other and governments less,’ he said, sounding like a member of the Tea Party. So pure was his support for free trade that Cobden even lambasted John Stuart Mill for briefly flirting with the idea that infant industries needed protection in their early years. He took the ideas of Adam Smith and David Ricardo and implemented them. The result was an acceleration of economic growth all around the world. There it is again, the peaceful co-existence in one head of causes embraced by today’s left and today’s right. Political liberation and economic liberation went hand in hand. Small government was a radical, progressive proposition. Between 1660 and 1846, in a vain attempt to control food prices by prescription, the British government had enacted an astonishing 127 Corn Laws, imposing not just tariffs, but rules about storage, sale, import, export and quality of grain and bread.

Between 1660 and 1846, in a vain attempt to control food prices by prescription, the British government had enacted an astonishing 127 Corn Laws, imposing not just tariffs, but rules about storage, sale, import, export and quality of grain and bread. In 1815, to protect landowners as grain prices fell from Napoleonic wartime highs, it had banned the import of all grain if the price fell below eighty shillings a quarter (twenty-eight pounds). This led to an impassioned pamphlet from the young theorist of free trade David Ricardo, but in vain (his friend and supporter of the Corn Law, Robert Malthus, was more persuasive). It was not until the 1840s, when the railways and the penny post enabled Cobden and John Bright to stir up a mass campaign against the laws on behalf of the working class, that the tide turned. With the famine in Ireland in 1845, even the Tory leader Robert Peel had to admit defeat. Cobden’s astonishing campaign against the Corn Laws, then against tariff protection more generally, succeeded eventually in persuading not just much of the country, and most intellectuals, but the leading politicians of the day, especially William Ewart Gladstone.


pages: 420 words: 124,202

The Most Powerful Idea in the World: A Story of Steam, Industry, and Invention by William Rosen

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Albert Einstein, All science is either physics or stamp collecting, barriers to entry, collective bargaining, computer age, Copley Medal, creative destruction, David Ricardo: comparative advantage, decarbonisation, delayed gratification, Fellow of the Royal Society, Flynn Effect, fudge factor, full employment, invisible hand, Isaac Newton, Islamic Golden Age, iterative process, Jacquard loom, James Hargreaves, James Watt: steam engine, John Harrison: Longitude, Joseph Schumpeter, Joseph-Marie Jacquard, knowledge economy, moral hazard, Network effects, Paul Samuelson, Peace of Westphalia, Peter Singer: altruism, QWERTY keyboard, Ralph Waldo Emerson, rent-seeking, Ronald Coase, Simon Kuznets, spinning jenny, the scientific method, The Wealth of Nations by Adam Smith, Thomas Malthus, transaction costs, transcontinental railway, zero-sum game, éminence grise

Ten men could each bake their own bread, weave their own cloth, and build their own houses, but if one became a baker, another a weaver, and a third a builder, the result would be more food, clothing, bricks … and trade. Smith’s theorems did a spectacular job of explaining the self-regulating character of a free market, in which prices and profits are forced by competition to the lowest possible level.* They inspired David Ricardo’s exposition, in 1817, of the principle of diminishing returns: his argument that the growth of the first decades of industrialization was certain to level off, as each successive improvement produced smaller results. Helped along by the inflation in food prices caused by the Napoleonic Wars, they even set the stage for Thomas Malthus’s Essay on the Principle of Population, with its famous argument that population always grows geometrically, food production arithmetically.

A lot more is known about how population increases than how wealth grows. Indeed, the Industrial Revolution was decades old before anyone realized that wealth was growing at all. The first edition of Malthus’s Essay on Population was published in 1798 and convinced nearly everyone that the hoofbeats of the horsemen of the Apocalypse could already be heard throughout England. In 1817, the English economist David Ricardo predicted2 that land rents would increase while wages would approach subsistence level, at precisely the moment when British farmland rents per acre started to plummet and the wages of laborers to explode. Partly this was evidence of the limits of accounting with very little data; Britain’s first census, inspired by Malthus, wasn’t conducted until 1800. But even more it was the lack of a model that carved up overall growth into its constituent parts.

., Technology in Western Civilization. 80 “a steam-loom weaver” Hills, Power from Steam, quoting Baines’s 1835 History of the Cotton Manufacture in Great Britain. 81 During the century and a half Clark, Farewell to Alms. CHAPTER ELEVEN: WEALTH OF NATIONS 1 nothing about the forging of iron David Warsh, Knowledge and the Wealth of Nations: A Story of Economic Discovery (New York: W. W. Norton, 2006). 2 David Ricardo predicted Clark, Farewell to Alms. 3 The second component, growth in capital Warsh, Knowledge and the Wealth of Nations. 4 Solow first assumed Ibid. 5 “the mass of persons with intermediate skills” Hobsbawm and Wrigley, Industry and Empire: from 1750 to the Present Day. 6 preindustrial Britain exhibited a fair bit F. F. Mendels, “Social mobility and phases of industrialization,” Journal of Interdisciplinary History 7, 1976. 7 “craftsman’s sons became laborers” Clark, Farewell to Alms. 8 A recent World Bank analysis Kirk Hamilton, et al., Where Is the Wealth of Nations?


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What Went Wrong: How the 1% Hijacked the American Middle Class . . . And What Other Countries Got Right by George R. Tyler

8-hour work day, active measures, activist fund / activist shareholder / activist investor, affirmative action, Affordable Care Act / Obamacare, bank run, banking crisis, Basel III, Black Swan, blood diamonds, blue-collar work, Bolshevik threat, bonus culture, British Empire, business process, capital controls, Carmen Reinhart, carried interest, cognitive dissonance, collateralized debt obligation, collective bargaining, commoditize, corporate governance, corporate personhood, corporate raider, corporate social responsibility, creative destruction, credit crunch, crony capitalism, crowdsourcing, currency manipulation / currency intervention, David Brooks, David Graeber, David Ricardo: comparative advantage, declining real wages, deindustrialization, Diane Coyle, Double Irish / Dutch Sandwich, eurozone crisis, financial deregulation, financial innovation, fixed income, Francis Fukuyama: the end of history, full employment, George Akerlof, George Gilder, Gini coefficient, Gordon Gekko, hiring and firing, income inequality, invisible hand, job satisfaction, John Markoff, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, labor-force participation, labour market flexibility, laissez-faire capitalism, lake wobegon effect, light touch regulation, Long Term Capital Management, manufacturing employment, market clearing, market fundamentalism, Martin Wolf, minimum wage unemployment, mittelstand, moral hazard, Myron Scholes, Naomi Klein, Northern Rock, obamacare, offshore financial centre, Paul Samuelson, pension reform, performance metric, pirate software, Plutocrats, plutocrats, Ponzi scheme, precariat, price stability, profit maximization, profit motive, purchasing power parity, race to the bottom, Ralph Nader, rent-seeking, reshoring, Richard Thaler, rising living standards, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, Sand Hill Road, shareholder value, Silicon Valley, South Sea Bubble, sovereign wealth fund, Steve Ballmer, Steve Jobs, The Chicago School, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, transcontinental railway, transfer pricing, trickle-down economics, tulip mania, Tyler Cowen: Great Stagnation, union organizing, Upton Sinclair, upwardly mobile, women in the workforce, working poor, zero-sum game

Leaders in these nations reacted with dispatch, transforming the dangers of global integration into broadly based prosperity. Protectionism was avoided and even aggressively attacked when identified abroad. These nations didn’t experience an American-style stagnation of wages and offshoring of jobs. Instead, Australia and northern Europe pursued policies informed by the best and brightest trade economists of our age. Drawing on the theories of David Ricardo, for example, economists Paul Samuelson and Wolfgang F. Stolper had concluded as early as 1941 that international trade creates long-term losers as well as winners. So leaders abroad crafted remediation: a balance of clever mechanisms maximizing the gains from globalization and broadcasting those gains to families, while minimizing its harm to jobs and wages. This reality reveals the hollowness of complaints by American firms such as Apple that routinely warn about high American labor costs and mediocre skill levels.

Here is how David Cay Johnston, the tax specialist formerly with the New York Times, described the historical context of progressive taxation stretching back 2,300 years: “The Athenians jettisoned their flat tax, and with it tyranny in favor of a tax system based on ability to pay. From Aristotle to the Father of Capitalism, Adam Smith, the idea that taxes should be based on ability to pay has been at the core of the rise of Western civilization. John Stuart Mill, his father John Mill, David Ricardo, and every other leading worldly philosopher embraced this concept, which today is embodied in the progressive income tax, in which the higher your income, the greater portion of each additional dollar of income is paid in taxes.”11 The admiration of America’s Founding Fathers for economic justice and for the insights of Aristotle account for their vigorous support of the progressive tax principle.

In fact, academic researchers have determined that the American business community in toto has been debt free since 2004, when the corporate debt ratio fell below zero.13 Some undercapitalized banks, small businesses, and struggling manufacturing enterprises are hard pressed and indebted, but they’re the exception in an American business community flush with profits and cash three decades into the Reagan era. Economists talk about two types of extraordinary profits, named to honor economists David Ricardo and Joseph Schumpeter. Ricardian rents accrue to owners of fixed (nonreproduceable) resources, such as quite fertile land, oil, or gold deposits, while Schumpeterian rents flow to individuals or firms because of entrepreneurial insights in a risky or complicated environment—think of the early days of Bill Gates or Steve Jobs. But the Reagan era created a third category I term Reagan rents, which accrue to enterprise leaders who command neither scarce resources nor unusual skill; they have the good fortune simply to hold senior corporate positions during the Reagan era of regulatory capture and shareholder capitalism, commanding only their supine boards of directors.


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The Cost of Inequality: Why Economic Equality Is Essential for Recovery by Stewart Lansley

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banking crisis, Basel III, Big bang: deregulation of the City of London, Bonfire of the Vanities, borderless world, Branko Milanovic, Bretton Woods, British Empire, business process, call centre, capital controls, collective bargaining, corporate governance, corporate raider, correlation does not imply causation, creative destruction, credit crunch, Credit Default Swap, crony capitalism, David Ricardo: comparative advantage, deindustrialization, Edward Glaeser, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, Goldman Sachs: Vampire Squid, high net worth, hiring and firing, Hyman Minsky, income inequality, James Dyson, Jeff Bezos, job automation, John Meriwether, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, laissez-faire capitalism, light touch regulation, Long Term Capital Management, low skilled workers, manufacturing employment, market bubble, Martin Wolf, mittelstand, mobile money, Mont Pelerin Society, Myron Scholes, new economy, Nick Leeson, North Sea oil, Northern Rock, offshore financial centre, oil shock, Plutocrats, plutocrats, Plutonomy: Buying Luxury, Explaining Global Imbalances, Right to Buy, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, shareholder value, The Great Moderation, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, Tyler Cowen: Great Stagnation, Washington Consensus, Winter of Discontent, working-age population

It is this shift that has been one of the principal drivers of the increasing economic polarisation of recent decades. How to divide the spoils of the economy—between employees (through wages and salaries) and the owners of business (through profits)—is one of the oldest issues of political economy. Indeed, the division of what economists call ‘factor shares’ has crucial implications for private enterprise economies. As one of the founding fathers of classical economics, David Ricardo—who made his own personal fortune from speculation—wrote in 1821, ‘The principal problem in Political Economy’ is to determine how ‘the produce of the earth … is divided among … the proprietor of the land, the owner of the stock or capital necessary for its cultivation and the labourers by whose industry it is cultivated’.59 The division of the national wealth between earnings and profits is in part an issue of social balance.

As much of the population did not earn enough to consume the full output, the system was unstable. The remedy lay in income redistribution in order to build demand and sustain growth. ‘If apportionment of incomes were such as to evoke no excessive savings, full constant employment for capital and labour would be furnished.’297 Although such theories were controversial and had been dismissed by classical political economists from David Ricardo onwards, Hobson’s work became influential in subsequent debates and anticipated in important respects the theories later developed by Keynes. Indeed, Keynes later described Hobson’s first book (which he co-authored with Arthur Mummery) published in 1889 as ‘an epoch in economic thought’.298 In 1926 Hobson had a big hand in a pamphlet, The Living Wage , published by the Independent Labour Party which called for an increase in working class purchasing power through redistributive taxation.

‘And raising unemployment was an extremely desirable way of reducing the strength of the working classes’, he continued, ‘… what was engineered there, in Marxist terms, was a crisis of capitalism which created a reserve army of labour and has allowed the capitalists to make high profits ever since.’93 While the dole queues remained stubbornly high, business fortunes began to revive quickly after the state-induced recession of the early 1980s. The initial slump in share prices turned, after 1987, into the longest bull run in history. Economic and social disruption was also an inevitable consequence of the wider attempts to hasten the move to a service-and finance-based economy. The government believed that Britain’s comparative advantage lay in finance not manufacturing. Britain’s industrial base had been in slow decline ever since the early 1960s—the product of intensified competition from the developing world and a deteriorating record on productivity. Despite this erosion, manufacturing in 1979 remained at the heart of the economy. Ford Motors in Dagenham employed more than 40,000 workers while a significant proportion of the workforce in the West Midlands worked in local car and motorcycle factories or steel mills.


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With Liberty and Dividends for All: How to Save Our Middle Class When Jobs Don't Pay Enough by Peter Barnes

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Alfred Russel Wallace, banks create money, basic income, Buckminster Fuller, collective bargaining, computerized trading, creative destruction, David Ricardo: comparative advantage, declining real wages, deindustrialization, diversified portfolio, en.wikipedia.org, Fractional reserve banking, full employment, hydraulic fracturing, income inequality, Jaron Lanier, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, land reform, Mark Zuckerberg, Network effects, oil shale / tar sands, Paul Samuelson, profit maximization, quantitative easing, rent-seeking, Ronald Coase, Ronald Reagan, Silicon Valley, sovereign wealth fund, the map is not the territory, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, transaction costs, Tyler Cowen: Great Stagnation, Upton Sinclair, Vilfredo Pareto, wealth creators, winner-take-all economy

A steadily tightening squeeze, with wages stagnating and prices of middle-class necessities rising, took hold. In addition to deindustrialization, three other long-term phenomena gained momentum after 1980: globalization, automation, and deunionization. Globalization. Since the early 1800s, economists have argued that trade is good and more trade is better. Their rationale is the theory of comparative advantage. As David Ricardo reasoned, if England could make textiles more efficiently than Portugal, and Portugal could make wine more efficiently than England, then both countries—including their workers—would benefit by trading woolens for port. But trading in physical goods is one thing and globalization is something else: it is the integration of separate national economies into a single world economy.

Culture and Prosperity: The Truth About Markets - Why Some Nations Are Rich but Most Remain Poor by John Kay

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Albert Einstein, Asian financial crisis, Barry Marshall: ulcers, Berlin Wall, Big bang: deregulation of the City of London, California gold rush, complexity theory, computer age, constrained optimization, corporate governance, corporate social responsibility, correlation does not imply causation, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, Donald Trump, double entry bookkeeping, double helix, Edward Lloyd's coffeehouse, equity premium, Ernest Rutherford, European colonialism, experimental economics, Exxon Valdez, failed state, financial innovation, Francis Fukuyama: the end of history, George Akerlof, George Gilder, greed is good, Gunnar Myrdal, haute couture, illegal immigration, income inequality, industrial cluster, information asymmetry, intangible asset, invention of the telephone, invention of the wheel, invisible hand, John Meriwether, John Nash: game theory, John von Neumann, Kenneth Arrow, Kevin Kelly, knowledge economy, labour market flexibility, late capitalism, light touch regulation, Long Term Capital Management, loss aversion, Mahatma Gandhi, market bubble, market clearing, market fundamentalism, means of production, Menlo Park, Mikhail Gorbachev, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, Naomi Klein, Nash equilibrium, new economy, oil shale / tar sands, oil shock, Pareto efficiency, Paul Samuelson, pets.com, popular electronics, price discrimination, price mechanism, prisoner's dilemma, profit maximization, purchasing power parity, QWERTY keyboard, Ralph Nader, RAND corporation, random walk, rent-seeking, Right to Buy, risk tolerance, road to serfdom, Ronald Coase, Ronald Reagan, second-price auction, shareholder value, Silicon Valley, Simon Kuznets, South Sea Bubble, Steve Jobs, telemarketer, The Chicago School, The Death and Life of Great American Cities, The Market for Lemons, The Nature of the Firm, the new new thing, The Predators' Ball, The Wealth of Nations by Adam Smith, Thorstein Veblen, total factor productivity, transaction costs, tulip mania, urban decay, Vilfredo Pareto, Washington Consensus, women in the workforce, yield curve, yield management

It contains rules for assignment, production, and exchange. In the late eighteenth and nineteenth centuries, economists established a durable method of analysis for understanding production for exchange. Adam Smith's principal work, The Wealth of Nations) described the division of labor. David Ricardo, who became a writer and member of the British Parliament after successful speculation in bonds, laid out the principle of comparative advantage fifty years later. The effectiveness of an economic system is determined by its efficiency in exploiting comparative advantage and the division oflabor. The Colombe d'Or For two hundred years, European artists have been attracted to the bright light and brilliant scenery of the south of France. The walled village of St. Paul de Vence, which is thirty miles west ofMenton, in the hills to the north of Nice, still houses a community of Culture and Prosperity { 85} artists. 4 Paul Roux, who bought a small hotel and restaurant at the entrance to the village in 1919, offered food and lodging to artists in return for examples of their work.

In the time he did not spend whisking mayonnaise by hand, Braque could produce a painting worth many, many meals. This benefit from exchange illustrates the principle of comparative advantage. Comparative advantage dictates that we should focus on what we do best, rather than on what we do better than other people. For exceptionally talented people like Braque, there may be more things they do better than other people than there are hours in the day. And for others, there may be little or nothing that { 86} John Kay they do better than other people. Comparative advantage requires us to look at our own relative performance in different activities. Both Braque and Raux benefit from following comparative advantage. Braque gets more time for his art, and Raux gets great pictures. Comparative advantage is a subtle concept. Our instinct is always to ask, "Who is the best person for the job?"

The oil Culture and Prosperity { 145} Box 12.1 ECONOMIC RENT A country like Saudi Arabia derives substantial economic rent from its oil supplies because the market price is so far above the cost of Saudi production. Economic rent is a central economic concept. But the phrase is unfortunate. In everyday language, rent is what we pay for land and buildings. To use the term economic rent when we talk of oil is puzzling, and the usage becomes even stranger when applied to Coca-Cola, Madonna, and the Harvard Business School. The explanation is historical. When David Ricardo (the nineteenthcenturyeconomist behind the principle ofcomparative advantage) introduced the concept, the economy was mainly agricultural. Ricardo's model explained how the rent of land was determined. The land of England could be ordered from best to worst, from the fertile fen lands ofLincolnshire to the acid moors of Dartmoor. The price of corn would determine the margin of cultivation-a graphic term to describe land at the frontier, which was barely worth bringing into production.


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The New Division of Labor: How Computers Are Creating the Next Job Market by Frank Levy, Richard J. Murnane

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Atul Gawande, call centre, computer age, Computer Numeric Control, correlation does not imply causation, David Ricardo: comparative advantage, deskilling, Frank Levy and Richard Murnane: The New Division of Labor, Gunnar Myrdal, hypertext link, index card, information asymmetry, job automation, knowledge economy, knowledge worker, low skilled workers, low-wage service sector, pattern recognition, profit motive, Robert Shiller, Robert Shiller, Ronald Reagan, speech recognition, talking drums, telemarketer, The Wealth of Nations by Adam Smith, working poor

In the intervening thirty-one years, the number of employed persons had grown from 83 million to 135 million—clearly not the picture the Ad Hoc Committee had expected.4 We have made reference to Herbert Simon’s 1960 essay, “The Corporation: Will It Be Managed by Machines?” In this essay, Simon explained why predictions of mass unemployment would prove to be wrong. Borrowing from international trade theory, Simon invoked David Ricardo’s historic principle of comparative advantage. Simon began from the premise that society can always find uses for additional output (consider today’s unfulfilled demand for health care). Under this premise, computers and humans will both be used in producing this output, each in those tasks for which they have a comparative advantage. As Simon wrote: If computers are a thousand times faster than bookkeepers in doing arithmetic, but only one hundred times faster than stenographers in taking dictation, we shall expect the number of bookkeepers per thousand employees to decrease but the number of stenographers to increase.

Private corporations spend an average of $800 per employee on training each year.16 Much of this effort is devoted to preparing people to work productively in the computerized workplace. If the effort is to make sense, the nation needs to understand what tasks humans will do at their work and the skills they will need to carry out these tasks effectively. We already have some answers. We have established that computers have a comparative advantage over people in carrying out tasks requiring the execution of rules, but people have the comparative advantage in recognizing complex patterns. We have also seen how complex pattern recognition is critical in two quite different kinds of tasks—optical recognition and physical movement (security guards, Simon’s “few vestigial ‘workmen’ ”) and tasks involving higher-order cognitive skills. As a next step we can usefully divide these higher order tasks into two broad groups.

Think of any task in the workplace: deciding to buy a bond future contract at a particular price, interpreting an echocardiogram, adding a column of numbers, installing the windshield on the frame of a pick-up truck, painting a picture of the Grand Teton Mountains, mediating a customer complaint, vacuuming a floor in a room crowded with furniture. Each task involves some kind of information processing. But which kinds of information processing can computers do better than people? Answering this question is the key to understanding why Saltz has a thriving cardiology practice while Liffe traders aren’t trading any more. 16 CHAPTER 2 A first answer is that computers’ comparative advantage over people lies in tasks that can be described using rules-based logic: step-by-step procedures with an action specified for every contingency. “Rules-based logic” is not an everyday expression, but humans use rules to process information every day. Most of us learned arithmetic using such rules (“If the numbers in the 1’s column add to ten or more, carry the . . .”). Recipes in The Joy of Cooking are largely based on rules.


pages: 515 words: 142,354

The Euro: How a Common Currency Threatens the Future of Europe by Joseph E. Stiglitz, Alex Hyde-White

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bank run, banking crisis, barriers to entry, battle of ideas, Berlin Wall, Bretton Woods, capital controls, Carmen Reinhart, cashless society, central bank independence, centre right, cognitive dissonance, collapse of Lehman Brothers, collective bargaining, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, currency peg, dark matter, David Ricardo: comparative advantage, disintermediation, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial innovation, full employment, George Akerlof, Gini coefficient, global supply chain, Growth in a Time of Debt, housing crisis, income inequality, incomplete markets, inflation targeting, information asymmetry, investor state dispute settlement, invisible hand, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labour market flexibility, labour mobility, light touch regulation, manufacturing employment, market bubble, market friction, market fundamentalism, Martin Wolf, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mortgage debt, neoliberal agenda, new economy, open economy, paradox of thrift, pension reform, pensions crisis, price stability, profit maximization, purchasing power parity, quantitative easing, race to the bottom, risk-adjusted returns, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, Silicon Valley, sovereign wealth fund, the payments system, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, transfer pricing, trickle-down economics, Washington Consensus, working-age population

TRADITIONAL ARGUMENTS FOR THE BENEFITS OF ECONOMIC INTEGRATION There is a long-standing argument that closer economic integration would lead to faster economic growth, based on the idea that larger markets lead to increases in standards of living as a result of economies of scale (that is, unit costs of production decrease as the scale of production increases) and taking advantage of comparative advantage (that is, there are efficiency gains from having each country specialize in the country’s relative strengths). These notions date back to the late 18th and early 19th centuries, in the works of two of the great classical economists, Adam Smith7 and David Ricardo.8 But there are several flaws in applying Smith’s and Ricardo’s analyses of largely agrarian 18th- and early 19th-century economies to Europe at the beginning of the 21st century. First, tariff and trade barriers are already low; the law of diminishing returns suggests that the relative benefits of further reductions may be fairly small.

Some societies may prefer more stability and better systems of social protection, and greater expenditures on public education and health; others may be more committed to preserving existing inequalities. Greater economic integration—or, I should say, certain forms of economic integration—may, as we shall see later, impede the ability of different countries to realize societal well-being by advancing their own conceptions of what the state should do and how it should do it.10 In the days of Adam Smith and David Ricardo, the economic role of the state was very limited; today, it is far more important—partly because of changes in the structure of the economy itself, and partly because increases in standard of living have led some societies to demand more of these collective goods provided by government. Indeed, advances in our standards of living largely result from our creation of a learning society11—of advances in technology and knowledge—which themselves are in the nature of public goods, goods that have to be collectively provided: all individuals can benefit from such advances.12 Markets by themselves will not result in efficient levels of investment in research and learning; they may not even result in learning and research going in the right direction.

There are a myriad of detailed issues in which different conceptions of how the economy functions play out, not just the macroeconomic issues of austerity and inflation previously discussed. One aspect of the neoliberal agenda entails privatization. There are strong arguments that governments should focus their attention on those areas where they have a comparative advantage, leaving the private sector to run the rest. Though this principle makes theoretical sense, in practice determining where the government has a comparative advantage is difficult. Experiences around the world have shown a variety of outcomes. Perhaps the most efficient steel companies in the world in the 1990s were the government-run firms in Korea and Taiwan, and there is little evidence that the privatization of the Korean company, POSCO (demanded by the IMF in its 1997 financial rescue), led to improved efficiency.

Hopes and Prospects by Noam Chomsky

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He warned that if English merchants and manufacturers were free to import, export, and invest abroad, they would profit while English society would be harmed. But that is unlikely to happen, he argued. The reason is that English capitalists would prefer to invest and purchase in the home country, so as if by an “invisible hand,” England would be spared the ravages of economic liberalism. The other leading founder of classical economics, David Ricardo, drew similar conclusions. Using his famous example of English textiles and Portuguese wines, he concluded that his theory of comparative advantage would collapse if it were advantageous to the capitalists of England to invest in Portugal for both manufacturing and agriculture. But, he argued, thanks to “the natural disinclination which every man has to quit the country of his birth and connections,” and “fancied or real insecurity of capital” abroad, most men of property would “be satisfied with the low rate of profits in their own country, rather than seek a more advantageous employment for their wealth in foreign nations,” feelings that “I should be sorry to see weakened,” he added.

On violation of international labor standards by prison labor, see Susan Kang, “Forcing Prison Labor,” New Political Science, June 2009. 6. Afaf Lutfi Al-Sayyid Marsot, Egypt in the Reign of Muhammad Ali (Cambridge: Cambridge University Press, 1984). For more extensive discussion, on to post–WWII Egypt, see World Orders, chap. 2. 7. Basil Davidson, The Black Man’s Burden: Africa and the Curse of the Nation-State (New York, London: Times Books, 1992). 8. Adam Smith, Wealth of Nations, bk. IV, chap. II. David Ricardo, Principles of Political Economy, cited by Dean Baker, Gerald Epstein, and Robert Pollin, eds., Globalization and Progressive Economic Policy (Cambridge: Cambridge University Press, 1998), editors’ introduction. 9. José Antonio Ocampo, “Rethinking the Development Agenda,” MS, 2001, based on paper at the American Economic Association annual meeting, January 2001. 10. Mark Weisbrot, Dean Baker, and David Rosnik, “The Scorecard on Globalization 1980–2005; 25 Years of Diminished Progress,” Center for Economic and Policy Reseach, September 2005.

Thus it was out of a sincere desire to help suffering Haitians that the United States forced them at gunpoint to allow U.S. investors to take over their country in an “unselfish intervention” carried out in a “fatherly way” with no thought of “preferential advantages, commercial or otherwise” for ourselves (New York Times). The terror and repression increased under the rule of the National Guard and the Duvalier dictatorships while the elite prospered, isolated from the country they were helping to rob. When Reagan took office, USAID and the World Bank instituted programs to turn Haiti into the “Taiwan of the Caribbean” by adhering to the sacred principle of comparative advantage: Haiti was to import food and other commodities from the United States while working people, mostly women, toiled under miserable conditions in U.S.-owned assembly plants. As the World Bank explained in a 1985 report, in this export-oriented development strategy domestic consumption should be “markedly restrained in order to shift the required share of output increases into exports,” with emphasis placed on “the expansion of private enterprises,” while support for education should be “minimized” and such “social objectives” as persist should be privatized.


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The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger by Marc Levinson

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Once the world began to change, it changed very rapidly: the more organizations that adopted the container, the more costs fell, and the cheaper and more ubiquitous container transportation became.13 The third intellectual stream feeding into this book is the connection between transportation costs and economic geography, the question of who makes what where. This connection might seem self-evident, but it is not. When David Ricardo showed in 1817 that both Portugal and England could gain by specializing in making products in which they had a comparative advantage, he assumed that only production costs mattered; the costs of shipping Portuguese wine to England and English cloth to Portugal did not enter his analysis. Ricardo’s assumption that transportation costs were zero has been incorporated into economists’ models ever since, despite ample real-world evidence that transportation costs matter a great deal.14 Economists have devoted serious effort to studying the geographic implications of transport costs only since the early 1990s.

Jorgenson and Kevin J. Stiroh, “Information Technology and Growth,” American Economic Review 89, no. 2 (1999): 109–115. 13. Paul M. Romer, “Why, Indeed, in America? Theory, History, and the Origins of Modern Economic Growth,” Working Paper 5443, NBER, January 1996. 14. David Ricardo, The Principles of Political Economy and Taxation (London, 1821; reprint, New York, 1965), pp. 77–97. Richard E. Caves and Ronald W. Jones point out that the widely taught Heckscher-Ohlin model, which shows that a country has a comparative advantage in producing goods that make more intensive uses of its more abundant factor of production, assumes that transport costs will not affect trade; see their World Trade and Payments: An Introduction, 2nd ed. (New York, 1977). More typically, Miltiades Chacholiades, Principles of International Economics (New York, 1981), p. 333, describes international market equilibrium under the unstated assumption that trade is costless. 15.

These companies’ megaships may have sailed between two ports, but the cargo they carried was increasingly unlikely to have been produced in or to be destined for the end points of the voyage. By deciding where to employ their vessels, the big ship lines had the power to determine which ports succeeded and which struggled. In some cases, that choice was made for unavoidable reasons; not all ports had the depths required to handle the biggest ships. In other cases, though, ship lines joined with government officials and private port operators to change comparative advantage. The list of the world’s largest containerports around the turn of the century is instructive. Of the twenty ports handling the greatest number of containers in 2003, seven had seen little or no container traffic in 1990, and three of those seven had not even existed before. These new ports, by and large, were privately managed, and in some cases privately financed. Their creation was a deliberate response to the economics of container shipping, in which keeping the ship moving is what matters most.


pages: 504 words: 126,835

The Innovation Illusion: How So Little Is Created by So Many Working So Hard by Fredrik Erixon, Bjorn Weigel

Airbnb, Albert Einstein, asset allocation, autonomous vehicles, barriers to entry, Basel III, Bernie Madoff, bitcoin, Black Swan, blockchain, BRICs, Burning Man, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, Clayton Christensen, Colonization of Mars, commoditize, corporate governance, corporate social responsibility, creative destruction, crony capitalism, dark matter, David Graeber, David Ricardo: comparative advantage, discounted cash flows, distributed ledger, Donald Trump, Elon Musk, Erik Brynjolfsson, fear of failure, first square of the chessboard / second half of the chessboard, Francis Fukuyama: the end of history, George Gilder, global supply chain, global value chain, Google Glasses, Google X / Alphabet X, Gordon Gekko, high net worth, hiring and firing, Hyman Minsky, income inequality, income per capita, index fund, industrial robot, Internet of things, Jeff Bezos, job automation, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, joint-stock company, Joseph Schumpeter, Just-in-time delivery, Kevin Kelly, knowledge economy, labour market flexibility, laissez-faire capitalism, lump of labour, Lyft, manufacturing employment, Mark Zuckerberg, market design, Martin Wolf, mass affluent, means of production, Mont Pelerin Society, Network effects, new economy, offshore financial centre, pensions crisis, Peter Thiel, Potemkin village, price mechanism, principal–agent problem, Productivity paradox, QWERTY keyboard, RAND corporation, Ray Kurzweil, rent-seeking, risk tolerance, risk/return, Robert Gordon, Ronald Coase, Ronald Reagan, savings glut, Second Machine Age, secular stagnation, Silicon Valley, Silicon Valley startup, Skype, sovereign wealth fund, Steve Ballmer, Steve Jobs, Steve Wozniak, technological singularity, telemarketer, The Chicago School, The Future of Employment, The Nature of the Firm, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, transaction costs, transportation-network company, tulip mania, Tyler Cowen: Great Stagnation, University of East Anglia, unpaid internship, Vanguard fund, Yogi Berra

Competition moved from countries to firms and ushered in new business structures to defend and exploit core ownership advantages. While it was not a novel idea in the late 1980s or early 1990s to begin contracting out parts of the supply chain to affiliated partners, the scale and sophistication of the fragmented networks that evolved from the early 1990s changed the texture of corporate globalization. For centuries, trade had broadly conformed to the standard wine-for-cloth thesis developed by David Ricardo in the early nineteenth century. Countries exchanged final goods with each other. Various endowments and advantages of countries (absolute or comparative) largely defined the actual composition of that trade. In this version of globalization, concentration of production was stronger than fragmentation, and specialization broadly followed the pattern of geographic concentration. Trade economist Richard Baldwin has defined two distinct phases of international trade expansion, each with a different profile: globalization’s first and second unbundling of production.34 The first unbundling – the end of the need to make goods close to their customers – was from 1820 (and the advent of the steam engine) to the mid-1980s based on a reduction in trade costs.

(Matt Taibbi) (i) see also Dodd–Frank Act; New York Stock Exchange Wall Street Journal, on compliance officers (i) wealth see rich people Wells, H.G. (i) Wells Fargo (i) Western Europe, GDP figures (i), (ii) WhatsApp (i) Whyte, William, The Organization Man (i), (ii) Williams, Richard (i) Williamson, Oliver (i)n16 Wilson, Sloan, The Man in the Gray Flannel Suit (i) wine-for-cloth thesis (David Ricardo) (i) Winston, Clifford (transportation expert) (i), (ii)n21 withering (i), (ii) see also creative destruction Woodward, Bob (i) work, vs. labor (i) world trade see global trade World Trade Organization (WTO) (i), (ii) WorldCom (i) Wozniak, Steve (i) Xerox, Palo Alto Research Center (PARC) (i) Zingales, Luigi (i), (ii), (iii) Zuckerberg, Mark (i), (ii)

Every organization needs internal bureaucracy – and bureaucracy is not the same thing as managerialism – but the combination of bureaucracy and a far higher degree of production specialization made it difficult to dismantle the old to make space for the new. The better you get at doing something, the more it costs to stop doing it and start doing something else. While the principle of specialization is about honing the absolute or comparative advantages of an individual, company, or economy, the world of innovation is based on the destruction of something you are currently doing. Nokia, for instance, did not fail because it was bad at producing mobile handsets. Nokia failed because it competed in a market that others were contesting. In a way, Nokia’s fortunes were squandered because it was remarkably good at what it was doing: it ran one of the most efficient production networks in the telecom sector.


pages: 607 words: 133,452

Against Intellectual Monopoly by Michele Boldrin, David K. Levine

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accounting loophole / creative accounting, agricultural Revolution, barriers to entry, cognitive bias, creative destruction, David Ricardo: comparative advantage, Dean Kamen, Donald Trump, double entry bookkeeping, en.wikipedia.org, endogenous growth, Ernest Rutherford, experimental economics, financial innovation, informal economy, interchangeable parts, invention of radio, invention of the printing press, invisible hand, James Watt: steam engine, Jean Tirole, John Harrison: Longitude, Joseph Schumpeter, Kenneth Arrow, linear programming, market bubble, market design, mutually assured destruction, Nash equilibrium, new economy, open economy, peer-to-peer, pirate software, placebo effect, price discrimination, profit maximization, rent-seeking, Richard Stallman, Silicon Valley, Skype, slashdot, software patent, the market place, total factor productivity, trade liberalization, transaction costs, Y2K

In particular, it is argued, our ideas and products are increasingly being unrightfully copied, and this requires some kind of serious intervention by our governments. In other words, globalization is risky for our innovators, and we need to strengthen intellectual property protection and force emerging countries to do the same things we do. Free markets and free trade, we are lectured, are becoming a threat to our economic well-being, and Adam Smith’s and David Ricardo’s views that competition and comparative advantages will make all of us better off are too naive to be believed, and certainly not applicable to this complex and globalized economy. In fact, as the economy expands, Smith and Ricardo, far from becoming irrelevant, as DeLong and Froomkin assert, become more relevant than ever, the rationale for intellectual monopoly fades away, and we may look forward to a future in which we earn our living by trading ideas and creations – but without the intervention of government-enforced intellectual monopolies.

Second, economists recognize the important element of transaction costs in determining which contracts should be enforced. “Possession is nine-tenths of the law” is a truth in economics as well as in common parlance. Take the case of slavery. Why should people not be allowed to sign private contracts binding them to slavery? In fact economists have consistently argued against slavery – during the nineteenth century David Ricardo and John Stuart Mill engaged in a heated public debate with literary luminaries such as Charles Dickens, with the economists opposing slavery and the literary giants arguing in favor.28 The fact is that our labor cannot be separated from ourselves. For someone else to own our labor requires them to engage in intrusive and costly supervision of our personal behavior. Selling our labor is not tantamount to selling our house, which is why even renting it – that is, becoming an employee – is quite complicated and subject to a variety of regulations and transaction costs.

Even worse, we also could not find anything in the field of health economics addressing what, in our view, is an even more basic question: where do medical and pharmaceutical discoveries of high social value come from? This left us on our own, trying to figure out what a fundamental medical discovery or a truly innovative medicine was, a topic we know nothing about. Being two theoretical economists, we appealed to the law of comparative advantages to figure out whom to ask: doctors, medical doctors more precisely. Consulting a large number of medical journals leads to the pleasant discovery that the British Medical Journal, a most distinguished publication, P1: PDX head margin: 1/2 gutter margin: 7/8 CUUS245-09 cuus245 978 0 521 87928 6 April 29, 2008 15:51 The Pharmaceutical Industry 229 had decided to inaugurate its new series by helping us out.


pages: 504 words: 139,137

Efficiently Inefficient: How Smart Money Invests and Market Prices Are Determined by Lasse Heje Pedersen

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activist fund / activist shareholder / activist investor, algorithmic trading, Andrei Shleifer, asset allocation, backtesting, bank run, banking crisis, barriers to entry, Black-Scholes formula, Brownian motion, buy low sell high, capital asset pricing model, commodity trading advisor, conceptual framework, corporate governance, credit crunch, Credit Default Swap, currency peg, David Ricardo: comparative advantage, declining real wages, discounted cash flows, diversification, diversified portfolio, Emanuel Derman, equity premium, Eugene Fama: efficient market hypothesis, fixed income, Flash crash, floating exchange rates, frictionless, frictionless market, Gordon Gekko, implied volatility, index arbitrage, index fund, interest rate swap, late capitalism, law of one price, Long Term Capital Management, margin call, market clearing, market design, market friction, merger arbitrage, money market fund, mortgage debt, Myron Scholes, New Journalism, paper trading, passive investing, price discovery process, price stability, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, random walk, Renaissance Technologies, Richard Thaler, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, selection bias, shareholder value, Sharpe ratio, short selling, sovereign wealth fund, statistical arbitrage, statistical model, survivorship bias, systematic trading, technology bubble, time value of money, total factor productivity, transaction costs, value at risk, Vanguard fund, yield curve, zero-coupon bond

For example, a haircut cannot easily be exported, and it is likely to remain cheaper in a poorer country even if iPad prices converge. 5 Soros (2010), “Financial Markets,” in The Soros Lectures, PublicAffairs, New York. CHAPTER 12 Managed Futures Trend-Following Investing Cut short your losses … and let your profits run on. —David Ricardo (1772–1823) … big money was not in the individual fluctuations but in … sizing up the entire market and its trend. —Jesse Livermore David Ricardo’s imperative, which has survived two centuries, suggests an attention to trends.1 Trends are also at the heart of the century-old statement by the legendary trader Jesse Livermore, and trends continue to play an important role for active investors. The traders who are most directly focused on trend-following investing are the managed futures hedge funds and commodity trading advisors (CTAs).

However, markets are very competitive, and most investment professionals do not beat the market. Efficiently Inefficient Markets: The idea that markets are inefficient but to an efficient extent. Competition among professional investors makes markets almost efficient, but the market remains so inefficient that they are compensated for their costs and risks. Active investment by those with a comparative advantage: A limited amount of capital can be invested with active managers who can beat the market using a few economically motivated investment styles. This idea underlying the book provides a framework for understanding why certain strategies work and how securities are priced. OVERVIEW TABLE II. HEDGE FUND STRATEGIES AND GURUS Classic Hedge Fund Strategies Gurus Interviewed in This Book The profit sources for active investment Who personify the classic strategies Discretionary Equity Investing: Lee Ainslie III: Stock picking through fundamental analysis of each company’s business.

Each lane moves approximately equally fast because lane-switchers ensure a relatively even number of cars in each lane. However, the lanes don’t move exactly equally fast because of the “cost” of switching lanes and the evolving traffic situation. Lane speeds probably tend to reach an efficiently inefficient level where switching lanes hardly helps, but doing so still makes sense for those with comparative advantages in lane switching—although frequent lane switching and high speed increase the risk of driving, just as frequent trading and high leverage increase the risk in financial markets. The economic mechanisms of an efficiently inefficient market are fundamentally different from those of neoclassical economics, as seen in table I.1. The neoclassical principles continue to be taught ubiquitously at global universities as they constitute the fundamental pillars for our understanding of economics.


pages: 868 words: 147,152

How Asia Works by Joe Studwell

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affirmative action, anti-communist, Asian financial crisis, bank run, banking crisis, barriers to entry, borderless world, Bretton Woods, British Empire, call centre, capital controls, central bank independence, collective bargaining, crony capitalism, cross-subsidies, currency manipulation / currency intervention, David Ricardo: comparative advantage, deindustrialization, demographic dividend, Deng Xiaoping, failed state, financial deregulation, financial repression, Gini coefficient, glass ceiling, income inequality, income per capita, industrial robot, Joseph Schumpeter, Kenneth Arrow, land reform, land tenure, large denomination, liberal capitalism, market fragmentation, non-tariff barriers, offshore financial centre, oil shock, open economy, passive investing, purchasing power parity, rent control, rent-seeking, Right to Buy, Ronald Coase, South China Sea, The Wealth of Nations by Adam Smith, urban sprawl, Washington Consensus, working-age population

The German view was put forward by the so-called Historical School, an informal affiliation of intellectuals that was the dominant force in the political economy and jurisprudence departments of German universities in the mid nineteenth century. The group held that the history of Britain showed that a successful developing state had to deploy protectionist industrial policies in order to nurture its manufacturers. The School rejected the newly fashionable pro-free market theories associated with Adam Smith and David Ricardo as inappropriate to Germany’s stage of development. Friedrich List, the group’s greatest luminary, contended that the free market evangelism emanating from Britain was motivated largely by opportunism based on the country’s global technological leadership. In an attack on the new profession of ‘economics’, he wrote: Any nation which by means of protective duties and restrictions on navigation has raised her manufacturing power and her navigation to such a degree of development that no other nation can sustain free competition with her can do nothing wiser than to throw away these ladders of her greatness, to preach to other nations the benefits of free trade, and to declare in penitent tones that she has hitherto wandered in the paths of error, and has now for the first time succeeded in discovering the truth.18 List’s views on development had formed while he was living in the United States between 1825 and 1832, when he had studied the arguments for a protectionist industrial policy to nurture ‘infant industries’ set out by Alexander Hamilton in his Report on the Subject of Manufactures submitted to Congress in 1791.

Each north-east Asian state bore out the truism set down by the Japanologists Kazushi Ohkawa and Henry Rosovsky when analysing the original Meiji lift-off: ‘If there had been no increase in the output of the traditional economy, there could hardly have existed any domestic market for the output of modern industry.’75 At the industrial policy-making level, what stands out with the benefit of hindsight is that there was almost no role played in Japan, Korea or Taiwan by economists. Meiji Japan blazed its trail by following the Prussian, and earlier American, model which rejected the modern classical economics that began with Adam Smith and David Ricardo. The framers of the Meiji revolution were trained in Germany and at Tokyo University’s law school, which focused not so much on law as on European-style public administration.76 There was a strong prejudice against the theoretical approach associated with modern economics, and in favour of practical problem-solving. Yoshino Shinji, vice minister of the Ministry of Commerce and Industry in the 1930s, said of Japan’s implementation of German industrial planning techniques that: ‘Concerning the idea of control, there are many complex explanations of it in terms of logical principles, but all one really needs to understand it is common sense.’77 Japan exalted the educated generalist – its government bureaucracy distinguished between administrative officers and technical officers, and the former always outranked the latter.

Tougher technologies were left to later in the learning process – for instance, there was no continuous casting of steel in phase one as the Koreans focused on the simpler, more upstream tasks. To start with, they built a single blast furnace. Once each construction phase was launched, POSCO moved at breakneck speed, building around the clock so as to start earning a return on precious investment capital as soon as possible. Construction speed ought to be a comparative advantage of the developing state, not least because of much lower health and safety standards. At Pohang, 24-hour building contributed to a construction cost per tonne of steel capacity that was one-quarter that of Brazil.106 A second driver of success was that there was constant checking of the technical advice being received. Nippon Steel was the main provider of technology. Even though Japanese reparations financed much of Pohang, POSCO went to the Australian mining firm BHP to review all the Japanese engineering reports and to provide independent advice on equipment procurement.


pages: 182 words: 53,802

The Production of Money: How to Break the Power of Banks by Ann Pettifor

Ben Bernanke: helicopter money, Bernie Madoff, Bernie Sanders, bitcoin, blockchain, borderless world, Bretton Woods, capital controls, Carmen Reinhart, central bank independence, clean water, credit crunch, Credit Default Swap, cryptocurrency, David Graeber, David Ricardo: comparative advantage, debt deflation, decarbonisation, distributed ledger, Donald Trump, eurozone crisis, fiat currency, financial deregulation, financial innovation, financial intermediation, financial repression, fixed income, Fractional reserve banking, full employment, Hyman Minsky, inflation targeting, interest rate derivative, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Rogoff, light touch regulation, London Interbank Offered Rate, market fundamentalism, Martin Wolf, mobile money, Naomi Klein, neoliberal agenda, offshore financial centre, Paul Samuelson, Ponzi scheme, pushing on a string, quantitative easing, rent-seeking, Satyajit Das, savings glut, secular stagnation, The Chicago School, the market place, Thomas Malthus, Tobin tax, too big to fail

While financing the war was important, the authorities at the time were more concerned with establishing a bank-money system like that already established by the prosperous Dutch, and along the lines of that described by the Bank of England staff today. Back in 1694 the goal of the Bank of England was to mimic Holland in reducing the rate of interest paid by Dutch commercial firms, and to bring English interest rates into line with those that prevailed in the financially more advanced Netherlands. But this understanding of a system of bank money causing rates of interest to fall was lost in the classical economics of one David Ricardo (a financier). As a result, the theories of credit and associated bank-money policies lived on only, as Keynes put it, in ‘an underworld’ of scholars and activists. These included Henry Thornton, Thomas Malthus and Henry Dunning McLeod, and the sociologists Peter Knapp and Georg Simmel, who were not content to leave the question of the nature of money to the economists. Keynes’s great achievement was to retrieve this understanding from its burial by economic scholars.

As the world appears to hurtle towards an era of chaotic protectionism and the threat of war, how can democratic societies alter this disastrous course of events? I would argue that first and foremost, we must demand the transformation of our financial systems, to render the finance sector servant, not master, of both domestic economies and the global economy. The management of financial flows would begin to end the asymmetry caused by the absolute advantage that finance has enjoyed over the comparative advantages of trade and labour. (While trade and labour invariably face barriers to movement – physical, economic and political – in our globalised economy, finance faces virtually no barriers. Finance, therefore, enjoys an absolute advantage over trade and labour.) There is a question of how to manage financial flows. Capital control, outlined above, must be one part of the approach. But for management of the international financial system as a whole, we have once again to turn to Keynes, who experienced the 1930s directly.


pages: 586 words: 159,901

Wall Street: How It Works And for Whom by Doug Henwood

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accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, affirmative action, Andrei Shleifer, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, borderless world, Bretton Woods, British Empire, capital asset pricing model, capital controls, central bank independence, computerized trading, corporate governance, corporate raider, correlation coefficient, correlation does not imply causation, credit crunch, currency manipulation / currency intervention, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, dematerialisation, diversification, diversified portfolio, Donald Trump, equity premium, Eugene Fama: efficient market hypothesis, experimental subject, facts on the ground, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, George Akerlof, George Gilder, hiring and firing, Hyman Minsky, implied volatility, index arbitrage, index fund, information asymmetry, interest rate swap, Internet Archive, invisible hand, Irwin Jacobs, Isaac Newton, joint-stock company, Joseph Schumpeter, kremlinology, labor-force participation, late capitalism, law of one price, liberal capitalism, liquidationism / Banker’s doctrine / the Treasury view, London Interbank Offered Rate, Louis Bachelier, market bubble, Mexican peso crisis / tequila crisis, microcredit, minimum wage unemployment, money market fund, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, oil shock, Paul Samuelson, payday loans, pension reform, Plutocrats, plutocrats, price mechanism, price stability, prisoner's dilemma, profit maximization, publication bias, Ralph Nader, random walk, reserve currency, Richard Thaler, risk tolerance, Robert Gordon, Robert Shiller, Robert Shiller, selection bias, shareholder value, short selling, Slavoj Žižek, South Sea Bubble, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Market for Lemons, The Nature of the Firm, The Predators' Ball, The Wealth of Nations by Adam Smith, transaction costs, transcontinental railway, women in the workforce, yield curve, zero-coupon bond

There is no mindset that puts this country first" (quoted in Reich 1991, p. 141). Not only Americans are so free of patriotic sentiment. "To be in business," said Frank Stronach, chair of Magna International, a Canadian auto-parts maker that has shifted its production to Mexico, "your first mandate is to make money, and money has no heart, soul, conscience, homeland" (quoted in Bilello 1992). This is very far from the constraints on capital flows imagined by David Ricardo (1911/1987, chapter 7), the founding father of modern free trade theory: Experience, however, shows that the fancied or real insecurity of capital, when not under the immediate control of its owner, together with the natural disinclination which every man has to quit the country of his birth and connections, and intrust himself, with all his habits fixed, to a strange government and new laws, check the emigration of capital.

Sober people, who will give for the use of money no MARKET MODELS more than a part of what they are likely to make by the use of it, would not venture into the competition. A great part of the capital of the country would thus be kept out of the hands which were most likely to make a profitable and advantageous use of it, and thrown into those which were most likely to waste and destroy it.^'' This provides an interesting gloss on the junk bond era. Or, as David Ricardo (1911/1987, Chapter 21), put it: To the question, "who would lend money to farmers, manufacturers, and merchants, at 5 per cent, per annum, when another borrower, having little credit would give 7 or 8?" I reply, that every prudent or reasonable man would. Because the rate of interest is 7 or 8 per cent, there where the lender runs extraordinary risk is this any reason that it should be equally high in those places where they are secured from such risks?

One gets the sense, reading Keynes, that the driving force behind capitalism is sentiment, the bullish or bearish state of expectations, and that social reality is important only insofar as it changes expectations through surprise, pleasant or unpleasant. This is consonant with Keynes's highly aestheticized view of the world, his rebellion against what he called the extraordinary contraption of the Benthamite School, by which all possible consequences of alternative courses of action were supposed to have attached to them, first a number expressing their comparative advantage, and secondly another number expressing the probability of their following from the course of action in question; so that multiplying together the numbers attached to all the possible consequences of a given action and adding the results, we could discover what to do. In this way a mythical system of probable knowledge was employed to reduce the future to the same calculable status as the present (CU^XIV, p. 124).


pages: 464 words: 139,088

The End of Alchemy: Money, Banking and the Future of the Global Economy by Mervyn King

Andrei Shleifer, Asian financial crisis, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, Bretton Woods, British Empire, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, centre right, collapse of Lehman Brothers, creative destruction, Credit Default Swap, crowdsourcing, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, distributed generation, Doha Development Round, Edmond Halley, Fall of the Berlin Wall, falling living standards, fiat currency, financial innovation, financial intermediation, floating exchange rates, forward guidance, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, German hyperinflation, Hyman Minsky, inflation targeting, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, labour market flexibility, large denomination, liquidity trap, Long Term Capital Management, manufacturing employment, market clearing, Martin Wolf, Mexican peso crisis / tequila crisis, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, Nick Leeson, North Sea oil, Northern Rock, oil shale / tar sands, oil shock, open economy, paradox of thrift, Paul Samuelson, Ponzi scheme, price mechanism, price stability, purchasing power parity, quantitative easing, rent-seeking, reserve currency, Richard Thaler, rising living standards, Robert Shiller, Robert Shiller, Satoshi Nakamoto, savings glut, secular stagnation, seigniorage, stem cell, Steve Jobs, The Great Moderation, the payments system, Thomas Malthus, too big to fail, transaction costs, Tyler Cowen: Great Stagnation, yield curve, Yom Kippur War, zero-sum game

Adam Smith’s close friend, the chemist Joseph Black, said that while teaching at the University of Edinburgh, where students paid the professors in advance, he was ‘obliged to weigh [coins] when strange students come, there being a very large number who bring light guineas, so that I should be defrauded of many pounds every year if I did not act in self-defence against this class of students’.9 Counterfeiting continues today – indeed, coins are counterfeited more often than banknotes. The use of standardised coinage was a big step forward. Technology, however, did not stand still. As the English economist David Ricardo wrote in 1816: The introduction of the precious metals for the purposes of money may with truth be considered as one of the most important steps towards the improvement of commerce, and the arts of civilised life; but it is no less true that, with the advancement of knowledge and science, we discover that it would be another improvement to banish them again from the employment, to which, during a less enlightened period, they had been so advantageously applied.10 The drawback of using precious metals as money had been evident since at least the sixteenth century when the first European voyages across the Atlantic led to the discovery of gold and, especially, silver mines in the Americas.

Krawczyk, Jacek and Kunhong Kim (2009), ‘Satisficing Solutions to a Monetary Policy Problem’, Macroeconomic Dynamics, Vol. 13, pp. 46–80. Krugman, Paul (2011), ‘Mr. Keynes and the Moderns’, Vox, 21 June 2011. Kynaston, David (1994), The City of London: Vol 1: A World of Its Own, 1815–90, Chatto and Windus, London. Lainà, Patrizio (2015), ‘Proposals for Full-Reserve Banking: A Historical Survey from David Ricardo to Martin Wolf’, University of Helsinki, mimeo. Levitt, Steven and Stephen Dubner (2005), Freakonomics: A Rogue Economist Explores the Hidden Side of Everything, William Morrow/Harper Collins, New York. Lewis, Michael (1989), Liar’s Poker, W. W. Norton, New York. —— (2014), Flash Boys: A Wall Street Revolt, W. W. Norton, New York. Litan, Robert (1987), What Should Banks Do? Brookings Institution, Washington, DC.

That enabled such a bank to expand more rapidly than its rivals in a virtuous circle of growth. So the size of the financial sector grew and grew. Along the way it included a massive expansion of trading in new and complex financial instruments, covering activities such as sub-prime mortgage lending. When I visited New York in December 2003, I found all the major banks worrying about whether they should either emulate Citigroup’s strategy of using its size to obtain a comparative advantage in funding costs or abandon the aim of global reach and try to become a niche player in particular markets. Inevitably, perhaps, when the crisis came it was Citi that required a large bailout. Although it fell from grace in dramatic fashion, the fact that it wasn’t allowed to fail vindicated the original strategy. Before the crisis, banks paid large salaries and bonuses to people who created and analysed new products that could be sold to their clients.


pages: 193 words: 63,618

The Fair Trade Scandal: Marketing Poverty to Benefit the Rich by Ndongo Sylla

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British Empire, carbon footprint, corporate social responsibility, David Ricardo: comparative advantage, deglobalization, Doha Development Round, Food sovereignty, global value chain, illegal immigration, income inequality, income per capita, invisible hand, Joseph Schumpeter, labour mobility, land reform, market fundamentalism, mass immigration, means of production, Mont Pelerin Society, Naomi Klein, non-tariff barriers, offshore financial centre, open economy, Philip Mirowski, Plutocrats, plutocrats, price mechanism, purchasing power parity, Ronald Reagan, Scientific racism, selection bias, structural adjustment programs, The Wealth of Nations by Adam Smith, trade liberalization, transaction costs, transatlantic slave trade, trickle-down economics, Washington Consensus, zero-sum game

According to Magnusson, describing Smith as someone with mercantilist leanings is only problematic if he is considered as a supporter of laissez-faire and the inventor of the doctrine of comparative advantage. He argues that Smith’s ‘productive theory’ was never developed with a view to producing the comparative advantage doctrine, as Smith had doubts about its relevance given the context of his time. The principle of comparative advantage The comparative advantage doctrine first appeared under the pen of Robert Torrens before being popularised by David Ricardo. It provides the main argument in favour of free trade and the international division of labour based on specialisation. To understand the comparative advantage logic, one has to approach it from the perspective of the notion of absolute advantage. In a context where international trade is based on absolute costs, a nation that produces goods at a lesser cost than other nations, for instance, has little interest in trading with them.

.), countries will tend to specialise in the production and export of goods for which they have a comparative advantage. Thus, in countries where labour is the abundant factor, which is the case for developing countries, exports will include a strong labour component, especially unskilled. In contrast, in countries where capital is the abundant factor, as is the case for developed countries, exports will contain a strong capital component. Trade openness therefore enables developing countries to export unskilled labour in the form of goods. This tends to increase the level of income for their unskilled labour via an increased global demand for the goods they produce. Under specific assumptions, this model even predicts an equalisation of factor prices for nations that engage in international trading, following the principle of specialisation based on comparative advantage. Another advantage of trade openness, highlighted this time by the new theory of international trade, is that it helps make substantial economies of scale and scope.

At a time when England was considered the ‘workshop of the world’, this concept was clearly not in line with the prevailing free trading mood. To justify the benefits of free trade, Ricardo developed the idea of comparative advantage. He gave the example of cloth and wine to show that although England was less competitive than Portugal on each of these products taken in isolation, it was still in the country’s interest to maintain trade relations with Portugal. The example chosen by Ricardo distorted reality (at the time, England was more competitive than Portugal from an industrial point of view – see Hudson, 2009). It is his counterintuitive conclusion, however, that grabs the attention. Nowadays, in the field of family economics, comparative advantage is also used to justify the domestic division of labour: even if men can be more efficient at the market and in household chores, the economic rationale recommends that they specialise in market activities while women specialise in ‘domestic 65 Sylla T02779 01 text 65 28/11/2013 13:04 the fair trade scandal production’.


pages: 209 words: 80,086

The Global Auction: The Broken Promises of Education, Jobs, and Incomes by Phillip Brown, Hugh Lauder, David Ashton

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active measures, affirmative action, barriers to entry, Branko Milanovic, BRICs, business process, business process outsourcing, call centre, collective bargaining, corporate governance, creative destruction, credit crunch, David Ricardo: comparative advantage, deindustrialization, deskilling, Frederick Winslow Taylor, full employment, future of work, glass ceiling, global supply chain, immigration reform, income inequality, industrial cluster, industrial robot, intangible asset, job automation, Joseph Schumpeter, knowledge economy, knowledge worker, labour market flexibility, low skilled workers, manufacturing employment, market bubble, market design, neoliberal agenda, new economy, Paul Samuelson, pensions crisis, post-industrial society, profit maximization, purchasing power parity, QWERTY keyboard, race to the bottom, Richard Florida, Ronald Reagan, shareholder value, Silicon Valley, sovereign wealth fund, stem cell, The Bell Curve by Richard Herrnstein and Charles Murray, The Wealth of Nations by Adam Smith, Thomas L Friedman, trade liberalization, transaction costs, trickle-down economics, winner-take-all economy, working poor, zero-sum game

Arguably everyone wants these things from a job but the difference with Generation Y is they’ll talk with their feet when their needs are not fulfilled.”15 From Bloody Wars to Knowledge Wars This evolutionary model of an inexorable shift from physical to mental labor is not limited to the changing occupational structure within North America or Europe. It extends to include the relationship The False Promise 19 between nation-states based on the principles of free trade and comparative advantage. David Ricardo, a nineteenth-century English political economist, argued the case for free trade, believing that rich and poor nations alike could gain from trading with each other as long as they specialized in products for which they had an advantage. The rise of the global knowledge economy was believed to remove much of the source of conflict and strife between nations. Trade liberalization was presented as a “win-win” opportunity for emerging and affluent nations.

However, this is not necessarily good news for American workers because, although their own incomes have stagnated or fallen, it does little to narrow the gap with low-wage competitors. Inside-Out Economic Development It wasn’t supposed to be like this. Emerging economies where expected to concentrate on the bodywork and slowly evolve toward more heady activities moving through the stages of economic development.24 But the quality-cost revolution challenges established ideas about the evolutionary model of economic progress and comparative advantage, lending support to Alexander Gerschenkron, a Russian-born economic historian at Harvard University. He argued against much of the literature in development economics in the 1960s by claiming that relative economic backwardness may not prevent emerging economies from leapfrogging more established economic competitors by finding substitutes for what are often seen as the prerequisites for achieving global quality standards.25 One of the advantages of backwardness is that there is no legacy of industrialism, as companies, regions, and nations can rapidly incorporate new technologies and business practices while taking advantage of low labor costs.

In part, an assumed sense of common fate associated with national economic development reflects the experience of the developed economies of the past, where economic innovation and social progress were assumed to march to the same beat.27 As we will show, the economic fates of those living in America and other developed economies have also diverged, perhaps in a less visible way, but its consequences are no less problematic. National economic performance in much of the expert literature is explained in terms of path dependence. This highlights historical, social, and institutional sources of comparative advantage to explain differences in national economic performance.28 Differences in social foundations are believed to explain why, for example, Germany has maintained a competitive advantage in high-end engineering. The high quality of its technical education is organized through the dual system of workplace and college training, and high trust relations within the Mittelstadt sector of small and medium-sized family-dominated companies encourage sharing ideas, technologies, and organizational know-how that contribute to competitive advantage.


pages: 219 words: 61,720

American Made: Why Making Things Will Return Us to Greatness by Dan Dimicco

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2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, 3D printing, Affordable Care Act / Obamacare, American energy revolution, American Society of Civil Engineers: Report Card, Bakken shale, barriers to entry, Bernie Madoff, carbon footprint, clean water, crony capitalism, currency manipulation / currency intervention, David Ricardo: comparative advantage, decarbonisation, fear of failure, full employment, Google Glasses, hydraulic fracturing, invisible hand, job automation, knowledge economy, laissez-faire capitalism, Loma Prieta earthquake, manufacturing employment, oil shale / tar sands, Ponzi scheme, profit motive, Report Card for America’s Infrastructure, Ronald Reagan, Silicon Valley, smart grid, smart meter, sovereign wealth fund, The Wealth of Nations by Adam Smith, too big to fail, uranium enrichment, Washington Consensus, Works Progress Administration

And free trade is supposed to make everyone richer, more equal, and improve global security because countries that are selling to each other aren’t likely shooting at one another. Free trade turns on the theory of comparative advantage, which says a country has an advantage in producing a commodity—it could be clothing, could be steel—if the opportunity costs of production are lower. Under the theory laid out nearly 200 years ago by British economist David Ricardo, countries could be pretty good at producing something (he used the examples of English textiles and Portuguese wine), but the country that is marginally better has the comparative advantage and should specialize in that thing. The idea is that everyone will gain and nobody will lose, because free trade ensures that the only transactions are mutually beneficial ones.

Too bad it doesn’t exist outside the cozy confines of academia and the mainstream media. In the real world, we don’t have free trade. We’ve never had free trade. At best, we have managed trade. At worst, we have predatory and protectionist countries unfairly exploiting our belief in free trade to their advantage. When governments get involved and stack the deck in their own favor instead of letting comparative advantage rule, then you have distorted trade. Call it free trade all you like, but it isn’t so. My career has spanned a period when U.S. leaders have outright ignored sound trade policy in the name of free trade. When I started out as a young engineer in the 1970s, we were in conflict with Japan and Germany over steel and cars. In those days, if you worked for a U.S. steel company, unionized or not, you didn’t buy a foreign car.

Yet even in 1955, when the United States negotiated the first post-occupation trade deal there, the Japanese did not act like a conquered people. American negotiators argued that Japan should cut its tariffs on auto imports because the United States was the world’s leading automaker, so it would be to Japan’s advantage to simply import U.S. cars and specialize in export goods wherein Japan had a comparative advantage. In response, Japan’s chief trade negotiator wrote, “If the theory of international trade were pursued to its ultimate conclusion, the United States would specialize in the production of automobiles and Japan in the production of tuna.”5 Japan said it would produce cars and package tuna while protecting and encouraging key domestic industries. In short, free trade was a luxury that Japan decided it could not afford.


pages: 238 words: 73,824

Makers by Chris Anderson

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3D printing, Airbnb, Any sufficiently advanced technology is indistinguishable from magic, Apple II, autonomous vehicles, barriers to entry, Buckminster Fuller, Build a better mousetrap, business process, commoditize, Computer Numeric Control, crowdsourcing, dark matter, David Ricardo: comparative advantage, death of newspapers, dematerialisation, Elon Musk, factory automation, Firefox, future of work, global supply chain, global village, industrial robot, interchangeable parts, Internet of things, inventory management, James Hargreaves, James Watt: steam engine, Jeff Bezos, job automation, Joseph Schumpeter, Kickstarter, Lean Startup, manufacturing employment, Mark Zuckerberg, means of production, Menlo Park, Network effects, profit maximization, QR code, race to the bottom, Richard Feynman, Richard Feynman, Ronald Coase, Rubik’s Cube, self-driving car, side project, Silicon Valley, Silicon Valley startup, Skype, slashdot, South of Market, San Francisco, spinning jenny, Startup school, stem cell, Steve Jobs, Steve Wozniak, Steven Levy, Stewart Brand, supply-chain management, The Nature of the Firm, The Wealth of Nations by Adam Smith, transaction costs, trickle-down economics, Whole Earth Catalog, X Prize, Y Combinator

My money is on the first model: something closer to today’s commercial Web—ever-accelerating entrepreneurship and innovation with ever-dropping barriers to entry. In this future, the pendulum of manufacturing will swing back to the most nimble developed countries, despite their relatively expensive labor. Globalization and communications flattened the world once, drawing manufacturing to low-cost labor in the developing world, a process first observed in the nineteenth century by David Ricardo as the triumph of “comparative advantage.” Now we are flattening it again, but along a different dimension. Thanks to automation, labor costs are a small and shrinking fraction of the cost of making something. For electronics, they can be just a few percent. At that point, other factors, from transportation costs to time, start to matter more. For example, the 3D Robotics factory in San Diego buys its electronics manufacturing equipment and components for essentially the same price our Chinese competitors do.

Of course, humans have been using tools since prehistory and one could argue that the “technologies” of fire, the plow, domesticated animals, and selective breeding were as defining as any steam engine. But agricultural technologies just allowed us to feed more people more easily. There was something different about the machines that allowed us to make products that improved our quality of life, from clothes to transportation. For one thing, people around the world wanted such goods, so they drove trade. Trade, in turn, drove the engine of comparative advantage, so that countries did what they could do best and imported the rest, which improved everyone’s productivity. And that, in turn, drove growth. As went the cotton mills of Manchester, so went the world economy. The Second Industrial Revolution The term industrial revolution itself was coined in 1799 by Louis-Guillaume Otto, a French diplomat, in a letter reporting that such a thing was under way in France (revolutions were much in vogue).16 Revolution was also, perhaps unsurprisingly, the term used to describe the industrial changes by Friedrich Engels, whose capitalist critiques in the mid-1800s helped lead to Marxism.

In a sense, this is just the extreme of the specialization that Adam Smith originally recognized in The Wealth of Nations as the key to an efficient market. People should do only what they do best, he said, and trade with others who make other specialized goods. No one person or town should try to do it all, since a society can do far more collectively with an efficient division of labor—comparative advantage plus trade equals growth. What was good in the eighteenth century is even better in the twenty-first, now that specialists have access to global supply chains for their commodity input materials and global consumer markets for their niche output products. Nearly thirty years ago, two MIT professors, Michael Piore and Charles Sabel, predicted this transition in a book titled The Second Industrial Divide.


Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages by Carlota Pérez

agricultural Revolution, Big bang: deregulation of the City of London, Bob Noyce, Bretton Woods, capital controls, commoditize, Corn Laws, creative destruction, David Ricardo: comparative advantage, deindustrialization, distributed generation, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, Hyman Minsky, informal economy, joint-stock company, Joseph Schumpeter, knowledge economy, late capitalism, market fundamentalism, new economy, nuclear winter, offshore financial centre, post-industrial society, profit motive, railway mania, Robert Shiller, Robert Shiller, Sand Hill Road, Silicon Valley, Simon Kuznets, South Sea Bubble, Thomas Kuhn: the structure of scientific revolutions, Thorstein Veblen, trade route, tulip mania, Upton Sinclair, Washington Consensus

This echoed the assertions of Irving Fisher, the brilliant economist, who had the misfortune of declaring in mid-1929 that ‘stock prices had reached what looked like a permanently high plateau’.241 The Methodenstreit between the historical school and the neo-classicals, which in practice expelled the state, Society and the historical context from economic theory, occurred in the period of installation of the third surge, which in the periodization proposed here is parallel to the installation period of the fifth, when the monetarists defeated the Keynesians.242 With a longer time frame, in Heilbroner’s classic about the ‘worldly philosophers’,243 where he locates each of the great economic thinkers in the context of his times, we get a glimpse at the possible experiential source of some of their interpretations. If David Ricardo had not been a successful stockbroker living in the midst of the maturing first surge, he might not have realized the threat to industrial profits coming from the protective Corn Laws and the rising cost of land, so he might not have come up with a theory of rents. If Veblen had not lived through the ‘savage world’ of the 1880s and 1890s he might not have developed his views about the negative role of financial capital in contrast with that of the engineers.

After asserting that the long waves he had established, ‘relative to the series most important in economic life, are international; and the timing of these cycles corresponds fairly well for European Uneven Development and Time-Lags in Diffusion 63 capitalist countries’, he added that, though the USA may have peculiarities, ‘we can venture ... that the same timing holds also for the United States’.81 What is held in this book is that, though major crises tend to be nearly simultaneous across industries and the world, because of instant transmission of the violent contraction of markets, most diffusion processes are sequential and lagged, taking the form of wider and wider ripples of propagation. As paradigms mature in the core countries, investment opportunities move further and further out, seeking comparative advantages, different conditions and possibilities for outstretching saturated markets. It would seem that each paradigm spreads in ripple-like fashion,82 both from sector to sector across the industrial structure and geographically inside each country and across the world. In terms of its sectoral impact, each technological revolution begins with a group of core industries, usually involving some energy source or another allpervasive input, a new infrastructure and a few main products and processes.83 From there it spreads to the most closely connected industries forming a strongly interactive constellation with very high synergy and intensive feedback effects.

But these countries had not gone through a Frenzy as intense as that of the United States, hence they did not have such a monumental collapse to come out from; but, neither did they benefit from the advantages of the frenzy phase: that is, they did not have a fully installed industrial base for deploying mass production, nor had they developed a vast road network accompanied by electric utilities, nor had the paradigm diffused as deeply as in the USA for the establishment of a mass-consumption mode of growth. So, neither alone nor together could those countries pull the world onto a synergy period and their recoveries were fragile.201 201. An additional point to make is that the nature of the particular paradigm can favor certain comparative advantages. For the deployment of the ‘homogenizing’ consumption patterns of mass production, large size and population were an advantage. The USA and the Soviet Union had them (and so would have been the case of a Nazi empire in Europe). 126 Technological Revolutions and Financial Capital In the meantime, Roosevelt’s New Deal, which tried to apply many of the right recipes for successful synergy, was being systematically opposed for fear of Socialism.


pages: 291 words: 81,703

Average Is Over: Powering America Beyond the Age of the Great Stagnation by Tyler Cowen

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Amazon Mechanical Turk, Black Swan, brain emulation, Brownian motion, Cass Sunstein, choice architecture, complexity theory, computer age, computer vision, computerized trading, cosmological constant, crowdsourcing, dark matter, David Brooks, David Ricardo: comparative advantage, deliberate practice, Drosophila, en.wikipedia.org, endowment effect, epigenetics, Erik Brynjolfsson, eurozone crisis, experimental economics, Flynn Effect, Freestyle chess, full employment, future of work, game design, income inequality, industrial robot, informal economy, Isaac Newton, John Markoff, Khan Academy, labor-force participation, Loebner Prize, low skilled workers, manufacturing employment, Mark Zuckerberg, meta analysis, meta-analysis, microcredit, Myron Scholes, Narrative Science, Netflix Prize, Nicholas Carr, pattern recognition, Peter Thiel, randomized controlled trial, Ray Kurzweil, reshoring, Richard Florida, Richard Thaler, Ronald Reagan, Silicon Valley, Skype, statistical model, stem cell, Steve Jobs, Turing test, Tyler Cowen: Great Stagnation, upwardly mobile, Yogi Berra

In these pages I paint a vision of a future which at first appears truly strange, but at least to me is also discomfortingly familiar and indeed intuitive. As a blogger and economics writer, I find that the question I receive most often from readers is—by far—something like: “What will the low- and mid-skilled jobs of the future look like?” This question is on everyone’s mind with a new urgency but it goes back to David Ricardo and Charles Babbage in the nineteenth century. Ricardo was a leading economist of his time who wrote on “the machinery question,” while Babbage was the intellectual father of the modern computer and he—not coincidentally—also wrote on how radical mechanization was going to reshape work. These questions have reemerged as culturally central because we are at the crux of a technological revolution once again.

The individual Mormon has influence as a living, walking exemplar of what the convert can aspire to. Of course, educational institutions aren’t ready to admit how much they share with churches. These temples of secularism don’t want to admit they are about simple tasks such as motivating the slugs or acculturating people into the work habits and sociological expectations of the so-called educated class. As it currently stands, we are losing track of a college education’s real comparative advantage. This was an acceptable bargain when the wages of educators and administrators were low, and government budgets had more slack, but it’s becoming increasingly expensive. We like to pretend our instructors teach as well as chess computers, but too often they don’t come close to that ideal. They are something far less noble, something that we are afraid to call by its real name, something quite ordinary: They are a mix of exemplars and nags and missionaries, packaged with a marketing model that stresses their nobility and a financial model that pays them pretty well and surrounds them with administrators.


pages: 242 words: 68,019

Why Information Grows: The Evolution of Order, From Atoms to Economies by Cesar Hidalgo

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Ada Lovelace, Albert Einstein, Arthur Eddington, assortative mating, Claude Shannon: information theory, David Ricardo: comparative advantage, Douglas Hofstadter, Everything should be made as simple as possible, frictionless, frictionless market, George Akerlof, Gödel, Escher, Bach, income inequality, income per capita, industrial cluster, information asymmetry, invention of the telegraph, invisible hand, Isaac Newton, James Watt: steam engine, Jane Jacobs, job satisfaction, John von Neumann, New Economic Geography, Norbert Wiener, p-value, Paul Samuelson, phenotype, price mechanism, Richard Florida, Ronald Coase, Rubik’s Cube, Silicon Valley, Simon Kuznets, Skype, statistical model, Steve Jobs, Steve Wozniak, Steven Pinker, The Market for Lemons, The Nature of the Firm, The Wealth of Nations by Adam Smith, total factor productivity, transaction costs, working-age population

When discussing the competitiveness of nations in his book On Competition, Porter remarked: According to standard economic theory, factors of production—labor, land, natural resources, capital, infrastructure—will determine the flow of trade. A nation will export those goods that make most use of the factors with which it is relatively well endowed. This doctrine, whose origins date back to Adam Smith and David Ricardo and that is embedded in classical economics, is at best incomplete and at worst incorrect. . . . Contrary to conventional wisdom, simply having a general work force that is high school or even college educated represents no competitive advantage in modern international competition. To support competitive advantage a factor must be highly specialized to an industry’s particular needs—a scientific institute specialized in optics, a pool of venture capital to fund software companies. . . .

AnnaLee Saxenian, “Inside-Out: Regional Networks and Industrial Adaptation in Silicon Valley and Route 128,” Cityscape, May 1996, 41–60. 15. For a discussion on adaptability see also Walter Powell, “Neither Market nor Hierarchy: Network Forms of Organization,” in Michael J. Handel, ed., The Sociology of Organizations: Classic, Contemporary, and Critical Readings (Thousand Oaks, CA: Sage Publications, 2003), 104–117. 16. As the sociologist Walter Powell noted, “Networks . . . possess some degree of comparative advantage in coping with an environment that places a premium on innovation and customized products” (ibid.). Networks are more adaptable than hierarchies because partnerships and coalitions are a faster means of adaptability than internal development (see Michael E. Porter and Mark B. Fuller, “Coalitions and Global Strategy,” Competition in Global Industries 1, no. 10 [1986]: 315–343), but also because they are better at communicating information that is crucial for the members of a regional cluster to learn about changes in markets and technologies. 17.


pages: 206 words: 70,924

The Rise of the Quants: Marschak, Sharpe, Black, Scholes and Merton by Colin Read

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Albert Einstein, Bayesian statistics, Black-Scholes formula, Bretton Woods, Brownian motion, capital asset pricing model, collateralized debt obligation, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, discovery of penicillin, discrete time, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, financial innovation, fixed income, floating exchange rates, full employment, Henri Poincaré, implied volatility, index fund, Isaac Newton, John Meriwether, John von Neumann, Joseph Schumpeter, Kenneth Arrow, Long Term Capital Management, Louis Bachelier, margin call, market clearing, martingale, means of production, moral hazard, Myron Scholes, naked short selling, Paul Samuelson, price stability, principal–agent problem, quantitative trading / quantitative finance, RAND corporation, random walk, risk tolerance, risk/return, Ronald Reagan, shareholder value, Sharpe ratio, short selling, stochastic process, The Chicago School, the scientific method, too big to fail, transaction costs, tulip mania, Works Progress Administration, yield curve

He took these insights to unexpected heights that redefined economics and finance in ways that still remain relevant today. The Kiel School Before the First World War, our understanding of economics took one of two forms. For some, the analysis was rhetorical and straddled the boundary between politics and economics. The political economy of Karl Marx (1818–1883), John Stuart Mill (1806–1873), David Ricardo (1772–1823), or even Adam Smith (1723–1790) treated such topics as trade, economic systems, and the ownership of resources and the means of production with unsophisticated graphical tools and with the strength of philosophical argument and logic. Alternatively, others, most notably Léon Walras (1834–1910), Antoine Augustin Cournot (1801–1877), Francis Ysidro Edgeworth (1845–1926), and Irving Fischer (1867–1947), enhanced our understanding of individual markets by introducing to the discipline increasingly sophisticated mathematical tools. 16 The Times 17 While the insights of these early great minds in economics remain valid today, their theories were not sufficiently rigorous and analytic to answer questions in modern finance.

He concluded that Black and Scholes must be correct after all, based on what is now called a “no arbitrage opportunity” strategy. The strength of his interpretation, though, is that it does not rely at all on pricing models for the underlying security. It is simply a natural implication of no arbitrage opportunities. While the Black-Scholes approach was static, in that it gives the option price at a fixed point in time, Merton’s intuition and comparative advantage was in looking at dynamic systems as processes. In his treatment, interest rates can change, and the equation also permitted dividends, as a percentage of the stock price. But, while Merton’s derivation is the most elegant and general of the three approaches, and while he was encouraged to publish his results immediately, he declined to do so until Black and Scholes had successfully published their derivation.

The Economic Singularity: Artificial intelligence and the death of capitalism by Calum Chace

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3D printing, additive manufacturing, agricultural Revolution, AI winter, Airbnb, artificial general intelligence, augmented reality, autonomous vehicles, banking crisis, basic income, Baxter: Rethink Robotics, Berlin Wall, Bernie Sanders, bitcoin, blockchain, call centre, Chris Urmson, congestion charging, credit crunch, David Ricardo: comparative advantage, Douglas Engelbart, Elon Musk, en.wikipedia.org, Erik Brynjolfsson, Flynn Effect, full employment, future of work, gender pay gap, gig economy, Google Glasses, Google X / Alphabet X, ImageNet competition, income inequality, industrial robot, Internet of things, invention of the telephone, invisible hand, James Watt: steam engine, Jaron Lanier, Jeff Bezos, job automation, John Markoff, John Maynard Keynes: technological unemployment, John von Neumann, Kevin Kelly, knowledge worker, lifelogging, lump of labour, Lyft, Marc Andreessen, Mark Zuckerberg, Martin Wolf, McJob, means of production, Milgram experiment, Narrative Science, natural language processing, new economy, Occupy movement, Oculus Rift, PageRank, pattern recognition, post scarcity, post-industrial society, precariat, prediction markets, QWERTY keyboard, railway mania, RAND corporation, Ray Kurzweil, RFID, Rodney Brooks, Satoshi Nakamoto, Second Machine Age, self-driving car, sharing economy, Silicon Valley, Skype, software is eating the world, speech recognition, Stephen Hawking, Steve Jobs, TaskRabbit, technological singularity, The Future of Employment, Thomas Malthus, transaction costs, Tyler Cowen: Great Stagnation, Uber for X, universal basic income, Vernor Vinge, working-age population, Y Combinator, young professional

[xxv] During the early 19th century, when the industrial revolution was in full swing, most members of the newly-established social science of economics argued that any unemployment caused by the introduction of machinery would be resolved by the growth in overall economic demand. But there were prominent figures who took the more pessimistic view, that innovation could cause long-term unemployment. They included Thomas Malthus, John Stuart Mill, and even the most respected economist of the time, David Ricardo.[xxvi] The Luddite fallacy and economic theory The debate can get quite technical, but there are two reasons why it has been correct to reject the Luddite fallacy up until now. The first reason is economic theory: companies introduce machines because they increase production and cut costs. This increase in supply builds up the wealth in the economy as a whole, and hence the demand for labour.

The third reason is that humans are creative and ingenious. There are many important businesses and activities now that could not have been imagined 50 years ago. In fact, Autor accuses Martin Ford of arrogance in writing off human ingenuity. In an article for the Journal of Economic Perspectives (summer 2015) entitled “Why are there still so many jobs?”,[lv] Autor forecasts that people will retain a comparative advantage in so-called “human” attributes such as interpersonal interaction, flexibility, adaptivity. He argues that many jobs – like radiologist – combine these with the routine, predictable tasks where computers win. Autor believes it will not be possible to separate these two types of tasks, so humans will continue to carry out the whole bundle. More generally, Autor is also one of those who believe the rate of change today is over-hyped.


pages: 935 words: 267,358

Capital in the Twenty-First Century by Thomas Piketty

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accounting loophole / creative accounting, Asian financial crisis, banking crisis, banks create money, Berlin Wall, Branko Milanovic, British Empire, capital controls, Capital in the Twenty-First Century by Thomas Piketty, carbon footprint, central bank independence, centre right, circulation of elites, collapse of Lehman Brothers, conceptual framework, corporate governance, correlation coefficient, David Ricardo: comparative advantage, demographic transition, distributed generation, diversification, diversified portfolio, European colonialism, eurozone crisis, Fall of the Berlin Wall, financial intermediation, full employment, German hyperinflation, Gini coefficient, high net worth, Honoré de Balzac, immigration reform, income inequality, income per capita, index card, inflation targeting, informal economy, invention of the steam engine, invisible hand, joint-stock company, Joseph Schumpeter, Kenneth Arrow, market bubble, means of production, mortgage debt, mortgage tax deduction, new economy, New Urbanism, offshore financial centre, open economy, Paul Samuelson, pension reform, purchasing power parity, race to the bottom, randomized controlled trial, refrigerator car, regulatory arbitrage, rent control, rent-seeking, Robert Gordon, Ronald Reagan, Simon Kuznets, sovereign wealth fund, Steve Jobs, The Nature of the Firm, the payments system, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, trade liberalization, very high income, Vilfredo Pareto, We are the 99%, zero-sum game

It is important to realize, however, that the economic and social transformations of the late eighteenth and early nineteenth centuries were objectively quite impressive, not to say traumatic, for those who witnessed them. Indeed, most contemporary observers—and not only Malthus and Young—shared relatively dark or even apocalyptic views of the long-run evolution of the distribution of wealth and class structure of society. This was true in particular of David Ricardo and Karl Marx, who were surely the two most influential economists of the nineteenth century and who both believed that a small social group—landowners for Ricardo, industrial capitalists for Marx—would inevitably claim a steadily increasing share of output and income.2 For Ricardo, who published his Principles of Political Economy and Taxation in 1817, the chief concern was the long-term evolution of land prices and land rents.

I will return to this issue later. The Ups and Downs of Ricardian Equivalence This long and tumultuous history of public debt, from the tranquil rentiers of the eighteenth and nineteenth centuries to the expropriation by inflation of the twentieth century, has indelibly marked collective memories and representations. The same historical experiences have also left their mark on economists. For example, when David Ricardo formulated in 1817 the hypothesis known today as “Ricardian equivalence,” according to which, under certain conditions, public debt has no effect on the accumulation of national capital, he was obviously strongly influenced by what he witnessed around him. At the moment he wrote, British public debt was close to 200 percent of GDP, yet it seemed not to have dried up the flow of private investment or the accumulation of capital.

This procedure will also allow me to post revised online versions and updates of the tables, graphs, and technical apparatus. I welcome input from readers of the book or website, who can send comments and criticisms to piketty@ens.fr. Introduction 1. The English economist Thomas Malthus (1766–1834) is considered to be one of the most influential members of the “classical” school, along with Adam Smith (1723–1790) and David Ricardo (1772–1823). 2. There is of course a more optimistic school of liberals: Adam Smith seems to belong to it, and in fact he never really considered the possibility that the distribution of wealth might grow more unequal over the long run. The same is true of Jean-Baptiste Say (1767–1832), who also believed in natural harmony. 3. The other possibility is to increase supply of the scarce good, for example by finding new oil deposits (or new sources of energy, if possible cleaner than oil), or by moving toward a more dense urban environment (by constructing high-rise housing, for example), which raises other difficulties.


pages: 364 words: 99,613

Servant Economy: Where America's Elite Is Sending the Middle Class by Jeff Faux

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back-to-the-land, Bernie Sanders, Black Swan, Bretton Woods, BRICs, British Empire, call centre, centre right, cognitive dissonance, collateralized debt obligation, collective bargaining, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency manipulation / currency intervention, David Brooks, David Ricardo: comparative advantage, falling living standards, financial deregulation, financial innovation, full employment, hiring and firing, Howard Zinn, Hyman Minsky, illegal immigration, indoor plumbing, informal economy, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, lake wobegon effect, Long Term Capital Management, market fundamentalism, Martin Wolf, McMansion, medical malpractice, mortgage debt, Myron Scholes, Naomi Klein, new economy, oil shock, old-boy network, Paul Samuelson, Plutocrats, plutocrats, price mechanism, price stability, private military company, Ralph Nader, reserve currency, rising living standards, Robert Shiller, Robert Shiller, rolodex, Ronald Reagan, school vouchers, Silicon Valley, single-payer health, South China Sea, statistical model, Steve Jobs, Thomas L Friedman, Thorstein Veblen, too big to fail, trade route, Triangle Shirtwaist Factory, union organizing, upwardly mobile, urban renewal, War on Poverty, We are the 99%, working poor, Yogi Berra, Yom Kippur War

But the Reagan-Clinton deals were as much or more about freeing capital as expanding trade. Their purpose was to give U.S. corporations the right to produce offshore and sell to the U.S. market. As the president of Peru, Alan Garcia, told the U.S. Chamber of Commerce after the 2007 U.S.-Peru free-trade agreement in December of that year, “Come and open your factories in my country so we can sell your own products back to the U.S.” This is not what Adam Smith, David Ricardo, and the classical advocates of free trade had in mind. But the actual content of these agreements was unimportant to economists defending intellectual dogma. Indeed, a survey of the economists who supported the first of these deals, NAFTA, showed that only one in nine had actually read the treaty itself.4 Not even the venerable Nobel Prize winner Paul Samuelson, a founder of the neoliberal economics that dominated postwar economic policy and a staunch supporter of free trade, was exempt from the contempt of the academic inquisition that tolerates no heresy.

When Samuelson suggested in a 2004 article that the United States might not, after all, benefit from free trade, he was dismissed as an old man who had lost his marbles.5 His point was simply that the dogma that free trade was a win-win for everyone had become dubious as (1) highly skilled workers overseas became increasingly cheaper to hire, (2) the gains from producing goods more cheaply elsewhere went to capital rather than labor, and (3) the United States lost a comparative advantage in expanding industries. Eventually, defenders of the free-trade deals admitted that they were not quite win-win for everyone. The very unskilled and uneducated, of course, might lose their jobs. But American workers were assured that their better education and access to superior U.S. technology would allow them to produce more high-value products. They would move up the global wage ladder, while the workers in other countries would get the vacated lower-wage jobs at the bottom.

The share of jobs for which a college education will actually be required is projected to be just 21 percent.6 It turned out that much of the job and wealth creation associated with the information economy was tied to the making of goods; success results from setting trained people to work on problems in the context of day-to-day production, whether of sneakers, automobiles, pharmaceuticals, or Hollywood films. The more we offshored production jobs, the more we offshored research and development as well. What had been touted as a natural comparative advantage for the United States in skills, technology, and organization was in reality duplicated or even surpassed by other nations. “American” transnational corporations were locating their research and development departments in India, Taiwan, and China, where the skills were high and came cheap. Soon IBM had more employees in China than in the United States. Apple had 25,000 workers in the United States and about 250,000 on contract in China.


pages: 354 words: 92,470

Grave New World: The End of Globalization, the Return of History by Stephen D. King

9 dash line, Admiral Zheng, air freight, Albert Einstein, Asian financial crisis, bank run, banking crisis, barriers to entry, Berlin Wall, Bernie Sanders, bilateral investment treaty, bitcoin, blockchain, Bonfire of the Vanities, borderless world, Bretton Woods, British Empire, capital controls, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, collateralized debt obligation, colonial rule, corporate governance, credit crunch, currency manipulation / currency intervention, currency peg, David Ricardo: comparative advantage, debt deflation, deindustrialization, Deng Xiaoping, Doha Development Round, Donald Trump, Edward Snowden, eurozone crisis, facts on the ground, failed state, Fall of the Berlin Wall, falling living standards, floating exchange rates, Francis Fukuyama: the end of history, full employment, George Akerlof, global supply chain, global value chain, hydraulic fracturing, Hyman Minsky, imperial preference, income inequality, income per capita, incomplete markets, inflation targeting, information asymmetry, Internet of things, invisible hand, joint-stock company, Long Term Capital Management, Martin Wolf, mass immigration, Mexican peso crisis / tequila crisis, moral hazard, Nixon shock, offshore financial centre, oil shock, old age dependency ratio, paradox of thrift, Peace of Westphalia, Plutocrats, plutocrats, price stability, profit maximization, quantitative easing, race to the bottom, rent-seeking, reserve currency, reshoring, rising living standards, Ronald Reagan, Scramble for Africa, Second Machine Age, Skype, South China Sea, special drawing rights, technology bubble, The Great Moderation, The Market for Lemons, the market place, trade liberalization, trade route, Washington Consensus, WikiLeaks, Yom Kippur War, zero-sum game

Moreover, if the claims made by the Office of the United States Trade Representative were really true, why would any country other than the US sign up to the deal? The Office’s case appeared to be based on a levelling of the playing field, implying that the other signatories had, in some sense, been cheating: seen this way, TPP represented a chance for the US to get its own back. Yet the Office’s interpretation was wide of the mark: like any meaningful trade agreement, TPP would have been disruptive for all concerned. Where David Ricardo’s comparative advantage applied, countries would have ended up specializing in some areas and exiting from others.10 In other words, there would have been both winners and losers in the US labour market, even if overall economic activity had ended up at a higher level (labour standards across the region would also have ended up higher, one reason why TPP’s demise comes at considerable cost).11 Where global supply chains were formed, specialist production would have been concentrated in some countries, and would have disappeared from others: again, there would have been labour market disruption even if the pie had increased in size.

Yet this wasn’t simply a story about an extended daisy-chain of manufacturing processes across countries and continents. For the supply chains to work, there had to be new factories, closer business relationships, upgraded cross-border financial arrangements, better logistics, protection of intellectual property rights and effective training programmes. In other words, the supply-chain story went well beyond the nineteenth-century Ricardian concept of comparative advantage, in which Portugal and England would specialize, respectively, in the production of port and cloth. A new global economic ecosystem was being constructed. And its foundations were underpinned by information technology. The combination of enhanced capital mobility and faster – and cheaper – information flows changed the nature of international economic connections. The new global economic ecosystem no longer depended on trade alone.

Chinese labour may be cheaper than US labour, but the increase in computational power since the 1980s means that an increasing number of tasks that once could only have been performed by human beings can now be carried out by machines, which are capable of working 24 hours a day, seven days a week.10 To date, this is primarily true of tasks with a considerable degree of repetition – typically those in factories or involving a high volume of clerical work. In the process of automating many of these tasks, some workers gain even as others lose. People blessed with high levels of creativity, intuition, social skills and problem-solving techniques may well flourish: computerization allows them to concentrate on the tasks in which they have a comparative advantage. Others may fall by the wayside, discovering that even a decent high-school education might not be enough to guarantee them the opportunities they aspire to. At the same time, given that computers have yet to (inexpensively) replicate common manual tasks – a human is more adept than a robot at cleaning a bathroom or waiting tables – those who fall by the wayside may find themselves in competition for manual jobs with others who have fewer educational qualifications.


pages: 372 words: 107,587

The End of Growth: Adapting to Our New Economic Reality by Richard Heinberg

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3D printing, agricultural Revolution, back-to-the-land, banking crisis, banks create money, Bretton Woods, carbon footprint, Carmen Reinhart, clean water, cloud computing, collateralized debt obligation, computerized trading, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, David Graeber, David Ricardo: comparative advantage, dematerialisation, demographic dividend, Deng Xiaoping, Elliott wave, en.wikipedia.org, energy transition, falling living standards, financial deregulation, financial innovation, Fractional reserve banking, full employment, Gini coefficient, global village, happiness index / gross national happiness, I think there is a world market for maybe five computers, income inequality, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Isaac Newton, Kenneth Rogoff, late fees, liberal capitalism, mega-rich, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, naked short selling, Naomi Klein, Negawatt, new economy, Nixon shock, offshore financial centre, oil shale / tar sands, oil shock, peak oil, Ponzi scheme, post-oil, price stability, private military company, quantitative easing, reserve currency, ride hailing / ride sharing, Ronald Reagan, short selling, special drawing rights, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, too big to fail, trade liberalization, tulip mania, working poor, zero-sum game

Adam Smith, The Wealth of Nations (New York: Oxford University Press, World’s Classics Edition, 2008). 49. Economists frame the advantages of increased trade in terms of a concept called “comparative advantage.” Technically, comparative advantage means that each country will specialize in what it is good at, even if another country does everything better, and the result is that all countries benefit from trade. However, this assumes that capital can only be invested domestically. If instead capital can be invested anywhere, which is actually the case, then it will go to whichever country has an absolute advantage. The net result is even greater output than a world based on comparative advantage, but one in which not all countries benefit. Even in the comparative advantage model, economists recognize that some sectors in a country can lose out while others gain. In world of absolute advantage, the sectors that gain need not be in the same country as the sectors that lose.

While the first economists were ancient Greek and Indian philosophers, among them Aristotle (382– 322 bce) — who discussed the “art” of wealth acquisition and questioned whether property should best be owned privately or by government acting on behalf of the people — little of real substance was added to the discussion during the next two thousand years. It’s in the 18th century that economic thinking really gets going. “Classical” economic philosophers such as Adam Smith (1723–1790), Thomas Robert Malthus (1766–1834), and David Ricardo (1772–1823) introduced basic concepts such as supply and demand, division of labor, and the balance of international trade. As happens in so many disciplines, early practitioners were presented with plenty of uncharted territory and proceeded to formulate general maps of their subject that future experts would labor to refine in ever more trivial ways. These pioneers set out to discover natural laws in the day-to-day workings of economies.

In world of absolute advantage, the sectors that gain need not be in the same country as the sectors that lose. Herman Daly has made this point, but apparently Ricardo also recognized that comparative advantage depends on capital being invested domestically, which was the case in his day. 50. Frances Berdan, “Trade and Markets in Precapitalist States,” in Economic Anthropology, Stuart Plattner, ed. (Stanford, CA: Stanford University Press, 1989). 51. Jeff Rubin, Why Your World Is About To Get a Whole Lot Smaller: Oil and the End of Globalization (New York: Random House, 2009). 52. Jeff Rubin, “Oil and the End of Globalization,” transcript and video of a presentation at 2010 ASPO-USA, The Oil Drum, posted November 8, 2010, theoildrum.com/node/7095#more. 53. Julian Lincoln Simon, The Ultimate Resource (Princeton, NJ: Princeton University Press, 1996). 54.


pages: 355 words: 92,571

Capitalism: Money, Morals and Markets by John Plender

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activist fund / activist shareholder / activist investor, Andrei Shleifer, asset-backed security, bank run, Berlin Wall, Big bang: deregulation of the City of London, Black Swan, bonus culture, Bretton Woods, business climate, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, collapse of Lehman Brothers, collective bargaining, computer age, Corn Laws, corporate governance, creative destruction, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, discovery of the americas, diversification, Eugene Fama: efficient market hypothesis, eurozone crisis, failed state, Fall of the Berlin Wall, fiat currency, financial innovation, financial intermediation, Fractional reserve banking, full employment, God and Mammon, Gordon Gekko, greed is good, Hyman Minsky, income inequality, inflation targeting, information asymmetry, invention of the wheel, invisible hand, Isaac Newton, James Watt: steam engine, Johann Wolfgang von Goethe, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, joint-stock company, Joseph Schumpeter, labour market flexibility, liberal capitalism, light touch regulation, London Interbank Offered Rate, London Whale, Long Term Capital Management, manufacturing employment, Mark Zuckerberg, market bubble, market fundamentalism, mass immigration, means of production, Menlo Park, money market fund, moral hazard, moveable type in China, Myron Scholes, Nick Leeson, Northern Rock, Occupy movement, offshore financial centre, paradox of thrift, Paul Samuelson, Plutocrats, plutocrats, price stability, principal–agent problem, profit motive, quantitative easing, railway mania, regulatory arbitrage, Richard Thaler, rising living standards, risk-adjusted returns, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, shareholder value, short selling, Silicon Valley, South Sea Bubble, spice trade, Steve Jobs, technology bubble, The Chicago School, The Great Moderation, the map is not the territory, The Wealth of Nations by Adam Smith, Thorstein Veblen, time value of money, too big to fail, tulip mania, Upton Sinclair, Veblen good, We are the 99%, Wolfgang Streeck, zero-sum game

Yet there are some categories of people who seem to have a greater ability to overcome the inhibition than others. Clearly stockbrokers have fewer worries about it than most. Yet this also applies to many economists, perhaps because their discipline encourages them to think entirely objectively about market behaviour. In the UK, some of the greatest speculators have, in fact, been economists. David Ricardo, best known for developing the law of comparative advantage, one of the most powerful ideas in economics, made a killing (as did Nathan Rothschild) by betting against a French victory at Waterloo. He amassed a considerable fortune in his stockbroking business, which allowed him to retire early to write and become a Member of Parliament. Keynes was also a great speculator, despite his reservations about speculation and about capitalism more generally.

Paid far less than the rocket scientists in the big banks who were devising new and complex financial instruments, they were, as always, one step behind and less well paid than the people they were trying to regulate. In the case of the British, they were also being urged by government ministers not to be too tough on the City of London, which appeared to have a unique capacity for creating employment and generating tax revenue in an industry where Britain appeared to enjoy a remarkable comparative advantage. The regulators will continue to struggle because they are locked in a vicious circle. Every time there is a financial crisis, a political backlash ensures a raft of ever more complex re-regulatory measures. Financial market practitioners react to these by engaging in regulatory arbitrage, which is relatively easy in a world of global capital flows without a global regulator – banks simply put their business through markets in countries that have less draconian rules.

Perhaps the biggest impetus behind the decline of manufacturing in the advanced economies is globalisation. In effect, developed countries have been outsourcing their manufacturing to China and other emerging markets that are now going through the rapid urbanisation and industrialisation that characterises the early stages of capitalist development, in which very low labour costs create comparative advantage. This is, then, part of a continuing process of international specialisation. If there is a backlash against this transfer of manufacturing activity to the developing countries, it is chiefly because ‘structural adjustment’, as the economists call it, involves wrenching change. Those whose jobs are lost in old industries may lack the skills or the willingness to migrate to take up jobs in new industries elsewhere, or be reluctant to take on lower-skill jobs than they have previously done.


pages: 339 words: 88,732

The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies by Erik Brynjolfsson, Andrew McAfee

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2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, 3D printing, access to a mobile phone, additive manufacturing, Airbnb, Albert Einstein, Amazon Mechanical Turk, Amazon Web Services, American Society of Civil Engineers: Report Card, Any sufficiently advanced technology is indistinguishable from magic, autonomous vehicles, barriers to entry, basic income, Baxter: Rethink Robotics, British Empire, business intelligence, business process, call centre, Chuck Templeton: OpenTable, clean water, combinatorial explosion, computer age, computer vision, congestion charging, corporate governance, creative destruction, crowdsourcing, David Ricardo: comparative advantage, digital map, employer provided health coverage, en.wikipedia.org, Erik Brynjolfsson, factory automation, falling living standards, Filter Bubble, first square of the chessboard / second half of the chessboard, Frank Levy and Richard Murnane: The New Division of Labor, Freestyle chess, full employment, game design, global village, happiness index / gross national happiness, illegal immigration, immigration reform, income inequality, income per capita, indoor plumbing, industrial robot, informal economy, intangible asset, inventory management, James Watt: steam engine, Jeff Bezos, jimmy wales, job automation, John Markoff, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Joseph Schumpeter, Kevin Kelly, Khan Academy, knowledge worker, Kodak vs Instagram, law of one price, low skilled workers, Lyft, Mahatma Gandhi, manufacturing employment, Marc Andreessen, Mark Zuckerberg, Mars Rover, mass immigration, means of production, Narrative Science, Nate Silver, natural language processing, Network effects, new economy, New Urbanism, Nicholas Carr, Occupy movement, oil shale / tar sands, oil shock, pattern recognition, Paul Samuelson, payday loans, price stability, Productivity paradox, profit maximization, Ralph Nader, Ray Kurzweil, recommendation engine, Report Card for America’s Infrastructure, Robert Gordon, Rodney Brooks, Ronald Reagan, Second Machine Age, self-driving car, sharing economy, Silicon Valley, Simon Kuznets, six sigma, Skype, software patent, sovereign wealth fund, speech recognition, statistical model, Steve Jobs, Steven Pinker, Stuxnet, supply-chain management, TaskRabbit, technological singularity, telepresence, The Bell Curve by Richard Herrnstein and Charles Murray, The Signal and the Noise by Nate Silver, The Wealth of Nations by Adam Smith, total factor productivity, transaction costs, Tyler Cowen: Great Stagnation, Vernor Vinge, Watson beat the top human players on Jeopardy!, winner-take-all economy, Y2K

As productivity improves, total amount of output per person would increase but the amount earned by human workers could either fall or rise, with the remainder going to capital owners. Of course, almost every economy has been using technology to substitute capital for labor for decades, if not centuries. Automatic threshing machines replaced a full 30 percent of the agricultural labor force in the middle of the nineteenth century, and industrialization continued at a brisk pace throughout the twentieth century. Nineteenth-century economists like Karl Marx and David Ricardo predicted that the mechanization of the economy would worsen the fate of workers, ultimately driving them to a subsistence wage.34 What has actually happened to the relative share of capital and labor? Historically, despite changes in the technology of production, the share of overall GDP going to labor has been surprisingly stable, at least until recently. As a result, wages and living standards have grown dramatically, roughly in line with the dramatic increases in productivity.

Ideation in its many forms is an area today where humans have a comparative advantage over machines. Scientists come up with new hypotheses. Journalists sniff out a good story. Chefs add a new dish to the menu. Engineers on a factory floor figure out why a machine is no longer working properly. Steve Jobs and his colleagues at Apple figure out what kind of tablet computer we actually want. Many of these activities are supported and accelerated by computers, but none are driven by them. Picasso’s quote at the head of this chapter is just about half right. Computers are not useless, but they’re still machines for generating answers, not posing interesting new questions. That ability still seems to be uniquely human, and still highly valuable. We predict that people who are good at idea creation will continue to have a comparative advantage over digital labor for some time to come, and will find themselves in demand.

How they reached this conclusion, and how technologies like Chauffeur started to overturn it in just a few years, offers important lessons about digital progress. In 2004 Frank Levy and Richard Murnane published their book The New Division of Labor.1 The division they focused on was between human and digital labor—in other words, between people and computers. In any sensible economic system, people should focus on the tasks and jobs where they have a comparative advantage over computers, leaving computers the work for which they are better suited. In their book Levy and Murnane offered a way to think about which tasks fell into each category. One hundred years ago the previous paragraph wouldn’t have made any sense. Back then, computers were humans. The word was originally a job title, not a label for a type of machine. Computers in the early twentieth century were people, usually women, who spent all day doing arithmetic and tabulating the results.


pages: 261 words: 103,244

Economists and the Powerful by Norbert Haring, Norbert H. Ring, Niall Douglas

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accounting loophole / creative accounting, Affordable Care Act / Obamacare, Albert Einstein, asset allocation, bank run, barriers to entry, Basel III, Bernie Madoff, British Empire, central bank independence, collective bargaining, commodity trading advisor, corporate governance, creative destruction, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, diversified portfolio, financial deregulation, George Akerlof, illegal immigration, income inequality, inflation targeting, information asymmetry, Jean Tirole, job satisfaction, Joseph Schumpeter, Kenneth Arrow, knowledge worker, labour market flexibility, law of one price, light touch regulation, Long Term Capital Management, low skilled workers, mandatory minimum, market bubble, market clearing, market fundamentalism, means of production, minimum wage unemployment, moral hazard, new economy, obamacare, old-boy network, open economy, Pareto efficiency, Paul Samuelson, pension reform, Ponzi scheme, price stability, principal–agent problem, profit maximization, purchasing power parity, Renaissance Technologies, rolodex, Sergey Aleynikov, shareholder value, short selling, Steve Jobs, The Chicago School, the payments system, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, ultimatum game, union organizing, Vilfredo Pareto, working-age population, World Values Survey

And if such an export-orientated policy sounds familiar today, it is because China and Germany (in the guise of the EU) have recently been using similar policies to gain advantage against all others in industrial production with great success. How power was purged from international economics However, after Britain had obtained the position of industrial world leader, classical British economist David Hume (1711–1776) fiercely criticized mercantilist theories and politics as unreasonable. He and his famous compatriots Adam Smith (1723–1790) and David Ricardo (1772–1823) became champions of global free trade. They agitated against continental European attempts to grab market share from the leading economy using the same mercantilist policies that Britain had so successfully employed before. Even so, it was not easy to convince other countries that it was best for them to continue exporting raw materials to Britain and importing industrial goods back from Britain.

In exchange, Portugal gained free access to British ports throughout the world, which was a boon for its traders, who were able to resell British manufactured goods with a much better profit margin than 4 ECONOMISTS AND THE POWERFUL their French or Spanish counterparts (and Britain did not try to seize Portugal’s Brazilian colonies, unlike those of Spain or France). Ricardo would later use this treaty as his famous example to illustrate the mutual benefits of comparative advantage (Ricardo 1817); however Portugal to this day still lives with an unusually global-trade-dependant economy as a legacy of that treaty (Almodovar and Cardoso 1998). The birth of marginalism While the classical economists touted the virtues of free international trade and took issues of power out of international economics, they still left some room to discuss power in the national context, notably on the labor market.

D. 13 American Economic Association ix, 10, 17, 20, 26–7, 44 American Economic Review 8, 20, 26–7 American International Group (AIG) 70, 90–91 Anglo-Saxon economics ix Arrow, Kenneth 7, 23–4, 212; see also impossibility theorem (Arrow’s) asset bubble 104 asymmetric information: see information, asymmetric AT&T 147 authoritarianism 24, 210 average cost 148, 151 Bank of America 77, 86, 94 barriers to entry 54, 160 Basel III Accord 104–5 Bear Stearns 90, 96, 107, 111 Becker, Gary S. 186 Bemis, Edward 9–10 Bentham, Jeremy 11 Berlin, Isaiah 25 Bernays, Edward 15–17 Bill of Rights (US) 208 Bolsa Família program 41 Boskin Commission 36 Bourdieu, Pierre 25, 115, 160 Bridgestone (tire manufacturer) 163–4, 166–7 British Empire ix, 16, 100 Buchanan, James 23–4 Buffett, Warren 93, 107–9 Bullionists 2 Bureau of Labor Statistics 32–3, 35 capitalism vii–viii, ix, 2, 5–6, 10, 18–19, 21, 31, 46, 142, 153, 158, 165 central bank 43, 67, 79–88, 104–5 CEO: see chief executive officer (CEO) Chicago, University of 10, 17, 19, 26, 27, 44, 80, 84, 168, 186, 193 chief executive officer (CEO) xi, 16, 47, 61, 70, 93, 95–6, 103, 107–13, 115–27, 132, 138–9, 215, 217 Chrysler xi, 113 Citicorp (bank) 43 Citigroup (bank) xi, 61, 63, 96, 105, 112, 125 Clark, John Bates 6, 10–11, 155, 193 classical value theory 5 Cold War 2, 18, 21, 25–8, 46 collective bargaining 185 Commodity Futures Trading Commission (CTFC) 90, 92 Commons, John R. 8–10 communism xii, 2, 19, 21, 25, 139 comparative advantage 4 Condorcet, Marquis de 23 conflict 165 consumption viii, 11, 13, 32, 78, 158, 192, 203, 211 control fraud 94–5 convergence vii 242 ECONOMISTS AND THE POWERFUL cooperation 73–5, 165, 167, 170, 198 cooperative 102 Cornell University 10 corporate elite x, xii, 115, 117, 140 corporate governance 92, 119, 127, 135, 136 corporate government 135 corporate management 109 corporation tax 139 corruption 220 credit x, xi, 29, 48–50, 59–60, 62, 65, 71, 73, 75, 77–84, 90–91, 95–8, 100, 104, 110, 149, 183 credit default swap 91, 93 CTFC: see Commodity Futures Trading Commission (CTFC) Darwinism 167 Debreu, Gerard 7 demand curve 146 democracy 18, 207, 211–13, 220 depreciation 33, 147 derivatives 67, 90–93, 96–7 Deutsche Bank 105, 121 disability adjusted life expectancy vii discrimination 130, 186–7 earnings management 129–30 economic growth xi, 80 economic policy xi, 46, 66, 76, 152 economic utility 4–5, 13 economics, mainstream viii, x–xi, xiii, 1, 29, 47, 136, 145, 164, 170, 208, 211, 214 economics, neoclassical ix, xii, 6, 8, 10–11, 13, 21–2, 25, 30, 38, 42, 45, 141, 143–4, 153–5, 157–60, 163–4, 168, 170–71, 173, 180–82, 188, 191–2, 210, 213 economies of scale 3, 54, 152, 161 economies of scope 54 Edgeworth, Francis Y. 10 efficiency vii, x, xi, xii, 13, 19, 25, 39, 43, 48, 62, 73, 101, 108, 136–7, 143, 144, 146–7, 149, 156, 160, 170, 176, 179, 183, 190, 193, 197, 202–4, 216, 219 efficient markets x Ely, Richard T. 9–10 employment protection 188, 200–203, 205 Enron 52, 92, 98, 110, 128, 132, 217 entrenchment 126, 135 equality of opportunity vii–ix, xii, 37, 39–41, 45, 53, 114, 124, 172 equality of outcome vii equilibrium x, 6–7, 37, 47, 146, 159, 161, 181–2, 197, 208 euro ix, 67, 82, 102 European Central Bank 103, 189, 215 European Commission/Union 67, 152 executive compensation 120–21, 138 exploitation 6, 156, 209, 212 exports 2, 34, 180–81 fairness ix, 13, 37, 39–40, 160, 164–6, 169–70, 177, 220 Fannie Mae (US government subsidizer of mortgages) 217 fear, uncertainty, doubt (FUD) 145 Federal Reserve (US) 43–4, 69–70, 85, 87–92, 143, 215 feedback loop 40, 216, 220 fiat money 75, 81 filibuster (US antilegislative maneuver) 218 financial industry xi, 44, 46–8, 51, 54–6, 64, 70, 89, 91–2, 121, 129, 217 financial markets xi, 47, 92, 108, 110, 128 financial rating agencies: see rating agencies financial sector xi, 43–4, 47–8, 53–4, 60, 64, 69, 79, 81, 83, 88–9, 100–101, 103, 105 Financial Stability Board 103 First (Workingmen’s) International 5 first mover advantage 132 Fisher, Irving 10, 13, 60, 75, 81, 83–4, 214 Fitch (ratings agency) 97 fixed costs 143 INDEX Fortune (magazine) 128 Fortune 500 (index) 49, 139 forwards (financial instrument) 67 founding fathers (of the United States) 207, 218 Freddie Mac (US government subsidizer of mortgages) 217 free market 6–7, 24, 46, 84, 147, 188, 193, 209 free riding 24, 37, 164 free trade 3–4, 16, 46, 209 freedom viii, 10, 18, 21, 25, 80, 94, 188, 191, 218 Freud, Sigmund 15 Friedman, Milton 44, 57, 81 front running (trading strategy) 65–6 FUD: see fear, uncertainty, doubt (FUD) fund managers 56–8, 63–4, 68, 134 futures (financial instrument) 67 Galbraith, John Kenneth 11, 74 GDP: see gross domestic product (GDP) General Motors xi, 16, 184–5 global financial crisis ix, 90; see also Great Financial Crisis God 24 gold 2, 72–7, 79–80, 86–7, 89 golden parachutes 112 Goldman Sachs 47, 49, 54, 56, 63, 66, 69, 88, 93, 105, 121, 215 goodwill 131 Great Depression 11, 70, 80, 138–9, 181, 204 Great Financial Crisis 79, 100, 111, 136; see also global financial crisis gross domestic product (GDP) vii–ix, xi, 28–31, 143 growth 27–8, 31, 33, 35, 39, 71, 90, 102, 108, 128, 132, 135, 151, 195, 203–4 Hadley, Arthur 10 happiness 202 Harvard Business Review 17–18 Harvard University 17–18, 26, 109, 208 243 hedge fund 29, 43, 46, 53, 58, 64–8, 92, 96, 101, 107 hedonic method 33–6 Hicks, John 13–14, 21 Homo economicus 164–6, 173 hostile takeovers 126 human capital 128 imports 2, 12, 34, 35 impossibility theorem (Arrow’s) 23–4, 212–13 incentives 39–40, 42–5, 52, 91, 93, 109, 114–15, 129, 132, 140, 172–4, 177, 182, 214 income guarantee 41 incompleteness viii, 12, 49, 145, 169, 184 incumbency 121, 134, 149 index tracking fund 55, 58 indifference 141, 168 industrial goods 2–3, 142 industrial production 2, 179 Industrial Revolution 5, 143, 181 inequality vii, 40, 138, 140 inflation 32–3, 36, 50, 78, 81, 104, 109, 120 information advantage 48, 131 information, asymmetric x, 191 information costs 144 information goods 143 information, imperfect x, xii, 142, 145, 149, 220 information technology 34, 218 innovation 34, 43, 147, 150–52, 160, 208 insider information 53–4, 62–3, 131 insider knowledge 131 insider trading 63–4, 131 institutionalism 8, 21 insurance xi, 39, 69, 82, 89–91,152, 189, 198, 204, 210 interest rate, real 50, 159 International Monetary Fund 27, 31, 48, 69, 74 International Workingmen’s Association 5 244 ECONOMISTS AND THE POWERFUL investment 32–3, 37, 41, 51, 56–7, 68, 78, 96–100, 103–4, 128–30, 133, 135, 140, 157, 184, 217 advice 51, 54, 56, 129 banking 29, 43, 47, 51, 52, 54, 55, 60–62, 64, 70–71, 89–90, 93, 94, 96, 97, 101, 107, 111–12, 125, 132 personal viii irrationality vii, 1, 13, 16, 38, 40, 151, 205, 211–12 Ivy League 27 Jevons, William Stanley 5, 16 job security viii, 108, 199–200, 202–4 J.P.


pages: 369 words: 94,588

The Enigma of Capital: And the Crises of Capitalism by David Harvey

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accounting loophole / creative accounting, anti-communist, Asian financial crisis, bank run, banking crisis, Bernie Madoff, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business climate, call centre, capital controls, creative destruction, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, deskilling, equal pay for equal work, European colonialism, failed state, financial innovation, Frank Gehry, full employment, global reserve currency, Google Earth, Guggenheim Bilbao, Gunnar Myrdal, illegal immigration, indoor plumbing, interest rate swap, invention of the steam engine, Jane Jacobs, joint-stock company, Joseph Schumpeter, Just-in-time delivery, land reform, liquidity trap, Long Term Capital Management, market bubble, means of production, megacity, microcredit, moral hazard, mortgage debt, Myron Scholes, new economy, New Urbanism, Northern Rock, oil shale / tar sands, peak oil, Pearl River Delta, place-making, Ponzi scheme, precariat, reserve currency, Ronald Reagan, sharing economy, Silicon Valley, special drawing rights, special economic zone, statistical arbitrage, structural adjustment programs, the built environment, the market place, The Wealth of Nations by Adam Smith, Thomas L Friedman, Thomas Malthus, Thorstein Veblen, too big to fail, trickle-down economics, urban renewal, urban sprawl, white flight, women in the workforce

Even without this, the track of perpetual accumulation puts enormous pressures on the supply of natural resources, while the inevitable increase in the quantity of waste products is bound to test the capacity of ecological systems to absorb them without turning toxic. Here, too, capitalism is likely to encounter limits and barriers which will become increasingly hard to circumvent. Nowhere has the idea of limits to capital been more stridently and persistently asserted throughout capitalism’s history than with respect to scarcities in nature. The famous Enlightenment economists Thomas Malthus and David Ricardo both held that diminishing returns in agriculture would eventually lead the profit rate to fall to zero, thus spelling the end of capitalism as we know it because all profit would be absorbed by rent on land and on the supply of natural resources. Malthus went still further, of course, insisting (in the first version of his population theory) that the conflict between population growth and natural limits was bound to produce (and already was producing) crises of famine, poverty, pestilence and war, no matter what policies were implemented.

War periods or periods of political tension (such as the Cold War, and more recently, the so-called ‘War on Terror’) have thus played a crucial role in directing paths of innovation. In much the same way that the state–finance nexus came to play a key role in capitalist development, so a state–corporate nexus also emerges around questions of research and development in sectors of the economy considered to be of strategic (and not solely military) importance to the state. Surveillance becomes big business. To the degree that R&D underpins comparative advantage in global economic competition, so a wide range of departments within the governmental apparatus (dealing with health, food and agriculture, transport and communications and energy, as well as the more traditional military arms and surveillance), backed by a huge semi-public research university system, have come to play a vital role in technological and organisational innovation in association with industry in the leading capitalist powers.

Index Numbers in italics indicate Figures; those in bold indicate a Table. 11 September 2001 attacks 38, 41–2 subject to perpetual renewal and transformation 128 A Abu Dhabi 222 Académie Française 91 accumulation by dispossession 48–9, 244 acid deposition 75, 187 activity spheres 121–4, 128, 130 deindustrialised working-class area 151 and ‘green revolution’ 185–6 institutional and administrative arrangements 123 ‘mental conceptions of the world’ 123 patterns of relations between 196 production and labour processes 123 relations to nature 123 the reproduction of daily life and of the species 123 slums 152 social relations 123 subject to perpetual renewal and transformation 128 suburbs 150 technologies and organisational forms 123 uneven development between and among them 128–9 Adelphia 100 advertising industry 106 affective bonds 194 Afghanistan: US interventionism 210 Africa civil wars 148 land bought up in 220 neocolonialism 208 population growth 146 agribusiness 50 agriculture collectivisation of 250 diminishing returns in 72 ‘green revolution’ 185–6 ‘high farming’ 82 itinerant labourers 147 subsidies 79 AIG 5 alcoholism 151 Allen, Paul 98 Allende, Salvador 203 Amazonia 161, 188 American Bankers Association 8 American Revolution 61 anarchists 253, 254 anti-capitalist revolutionary movement 228 anti-racism 258 anti-Semitism 62 après moi le déluge 64, 71 Argentina Debt Crisis (2000–2002) 6, 243, 246, 261 Arizona, foreclosure wave in 1 Arrighi, Giovanni: The Long Twentieth Century 35, 204 asbestos 74 Asia Asian Currency Crisis (1997–98) 141, 261 collapse of export markets 141 growth 218 population growth 146 asset stripping 49, 50, 245 asset traders 40 asset values 1, 6, 21, 23, 26, 29, 46, 223, 261 Association of South East Asian Nations (ASEAN) 200 Athabaska tar sands, Canada 83 austerity programmes 246, 251 automobile industry 14, 15, 23, 56, 67, 68, 77, 121, 160–61 Detroit 5, 15, 16, 91, 108, 195, 216 autonomista movement 233, 234, 254 B Baader-Meinhof Gang 254 Bakunin, Michael 225 Balzac, Honoré 156 Bangalore, software development in 195 Bangkok 243 Bank of England 53, 54 massive liquidity injections in stock markets 261 Bank of International Settlements, Basel 51, 55, 200 Bank of New England 261 Bankers Trust 25 banking bail-outs 5, 218 bank shares become almost worthless 5 bankers’ pay and bonuses 12, 56, 218 ‘boutique investment banks’ 12 de-leveraging 30 debt-deposit ratio 30 deposit banks 20 French banks nationalised 198 international networks of finance houses 163 investment banks 2, 19, 20, 28, 219 irresponsible behaviour 10–11 lending 51 liquidity injections by central banks vii, 261 mysterious workings of central banks 54 ‘national bail-out’ 30–31 property market-led Nordic and Japanese bank crises 261 regional European banks 4 regular banks stash away cash 12, 220 rising tide of ‘moral hazard’ in international bank lending practices 19 ‘shadow banking’ system 8, 21, 24 sympathy with ‘Bonnie and Clyde’ bank robbers 56 Baran, Paul and Sweezey, Paul: Monopoly Capital 52, 113 Barings Bank 37, 100, 190 Baucus, Max 220 Bavaria, automotive engineering in 195 Beijing declaration (1995) 258 Berlin: cross-border leasing 14 Bernanke, Ben 236 ‘Big Bang’ (1986) 20, 37 Big Bang unification of global stock, options and currency trading markets 262 billionaire class 29, 110, 223 biodiversity 74, 251 biomass 78 biomedical engineering 98 biopiracy 245, 251 Birmingham 27 Bismarck, Prince Otto von 168 Black, Fischer 100 Blackstone 50 Blair, Tony 255 Blair government 197 blockbusting neighbourhoods 248 Bloomberg, Mayor Michael 20, 98, 174 Bolivarian movement 226, 256 bonuses, Wall Street 2, 12 Borlaug, Norman 186 bourgeoisie 48, 89, 95, 167, 176 ‘boutique investment banks’ 12 Brazil automobile industry 16 capital flight crisis (1999) 261 containerisation 16 an export-dominated economy 6 follows Japanese model 92 landless movement 257 lending to 19 the right to the city movement 257 workers’ party 256 Bretton Woods Agreement (1944) 31, 32, 51, 55, 171 British Academy 235 British empire 14 Brown, Gordon 27, 45 Budd, Alan 15 Buenos Aires 243 Buffett, Warren 173 building booms 173–4 Bush, George W. 5, 42, 45 business associations 195 C California, foreclosure wave in 1, 2 Canada, tightly regulated banks in 141 ‘cap and trade’ markets in pollution rights 221 capital bank 30 centralisation of 95, 110, 113 circulation of 90, 93, 108, 114, 116, 122, 124, 128, 158, 159, 182, 183, 191 cultural 21 devalued 46 embedded in the land 191 expansion of 58, 67, 68 exploitations of 102 export 19, 158 fixed 191, 213 industrial 40–41, 56 insufficient initial money capital 47 investment 93, 203 and labour 56, 88, 169–70 liquid money 20 mobility 59, 63, 64, 161–2, 191, 213 and nature 88 as a process 40 reproduction of 58 scarcity 50 surplus 16, 28, 29, 50–51, 84, 88, 100, 158, 166, 167, 172, 173, 174, 206, 215, 216, 217 capital accumulation 107, 108, 123, 182, 183, 191, 211 and the activity spheres 128 barriers to 12, 16, 47, 65–6, 69–70, 159 compound rate 28, 74, 75, 97, 126, 135, 215 continuity of endless 74 at the core of human evolutionary dynamics 121 dynamics of 188, 197 geographic landscape of 185 geographical dynamics of 67, 143 and governance 201 lagging 130 laws of 113, 154, 160 main centres of 192 market-based 180 Mumbai redevelopment 178 ‘nature’ affected by 122 and population growth 144–7 and social struggles 105 start of 159 capital circulation barriers to 45 continuity of 68 industrial/production capital 40–41 inherently risky 52 interruption in the process 41–2, 50 spatial movement 42 speculative 52, 53 capital controls 198 capital flow continuity 41, 47, 67, 117 defined vi global 20 importance of understanding vi, vii-viii interrupted, slowed down or suspended vi systematic misallocation of 70 taxation of vi wealth creation vi capital gains 112 capital strike 60 capital surplus absorption 31–2, 94, 97, 98, 101, 163 capital-labour relation 77 capitalism and communism 224–5 corporate 1691 ‘creative-destructive’ tendencies in 46 crisis of vi, 40, 42, 117, 130 end of 72 evolution of 117, 118, 120 expansion at a compound rate 45 first contradiction of 77 geographical development of 143 geographical mobility 161 global 36, 110 historical geography of 76, 117, 118, 121, 174, 180, 200, 202, 204 industrial 58, 109, 242 internal contradictions 115 irrationality of 11, 215, 246 market-led 203 positive and negative aspects 120 and poverty 72 relies on the beneficence of nature 71 removal of 260 rise of 135, 192, 194, 204, 228, 248–9, 258 ‘second contradiction of’ 77, 78 social relations in 101 and socialism 224 speculative 160 survival of 46, 57, 66, 86, 107, 112, 113, 116, 130, 144, 229, 246 uneven geographical development of 211, 213 volatile 145 Capitalism, Nature, Socialism journal 77 capitalist creed 103 capitalist development considered over time 121–4 ‘eras’ of 97 capitalist exploitation 104 capitalist logic 205 capitalist reinvestment 110–11 capitalists, types of 40 Carnegie, Andrew 98 Carnegie foundation 44 Carnegie Mellon University, Pittsburgh, Pennsylvania 195 Carson, Rachel: Silent Spring 187 Case Shiller Composite Indices SA 3 Catholic Church 194, 254 cell phones 131, 150, 152 Central American Free Trade Association (CAFTA) 200 centralisation 10, 11, 165, 201 Certificates of Deposit 262 chambers of commerce 195, 203 Channel Tunnel 50 Chiapas, Mexico 207, 226 Chicago Board Options Exchange 262 Chicago Currency Futures Market 262 ‘Chicago School’ 246 Chile, lending to 19 China ‘barefoot doctors’ 137 bilateral trade with Latin America 173 capital accumulation issue 70 cheap retail goods 64 collapse of communism 16 collapse of export markets 141 Cultural Revolution 137 Deng’s announcement 159 falling exports 6 follows Japanese model 92 ‘Great Leap Forward’ 137, 138 growth 35, 59, 137, 144–5, 213, 218, 222 health care 137 huge foreign exchange reserves 141, 206 infant mortality 59 infrastructural investment 222 labour income and household consumption (1980–2005) 14 market closed after communists took power (1949) 108 market forcibly opened 108 and oil market 83 one child per family policy 137, 146 one-party rule 199 opening-up of 58 plundering of wealth from 109, 113 proletarianisation 60 protests in 38 and rare earth metals 188 recession (1997) 172 ‘silk road’ 163 trading networks 163 unemployment 6 unrest in 66 urbanisation 172–3 and US consumerism 109 Chinese Central Bank 4, 173 Chinese Communist Party 180, 200, 256 chlorofluoral carbons (CFCs) 74, 76, 187 chronometer 91, 156 Church, the 249 CIA (Central Intelligence Agency) 169 circular and cumulative causation 196 Citibank 19 City Bank 261 city centres, Disneyfication of 131 City of London 20, 35, 45, 162, 219 class consciousness 232, 242, 244 class inequalities 240–41 class organisation 62 class politics 62 class power 10, 11, 12, 61, 130, 180 class relations, radical reconstitution of 98 class struggle 56, 63, 65, 96, 102, 127, 134, 193, 242, 258 Clausewitz, Carl von 213 Cleveland, foreclosure crisis in 2 Cleveland, foreclosures on housing in 1 Clinton, Bill 11, 12, 17, 44, 45 co-evolution 132, 136, 138, 168, 185, 186, 195, 197, 228, 232 in three cases 149–53 coal reserves 79, 188 coercive laws of competition see under competition Cold War 31, 34, 92 Collateralised Bond Obligations (CBOs) 262 Collateralised Debt Obligations (CDOs) 36, 142, 261, 262 Collateralised Mortgage Obligations (CMOs) 262 colonialism 212 communications, innovations in 42, 93 communism 228, 233, 242, 249 collapse of 16, 58, 63 compared with socialism 224 as a loaded term 259–60 orthodox communists 253 revolutionary 136 traditional institutionalised 259 companies joint stock 49 limited 49 comparative advantage 92 competition 15, 26, 43, 70 between financial centres 20 coercive laws of 43, 71, 90, 95, 158, 159, 161 and expansion of production 113 and falling prices 29, 116 fostering 52 global economic 92, 131 and innovation 90, 91 inter-capitalist 31 inter-state 209, 256 internalised 210 interterritorial 202 spatial 164 and the workforce 61 competitive advantage 109 computerised trading 262 computers 41, 99, 158–9 consortia 50, 220 consumerism 95, 109, 168, 175, 240 consumerist excess 176 credit-fuelled 118 niche 131 suburban 171 containerisation 16 Continental Illinois Bank 261 cooperatives 234, 242 corporate fraud 245 corruption 43, 69 cotton industry 67, 144, 162 credit cards fees vii, 245 rise of the industry 17 credit crunch 140 Credit Default swaps 262 Crédit Immobilièr 54 Crédit Mobilier 54 Crédit Mobilier and Immobilier 168 credit swaps 21 credit system and austerity programmes 246 crisis within 52 and the current crisis 118 and effective demand problem 112 an inadequate configuration of 52 predatory practices 245 role of 115 social and economic power in 115 crises crises of disproportionality 70 crisis of underconsumption 107, 111 east Asia (1997–8) 6, 8, 35, 49, 246 financial crisis of 1997–8 198, 206 financial crisis of 2008 34, 108, 114, 115 general 45–6 inevitable 71 language of crisis 27 legitimation 217 necessary 71 property market 8 role of 246–7 savings and loan crisis (US, 1984–92) 8 short sharp 8, 10 south-east Asia (1997–8) 6, 8, 35, 49, 246 cross-border leasing 142–3 cultural choice 238 ‘cultural industries’ 21 cultural preferences 73–4 Cultural Revolution 137 currency currency swaps 262 futures market 24, 32 global 32–3, 34 options markets on 262 customs barriers 42, 43 cyberspace 190 D Darwin, Charles 120 DDT 74, 187 de-leveraging 30 debt-financing 17, 131, 141, 169 decentralisation 165, 201 decolonisation 31, 208, 212 deficit financing 35, 111 deforestation 74, 143 deindustrialisation 33, 43, 88, 131, 150, 157, 243 Deleuze, Gilles 128 demand consumer 107, 109 effective 107, 110–14, 116, 118, 221, 222 lack of 47 worker 108 Democratic Party (US) 11 Deng Xiaoping 159 deregulation 11, 16, 54, 131 derivatives 8 currency 21 heavy losses in (US) 261 derivatives markets creation of 29, 85 unregulated 99, 100, 219 Descartes, René 156 desertification 74 Detroit auto industry 5, 15, 16, 91, 108, 195, 216 foreclosures on housing in 1 Deutsches Bank 20 devaluation 32, 47, 116 of bank capital 30 of prior investments 93 developing countries: transformation of daily lives 94–5 Developing Countries Debt Crisis 19, 261 development path building alliances 230 common objectives 230–31 development not the same as growth 229–30 impacts and feedbacks from other spaces in the global economy 230 Diamond, Jared: Guns, Germs and Steel 132–3, 154 diasporas 147, 155, 163 Dickens, Charles: Bleak House 90 disease 75, 85 dispossession anti-communist insurgent movements against 250–51 of arbitrary feudal institutions 249 of the capital class 260 China 179–80 first category 242–4 India 178–9, 180 movements against 247–52 second category 242, 244–5 Seoul 179 types of 247 under socialism and communism 250 Domar, Evsey 71 Dongguan, China 36 dot-com bubble 29, 261 Dow 35,000 prediction 21 drug trade 45, 49 Dubai: over-investment 10 Dubai World 174, 222 Durban conference on anti-racism (2009) 258 E ‘earth days’ 72, 171 east Asia crash of 1997–8 6, 8, 35, 49, 246 labour reserves 64 movement of production to 43 proletarianisation 62 state-centric economies 226 wage rates 62 eastern European countries 37 eBay 190 economic crisis (1848) 167 economists, and the current financial crisis 235–6 ecosystems 74, 75, 76 Ecuador, and remittances 38 education 59, 63, 127, 128, 221, 224, 257 electronics industry 68 Elizabeth II, Queen vi-vii, 235, 236, 238–9 employment casual part-time low-paid female 150 chronic job insecurity 93 culture of the workplace 104 deskilling 93 reskilling 93 services 149 Engels, Friedrich 89, 98, 115, 157, 237 The Housing Question 176–7, 178 Enron 8, 24, 52, 53, 100, 261 entertainment industries 41 environment: modified by human action 84–5 environmental movement 78 environmental sciences 186–7 equipment 58, 66–7 equity futures 262 equity index swaps 262 equity values 262 ethanol plants 80 ethnic cleansings 247 ethnicity issues 104 Eurodollars 262 Europe negative population growth in western Europe 146 reconstruction of economy after Second World War 202 rsouevolutions of 1848 243 European Union 200, 226 eastern European countries 37 elections (June 2009) 143 unemployment 140 evolution punctuated equilibrium theory of natural evolution 130 social 133 theory of 120, 129 exchange rates 24, 32, 198 exports, falling 141 external economies 162 F Factory Act (1848) 127 factory inspectors 127 ‘failed states’ 69 Fannie Mae (US government-chartered mortgage institution) 4, 17, 173, 223 fascism 169, 203, 233 Federal Deposit Insurance Corporation (FDIC) 8 rescue of Continental Illinois Bank 261 Federal Reserve System (the Fed) 2, 17, 54, 116, 219, 236, 248 and asset values 6 cuts interest rates 5, 261 massive liquidity injections in stock markets 261 rescue of Continental Illinois Bank 261 feminists, and colonisation of urban neighbourhoods 248 fertilisers 186 feudalism 135, 138, 228 finance capitalists 40 financial institutions awash with credit 17 bankruptcies 261 control of supply and demand for housing 17 nationalisations 261 financial services 99 Financial Times 12 financialisation 30, 35, 98, 245 Finland: Nordic cris (1992) 8 Flint strike, Michigan (1936–7) 243 Florida, foreclosure wave in 1, 2 Forbes magazine 29, 223 Ford, Henry 64, 98, 160, 161, 188, 189 Ford foundation 44, 186 Fordism 136 Fordlandia 188, 189 foreclosed businesses 245 foreclosed properties 220 fossil fuels 78 Foucault, Michel 134 Fourierists 168 France acceptance of state interventions 200 financial crisis (1868) 168 French banks nationalised 198 immigration 14 Paris Commune 168 pro-natal policies 59 strikes in 38 train network 28 Franco-Prussian War (1870) 168 fraud 43, 49 Freddie Mac (US government-chartered mortgage institution) 4, 17, 173, 223 free trade 10, 33, 90, 131 agreements 42 French Communist Party 52 French Revolution 61 Friedman, Thomas L.: The World is Flat 132 futures, energy 24 futures markets 21 Certificates of Deposit 262 currency 24 Eurodollars 262 Treasury instruments 262 G G7/G8/G20 51, 200 Galileo Galilei 89 Gates, Bill 98, 173, 221 Gates foundation 44 gays, and colonisation of urban neighbourhoods 247, 248 GDP growth (1950–2030) 27 Gehry, Frank 203 Geithner, Tim 11 gender issues 104, 151 General Motors 5 General Motors Acceptance Corporation 23 genetic engineering 84, 98 genetic modification 186 genetically modified organisms (GMOs) 186 gentrification 131, 256, 257 geographical determinism 210 geopolitics 209, 210, 213, 256 Germany acceptance of state interventions 199–200 cross-border leasing 142–3 an export-dominated economy 6 falling exports 141 invasion of US auto market 15 Nazi expansionism 209 neoliberal orthodoxies 141 Turkish immigrants 14 Weimar inflation 141 Glass-Steagall act (1933) 20 Global Crossing 100 global warming 73, 77, 121, 122, 187 globalisation 157 Glyn, Andrew et al: ‘British Capitalism, Workers and the Profits Squeeze’ 65 Goethe, Johann Wolfgang von 156 gold reserves 108, 112, 116 Goldman Sachs 5, 11, 20, 163, 173, 219 Google Earth 156 Gould, Stephen Jay 98, 130 governance 151, 197, 198, 199, 201, 208, 220 governmentality 134 GPS systems 156 Gramsci, Antonio 257 Grandin, Greg: Fordlandia 188, 189 grassroots organisations (GROS) 254 Great Depression (1920s) 46, 170 ‘Great Leap Forward’ 137, 138, 250 ‘Great Society’ anti-poverty programmes 32 Greater London Council 197 Greece sovereign debt 222 student unrest in 38 ‘green communes’ 130 Green Party (Germany) 256 ‘green revolution’ 185–6 Greenspan, Alan 44 Greider, William: Secrets of the Temple 54 growth balanced 71 compound 27, 28, 48, 50, 54, 70, 75, 78, 86 economic 70–71, 83, 138 negative 6 stop in 45 Guggenheim Museu, Bilbao 203 Gulf States collapse of oil-revenue based building boom 38 oil production 6 surplus petrodollars 19, 28 Gulf wars 210 gun trade 44 H habitat loss 74, 251 Haiti, and remittances 38 Hanseatic League 163 Harrison, John 91 Harrod, Roy 70–71 Harvey, David: A Brief History of Neoliberalism 130 Harvey, William vii Haushofer, Karl 209 Haussmann, Baron 49, 167–8, 169, 171, 176 Hawken, Paul: Blessed Unrest 133 Hayek, Friedrich 233 health care 28–9, 59, 63, 220, 221, 224 reneging on obligations 49 Health Care Bill 220 hedge funds 8, 21, 49, 261 managers 44 hedging 24, 36 Hegel, Georg Wilhelm Friedrich 133 hegemony 35–6, 212, 213, 216 Heidegger, Martin 234 Helú, Carlos Slim 29 heterogeneity 214 Hitler, Adolf 141 HIV/AIDS pandemic 1 Holloway, John: Change the World without Taking Power 133 homogeneity 214 Hong Kong excessive urban development 8 rise of (1970s) 35 sweatshops 16 horizontal networking 254 household debt 17 housing 146–7, 149, 150, 221, 224 asset value crisis 1, 174 foreclosure crises 1–2, 166 mortgage finance 170 values 1–2 HSBC 20, 163 Hubbert, M.


pages: 323 words: 90,868

The Wealth of Humans: Work, Power, and Status in the Twenty-First Century by Ryan Avent

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3D printing, Airbnb, American energy revolution, assortative mating, autonomous vehicles, Bakken shale, barriers to entry, basic income, Bernie Sanders, BRICs, call centre, Capital in the Twenty-First Century by Thomas Piketty, Clayton Christensen, cloud computing, collective bargaining, computer age, creative destruction, dark matter, David Ricardo: comparative advantage, deindustrialization, dematerialisation, Deng Xiaoping, deskilling, Dissolution of the Soviet Union, Donald Trump, Downton Abbey, Edward Glaeser, Erik Brynjolfsson, eurozone crisis, everywhere but in the productivity statistics, falling living standards, first square of the chessboard, first square of the chessboard / second half of the chessboard, Ford paid five dollars a day, Francis Fukuyama: the end of history, future of work, gig economy, global supply chain, global value chain, hydraulic fracturing, income inequality, indoor plumbing, industrial robot, intangible asset, interchangeable parts, Internet of things, inventory management, invisible hand, Jacquard loom, James Watt: steam engine, Jeff Bezos, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph-Marie Jacquard, knowledge economy, low skilled workers, lump of labour, Lyft, manufacturing employment, Marc Andreessen, mass immigration, means of production, new economy, performance metric, pets.com, price mechanism, quantitative easing, Ray Kurzweil, rent-seeking, reshoring, rising living standards, Robert Gordon, Ronald Coase, savings glut, Second Machine Age, secular stagnation, self-driving car, sharing economy, Silicon Valley, single-payer health, software is eating the world, supply-chain management, supply-chain management software, TaskRabbit, The Future of Employment, The Nature of the Firm, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, trade liberalization, transaction costs, Tyler Cowen: Great Stagnation, Uber and Lyft, Uber for X, very high income, working-age population

Unexpectedly, agricultural productivity grew very rapidly, and families began having fewer children. Malthusian collapse was thankfully averted. David Ricardo, a contemporary of Malthus, had a more sophisticated take on the relationship between the scarcity of land and the distribution of resources in society. Ricardo was born in London in 1772, one of the seventeen children of a Portuguese family recently relocated to Britain. He made his fortune in finance, making a killing when the price of British government debt soared after news of victory at the Battle of Waterloo (in some versions of the story, Ricardo first encouraged rumours of an English defeat to drive prices down). But he is best known for his fundamental contributions to early economics; he’s famous for developing the idea of ‘comparative advantage’, for instance, which states that trade can make two trading partners better off even if one of them is more productive in every industry.

Ray labour abundance as good problem bargaining power cognitive but repetitive collective bargaining and demographic issues discrimination and exclusion global growth of workforce and immigration liberalization in 1970s/80s ‘lump of labour’ fallacy occupational licences organized and proximity reallocation to growing industries retraining and skill acquisition and scarcity and social value work as a positive good see also employment Labour Party, British land scarcity Latvia Le Pen, Jean-Marie Le Pen, Marine legal profession Lehman Brothers collapse (2008) Lepore, Jill liberalization, economic (from 1970s) Linkner, Josh, The Road to Reinvention London Lucas, Robert Lyft maker-taker distinction Malthus, Reverend Thomas Manchester Mandel, Michael Mankiw, Gregory marketing and public relations Marshall, Alfred Marx, Karl Mason, Paul, Postcapitalism (2015) McAfee, Andrew medicine and healthcare ‘mercantilist’ world Mercedes Benz Mexico Microsoft mineral industries minimum wage Mokyr, Joel Monroe, President James MOOCs (‘massive open online courses’) Moore, Gordon mortality rates Mosaic (web browser) music, digital nation states big communities of affinity inequality between as loci of redistribution and social capital nationalist and separatist movements Netherlands Netscape New York City Newsweek NIMBYism Nordic and Scandinavian economies North Carolina North Dakota Obama, Barack oil markets O’Neill, Jim Oracle Orbán, Viktor outsourcing Peretti, Jonah Peterson Institute for International Economics pets.com Philadelphia Centennial Fair (1876) Philippines Phoenix, Arizona Piketty, Thomas, Capital in the Twenty-First Century (2013) Poland political institutions politics fractionalization in Europe future/emerging narratives geopolitical forces human wealth narrative left-wing looming upheaval/conflict Marxism nationalist and separatist movements past unrest and conflict polarization in USA radicalism and extremism realignment revolutionary right-wing rise of populist outsiders and scarcity social membership battles Poor Laws, British print media advertising revenue productivity agricultural artisanal goods and services Baumol’s Cost Disease and cities and dematerialization and digital revolution and employment trilemma and financial crisis (2008) and Henry Ford growth data in higher education of highly skilled few and industrial revolution minimum wage impact paradox of in service sector and specialization and wage rates see also factors of production professional, technical or managerial work and education levels and emerging economies the highly skilled few and industrial revolution and ‘offshoring’ professional associations skilled cities professional associations profits Progressive Policy Institute property values proximity public spending Putnam, Robert Quakebot quantitative easing Race Against the Machine, Brynjolfsson and McAfee (2011) railways Raleigh, North Carolina Reagan, Ronald redistribution and geopolitical forces during liberal era methods of nation state as locus of as a necessity as politically hard and societal openness wealth as human rent, economic Republican Party, US ‘reshoring’ phenomenon Resseger, Matthew retail sector retirement age Ricardo, David rich people and maker-taker distinction wild contingency of wealth Robinson, James robots Rodrik, Dani Romney, Mitt rule of law Russia San Francisco San Jose Sanders, Bernie sanitation SAP Saudi Arabia savings glut, global ‘Say’s Law’ Scalia, Antonin Scandinavian and Nordic economies scarcity and labour political effects of Schleicher, David Schwartz, Anna scientists Scotland Sears Second World War secular stagnation global spread of possible solutions shale deposits sharing economies Silicon Valley Singapore skilled workers and education levels and falling wages the highly skilled few and industrial revolution ‘knowledge-intensive’ goods and services reshoring phenomenon technological deskilling see also professional, technical or managerial work Slack (chat service) Slate (web publication) smartphone culture Smith, Adam social capital and American Constitution baseball metaphor and cities ‘deepening’ definition/nature of and dematerialization and developing economies and erosion of institutions of firms and companies and good government and housing wealth and immigration and income distribution during industrial revolution and liberalization and nation-states productive application of and rich-poor nation gap and Adam Smith and start-ups social class conflict middle classes and NIMBYism social conditioning of labour force working classes social democratic model social reform social wealth and social membership software ‘enterprise software’ products supply-chain management Solow, Robert Somalia South Korea Soviet Union, dissolution of (1991) specialization Star Trek state, role of steam power Subramanian, Arvind suburbanization Sweden Syriza party Taiwan TaskRabbit taxation telegraphy Tesla, Nikola Thatcher, Margaret ‘tiger’ economies of South-East Asia Time Warner Toyota trade China as ‘mega-trader’ ‘comparative advantage’ theory and dematerialization global supply chains liberalization shaping of by digital revolution Adam Smith on trade unions transhumanism transport technology self-driving cars Trump, Donald Twitter Uber UK Independence Party United States of America (USA) 2016 Presidential election campaign average income Bureau of Labour Statistics (BLS) Constitution deindustrialization education in employment in ethno-nationalist diversity of financial crisis (2008) housing costs in housing wealth in individualism in industrialization in inequality in Jim Crow segregation labour scarcity in Young America liberalization in minimum wage in political polarization in post-crisis profit rates productivity boom of 1990s real wage data rising debt levels secular stagnation in shale revolution in social capital in and social wealth surpasses Britain as leading nation wage subsidies in university education advanced degrees downward mobility of graduates MOOCs (‘massive open online courses’) and productivity see also education urbanization utopias, post-work Victoria, Queen video-gamers Virginia, US state Volvo Vox wages basic income policy Baumol’s Cost Disease cheap labour and employment growth and dot.com boom and financial crisis (2008) and flexibility and Henry Ford government subsidies and housing costs and immigration and industrial revolution low-pay as check on automation minimum wage and productivity the ‘reservation wage’ as rising in China rising in emerging economies and scarcity in service sector and skill-upgrading approach stagnation of and supply of graduates Wandsworth Washington D.C.


words: 49,604

The Weightless World: Strategies for Managing the Digital Economy by Diane Coyle

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barriers to entry, Berlin Wall, Big bang: deregulation of the City of London, blue-collar work, Bretton Woods, clean water, computer age, Corn Laws, creative destruction, cross-subsidies, David Ricardo: comparative advantage, dematerialisation, Diane Coyle, Edward Glaeser, everywhere but in the productivity statistics, financial deregulation, full employment, George Santayana, global village, hiring and firing, Howard Rheingold, income inequality, informal economy, invisible hand, Jane Jacobs, Joseph Schumpeter, knowledge economy, labour market flexibility, laissez-faire capitalism, lump of labour, Marshall McLuhan, mass immigration, McJob, microcredit, moral panic, Network effects, new economy, Nick Leeson, night-watchman state, North Sea oil, offshore financial centre, pension reform, pensions crisis, Ronald Reagan, Silicon Valley, spinning jenny, The Death and Life of Great American Cities, the market place, The Wealth of Nations by Adam Smith, Thorstein Veblen, Tobin tax, two tier labour market, very high income, War on Poverty, winner-take-all economy, working-age population

Danny Quah (July 1996) ‘Twin Peaks: growth and convergence in models of distribution dynamics’, Economic Journal. Danny Quah (October 1996) Discarding Non-stick Frying Pans for Economic Growth, Centrepiece, Centre for Economic Performance, London School of Economics, London. Gregory Rawlins (1996) Moths to the Flame, MIT Press, Cambridge, MA. Robert Reich (1991) The Work of Nations, Simon & Schuster, London. Howard Rheingold (1994) The Virtual Community, Secker & Warburg, London. David Ricardo (first published 1817) Principles of Political Economy and Taxation. Jeremy Rifkin (1995) The End of Work, Tarcher/Putnam. Gillian Rose (1996) Mourning Becomes the Law: Philosophy and Representation, Cambridge University Press, Cambridge. Nathan Rosenberg (1982) Inside the Black Box: Technology and Economics, Cambridge University Press, Cambridge. Jean-Jacques Rousseau (1994; first published 1755) Political Economy (transl.

Footwear, clothing and textiles account for a quarter of OECD imports of manufactured goods from non-OECD countries. The effect of the power loom on employment in Lancashire last century was trivial compared to the impact of Weightless Work 53 cheap imports in the 1980s. The industry’s capital stock was shipped direct from mill to scrap yard or textile museum in the space of less than a decade. This is just what economic theory would predict. Countries should export the goods in which they have a comparative advantage (that is, goods which make intensive use of inputs that are relatively cheaper in those countries — unskilled workers, in the developing world). An increase in trade will tend to raise the return to the relatively abundant input world-wide, which should mean higher wages in the third world, but a decline in demand and lower wages for these workers in the developed world. The return to other inputs — capital and skilled labour — ought to rise in the industrial world.

His research indicates two conditions that produce this result. Communications will favour the cities if urban residents use them more than rural residents; and if the value of interaction between people increases, say because the ideas that need to be exchanged become more complex and creative. He and a co-author write: ‘The rise in the New York multimedia industry may be a sign of big cities’ comparative advantage in facilitating the difficult information flows involved in cutting-edge industries ... As telecommunications improve, the demand for interactions of all varieties should rise, and the role of cities as centres of interactions should also increase. After all, the most famous modern agglomeration of industry, Silicon Valley, has occurred in the industry with the most direct access to the latest and best information technology.


pages: 823 words: 220,581

Debunking Economics - Revised, Expanded and Integrated Edition: The Naked Emperor Dethroned? by Steve Keen

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accounting loophole / creative accounting, banking crisis, banks create money, barriers to entry, Benoit Mandelbrot, Big bang: deregulation of the City of London, Black Swan, Bonfire of the Vanities, butterfly effect, capital asset pricing model, cellular automata, central bank independence, citizen journalism, clockwork universe, collective bargaining, complexity theory, correlation coefficient, creative destruction, credit crunch, David Ricardo: comparative advantage, debt deflation, diversification, double entry bookkeeping, en.wikipedia.org, Eugene Fama: efficient market hypothesis, experimental subject, Financial Instability Hypothesis, fixed income, Fractional reserve banking, full employment, Henri Poincaré, housing crisis, Hyman Minsky, income inequality, information asymmetry, invisible hand, iterative process, John von Neumann, laissez-faire capitalism, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, market clearing, market microstructure, means of production, minimum wage unemployment, money market fund, open economy, Pareto efficiency, Paul Samuelson, place-making, Ponzi scheme, profit maximization, quantitative easing, RAND corporation, random walk, risk tolerance, risk/return, Robert Shiller, Robert Shiller, Ronald Coase, Schrödinger's Cat, scientific mainstream, seigniorage, six sigma, South Sea Bubble, stochastic process, The Great Moderation, The Wealth of Nations by Adam Smith, Thorstein Veblen, time value of money, total factor productivity, tulip mania, wage slave, zero-sum game

As a result, while Marx’s thought still has considerable influence upon philosophers, historians, sociologists and left-wing political activists, at the beginning of the twenty-first century, Marx and Marxists are largely ignored by other economists.1 Most non-orthodox economists would acknowledge that Marx made major contributions to economic thought, but it seems that overall Samuelson was right: Marx was a ‘minor Post-Ricardian’ – someone who took classical economics slightly farther than had David Ricardo, but who ultimately led it into a dead end. This conclusion is false. Properly understood, Marx’s theory of value liberates classical economics from its dependence on the labor theory of value, and makes it the basis for a deep and critical understanding of capitalism. But in a truly Machiavellian irony, the main factor obscuring this richer appreciation of Marx is the slavish devotion of Marxist economists to the labor theory of value. To see why Marx’s theory of value is not the labor theory of value, we have to first delve into the minds of the great classical economists Adam Smith and David Ricardo. Value – a prelude The proposition that something is the source of value raises two questions: what is ‘value’ anyway, and why should any one thing be the source of it?

There is also substantially more information on why the theory of demand is false in ‘The calculus of hedonism’ and ‘The price of everything and the value of nothing,’ and a record of the recanting of the Efficient Markets Hypothesis by its major advocates Fama and French in the addendum to ‘The price is not right.’ Lastly, a book that was in its first incarnation almost exclusively about microeconomics now covers microeconomics and macroeconomics in roughly equal measure. The one glaring omission is the absence of any discussion of international trade theory. The reason for this is that, while the flaws in the theory of comparative advantage are, to me, both huge and obvious, a detailed critique of the mathematical logic has not yet been done, and nor is there a viable alternative. That is a task that I may tackle after Finance and Economic Breakdown is completed, but not before. Looking back The reception of the first edition was both gratifying and predictable. The gratifying side was the public reception: sales far exceeded the norm for this class of book, it continued to sell well a decade after it was first published, and the critical response from the public was almost universally positive.


pages: 279 words: 87,910

How Much Is Enough?: Money and the Good Life by Robert Skidelsky, Edward Skidelsky

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banking crisis, basic income, Bertrand Russell: In Praise of Idleness, Bonfire of the Vanities, call centre, creative destruction, David Ricardo: comparative advantage, death of newspapers, financial innovation, Francis Fukuyama: the end of history, full employment, happiness index / gross national happiness, income inequality, income per capita, informal economy, Intergovernmental Panel on Climate Change (IPCC), invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Joseph Schumpeter, lump of labour, market clearing, market fundamentalism, Paul Samuelson, profit motive, purchasing power parity, Ralph Waldo Emerson, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, Tobin tax, union organizing, University of East Anglia, Veblen good, wage slave, wealth creators, World Values Survey, zero-sum game

In fact he and his contemporaries did not talk about growth at all but about “improvement,” a term encompassing moral as well as material conditions. At the end of this road lay the “stationary state”—a state in which the possibilities of improvement were exhausted. All the classical economists had this end point in mind, at varying degrees of affluence. Smith’s two famous successors, Thomas Malthus and David Ricardo, were much less optimistic than Smith himself. Malthus’s Essay on the Principle of Population (1798, 1826) was written to challenge William Godwin’s utopian claim that property redistribution would make possible abundance for all. Its logic was straightforwardly cyclical. Without strenuous moral “checks,” population would inevitably outstrip the land available to support it: variations in population pressure would determine cycles of rising and falling incomes.

* The “natural” form of trade is between areas of the world with different resource and climatic endowments. This makes it impossible or extremely costly to produce all desired goods in the same place. If the Scots want to drink wine they will have to import it from wine-growing areas, exchanging in return, say, tartan kilts. However, the most efficient form of trade takes place according to comparative advantage: that is, it will pay country A to specialize in that good, or goods, which it can produce relatively more cheaply than B, even if it can produce all goods more cheaply than in B. This is the basis of the modern doctrine of free trade. Evidently, its persuasive power declines in conditions of abundance, when cheapness is no longer the main consideration. Notes INTRODUCTION 1. John Maynard Keynes, Essays in Persuasion, The Collected Writings of John Maynard Keynes, vol. 9 (Cambridge: Cambridge University Press, 1978), p. 293. 2.


pages: 309 words: 91,581

The Great Divergence: America's Growing Inequality Crisis and What We Can Do About It by Timothy Noah

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assortative mating, autonomous vehicles, blue-collar work, Bonfire of the Vanities, Branko Milanovic, call centre, collective bargaining, computer age, corporate governance, Credit Default Swap, David Ricardo: comparative advantage, Deng Xiaoping, Erik Brynjolfsson, feminist movement, Frank Levy and Richard Murnane: The New Division of Labor, Gini coefficient, Gunnar Myrdal, income inequality, industrial robot, invisible hand, job automation, Joseph Schumpeter, low skilled workers, lump of labour, manufacturing employment, moral hazard, oil shock, pattern recognition, Paul Samuelson, performance metric, positional goods, post-industrial society, postindustrial economy, Powell Memorandum, purchasing power parity, refrigerator car, rent control, Richard Feynman, Richard Feynman, Ronald Reagan, shareholder value, Silicon Valley, Simon Kuznets, Stephen Hawking, Steve Jobs, The Spirit Level, too big to fail, trickle-down economics, Tyler Cowen: Great Stagnation, union organizing, upwardly mobile, very high income, Vilfredo Pareto, War on Poverty, We are the 99%, women in the workforce, Works Progress Administration, Yom Kippur War

Samuelson, who considered himself “the midwife, helping to deliver Wolfie’s brainchild,” would go on to write the twentieth century’s bestselling economics textbook and to win the Nobel Prize. Fifty years after the theorem’s debut, the Columbia economist Jagdish Bhagwati wrote, “I know of no major international economic theorist today who would not trade an arm and a leg” for its authorship.4 The Stolper-Samuelson theorem challenged the notion dating back to David Ricardo that everybody benefited when trade between nations proceeded unimpeded. According to classical economics, even higher-wage workers benefited when their country traded with a lower-wage nation. That was because the resulting drop in prices would so exceed their reduced wages that the workers would net out with the practical equivalent of a raise. In their 1941 paper, Stolper and Samuelson showed that the opposite was true.

Such a dystopia may yet one day emerge. But thus far traditional economic theory is holding up reasonably well.7 Computers are eliminating jobs, but they’re also creating jobs. The trouble is that the kinds of jobs computers eliminate tend to be the ones previously occupied by moderately skilled middle-class workers, while the kinds of jobs computers create tend to be ones for highly skilled, affluent workers. “Computers’ comparative advantage over people,” write Levy and Murnane, “lies in tasks that can be described using rules-based logic: step-by-step procedures with an action specified for every contingency.” Where rule-based logic breaks down, they point out, is whenever an unforeseen contingency arises. They cite the example of an auto mechanic using computerized diagnostics to figure out what’s wrong with a minivan whose front seat won’t move forward or backward at the touch of an electric switch.


pages: 369 words: 98,776

The God Species: Saving the Planet in the Age of Humans by Mark Lynas

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Airbus A320, back-to-the-land, Berlin Wall, carbon footprint, clean water, Climategate, Climatic Research Unit, David Ricardo: comparative advantage, decarbonisation, dematerialisation, demographic transition, Haber-Bosch Process, ice-free Arctic, Intergovernmental Panel on Climate Change (IPCC), invention of the steam engine, James Watt: steam engine, megacity, meta analysis, meta-analysis, moral hazard, Negawatt, New Urbanism, oil shale / tar sands, out of africa, peak oil, planetary scale, quantitative easing, race to the bottom, Ronald Reagan, special drawing rights, Stewart Brand, University of East Anglia

Studies of the amount of water saved globally per year through the virtual water trade in food amount to some 455 cubic kilometers,38 a substantial saving given that only 2,000 cubic kilometers remain to be used before we find ourselves on the wrong side of the proposed water planetary boundary. Producing food where the maximum water efficiency can be achieved, and where water is most plentiful, is a natural extension of the idea of comparative advantage, a basic concept in economics that was first proposed by David Ricardo in the early nineteenth century. The idea does have relevance domestically as well as internationally: Instead of trying to divert enormous quantities of water from the wetter south to the arid north, China could instead explicitly formulate a policy to focus on transferring virtual rather than real water, saving money and promoting environmental efficiency in the process.


pages: 382 words: 92,138

The Entrepreneurial State: Debunking Public vs. Private Sector Myths by Mariana Mazzucato

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Apple II, banking crisis, barriers to entry, Bretton Woods, California gold rush, call centre, carbon footprint, Carmen Reinhart, cleantech, computer age, creative destruction, credit crunch, David Ricardo: comparative advantage, demand response, deskilling, endogenous growth, energy security, energy transition, eurozone crisis, everywhere but in the productivity statistics, Financial Instability Hypothesis, full employment, G4S, Growth in a Time of Debt, Hyman Minsky, incomplete markets, information retrieval, intangible asset, invisible hand, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, knowledge worker, natural language processing, new economy, offshore financial centre, Philip Mirowski, popular electronics, profit maximization, Ralph Nader, renewable energy credits, rent-seeking, ride hailing / ride sharing, risk tolerance, shareholder value, Silicon Valley, Silicon Valley ideology, smart grid, Steve Jobs, Steve Wozniak, The Wealth of Nations by Adam Smith, Tim Cook: Apple, too big to fail, total factor productivity, trickle-down economics, Washington Consensus, William Shockley: the traitorous eight

Within the firm’s hierarchical and functional division of labour, there is the integration of organizational learning into process routines that leverage the skills and efforts of large numbers of people. A New Framework What are the mechanisms that can help ensure that growth is not only ‘smart’ but also ‘inclusive’ (e.g. the goal of the EC’s 2020 strategy)? What explains the reasons why innovation and inequality have gone hand in hand? While the classical economists (such as David Ricardo or Karl Marx) studied innovation and distribution together through, for example, the analysis of the effect of mechanization on the wage/profit ratio, for years studies of innovation and distribution have been separated. Today, they have been brought back together mainly by the de-skilling perspective and its realization that innovation has a tendency of allowing those with high skills to prosper, and those with low skills to get left behind (Acemoglu 2002).

China has emerged as the world’s major solar PV manufacturing region, successfully out-competing US, Japanese and European rivals that led in prior decades. What must be explained is how a country like the US can become a leading market, but fail to produce a leading manufacturer, and conversely, how a country like China can produce a leading manufacturer in the absence (until recently) of a domestic market. What distinguishes these nations has nothing to do with their ‘comparative advantages’ as producers of wind turbines or solar PV panels, and it has nothing to do with a natural abundance of wind or sun. Historically, the development of wind and solar power has reflected differences in government policies meant to foster these power sources. For some countries, this is a process that has unfolded over many decades. For others, it is a process of ‘catching-up’ – but no matter the case, it is the tools deployed by government that have supported and attempted to drive outcomes.


pages: 370 words: 102,823

Rethinking Capitalism: Economics and Policy for Sustainable and Inclusive Growth by Michael Jacobs, Mariana Mazzucato

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3D printing, balance sheet recession, banking crisis, basic income, Bernie Sanders, Bretton Woods, business climate, Carmen Reinhart, central bank independence, collaborative economy, complexity theory, conceptual framework, corporate governance, corporate social responsibility, creative destruction, credit crunch, Credit Default Swap, crony capitalism, David Ricardo: comparative advantage, decarbonisation, deindustrialization, dematerialisation, Detroit bankruptcy, double entry bookkeeping, Elon Musk, endogenous growth, energy security, eurozone crisis, factory automation, facts on the ground, fiat currency, Financial Instability Hypothesis, financial intermediation, forward guidance, full employment, G4S, Gini coefficient, Growth in a Time of Debt, Hyman Minsky, income inequality, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), Internet of things, investor state dispute settlement, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, labour market flexibility, low skilled workers, Martin Wolf, mass incarceration, Mont Pelerin Society, neoliberal agenda, Network effects, new economy, non-tariff barriers, paradox of thrift, Paul Samuelson, price stability, private sector deleveraging, quantitative easing, QWERTY keyboard, railway mania, rent-seeking, road to serfdom, savings glut, Second Machine Age, secular stagnation, shareholder value, sharing economy, Silicon Valley, Steve Jobs, the built environment, The Great Moderation, The Spirit Level, Thorstein Veblen, too big to fail, total factor productivity, transaction costs, trickle-down economics, universal basic income, very high income

And in focusing his theory of production on investments in productive capabilities and the management of the labour force, Marx provided a substantive theory of how the capitalist enterprise generates productivity—even though, as I explain below, key arguments about how capitalist employers extracted unremunerated labour effort from production workers in the British industrial revolution on which his theory of surplus value was based were empirically wrong. Marx was no stranger to a general equilibrium theory of the market economy. In Das Kapital, Marx constructed the general equilibrium system of market exchange on the basis of the labour theory of value, in the tradition of what we now call the ‘classical’ economists, especially David Ricardo.10 Marx argued that, in a general equilibrium of market exchange, capitalism presents itself as ‘a very Eden of the innate rights of man’ because all parties can exchange commodities, including the commodity ‘labour power’, at their own free will. A century after Marx wrote Capital, Milton Friedman would encapsulate this ideology of the market economy in his tract, Capitalism and Freedom (without, of course, invoking the labour theory of value), while subordinating production to the market through the theory of the firm in perfect competition (or what, as we have seen, should really be called the theory of the unproductive firm).11 In Parts 1 and 2 of Capital, Marx began the analysis of the capitalist system by laying out the logic of a general equilibrium system of exchange based on labour values, so that he could then demonstrate that capitalism does not in fact operate according to the ideology of ‘Freedom, Equality, Property and Bentham’ that market exchange appears to offer.12 For Marx, the point of this exercise was not (as many Marxist and non-Marxist economists have wrongly believed) to explain relative market prices by the exchange value of labour inputs, but, to the contrary, to show that, as a theory of the market economy, the labour theory of value cannot explain the existence of capitalist profit (and hence market prices) in the economic system.

Hutton, How Good We Can Be: Ending the Mercenary Society and Building a Great Country, London, Abacus, 2015. 44 Lawrence Summers, October 1991, when Chief Economist at the World Bank; cited by M. Ellman, ‘Transition economies’, in H.-J. Chang, ed., Rethinking Development Economics, London and New York, Anthem Press, 2003, pp. 179–98 (p. 197). 45 P. A. Hall and D. Soskice, eds., Varieties of Capitalism. The Institutional Foundations of Comparative Advantage, Oxford, Oxford University Press, 2001. 46 C. Perez, Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages, London, Edward Elgar, 2002. 47 J. A. Schumpeter, Capitalism, Socialism, and Democracy, 3rd edn, New York, Harper, 1962 [1942]. 48 Nelson and Winter, An Evolutionary Theory of Economic Change; see also R. Nelson, Economic Development from the Perspective of Evolutionary Economic Theory, GLOBELICS Working Paper No. 2007-02, 2007, http://dcsh.xoc.uam.mx/eii/globelicswp/wpg0702.pdf (accessed 12 April 2016). 49 A.


pages: 327 words: 90,542

The Age of Stagnation by Satyajit Das

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9 dash line, accounting loophole / creative accounting, additive manufacturing, Airbnb, Albert Einstein, Alfred Russel Wallace, Anton Chekhov, Asian financial crisis, banking crisis, Berlin Wall, bitcoin, Bretton Woods, BRICs, British Empire, business process, business process outsourcing, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Clayton Christensen, cloud computing, collaborative economy, colonial exploitation, computer age, creative destruction, cryptocurrency, currency manipulation / currency intervention, David Ricardo: comparative advantage, declining real wages, Deng Xiaoping, deskilling, disintermediation, Downton Abbey, Emanuel Derman, energy security, energy transition, eurozone crisis, financial innovation, financial repression, forward guidance, Francis Fukuyama: the end of history, full employment, gig economy, Gini coefficient, global reserve currency, global supply chain, Goldman Sachs: Vampire Squid, happiness index / gross national happiness, Honoré de Balzac, hydraulic fracturing, Hyman Minsky, illegal immigration, income inequality, income per capita, indoor plumbing, informal economy, Innovator's Dilemma, intangible asset, Intergovernmental Panel on Climate Change (IPCC), Jane Jacobs, John Maynard Keynes: technological unemployment, Kenneth Rogoff, knowledge economy, knowledge worker, labour market flexibility, labour mobility, light touch regulation, liquidity trap, Long Term Capital Management, low skilled workers, Lyft, Mahatma Gandhi, margin call, market design, Marshall McLuhan, Martin Wolf, Mikhail Gorbachev, mortgage debt, mortgage tax deduction, new economy, New Urbanism, offshore financial centre, oil shale / tar sands, oil shock, old age dependency ratio, open economy, passive income, peak oil, peer-to-peer lending, pension reform, Plutocrats, plutocrats, Ponzi scheme, Potemkin village, precariat, price stability, profit maximization, pushing on a string, quantitative easing, race to the bottom, Ralph Nader, Rana Plaza, rent control, rent-seeking, reserve currency, ride hailing / ride sharing, rising living standards, risk/return, Robert Gordon, Ronald Reagan, Satyajit Das, savings glut, secular stagnation, seigniorage, sharing economy, Silicon Valley, Simon Kuznets, Slavoj Žižek, South China Sea, sovereign wealth fund, TaskRabbit, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, the market place, the payments system, The Spirit Level, Thorstein Veblen, Tim Cook: Apple, too big to fail, total factor productivity, trade route, transaction costs, unpaid internship, Unsafe at Any Speed, Upton Sinclair, Washington Consensus, We are the 99%, WikiLeaks, Y2K, Yom Kippur War, zero-coupon bond, zero-sum game

Financial flows remain around 60 percent below their pre-crisis level, falling from 21 percent of global GDP to only 5 percent in 2012.2 Historically, sluggish growth in trade and capital flows has signaled impending recession. It is not clear whether the current trend reflects cyclical factors or a fundamental structural change. Expectations of a rapid return to pre-crisis conditions appear optimistic. In recent decades, international integration has focused on the geographic separation of production and consumption. Economist David Ricardo's concept of comparative advantage, whereby countries produce more of those goods and services in which they enjoy a competitive edge, gained ascendancy. The manufacturing process itself was divided into discrete components. A pair of trousers could be made using yarn spun in Bangladesh that was then woven into fabric and dyed in India, China, or Vietnam; the zipper might be manufactured in Japan and the buttons in China; and the whole could be stitched together in Sri Lanka, Pakistan, or Honduras.


pages: 624 words: 127,987

The Personal MBA: A World-Class Business Education in a Single Volume by Josh Kaufman

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Albert Einstein, Atul Gawande, Black Swan, business process, buy low sell high, capital asset pricing model, Checklist Manifesto, cognitive bias, correlation does not imply causation, Credit Default Swap, Daniel Kahneman / Amos Tversky, David Heinemeier Hansson, David Ricardo: comparative advantage, Dean Kamen, delayed gratification, discounted cash flows, Donald Knuth, double entry bookkeeping, Douglas Hofstadter, en.wikipedia.org, Frederick Winslow Taylor, George Santayana, Gödel, Escher, Bach, high net worth, hindsight bias, index card, inventory management, iterative process, job satisfaction, Johann Wolfgang von Goethe, Kevin Kelly, Lao Tzu, loose coupling, loss aversion, Marc Andreessen, market bubble, Network effects, Parkinson's law, Paul Buchheit, Paul Graham, place-making, premature optimization, Ralph Waldo Emerson, rent control, side project, statistical model, stealth mode startup, Steve Jobs, Steve Wozniak, subscription business, telemarketer, the scientific method, time value of money, Toyota Production System, tulip mania, Upton Sinclair, Vilfredo Pareto, Walter Mischel, Y Combinator, Yogi Berra

The more people know your capabilities and respect the Reputation you’ve built, the more Power you will have. SHARE THIS CONCEPT: http://book.personalmba.com/power/ Comparative Advantage Be a first-rate version of yourself, not a second-rate version of someone else. —JUDY GARLAND, ACTRESS AND SINGER Essential to the idea of working with other people is the question, Why work with other people in the first place? If you can’t control them and get them to do exactly what you want them to do all the time, why bother? The answer is Comparative Advantage, a concept that originated in the “dismal science” of economics. Attributed to David Ricardo’s 1817 text On the Principles of Political Economy and Taxation, “Ricardo’s Law of Comparative Advantage” provided an answer to a question of international politics: is it better for the economies of countries to be self-sufficient and produce everything themselves, or specialize in producing certain goods, then trade with one another?

As a result, instead of wasting time and money struggling to do something they weren’t good at, Portugal and England would both be better off if they specialized, then traded with each other. Comparative Advantage means it’s better to capitalize on your strengths than to shore up your weaknesses. In First, Break All The Rules by Marcus Buckingham and Curt Coffman, and StrengthsFinder 2.0 by Tom Rath, the authors share the results of the Gallup Organization’s comprehensive research on human productivity. As it turns out, Comparative Advantage applies as much to individuals as it does to countries: businesses work better if the individuals who operate them focus on what they’re best at, working with other specialists to accomplish everything else they need. “Strengths-Based Management” is simply another term for Comparative Advantage. Comparative Advantage explains why it often makes sense to work with contractors or outsourcers rather than try to do everything yourself.

Comparative Advantage explains why it often makes sense to work with contractors or outsourcers rather than try to do everything yourself. If you want to build a house, it’s probably more efficient to hire a general contractor and specialists who do the kind of work the project requires every day. You could certainly try to do it yourself, but unless you know what you’re doing, it’ll probably take longer, and the results won’t be as good. Comparative Advantage also explains why diverse teams consistently outperform homogenous teams. Having a wide variety of team members with different skills and backgrounds is a major asset: it increases the probability that one of your teammates will know what to do in any given circumstance. If every team member has the same skills and the same background, it’s far more likely the team will get stuck or make a preventable error. Self-reliance naturally improves your flexibility and knowledge over time, but too much self-reliance is a mistake.


pages: 790 words: 150,875

Civilization: The West and the Rest by Niall Ferguson

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Admiral Zheng, agricultural Revolution, Albert Einstein, Andrei Shleifer, Atahualpa, Ayatollah Khomeini, Berlin Wall, BRICs, British Empire, clean water, collective bargaining, colonial rule, conceptual framework, Copley Medal, corporate governance, creative destruction, credit crunch, David Ricardo: comparative advantage, Dean Kamen, delayed gratification, Deng Xiaoping, discovery of the americas, Dissolution of the Soviet Union, European colonialism, Fall of the Berlin Wall, Francisco Pizarro, full employment, Hans Lippershey, haute couture, Hernando de Soto, income inequality, invention of movable type, invisible hand, Isaac Newton, James Hargreaves, James Watt: steam engine, John Harrison: Longitude, joint-stock company, Joseph Schumpeter, Kitchen Debate, land reform, land tenure, liberal capitalism, Louis Pasteur, Mahatma Gandhi, market bubble, Martin Wolf, mass immigration, means of production, megacity, Mikhail Gorbachev, new economy, Pearl River Delta, Pierre-Simon Laplace, probability theory / Blaise Pascal / Pierre de Fermat, profit maximization, purchasing power parity, quantitative easing, rent-seeking, reserve currency, road to serfdom, Ronald Reagan, savings glut, Scramble for Africa, Silicon Valley, South China Sea, sovereign wealth fund, special economic zone, spice trade, spinning jenny, Steve Jobs, Steven Pinker, The Great Moderation, the market place, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Thomas Malthus, Thorstein Veblen, total factor productivity, trade route, transaction costs, transatlantic slave trade, transatlantic slave trade, upwardly mobile, uranium enrichment, wage slave, Washington Consensus, women in the workforce, World Values Survey

But it not at all clear why the doctrine of the sovereignty of parliament or the evolution of the common law would have provided Boulton and Watt with stronger incentives than their unsung counterparts on the continent. It is possible that eighteenth-century tariffs erected against Indian calicoes gave British manufacturers some advantage, just as similar protectionist policies would later nurture the infant industries of the United States against British competition.18 David Ricardo’s doctrine of comparative advantage* was not the sole reason why cotton exports from Britain soared in the first half of the nineteenth century. Aside from that, the case seems unconvincing that British (or, for that matter, American) political or legal institutions were more favourable to industrial development than Dutch, French or German.19 In the eyes of contemporaries, the state of the British political and legal systems in the key decades of industrial take-off was the very reverse of favourable to fledgling industry.

Gregory Clark has argued that the tendency for the children of richer individuals to live longer than those of the poor explains the Industrial Revolution, since ‘Middle-class values, and economic orientation, were most likely being spread through reproductive advantage … Thrift, prudence, negotiation and hard work were imbuing themselves into communities that had been spendthrift, violent, impulsive and leisure loving’ (Clark, Farewell to Alms, pp. 132, 166). But presumably rich French and Italian children also fared better than poor ones. * Comparative advantage means one country’s ability to produce a good or service with a lower opportunity cost/higher relative efficiency than another. Ricardo’s famous example concerns the trade between England and Portugal. In Portugal it is possible to produce both wine and cloth more easily and cheaply than in England, but in England it is much harder and therefore more expensive to produce wine than cloth. Both sides therefore gain if Portugal focuses on producing wine, where its comparative advantage is greatest, leaving the English to produce only cloth. The Portuguese exchange their surplus wine for surplus English cloth. The former get more cloth than would be the case if they produced their own; the latter get cheaper wine.

The impoverished, strife-torn petty states of Western Europe embarked on half a millennium of almost unstoppable expansion. The great empires of the Orient meanwhile stagnated and latterly succumbed to Western dominance. Why did China founder while Europe forged ahead? Smith’s main answer was that the Chinese had failed to ‘encourage foreign commerce’, and had therefore missed out on the benefits of comparative advantage and the international division of labour. But other explanations were possible. Writing in the 1740s, Charles de Secondat, baron de Montesquieu, blamed the ‘settled plan of tyranny’, which he traced back to China’s exceptionally large population, which in turn was due to the East Asian weather: I reason thus: Asia has properly no temperate zone, as the places situated in a very cold climate immediately touch upon those which are exceedingly hot, that is, Turkey, Persia, India, China, Korea, and Japan.


pages: 422 words: 131,666

Life Inc.: How the World Became a Corporation and How to Take It Back by Douglas Rushkoff

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affirmative action, Amazon Mechanical Turk, banks create money, big-box store, Bretton Woods, car-free, colonial exploitation, Community Supported Agriculture, complexity theory, computer age, corporate governance, credit crunch, currency manipulation / currency intervention, David Ricardo: comparative advantage, death of newspapers, don't be evil, Donald Trump, double entry bookkeeping, easy for humans, difficult for computers, financial innovation, Firefox, full employment, global village, Google Earth, greed is good, Howard Rheingold, income per capita, invention of the printing press, invisible hand, Jane Jacobs, John Nash: game theory, joint-stock company, Kevin Kelly, laissez-faire capitalism, loss aversion, market bubble, market design, Marshall McLuhan, Milgram experiment, moral hazard, mutually assured destruction, Naomi Klein, negative equity, new economy, New Urbanism, Norbert Wiener, peak oil, peer-to-peer, place-making, placebo effect, Ponzi scheme, price mechanism, price stability, principal–agent problem, private military company, profit maximization, profit motive, race to the bottom, RAND corporation, rent-seeking, RFID, road to serfdom, Ronald Reagan, short selling, Silicon Valley, Simon Kuznets, social software, Steve Jobs, Telecommunications Act of 1996, telemarketer, The Wealth of Nations by Adam Smith, Thomas L Friedman, too big to fail, trade route, trickle-down economics, union organizing, urban decay, urban planning, urban renewal, Vannevar Bush, Victor Gruen, white flight, working poor, Works Progress Administration, Y2K, young professional, zero-sum game

Defenders of the free market—including editors of financial publications from The Economist to The Wall Street Journal—deride any critique of these development strategies as jingoistic, ill-informed, and protectionist. They like to cite David Ricardo’s 1817 theory of comparative advantage, which most of us were taught as freshmen in Econ 101. I had the pleasure of learning it in a Princeton lecture hall with a thousand other college freshmen from the left-leaning former Fed vice chairman Alan Blinder, and it goes something like this: The theory of comparative advantage shows how trade can benefit all parties as long as they produce goods with different relative costs. It’s easy to see that if Country A makes shoes faster, and Country B makes hats faster, then everyone in Country A should make shoes, and everyone in Country B should make hats.

Trade is good, especially if it allows nations to specialize in what they do best, or what their natural endowment allows. The comparative advantage argument no longer holds when you’re talking about a car manufactured in ten countries, each with its own exchange rates. Comparative advantage applies to balanced national economies trading with one another. Trade agreements like the North American Free Trade Agreement (NAFTA) and the General Agreement on Tariffs and Trade (GATT) are more about creating “integrated economies,” whose national boundaries no longer pose any obstacles to the corporations who transcend them. The United States is not trading with China at all. Wal-Mart is leveraging what used to be comparative advantage by sourcing products in China and selling them in the U.S.—where nothing but credit is produced in return.

Let’s say it’s dresses. When the two nations trade their stuff, both do better. For every man-hour the U.K. spends making cars, it earns more value to trade for Italy’s dresses than it would if it made dresses for itself. It’s better to have everyone in the U.K. doing the thing they do best, and then trade with other countries that are doing what they do best. Corporations use the theory of comparative advantage to justify the way they do foreign trade and, moreover, to explain why building cars and trucks over in Mexico or Brazil doesn’t really take away jobs from people in Detroit or Birmingham. The domestic workers simply need to be “retrained” to do what Westerners do best (whatever that is), and then everything will be okay. A closer look at Ricardo’s theory, however—the kind of look offered by a teacher like Blinder—reveals that it depends on a set of preconditions.


pages: 518 words: 147,036

The Fissured Workplace by David Weil

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accounting loophole / creative accounting, affirmative action, Affordable Care Act / Obamacare, banking crisis, barriers to entry, business process, call centre, Carmen Reinhart, Cass Sunstein, Clayton Christensen, clean water, collective bargaining, commoditize, corporate governance, corporate raider, Corrections Corporation of America, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, declining real wages, employer provided health coverage, Frank Levy and Richard Murnane: The New Division of Labor, George Akerlof, global supply chain, global value chain, hiring and firing, income inequality, information asymmetry, intermodal, inventory management, Jane Jacobs, Kenneth Rogoff, law of one price, loss aversion, low skilled workers, minimum wage unemployment, moral hazard, Network effects, new economy, occupational segregation, Paul Samuelson, performance metric, pre–internet, price discrimination, principal–agent problem, Rana Plaza, Richard Florida, Richard Thaler, Ronald Coase, shareholder value, Silicon Valley, statistical model, Steve Jobs, supply-chain management, The Death and Life of Great American Cities, The Nature of the Firm, transaction costs, ultimatum game, union organizing, women in the workforce, Y2K, yield management

A New York Times report in 2012 found that 86% of those surveyed said buying products in the United States was “very or somewhat important to them,” and that 58% believed that “a lot” of unemployment is caused by products sold by U.S. companies being manufactured abroad.23 Outsourcing and offshoring share a fundamental characteristic with other organizational forms that create fissured workplaces: they entail a lead company focusing on a core area of competency and shedding activities (manufacturing and assembly) to other businesses, all the while ensuring that technical, quality, and delivery standards are rigorously adhered to by those subordinate suppliers. Successful global manufacturers accomplish this through supply chain management, which comprises the planning, coordination, and control of the activities of that network of suppliers through the creation and implementation of standards. Offshoring, Trade, and the Impact on Workers The economic literature on the consequences of trade between nations goes back to David Ricardo’s work on comparative advantage in the early 1800s. The focus of discussion has been trade in final goods.24 But offshoring typically involves the use of outside suppliers to provide intermediate products—arising from what trade economist Rob Feenstra calls the “disintegration of production.” The changing nature of trade—as well as the growing importance of trade in intermediate goods—is illustrated by looking at U.S. imports and exports with respect to their end use over time.

To the extent that offshoring is simply a specific case of trade between two nations, X and Y, with different comparative advantages, traditional economics argues that both nations benefit from it. If country X can produce a good (or subassembly) at lower cost than country Y, the national economy of Y benefits from letting that work go to country X, thereby freeing country Y’s resources for more productive uses.27 Many questions arise, however, in the trade literature on the gains from trade where there are other imperfections in product or capital markets. In addition, Ricardo’s ideas on gains from trade were built around natural endowments (climate, access to raw materials) conveying comparative advantages to different nations. Two countries producing products where they could translate those endowments into lower costs would benefit from exchanges between them.

The situation becomes more complicated if each party can create an advantage through volitional policy (for example, educating its workforce; investing in research and development; devoting significant national resources to developing comparative advantage in an industry), although the overall benefits from trade between those with higher and lower productivity arising from those policies still hold. Several articles by eminent economists rekindled the debate on the gains from trade. In 2004 the Nobel laureate Paul Samuelson examined in an essay late in his life situations where an increase in the productivity of a trading partner reduces its partner’s gains from trade relative to the status quo. Samuelson modeled a situation where one country (for example, China) rapidly creates new comparative advantage in a good that its trading partner (for example, the United States) historically had specialized in producing.


pages: 497 words: 143,175

Pivotal Decade: How the United States Traded Factories for Finance in the Seventies by Judith Stein

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1960s counterculture, affirmative action, airline deregulation, anti-communist, Ayatollah Khomeini, barriers to entry, Berlin Wall, blue-collar work, Bretton Woods, capital controls, centre right, collective bargaining, Credit Default Swap, crony capitalism, David Ricardo: comparative advantage, deindustrialization, desegregation, energy security, Fall of the Berlin Wall, falling living standards, feminist movement, financial deregulation, floating exchange rates, full employment, Gunnar Myrdal, income inequality, income per capita, intermodal, invisible hand, knowledge worker, laissez-faire capitalism, liberal capitalism, Long Term Capital Management, manufacturing employment, market bubble, Martin Wolf, new economy, oil shale / tar sands, oil shock, open economy, Paul Samuelson, payday loans, post-industrial society, post-oil, price mechanism, price stability, Ralph Nader, RAND corporation, reserve currency, Robert Gordon, Ronald Reagan, Simon Kuznets, strikebreaker, trade liberalization, union organizing, urban planning, urban renewal, War on Poverty, Washington Consensus, working poor, Yom Kippur War

The Americans were the main force behind the so-called Tokyo Round of trade negotiations, which attempted to rein in the subsidies and other special industrial policies that Europeans and Japanese had used to prosper in the low-tariff, recessionary era of the 1970s. TOKYO ROUND Every nation approached the Tokyo Round, begun in 1974 and completed in 1979, with its own interests front and center. The behavior contrasted sharply with official trilateralism, a variant of the theory of comparative advantage, which had dominated academic and policy thinking about trade since British political economist David Ricardo formulated it two hundred years ago. Both the first and modern version posited free trade as the obvious policy for national well-being. The durability of the theory is striking, especially when its original assumption—a world of small-scale enterprise—disappeared many years ago. But some economists have transported trade theory from the eighteenth to the twenty-first century.

Whether it was by personal conviction or the desire to placate his coalition partner, Schmidt’s current interpretation of the crisis was closer to the FDP’s than to his own party’s. He chose to continue macroeconomic austerity while he reorganized and cartelized troubled industries like mining and steel. The Japanese story is better known. Had the Japanese followed the prescriptions of classical economics, they would have capitalized on their comparative advantage, cheap labor. Although low wages made them formidable competitors in textiles, clothing, and trinkets, the government had grander ambitions. Capital-intensive industries like steel, shipbuilding, autos, and machinery produced great nations, and that was its goal. The Japanese restricted market access for foreign multinationals, forcing them to license their technologies.34 But how would Japan acquire the necessary capital?

The companies had to manufacture enough models and parts in Canada for export to the United States to offset 95 percent of the value of the models and parts it manufactured in the United States for sale in Canada. Over time, the companies shifted much production north of the border, producing a U.S. automobile trade deficit with Canada.135 The auto trade was a managed traffic. The goal of achieving a national industry or domestic auto employment trumped principles of comparative advantage everywhere. Given the superiority of Detroit’s cars and their dominance in the U.S. market, the issue of foreign cars at home had been nonexistent until the 1970s, at which time the oil crises coincided with the coming of age of Japanese auto exports. Initially, Japan built cars for its own market. In 1951 its Ministry of International Trade and Industry (MITI) prepared a package of support, including 40 and 50 percent tariffs on foreign imports and investment controls, that prevented foreign facilities from being established in Japan.


pages: 464 words: 116,945

Seventeen Contradictions and the End of Capitalism by David Harvey

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accounting loophole / creative accounting, bitcoin, Branko Milanovic, Bretton Woods, BRICs, British Empire, business climate, California gold rush, call centre, central bank independence, clean water, cloud computing, collapse of Lehman Brothers, colonial rule, creative destruction, Credit Default Swap, David Ricardo: comparative advantage, deindustrialization, demographic dividend, Deng Xiaoping, deskilling, drone strike, end world poverty, falling living standards, fiat currency, first square of the chessboard, first square of the chessboard / second half of the chessboard, Food sovereignty, Frank Gehry, future of work, global reserve currency, Guggenheim Bilbao, Gunnar Myrdal, income inequality, informal economy, invention of the steam engine, invisible hand, Isaac Newton, Jane Jacobs, Jarndyce and Jarndyce, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Just-in-time delivery, knowledge worker, low skilled workers, Mahatma Gandhi, market clearing, Martin Wolf, means of production, microcredit, new economy, New Urbanism, Occupy movement, peak oil, phenotype, Plutocrats, plutocrats, Ponzi scheme, quantitative easing, rent-seeking, reserve currency, road to serfdom, Robert Gordon, Ronald Reagan, short selling, Silicon Valley, special economic zone, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, transaction costs, Tyler Cowen: Great Stagnation, wages for housework, Wall-E, women in the workforce, working poor, working-age population

Arguably, the role of experts has increased exponentially over recent decades and this poses a serious problem for the transparency and legibility of the world in which we live. We all depend on experts to fix our computer, diagnose our illnesses, design our transport systems and ensure our security. In the 1970s a new perspective was introduced to the discussion with the rise of a so-called ‘new international division of labour’. David Ricardo, appealing to the doctrine of comparative advantage, had long ago insisted on the benefits in efficiency to be gained from specialisation within and trade between countries. The specialisations partly depended on natural factors (it is no more possible to grow bananas and coffee in Canada than it is possible to mine copper or extract oil where there is none). But they also derived from social features such as labour skills, institutional arrangements, political systems and class configurations, along with the brute facts of colonial and neocolonial plunder and geopolitical and military power.

., Disposable Women and Other Myths of Global Capitalism, New York, Routledge, 2006 Index Numbers in italics indicate Figures. 2001: A Space Odyssey (film) 271 A Abu Ghraib, Iraq 202 acid deposition 255, 256 advertising 50, 121, 140, 141, 187, 197, 236, 237, 275, 276 Aeschylus 291 Afghanistan 202, 290 Africa and global financial crisis 170 growth 232 indigenous population and property rights 39 labour 107, 108, 174 ‘land grabs’ 39, 58, 77, 252 population growth 230 Agamben, Giorgio 283–4 agglomeration 149, 150 economies 149 aggregate demand 20, 80, 81, 104, 173 aggregate effective demand 235 agribusiness 95, 133, 136, 206, 247, 258 agriculture ix, 39, 61, 104, 113, 117, 148, 229, 239, 257–8, 261 Alabama 148 Algerian War (1954–62) 288, 290 alienation 57, 69, 125, 126, 128, 129, 130, 198, 213, 214, 215, 263, 266–70, 272, 275–6, 279–80, 281, 286, 287 Allende, Salvador 201 Althusser, Louis 286 Amazon 131, 132 Americas colonisation of 229 indigenous populations 283 Amnesty International 202 anti-capitalist movements 11, 14, 65, 110, 111, 162 anti-capitalist struggle 14, 110, 145, 193, 269, 294 anti-globalisation 125 anti-terrorism xiii apartheid 169, 202, 203 Apple 84, 123, 131 apprenticeships 117 Arab Spring movement 280 Arbenz, Jacobo 201 Argentina 59, 107, 152, 160, 232 Aristotelianism 283, 289 Aristotle 1, 4, 200, 215 arms races 93 arms traffickers 54 Arrighi, Giovanni 136 Adam Smith in Beijing 142 Arthur, Brian: The Nature of Technology 89, 95–9, 101–4, 110 artificial intelligence xii, 104, 108, 120, 139, 188, 208, 295 Asia ‘land grabs’ 58 urbanisation 254 assembly lines 119 asset values and the credit system 83 defined 240 devalued 257 housing market 19, 20, 21, 58, 133 and predatory lending 133 property 76 recovery of 234 speculation 83, 101, 179 associationism 281 AT&T 131 austerity xi, 84, 177, 191, 223 Australia 152 autodidacts 183 automation xii, 103, 105, 106, 108, 138, 208, 215, 295 B Babbage, Charles 119 Bangkok riots, Thailand (1968) x Bangladesh dismantlement of old ships 250 factories 129, 174, 292 industrialisation 123 labour 108, 123, 129 protests against unsafe labour conditions 280 textile mill tragedies 249 Bank of England 45, 46 banking bonuses 164 electronic 92, 100, 277 excessive charges 84 interbank lending 233 and monopoly power 143 national banks supplant local banking in Britain and France 158 net transfers between banks 28 power of bankers 75 private banks 233 profits 54 regional banks 158 shell games 54–5 systematic banking malfeasance 54, 61 Baran, Paul and Sweezy, Paul: Monopoly Capitalism 136 Barcelona 141, 160 barrios pobres ix barter 24, 25, 29 Battersea Power Station, London 255 Battle of Algiers, The (film) 288 Bavaria, Germany 143, 150 Becker, Gary 186 Bernanke, Ben 47 Bhutan 171 billionaires xi, 165, 169, 170 biodiversity 246, 254, 255, 260 biofuels 3 biomedical engineering xii Birmingham 149 Bitcoin 36, 109 Black Panthers 291 Blade Runner (film) 271 Blankfein, Lloyd 239–40 Bohr, Niels 70 Bolivia 257, 260, 284 bondholders xii, 32, 51, 152, 158, 223, 240, 244, 245 bonuses 54, 77, 164, 178 Bourdieu, Pierre 186, 187 bourgeois morality 195 bourgeois reformism 167, 211 ‘Brady Bonds’ 240 Braudel, Fernand 193 Braverman, Harry: Labor and Monopoly Capital 119 Brazil a BRIC country 170, 228 coffee growers 257 poverty grants 107 unrest in (2013) 171, 243, 293 Brecht, Bertolt 265, 293 Bretton Woods (1944) 46 brewing trade 138 BRIC countries 10, 170, 174, 228 Britain alliance between state and London merchant capitalists 44–5 banking 158 enclosure movement 58 lends to United States (nineteenth century) 153 suppression of Mau Mau 291 surpluses of capital and labour sent to colonies 152–3 welfare state 165 see also United Kingdom British Empire 115, 174 British Museum Library, London 4 British Petroleum (BP) 61, 128 Buffett, Peter 211–12, 245, 283, 285 Buffett, Warren 211 bureaucracy 121–2, 165, 203, 251 Bush, George, Jr 201, 202 C Cabet, Étienne 183 Cabral, Amilcar 291 cadastral mapping 41 Cadbury 18 Cairo uprising (2011) 99 Calhoun, Craig 178 California 29, 196, 254 Canada 152 Cape Canaveral, Florida 196 capital abolition of monopolisable skills 119–20 aim of 92, 96–7, 232 alternatives to 36, 69, 89, 162 annihilation of space through time 138, 147, 178 capital-labour contradiction 65, 66, 68–9 and capitalism 7, 57, 68, 115, 166, 218 centralisation of 135, 142 circulation of 5, 7, 8, 53, 63, 67, 73, 74, 75, 79, 88, 99, 147, 168, 172, 177, 234, 247, 251, 276 commodity 74, 81 control over labour 102–3, 116–17, 166, 171–2, 274, 291–2 creation of 57 cultural 186 destruction of 154, 196, 233–4 and division of labour 112 economic engine of 8, 10, 97, 168, 172, 200, 253, 265, 268 evolution of 54, 151, 171, 270 exploitation by 156, 195 fictitious 32–3, 34, 76, 101, 110–11, 239–42 fixed 75–8, 155, 234 importance of uneven geographical development to 161 inequality foundational for 171–2 investment in fixed capital 75 innovations 4 legal-illegal duality 72 limitless growth of 37 new form of 4, 14 parasitic forms of 245 power of xii, 36, 47 private capital accumulation 23 privatisation of 61 process-thing duality 70–78 profitability of 184, 191–2 purpose of 92 realisation of 88, 173, 192, 212, 231, 235, 242, 268, 273 relation to nature 246–63 reproduction of 4, 47, 55, 63, 64, 88, 97, 108, 130, 146, 161, 168, 171, 172, 180, 181, 182, 189, 194, 219, 233, 252 spatiality of 99 and surplus value 63 surpluses of 151, 152, 153 temporality of 99 tension between fixed and circulating capital 75–8, 88, 89 turnover time of 73, 99, 147 and wage rates 173 capital accumulation, exponential growth of 229 capital gains 85, 179 capital accumulation 7, 8, 75, 76, 78, 102, 149, 151–5, 159, 172, 173, 179, 192, 209, 223, 228–32, 238, 241, 243, 244, 247, 273, 274, 276 basic architecture for 88 and capital’s aim 92, 96 collapse of 106 compound rate of 228–9 and the credit system 83 and democratisation 43 and demographic growth 231 and household consumerism 192 and lack of aggregate effective demand in the market 81 and the land market 59 and Marx 5 maximising 98 models of 53 in a new territories 152–3 perpetual 92, 110, 146, 162, 233, 265 private 23 promotion of 34 and the property market 50 recent problems of 10 and the state 48 capitalism ailing 58 an alternative to 36 and capital 7, 57, 68, 115, 166, 218 city landscape of 160 consumerist 197 contagious predatory lawlessness within 109 crises essential to its reproduction ix; defined 7 and demand-side management 85 and democracy 43 disaster 254–5, 255 economic engine of xiii, 7–8, 11, 110, 220, 221, 252, 279 evolution of 218 geographical landscape of 146, 159 global xi–xii, 108, 124 history of 7 ‘knowledge-based’ xii, 238 and money power 33 and a moneyless economy 36 neoliberal 266 political economy of xiv; and private property rights 41 and racialisation 8 reproduction of ix; revivified xi; vulture 162 capitalist markets 33, 53 capitalo-centric studies 10 car industry 121, 138, 148, 158, 188 carbon trading 235, 250 Caribbean migrants 115 Cartesian thinking 247 Cato Institute 143 Central America 136 central banks/bankers xi–xii, 37, 45, 46, 48, 51, 109, 142, 156, 161, 173, 233, 245 centralisation 135, 142, 144, 145, 146, 149, 150, 219 Césaire, Aimé 291 CFCs (chloro-fluorocarbons) 248, 254, 256, 259 chambers of commerce 168 Chandler, Alfred 141 Chaplin, Charlie 103 Charles I, King 199 Chartism 184 Chávez, Hugo 123, 201 cheating 57, 61, 63 Cheney, Dick 289 Chicago riots (1968) x chicanery 60, 72 children 174 exploitation of 195 raising 188, 190 trading of 26 violence and abuse of 193 Chile 136, 194, 280 coup of 1973 165, 201 China air quality 250, 258 becomes dynamic centre of a global capitalism 124 a BRIC country 170, 228 capital in (after 2000) 154 class struggles 233 and competition 150, 161 consumerism 194–5, 236 decentralisation 49 dirigiste governmentality 48 dismantlement of old ships 250 dispossessions in 58 education 184, 187 factories 123, 129, 174, 182 famine in 124–5 ‘great leap forward’ 125 growth of 170, 227, 232 income inequalities 169 industrialisation 232 Keynesian demand-side and debt-financed expansion xi; labour 80, 82, 107, 108, 123, 174, 230 life expectancy 259 personal debt 194 remittances 175 special economic zones 41, 144 speculative booms and bubbles in housing markets 21 suburbanisation 253 and technology 101 toxic batteries 249–50 unstable lurches forward 10 urban and infrastructural projects 151 urbanisation 232 Chinese Communist Party 108, 142 Church, the 185, 189, 199 circular cumulative causation 150 CitiBank 61 citizenship rights 168 civil rights 202, 205 class affluent classes 205 alliances 143, 149 class analysis xiii; conflict 85, 159 domination 91, 110 plutocratic capitalist xiii; power 55, 61, 88, 89, 92, 97, 99, 110, 134, 135, 221, 279 and race 166, 291 rule 91 structure 91 class struggle 34, 54, 67, 68, 85, 99, 103, 110, 116, 120, 135, 159, 172, 175, 183, 214, 233 climate change 4, 253–6, 259 Clinton, President Bill 176 Cloud Atlas (film) 271 CNN 285 coal 3, 255 coercion x, 41–4, 53, 60–63, 79, 95, 201, 286 Cold War 153, 165 collateralised debt obligations (CDOs) 78 Collins, Suzanne: The Hunger Games 264 Colombia 280 colonialism 257 the colonised 289–90 indigenous populations 39, 40 liberation from colonial rule 202 philanthropic 208, 285 colonisation 229, 262 ‘combinatorial evolution’ 96, 102, 104, 146, 147, 248 commercialisation 262, 263, 266 commodification 24, 55, 57, 59–63, 88, 115, 140, 141, 192, 193, 235, 243, 251, 253, 260, 262, 263, 273 commodities advertising 275 asking price 31 and barter 24 commodity exchange 39, 64 compared with products 25–6 defective or dangerous 72 definition 39 devaluation of 234 exchange value 15, 25 falling costs of 117 importance of workers as buyers 80–81 international trade in 256 labour power as a commodity 62 low-value 29 mobility of 147–8 obsolescence 236 single metric of value 24 unique 140–41 use value 15, 26, 35 commodity markets 49 ‘common capital of the class’ 142, 143 common wealth created by social labour 53 private appropriation of 53, 54, 55, 61, 88, 89 reproduction of 61 use values 53 commons collective management of 50 crucial 295 enclosure of 41, 235 natural 250 privatised 250 communications 99, 147, 148, 177 communism 196 collapse of (1989) xii, 165 communist parties 136 during Cold War 165 scientific 269 socialism/communism 91, 269 comparative advantage 122 competition and alienated workers 125 avoiding 31 between capitals 172 between energy and food production 3 decentralised 145 and deflationary crisis (1930s) 136 foreign 148, 155 geopolitical 219 inter-capitalist 110 international 154, 175 interstate 110 interterritorial 219 in labour market 116 and monopoly 131–45, 146, 218 and technology 92–3 and turnover time of capital 73, 99 and wages 135 competitive advantage 73, 93, 96, 112, 161 competitive market 131, 132 competitiveness 184 complementarity principle of 70 compounding growth 37, 49, 222, 227, 228, 233, 234, 235, 243, 244 perpetual 222–45, 296 computerisation 100, 120, 222 computers 92, 100, 105, 119 hardware 92, 101 organisational forms 92, 93, 99, 101 programming 120 software 92, 99, 101, 115, 116 conscience laundering 211, 245, 284, 286 Conscious Capitalism 284 constitutional rights 58 constitutionality 60, 61 constitutions progressive 284 and social bond between human rights and private property 40 US Constitution 284 and usurpation of power 45 consumerism 89, 106, 160, 192–5, 197, 198, 236, 274–7 containerisation 138, 148, 158 contracts 71, 72, 93, 207 contradictions Aristotelian conception of 4 between money and the social labour money represents 83 between reality and appearance 4–6 between use and exchange value 83 of capital and capitalism 68 contagious intensification of 14 creative use of 3 dialectical conception of 4 differing reactions to 2–3 and general crises 14 and innovation 3 moved around rather than resolved 3–4 multiple 33, 42 resolution of 3, 4 two modes of usage 1–2 unstable 89 Controller of the Currency 120 corporations and common wealth 54 corporate management 98–9 power of 57–8, 136 and private property 39–40 ‘visible hand’ 141–2 corruption 53, 197, 266 cosmopolitanism 285 cost of living 164, 175 credit cards 67, 133, 277 credit card companies 54, 84, 278 credit financing 152 credit system 83, 92, 101, 111, 239 crises changes in mental conceptions of the world ix-x; crisis of capital 4 defined 4 essential to the reproduction of capitalism ix; general crisis ensuing from contagions 14 housing markets crisis (2007–9) 18, 20, 22 reconfiguration of physical landscapes ix; slow resolution of x; sovereign debt crisis (after 2012) 37 currency markets, turbulence of (late 1960s) x customary rights 41, 59, 198 D Davos conferences 169 DDT 259 Debord, Guy: The Society of the Spectacle 236 debt creation 236 debt encumbrancy 212 debt peonage 62, 212 decentralisation 49, 142, 143, 144, 146, 148, 219, 281, 295 Declaration of Independence (US) 284 decolonisation 282, 288, 290 decommodification 85 deindustrialisation xii, 77–8, 98, 110, 148, 153, 159, 234 DeLong, Bradford 228 demand management 81, 82, 106, 176 demand-side management 85 democracy 47, 215 bourgeois 43, 49 governance within capitalism 43 social 190 totalitarian 220, 292 democratic governance 220, 266 democratisation 43 Deng Xiaoping x depressions 49, 227 1930s x, 108, 136, 169, 227, 232, 234 Descartes, René 247 Detroit 77, 136, 138, 148, 150, 152, 155, 159, 160 devaluation 153, 155, 162 of capital 233 of commodities 234 crises 150–51, 152, 154 localised 154 regional 154 developing countries 16, 240 Dhaka, Bangladesh 77 dialectics 70 Dickens, Charles 126, 169 Bleak House 226 Dombey and Son 184 digital revolution 144 disabled, the 202 see also handicapped discrimination 7, 8, 68, 116, 297 diseases 10, 211, 246, 254, 260 disempowerment 81, 103, 116, 119, 198, 270 disinvestment 78 Disneyfication 276 dispossession accumulation by 60, 67, 68, 84, 101, 111, 133, 141, 212 and capital 54, 55, 57 economies of 162 of indigenous populations 40, 59, 207 ‘land grabs’ 58 of land rights of the Irish 40 of the marginalised 198 political economy of 58 distributional equality 172 distributional shares 164–5, 166 division of labour 24, 71, 112–30, 154, 184, 268, 270 and Adam Smith 98, 118 defined 112 ‘the detail division of labour’ 118, 121 distinctions and oppositions 113–14 evolution of 112, 120, 121, 126 and gender 114–15 increasing complexity of 124, 125, 126 industrial proletariat 114 and innovation 96 ‘new international division of labour’ 122–3 organisation of 98 proliferating 121 relation between the parts and the whole 112 social 113, 118, 121, 125 technical 113, 295 uneven geographical developments in 130 dot-com bubble (1990s) 222–3, 241 ‘double coincidence of wants and needs’ 24 drugs 32, 193, 248 cartels 54 Durkheim, Emile 122, 125 Dust Bowl (United States, 1930s) 257 dynamism 92, 104, 146, 219 dystopia 229, 232, 264 E Eagleton , Terry: Why Marx Was Right 1, 21, 200, 214–15 East Asia crisis of 1997–98 154 dirigiste governmentality 48 education 184 rise of 170 Eastern Europe 115, 230 ecological offsets 250 economic rationality 211, 250, 252, 273, 274, 275, 277, 278, 279 economies 48 advanced capitalist 228, 236 agglomeration 149 of dispossession 162 domination of industrial cartels and finance capital 135 household 192 informal 175 knowledge-based 188 mature 227–8 regional 149 reoriented to demand-side management 85 of scale 75 solidarity 66, 180 stagnant xii ecosystems 207, 247, 248, 251–6, 258, 261, 263, 296 Ecuador 46, 152, 284 education 23, 58, 60, 67–8, 84, 110, 127–8, 129, 134, 150, 156, 168, 183, 184, 185, 187, 188, 189, 223, 235, 296 efficiency 71, 92, 93, 98, 103, 117, 118, 119, 122, 126, 272, 273, 284 efficient market hypothesis 118 Egypt 107, 280, 293 Ehrlich, Paul 246 electronics 120, 121, 129, 236, 292 emerging markets 170–71, 242 employment 37 capital in command of job creation 172, 174 conditions of 128 full-time 274 opportunities for xii, 108, 168 regional crises of 151 of women 108, 114, 115, 127 see also labour enclosure movement 58 Engels, Friedrich 70 The Condition of the English Working Class in England 292 English Civil War (1642–9) 199 Enlightenment 247 Enron 133, 241 environmental damage 49, 61, 110, 111, 113, 232, 249–50, 255, 257, 258, 259, 265, 286, 293 environmental movement 249, 252 environmentalism 249, 252–3 Epicurus 283 equal rights 64 Erasmus, Desiderius 283 ethnic hatreds and discriminations 8, 165 ethnic minorities 168 ethnicisation 62 ethnicity 7, 68, 116 euro, the 15, 37, 46 Europe deindustrialisation in 234 economic development in 10 fascist parties 280 low population growth rate 230 social democratic era 18 unemployment 108 women in labour force 230 European Central Bank 37, 46, 51 European Commission 51 European Union (EU) 95, 159 exchange values commodities 15, 25, 64 dominance of 266 and housing 14–23, 43 and money 28, 35, 38 uniform and qualitatively identical 15 and use values 15, 35, 42, 44, 50, 60, 65, 88 exclusionary permanent ownership rights 39 experts 122 exploitation 49, 54, 57, 62, 68, 75, 83, 107, 108, 124, 126, 128, 129, 150, 156, 159, 166, 175, 176, 182, 185, 193, 195, 208, 246, 257 exponential growth 224, 240, 254 capacity for 230 of capital 246 of capital accumulation 223, 229 of capitalist activity 253 and capital’s ecosystem 255 in computer power 105 and environmental resources 260 in human affairs 229 and innovations in finance and banking 100 potential dangers of 222, 223 of sophisticated technologies 100 expropriation 207 externality effects 43–4 Exxon 128 F Facebook 236, 278, 279 factories ix, 123, 129, 160, 174, 182, 247, 292 Factory Act (1864) 127, 183 famine 124–5, 229, 246 Fannie Mae 50 Fanon, Frantz 287 The Wretched of the Earth 288–90, 293 fascist parties 280 favelas ix, 16, 84, 175 feminisation 115 feminists 189, 192, 283 fertilisers 255 fetishes, fetishism 4–7, 31, 36–7, 61, 103, 111, 179, 198, 243, 245, 269, 278 feudalism 41 financial markets 60, 133 financialisation 238 FIRE (finance, insurance and real estate) sections 113 fishing 59, 113, 148, 249, 250 fixity and motion 75–8, 88, 89, 146, 155 Food and Drug Administration 120 food production/supply 3, 229, 246, 248, 252 security 253, 294, 296 stamp aid 206, 292 Ford, Martin 104–8, 111, 273 foreclosure 21, 22, 24, 54, 58, 241, 268 forestry 113, 148, 257 fossil fuels 3–4 Foucault, Michel xiii, 204, 209, 280–81 Fourier, François Marie Charles 183 Fourierists 18 Fourteen Points 201 France banking 158 dirigiste governmentality under de Gaulle 48 and European Central Bank 46 fascist parties 280 Francis, Pope 293 Apostolic Exhortation 275–6 Frankfurt School 261 Freddie Mac 50 free trade 138, 157 freedom 47, 48, 142, 143, 218, 219, 220, 265, 267–270, 276, 279–82, 285, 288, 296 and centralised power 142 cultural 168 freedom and domination 199–215, 219, 268, 285 and the good life 215 and money creation 51 popular desire for 43 religious 168 and state finances 48 under the rule of capital 64 see also liberty and freedom freedom of movement 47, 296 freedom of thought 200 freedom of the press 213 French Revolution 203, 213, 284 G G7 159 G20 159 Gallup survey of work 271–2 Gandhi, Mahatma 284, 291 Gaulle, Charles de 48 gay rights 166 GDP 194, 195, 223 Gehry, Frank 141 gender discriminations 7, 8, 68, 165 gene sequences 60 General Motors xii genetic engineering xii, 101, 247 genetic materials 235, 241, 251, 261 genetically modified foods 101 genocide 8 gentrification 19, 84, 141, 276 geocentric model 5 geographical landscape building a new 151, 155 of capitalism 159 evolution of 146–7 instability of 146 soulless, rationalised 157 geopolitical struggles 8, 154 Germany and austerity 223 autobahns built 151 and European Central Bank 46 inflation during 1920s 30 wage repression 158–9 Gesell, Silvio 35 Ghana 291 global economic crisis (2007–9) 22, 23, 47, 118, 124, 132, 151, 170, 228, 232, 234, 235, 241 global financialisation x, 177–8 global warming 260 globalisation 136, 174, 176, 179, 223, 293 gold 27–31, 33, 37, 57, 227, 233, 238, 240 Golden Dawn 280 Goldman Sachs 75, 239 Google 131, 136, 195, 279 Gordon, Robert 222, 223, 230, 239, 304n2 Gore, Al 249 Gorz, André 104–5, 107, 242, 270–77, 279 government 60 democratic 48 planning 48 and social bond between human rights and private property 40 spending power 48 governmentality 43, 48, 157, 209, 280–81, 285 Gramsci, Antonio 286, 293 Greco, Thomas 48–9 Greece 160, 161, 162, 171, 235 austerity 223 degradation of the well-being of the masses xi; fascist parties 280 the power of the bondholders 51, 152 greenwashing 249 Guantanamo Bay, Cuba 202, 284 Guatemala 201 Guevara, Che 291 Guggenheim Museum, Bilbao 141 guild system 117 Guinea-Bissau 291 Gulf Oil Spill (2010) 61 H Habermas, Jürgen 192 habitat 246, 249, 252, 253, 255 handicapped, the 218 see also disabled Harvey, David The Enigma of Capital 265 Rebel Cities 282 Hayek, Friedrich 42 Road to Serfdom 206 health care 23, 58, 60, 67–8, 84, 110, 134, 156, 167, 189, 190, 235, 296 hedge funds 101, 162, 239, 241, 249 managers 164, 178 Heidegger, Martin 59, 250 Heritage Foundation 143 heterotopic spaces 219 Hill, Christopher 199 Ho Chi Minh 291 holocausts 8 homelessness 58 Hong Kong 150, 160 housing 156, 296 asset values 19, 20, 21, 58 ‘built to order’ 17 construction 67 controlling externalities 19–20 exchange values 14–23, 43 gated communities ix, 160, 208, 264 high costs 84 home ownership 49–50 investing in improvements 20, 43 mortgages 19, 21, 28, 50, 67, 82 predatory practices 67, 133 production costs 17 rental markets 22 renting or leasing 18–19, 67 self-built 84 self-help 16, 160 slum ix, 16, 175 social 18, 235 speculating in exchange value 20–22 speculative builds 17, 28, 78, 82 tenement 17, 160 terraced 17 tract ix, 17, 82 use values 14–19, 21–2, 23, 67 housing markets 18, 19, 21, 22, 28, 32, 49, 58, 60, 67, 68, 77, 83, 133, 192 crisis (2007–9) 18, 20, 22, 82–3 HSBC 61 Hudson, Michael 222 human capital theory 185, 186 human evolution 229–30 human nature 97, 198, 213, 261, 262, 263 revolt of 263, 264–81 human rights 40, 200, 202 humanism 269 capitalist 212 defined 283 education 128 excesses and dark side 283 and freedom 200, 208, 210 liberal 210, 287, 289 Marxist 284, 286 religious 283 Renaissance 283 revolutionary 212, 221, 282–93 secular 283, 285–6 types of 284 Hungary: fascist parties 280 Husserl, Edmund 192 Huygens, Christiaan 70 I IBM 128 Iceland: banking 55 identity politics xiii illegal aliens (‘sans-papiers’) 156 illegality 61, 72 immigrants, housing 160 imperialism 135, 136, 143, 201, 257, 258 income bourgeois disposable 235 disparities of 164–81 levelling up of 171 redistribution to the lower classes xi; see also wages indebtedness 152, 194, 222 India billionaires in 170 a BRIC country 170, 228 call centres 139 consumerism 236 dismantlement of old ships 250 labour 107, 230 ‘land grabs’ 77 moneylenders 210 social reproduction in 194 software engineers 196 special economic zones 144 unstable lurches forward 10 indigenous populations 193, 202, 257, 283 dispossession of 40, 59, 207 and exclusionary ownership rights 39 individualism 42, 197, 214, 281 Indonesia 129, 160 industrial cartels 135 Industrial Revolution 127 industrialisation 123, 189, 229, 232 inflation 30, 36, 37, 40, 49, 136, 228, 233 inheritance 40 Inner Asia, labour in 108 innovation 132 centres of 96 and the class struggle 103 competitive 219 as a double-edged sword xii; improving the qualities of daily life 4 labour-saving 104, 106, 107, 108 logistical 147 organisational 147 political 219 product 93 technological 94–5, 105, 147, 219 as a way out of a contradiction 3 insurance companies 278 intellectual property rights xii, 41, 123, 133, 139, 187, 207, 235, 241–2, 251 interest compound 5, 222, 224, 225, 226–7 interest-rate manipulations 54 interest rates 54, 186 living off 179, 186 on loans 17 money capital 28, 32 and mortgages 19, 67 on repayment of loans to the state 32 simple 225, 227 usury 49 Internal Revenue Service income tax returns 164 International Monetary Fund (IMF) 49, 51, 100, 143, 161, 169, 186, 234, 240 internet 158, 220, 278 investment: in fixed capital 75 investment pension funds 35–6 IOUs 30 Iran 232, 289 Iranian Revolution 289 Iraq war 201, 290 Ireland dispossession of land rights 40 housing market crash (2007–9) 82–3 Istanbul 141 uprising (2013) 99, 129, 171, 243 Italy 51,161, 223, 235 ITT 136 J Jacobs, Jane 96 James, C.L.R. 291 Japan 1980s economic boom 18 capital in (1980s) 154 economic development in 10 factories 123 growth rate 227 land market crash (1990) 18 low population growth rate 230 and Marshall Plan 153 post-war recovery 161 Jewish Question 213 JPMorgan 61 Judaeo-Christian tradition 283 K Kant, Immanuel 285 Katz, Cindi 189, 195, 197 Kenya 291 Kerala, India 171 Keynes, John Maynard xi, 46, 76, 244, 266 ‘Economic Possibilities for our Grandchildren’ 33–4 General Theory of Employment, Interest, and Money 35 Keynesianism demand management 82, 105, 176 demand-side and debt-financed expansion xi King, Martin Luther 284, 291 knowledge xii, 26, 41, 95, 96, 100, 105, 113, 122, 123, 127, 144, 184, 188, 196, 238, 242, 295 Koch brothers 292 Kohl, Helmut x L labour agitating and fighting for more 64 alienated workers 125, 126, 128, 129, 130 artisan 117, 182–3 and automation 105 capital/labour contradiction 65, 66, 68–9, 146 collective 117 commodification of 57 contracts 71, 72 control over 74, 102–11, 119, 166, 171–2, 274, 291–2 deskilling 111, 119 discipline 65, 79 disempowering workers 81, 103, 116, 119, 270 division of see division of labour; domestic 196 education 127–8, 129, 183, 187 exploitation of 54, 57, 62, 68, 75, 83, 107, 108, 126, 128, 129, 150, 156, 166, 175, 176, 182, 185, 195 factory 122, 123, 237 fair market value 63, 64 Gallup survey 271–2 house building 17 housework 114–15, 192 huge increase in the global wage labour force 107–8 importance of workers as buyers of commodities 80–81 ‘industrial reserve army’ 79–80, 173–4 migrations of 118 non-unionised xii; power of 61–4, 71, 73, 74, 79, 81, 88, 99, 108, 118–19, 127, 173, 175, 183, 189, 207, 233, 267 privatisation of 61 in service 117 skills 116, 118–19, 123, 149, 182–3, 185, 231 social see social labour; surplus 151, 152, 173–4, 175, 195, 233 symbolic 123 and trade unions 116 trading in labour services 62–3 unalienated 66, 89 unionised xii; unpaid 189 unskilled 114, 185 women in workforce see under women; worked to exhaustion or death 61, 182 see also employment labour markets 47, 62, 64, 66–9, 71, 102, 114, 116, 118, 166 labour-saving devices 104, 106, 107, 173, 174, 277 labour power commodification of 61, 88 exploitation of 62, 175 generation of surplus value 63 mobility of 99 monetisation of 61 private property character of 64 privatisation of 61 reserves of 108 Lagos, Nigeria, social reproduction in 195 laissez-faire 118, 205, 207, 281 land commodification 260–61 concept of 76–7 division of 59 and enclosure movement 58 establishing as private property 41 exhausting its fertility 61 privatisation 59, 61 scarcity 77 urban 251 ‘land grabs’ 39, 58, 77, 252 land market 18, 59 land price 17 land registry 41 land rents 78, 85 land rights 40, 93 land-use zoning 43 landlords 54, 67, 83, 140, 179, 251, 261 Latin America ’1and grabs’ 58, 77 labour 107 reductions in social inequality 171 two ‘lost decades’ of development 234 lawyers 22, 26, 67, 82, 245 leasing 16, 17, 18 Lebed, Jonathan 195 Lee Kuan-Yew 48 Leeds 149 Lefebvre, Henri 157, 192 Critique of Everyday Life 197–8 left, the defence of jobs and skills under threat 110 and the factory worker 68 incapable of mounting opposition to the power of capital xii; remains of the radical left xii–xiii Lehman Brothers investment bank, fall of (2008) x–xi, 47, 241 ‘leisure’ industries 115 Lenin, Vladimir 135 Leninism 91 Lewis, Michael: The Big Short 20–21 LGBT groups 168, 202, 218 liberation struggle 288, 290 liberty, liberties 44, 48–51, 142, 143, 212, 276, 284, 289 and bourgeois democracy 49 and centralised power 142 and money creation 51 non-coercive individual liberty 42 popular desire for 43 and state finances 48 liberty and freedom 199–215 coercion and violence in pursuit of 201 government surveillance and cracking of encrypted codes 201–2 human rights abuses 202 popular desire for 203 rhetoric on 200–201, 202 life expectancy 250, 258, 259 light, corpuscular theory of 70 living standards xii, 63, 64, 84, 89, 134, 175, 230 loans fictitious capital 32 housing 19 interest on 17 Locke, John 40, 201, 204 logos 31 London smog of 1952 255 unrest in (2011) 243 Los Angeles 150, 292 Louis XIV, King of France 245 Lovelace, Richard 199, 200, 203 Luddites 101 M McCarthyite scourge 56 MacKinnon, Catherine: Are Women Human?


pages: 448 words: 142,946

Sacred Economics: Money, Gift, and Society in the Age of Transition by Charles Eisenstein

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Albert Einstein, back-to-the-land, bank run, Bernie Madoff, big-box store, Bretton Woods, capital controls, clean water, collateralized debt obligation, commoditize, corporate raider, credit crunch, David Ricardo: comparative advantage, debt deflation, deindustrialization, delayed gratification, disintermediation, diversification, fiat currency, financial independence, financial intermediation, fixed income, floating exchange rates, Fractional reserve banking, full employment, global supply chain, God and Mammon, happiness index / gross national happiness, hydraulic fracturing, informal economy, invisible hand, Jane Jacobs, land tenure, land value tax, Lao Tzu, liquidity trap, lump of labour, McMansion, means of production, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, new economy, off grid, oil shale / tar sands, Own Your Own Home, Paul Samuelson, peak oil, phenotype, Ponzi scheme, profit motive, quantitative easing, race to the bottom, Scramble for Africa, special drawing rights, spinning jenny, technoutopianism, the built environment, Thomas Malthus, too big to fail

In it, the meadow in a village commons was stripped bare of vegetation, because it was to each villager’s advantage to graze as many sheep there as possible. When everyone pursued their own advantage, the result was overgrazing and losses for all. 3. The unfairness and economic inefficiency of economic rents were recognized by classical economists as well and come under criticism in the writings of Adam Smith, David Ricardo, and John Stuart Mill. See Hudson, “Deficit Commission Follies.” 4. This distinction is actually somewhat problematic. The value of the land and the value of “improvements” on the land cannot always be separated. For one, human activity can alter the land permanently and change its “underlying value.” Secondly, improvements can attract other people to the area, raising land prices generally regardless of improvements.

However, because the habits and infrastructure of local economy have largely disappeared, additional measures are necessary to rebuild community-based, place-based economies. This chapter discusses one of these measures: the localization of money itself. I am not advocating the abandonment of global trade. While many things that should be local, such as food, have become global, there are many realms of collective human creativity that by their nature require a global coordination of labor. Moreover, economists’ doctrines of efficiency of scale and comparative advantage (that some places and cultures are better suited to certain kinds of production) are not entirely without basis.1 In general, though, sacred economics will induce the local sourcing of many commodities that are shipped across oceans and continents today. While the changes described thus far make globalization less economic, my affinity for local economy is not primarily motivated by economic logic: the maximization of some measurable quantum of well-being.

In different ways, these systems return the power of money and credit to the people, whether mediated through grass-roots P2P structures as in mutual-credit systems, or through politically constituted institutions such as public banks. And since political sovereignty is worth little in the absence of monetary sovereignty, reasserting local, regional, and (in the case of small countries) national control over credit is an important path toward the relocalization of economy, culture, and life. 1. They are, however, exaggerated. Comparative advantage is often a cover for hidden subsidies, and efficiency of scale is often a cover for market leverage and bargaining power. An example of the former is the U. S. sugar industry, beneficiary of both direct government subsidies and indirect subsidies in the form of soil and water depletion, which allow it to undercut producers in other countries. The indirect subsidies are especially pernicious, because in essence they represent the competitive advantage of more efficient drawdown of natural capital.


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Democracy Incorporated by Sheldon S. Wolin

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affirmative action, Berlin Wall, British Empire, centre right, collective bargaining, colonial rule, corporate governance, creative destruction, cuban missile crisis, David Ricardo: comparative advantage, dematerialisation, Donald Trump, Fall of the Berlin Wall, full employment, illegal immigration, invisible hand, mass incarceration, money market fund, mutually assured destruction, new economy, offshore financial centre, Ralph Nader, Ronald Reagan, school vouchers, single-payer health, stem cell, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Thorstein Veblen

In Edmund Burke’s classic version conservatism responded to the French Revolution by preaching quietism, appealing to tradition (represented by the landed gentry and established church), and defending a politics of deference to superiors. Thus conservatism stood as a holding action against radical change from “below,” a defense of customary ways and institutions, a skeptical view of marketplace values and types, and an abhorrence of demotic equality.12 The liberal apostles of change were the great political economists—Adam Smith, Jeremy Bentham, John Stuart Mill, and David Ricardo. In varying degrees they advocated a politics centered on the middle class and excluding the working class and poor. None were egalitarians—with the possible exception of Bentham. They pitted intellectual elitism against the inherited privileges of an aristocracy, the free market against mercantilist notions of state control of the economy, and they sided with modern science against religious obscurantism.

Rapid change not only blunts the collective conscience but dims the collective memory. So many “pasts” have flashed by and vanished that the temporal category itself seems obsolete. No collective memory means no collective guilt: surely My Lai is the name of a rock star. Rapid change is not a neutral force, a natural phenomenon that exists independently of human will, or of considerations of power, comparative advantage, and ideological biases. It is a “reality” constructed from decisions arrived at within a certain framework—itself not accidental. We might call it “the political economy of change.” That framework involves a wide range of factors: players with unequal resources, available capital, investment opportunities and decisions, market conditions, scientific discoveries, technological innovations, cultural dispositions, and the relative strength of contending political forces.


pages: 504 words: 143,303

Why We Can't Afford the Rich by Andrew Sayer

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accounting loophole / creative accounting, Albert Einstein, asset-backed security, banking crisis, banks create money, basic income, Bretton Woods, British Empire, call centre, capital controls, carbon footprint, collective bargaining, corporate raider, corporate social responsibility, creative destruction, credit crunch, Credit Default Swap, crony capitalism, David Graeber, David Ricardo: comparative advantage, debt deflation, decarbonisation, declining real wages, deglobalization, deindustrialization, delayed gratification, demand response, don't be evil, Double Irish / Dutch Sandwich, en.wikipedia.org, Etonian, financial innovation, financial intermediation, Fractional reserve banking, full employment, G4S, Goldman Sachs: Vampire Squid, high net worth, income inequality, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), investor state dispute settlement, Isaac Newton, James Dyson, job automation, Julian Assange, labour market flexibility, laissez-faire capitalism, land value tax, low skilled workers, Mark Zuckerberg, market fundamentalism, Martin Wolf, mass immigration, means of production, moral hazard, mortgage debt, negative equity, neoliberal agenda, new economy, New Urbanism, Northern Rock, Occupy movement, offshore financial centre, oil shale / tar sands, patent troll, payday loans, Philip Mirowski, Plutocrats, plutocrats, popular capitalism, predatory finance, price stability, pushing on a string, quantitative easing, race to the bottom, rent-seeking, Ronald Reagan, shareholder value, short selling, sovereign wealth fund, Steve Jobs, The Nature of the Firm, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, transfer pricing, trickle-down economics, universal basic income, unpaid internship, upwardly mobile, Washington Consensus, wealth creators, Winter of Discontent, working poor, Yom Kippur War, zero-sum game

While pure capitalists also depend on this surplus for their profit, they are also instrumental in making the generation of that surplus possible, and can make a profit only as long as this is the case. For Marx, whereas the capitalists funded production, those who merely made money out of money by lending or speculation belonged to ‘the class of parasites’.88 Further, as the political economist David Ricardo and, later, Marx, Henry George and many subsequent commentators have argued, capitalists and landlords and other rentiers have opposed interests, for rent puts up living costs for workers, creating upward pressure on wages, and it creates overheads for capitalists who rent land from the landlords. In both cases, it squeezes profits from industry. Interest on loans also cuts into capitalists’ profits; not surprisingly, where firms can finance their investment internally from their own profits, interest free, they tend to do so.

But, given the financial sector’s concentration in London and its success in privatising gains and socialising losses, it’s the rest of the country that has had to bail out the City, while its rescuers have lost out. In geographical terms, the majority of the country’s population cannot afford to continue to transfer wealth to the metropolis.124 Martin Wolf of the Financial Times was equally robust in his condemnation of the financial sector: ‘The UK has a strategic nightmare: it has a strong comparative advantage in the world’s most irresponsible industry.’ The influence of the sector, with its ‘light-touch’ approach, was ‘surely malign’. Echoing John Gieve’s less-appealing avian metaphor, he wrote that Britain needs to ask itself a ‘painful question: how should the country manage the cuckoo sitting in its nest?’125 Given that financial capital can extract wealth from other economies than those in which it is resident, it is possible that some parts of the UK may indeed share some of the benefits of this global wealth extraction.

The Old Patagonian Express by Paul Theroux

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anti-communist, Atahualpa, David Ricardo: comparative advantage, Francisco Pizarro, Khyber Pass, Mahatma Gandhi, Maui Hawaii, place-making, Ralph Waldo Emerson, transcontinental railway

Without the whoring and racketeering, Nuevo Laredo would not have had enough municipal funds to plant geraniums around the statue of its madly gesturing patriot in the plaza, much less advertise itself as a bazaar of wicker-work and guitar-twanging folklore - not that anyone ever went to Nuevo Laredo to be sold baskets. And Laredo required the viciousness of its sister-city to keep its own churches full. Laredo had the airport and the churches, Nuevo Laredo the brothels and basket-factories. Each nationality had seemed to gravitate to its own special area of competence. This was economically-sound thinking; it followed to the letter the Theory of Comparative Advantage, outlined by the distinguished economist, David Ricardo (1772-1823). At first glance, this looked like the typical sort of mushroom-and-dunghill relationship that exists at the frontiers of many unequal countries. But the longer I thought about it the more Laredo seemed like all of the United States, and Nuevo Laredo all of Latin America. This frontier was more than an example of cozy hypocrisy; it demonstrated all one needed to know about the morality of the Americas, the relationship between the puritanical efficiency north of the border, and the bumbling and passionate disorder - the anarchy of sex and hunger - south of it.


pages: 461 words: 128,421

The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street by Justin Fox

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activist fund / activist shareholder / activist investor, Albert Einstein, Andrei Shleifer, asset allocation, asset-backed security, bank run, beat the dealer, Benoit Mandelbrot, Black-Scholes formula, Bretton Woods, Brownian motion, capital asset pricing model, card file, Cass Sunstein, collateralized debt obligation, complexity theory, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, discovery of the americas, diversification, diversified portfolio, Edward Glaeser, Edward Thorp, endowment effect, Eugene Fama: efficient market hypothesis, experimental economics, financial innovation, Financial Instability Hypothesis, fixed income, floating exchange rates, George Akerlof, Henri Poincaré, Hyman Minsky, implied volatility, impulse control, index arbitrage, index card, index fund, information asymmetry, invisible hand, Isaac Newton, John Meriwether, John Nash: game theory, John von Neumann, joint-stock company, Joseph Schumpeter, Kenneth Arrow, libertarian paternalism, linear programming, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, market bubble, market design, Myron Scholes, New Journalism, Nikolai Kondratiev, Paul Lévy, Paul Samuelson, pension reform, performance metric, Ponzi scheme, prediction markets, pushing on a string, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Richard Thaler, risk/return, road to serfdom, Robert Bork, Robert Shiller, Robert Shiller, rolodex, Ronald Reagan, shareholder value, Sharpe ratio, short selling, side project, Silicon Valley, South Sea Bubble, statistical model, The Chicago School, The Myth of the Rational Market, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, Thorstein Veblen, Tobin tax, transaction costs, tulip mania, value at risk, Vanguard fund, Vilfredo Pareto, volatility smile, Yogi Berra

“It is conceivable that one could introduce other variables which did have some predictive values.”6 More to the point, they argued that it was nonsense to say stock prices reflected intrinsic values. These intrinsic values of stocks “are supposed to reflect fundamentals of their companies, such as capital equipment, inventories, unfilled orders, profits,” they wrote. “Most of these items, and the values attached to them, will hardly fluctuate as fast and far as the stock prices do. It is…a subterfuge going back at least to Adam Smith and David Ricardo to say that market price will always oscillate around the true (equilibrium) price. But since no methods are developed how to separate the oscillations from the basis, this is not an empirically testable assertion and it can be disregarded.”7 Fama had proposed that the way to test the efficient market hypothesis was to see if stock price movements obeyed the dictates of the capital asset pricing model, but this was only a relative test.

5 The improbable-but-not-impossible was not something that bell curve statistics could address. But Osborne didn’t see any point in reinventing statistics to handle it. When it came to rare events, he argued, one had to look outside the statistics of randomness and identify actual causes for the anomalies. This required judgment and experience, two areas in which finance scholars possessed no comparative advantage. They focused instead on the probable. THE REWARDS FOR DOING SO were great in the 1970s, as the war between random walkers and professional investors began to settle into an uneasy but profitable truce. Hostilities still flared up from time to time, as on a mid-decade summer morning at Stanford Business School. On the first day of a weeklong seminar for money managers, a young accounting professor just arrived from Chicago (Bill Beaver) kicked things off with a ferocious attack on the idea that anybody could beat the market.


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Antifragile: Things That Gain From Disorder by Nassim Nicholas Taleb

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Air France Flight 447, Andrei Shleifer, banking crisis, Benoit Mandelbrot, Berlin Wall, Black Swan, Chuck Templeton: OpenTable, commoditize, creative destruction, credit crunch, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, discrete time, double entry bookkeeping, Emanuel Derman, epigenetics, financial independence, Flash crash, Gary Taubes, George Santayana, Gini coefficient, Henri Poincaré, high net worth, hygiene hypothesis, Ignaz Semmelweis: hand washing, informal economy, invention of the wheel, invisible hand, Isaac Newton, James Hargreaves, Jane Jacobs, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Arrow, knowledge economy, Lao Tzu, Long Term Capital Management, loss aversion, Louis Pasteur, mandelbrot fractal, Marc Andreessen, meta analysis, meta-analysis, microbiome, money market fund, moral hazard, mouse model, Myron Scholes, Norbert Wiener, pattern recognition, Paul Samuelson, placebo effect, Ponzi scheme, principal–agent problem, purchasing power parity, quantitative trading / quantitative finance, Ralph Nader, random walk, Ray Kurzweil, rent control, Republic of Letters, Ronald Reagan, Rory Sutherland, selection bias, Silicon Valley, six sigma, spinning jenny, statistical model, Steve Jobs, Steven Pinker, Stewart Brand, stochastic process, stochastic volatility, The Great Moderation, the new new thing, The Wealth of Nations by Adam Smith, Thomas Bayes, Thomas Malthus, too big to fail, transaction costs, urban planning, Vilfredo Pareto, Yogi Berra, Zipf's Law

The method of point estimate would assume a Dirac stick at −200, thus underestimating both the expected deficit (−312) and the tail fragility of it. (From Taleb and Douady, 2012). Application: Ricardian Model and Left Tail—The Price of Wine Happens to Vary For almost two hundred years, we’ve been talking about an idea by the economist David Ricardo called “comparative advantage.” In short, it says that a country should have a certain policy based on its comparative advantage in wine or clothes. Say a country is good at both wine and clothes, better than its neighbors with whom it can trade freely. Then the visible optimal strategy would be to specialize in either wine or clothes, whichever fits the best and minimizes opportunity costs. Everyone would then be happy. The analogy by the economist Paul Samuelson is that if someone happens to be the best doctor in town and, at the same time, the best secretary, then it would be preferable to be the higher-earning doctor—as it would minimize opportunity losses—and let someone else be the secretary and buy secretarial services from him.

For instance, the concept of specialization that has obsessed economists since Ricardo (and before) blows up countries when imposed by policy makers, as it makes the economies error-prone; but it works well when reached progressively by evolutionary means, with the right buffers and layers of redundancies. Another case where economists may inspire us but should never tell us what to do—more on that in the discussion of Ricardian comparative advantage and model fragility in the Appendix. The difference between a narrative and practice—the important things that cannot be easily narrated—lies mainly in optionality, the missed optionality of things. The “right thing” here is typically an antifragile payoff. And my argument is that you don’t go to school to learn optionality, but the reverse: to become blind to it. PROMETHEUS AND EPIMETHEUS In Greek legend, there were two Titan brothers, Prometheus and Epimetheus.

What looks like the paradox is as follows: that Portugal produces cloth cheaper than Britain, but should buy cloth from there instead, using the gains from the sales of wine. In the absence of transaction and transportation costs, it is efficient for Britain to produce just cloth, and Portugal to only produce wine. The idea has always attracted economists because of its paradoxical and counterintuitive aspect. For instance, in an article “Why Intellectuals Don’t Understand Comparative Advantage” (Krugman, 1998), Paul Krugman, who fails to understand the concept himself, as this essay and his technical work show him to be completely innocent of tail events and risk management, makes fun of other intellectuals such as S. J. Gould who understand tail events albeit intuitively rather than analytically. (Clearly one cannot talk about returns and gains without discounting these benefits by the offsetting risks.)


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The World's First Railway System: Enterprise, Competition, and Regulation on the Railway Network in Victorian Britain by Mark Casson

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banking crisis, barriers to entry, Beeching cuts, British Empire, combinatorial explosion, Corn Laws, corporate social responsibility, David Ricardo: comparative advantage, intermodal, iterative process, joint-stock company, joint-stock limited liability company, knowledge economy, linear programming, Network effects, New Urbanism, performance metric, railway mania, rent-seeking, strikebreaker, the market place, transaction costs

He was a Liberal MP, Wnancial secretary to the Treasury, 1859–60, and the author of best-selling philosophical and anthropological books. General Charles Pasley FRS (as he later became) was a young military engineer who had served in Spain, Holland, and throughout the Mediterranean before he joined the Board of Trade. He lectured at a military college and was responsible for a range of innovations in telegraphy, mining, pontooning, and explosives. George Porter was an economist, married to the sister of David Ricardo, MP (the classical economic theorist who was an opponent of Malthus and an advocate of free trade). He was an established Wgure with a high personal reputation at the time that he served on the Committee. He was the author of a monumental work on The Progress of the Nation, in its Social and Economic Relations from the Beginning of the 19th Century to the Present Day, which Wrst appeared in 1836.

It is a mistake to infer that entrepreneurship declined in late Victorian Britain just because Britain failed to maintain its industrial lead over Germany and the United States. Victorian entrepreneurs may well have been slow to recognize the magnitude of scale economies in heavy industries, and to appreciate the commercial benefits of organized industrial research in well-equipped laboratories. But in a small and increasingly crowded country, this was not where national comparative advantage lay. The late Victorian economy is an example of what is now called the knowledgebased economy. Its comparative advantage lay increasingly in the export of knowledge-intensive services, such as public administration, trade, shipping, finance, and engineering consultancy. These services were mainly delivered in packages relating to major projects for colonial and overseas development. Each project required inputs of several of these knowledge-based services for its successful completion.

The development of steam power in the early nineteenth century shifted the balance of advantages from roads and canals to railways and shipping. By increasing speeds, steam power enlarged the range of traffic that could be transported—for example, perishable goods—and also stimulated existing demands—especially for passenger travel. As a result, railways began to specialize in carrying a distinctive type of traffic, in which they had a strong comparative advantage; this had important implications for the way that the railway network needed to be configured. The second part of this chapter discusses the techniques that were used to derive the counterfactual. They comprise a set of nine heuristic principles which achieve reasonably direct linkages between major traffic centres with the lowest possible route mileage. The heuristics also inform the design of the regional subsystems, and indicate how these systems can be interlocked into a national system.


pages: 603 words: 182,781

Aerotropolis by John D. Kasarda, Greg Lindsay

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3D printing, air freight, airline deregulation, airport security, Akira Okazaki, Asian financial crisis, back-to-the-land, barriers to entry, Berlin Wall, big-box store, blood diamonds, borderless world, British Empire, call centre, carbon footprint, Cesare Marchetti: Marchetti’s constant, Clayton Christensen, cleantech, cognitive dissonance, commoditize, conceptual framework, credit crunch, David Brooks, David Ricardo: comparative advantage, Deng Xiaoping, deskilling, digital map, edge city, Edward Glaeser, failed state, food miles, Ford paid five dollars a day, Frank Gehry, fudge factor, full employment, future of work, Geoffrey West, Santa Fe Institute, George Gilder, global supply chain, global village, gravity well, Haber-Bosch Process, Hernando de Soto, hive mind, if you build it, they will come, illegal immigration, inflight wifi, intangible asset, interchangeable parts, Intergovernmental Panel on Climate Change (IPCC), intermodal, invention of the telephone, inventory management, invisible hand, Jane Jacobs, Jeff Bezos, Kangaroo Route, knowledge worker, kremlinology, labour mobility, Marchetti’s constant, Marshall McLuhan, Masdar, mass immigration, McMansion, megacity, Menlo Park, microcredit, Network effects, New Economic Geography, new economy, New Urbanism, oil shale / tar sands, oil shock, peak oil, Pearl River Delta, Peter Thiel, pets.com, pink-collar, pre–internet, RFID, Richard Florida, Ronald Coase, Ronald Reagan, Rubik’s Cube, savings glut, Seaside, Florida, Shenzhen was a fishing village, Silicon Valley, Silicon Valley startup, Skype, smart cities, smart grid, South China Sea, South Sea Bubble, sovereign wealth fund, special economic zone, spice trade, spinning jenny, stem cell, Steve Jobs, supply-chain management, sustainable-tourism, telepresence, the built environment, The Chicago School, The Death and Life of Great American Cities, The Nature of the Firm, thinkpad, Thomas L Friedman, Thomas Malthus, Tony Hsieh, trade route, transcontinental railway, transit-oriented development, traveling salesman, trickle-down economics, upwardly mobile, urban planning, urban renewal, urban sprawl, walkable city, white flight, white picket fence, Yogi Berra, zero-sum game

It opened up the possibility for international consultations on a day-to-day basis not only between the officials of governments but also between the engineers, controllers, salesmen and strategists of private firms.” These face-to-face encounters were sufficient to begin flattening the world a good three decades before e-mail. A more detailed explication was folded into his description of the “product life cycle,” a modern take on David Ricardo’s nineteenth-century theories of comparative advantage and trade. Vernon’s model charted the path from cradle to grave of the latest and greatest inventions. Beginning life as expensive innovations, they were created by American firms and sold to American customers. Overseas demand begot overseas factories, ostensibly to serve local markets. But the radical connectivity of air travel had suddenly made it possible for firms to knit together these foreign outposts into a single low-cost network.

Not much bigger, he argued, because beyond a certain point, the drag of managing huge organizations over long distances would offset any advantages of scale. Size mattered, however, if advances in transportation, communication, and management techniques could shrink these distances and di-minish the drag. This is exactly what happened. Emboldened by the Jet Age, companies broke themselves into pieces and spread them around searching for comparative advantage. Given enough telephones, flights, and mainframes, they could put their headquarters in one place, their factories in another, their R & D labs in a third, their back-office file cabinets in a fourth, and their call centers in a fifth. Once they added FedEx to the equation and swapped out their mainframes for PCs, factories left for Mexico (then China), call centers for India, and R & D for Beijing.

Forty percent of IBM’s employees don’t have an office, working either from home or at the client. Sixty percent of Agilent Technologies’s telecommute at least part of the time. And a third of AT&T’s managers are now “postgeographic.” Demographers call this “the distributed workforce.” If Melvin Webber were still alive, he might have tried “employees without propinquity” because we’re acting like the companies we work for, looking to live, play, and pray wherever we see comparable advantage—provided, of course, we can get from here to there. Joel Garreau calls this the “Santa Fe-ing of the World”—“places the entire point of which is face-to-face contact”— although the test bed for his hypothesis is actually sixty miles down the road. In searching for an upper limit to the sizes of salvageable aerotropoli, Mesa del Sol isn’t the largest infill project in the West. It’s not even the largest named Mesa.

Understanding Power by Noam Chomsky

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anti-communist, Ayatollah Khomeini, Berlin Wall, Bretton Woods, British Empire, Burning Man, business climate, cognitive dissonance, continuous integration, Corn Laws, cuban missile crisis, dark matter, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, deskilling, European colonialism, Fall of the Berlin Wall, feminist movement, global reserve currency, Howard Zinn, labour market flexibility, liberation theology, Mahatma Gandhi, Mikhail Gorbachev, Monroe Doctrine, mortgage tax deduction, Paul Samuelson, Ralph Nader, reserve currency, Ronald Reagan, Rosa Parks, school choice, strikebreaker, structural adjustment programs, the scientific method, The Wealth of Nations by Adam Smith, union organizing, wage slave, women in the workforce

How exactly did that kind of “free market” economic thinking get instituted as legitimate in the universities and in the popular ideology as a whole over the years—for instance, the work of the Social Darwinists [who claimed that natural selection and “survival of the fittest” determine individual and societal wealth], and of Malthus [early-nineteenth-century economist who argued that poverty was inevitable and population growth should be checked by famine, war, and disease], and others who in various ways blamed the poor for being poor? Malthus gets kind of a bad press, actually: he’s singled out as the guy who said that people should just be left to starve if they can’t support themselves—but really that was pretty much the line of classical economics in general. In fact, Malthus was one of the founders of classical economics, right alongside of guys like David Ricardo. Malthus’s point was basically this: if you don’t have independent wealth, and you can’t sell your labor on the market at a level at which you can survive, then you have no right being here—go to the workhouse prison or go somewhere else. And in those days, “go somewhere else” meant go to North America, or to Australia, and so on. Now, he wasn’t saying it was anyone’s fault if they were poor and had to remove themselves; he was saying, it’s a law of nature that this is the way it has to be. 32 Ricardo in fact said that it was true at the level of “the principle of gravitation”—and of course, to try to interfere with a law of nature like that only makes things worse. 33 So what both Malthus and Ricardo were arguing, sort of in parallel, was that you only harm the poor by making them believe that they have rights other than what they can win on the market, like a basic right to live, because that kind of right interferes with the market, and with efficiency, and with growth and so on—so ultimately people will just be worse off if you try to recognize them.

And back then, capital was indeed immobile—first because “capital” primarily meant land, and you can’t move land, and also because to the extent that there was investment, it was very local: like, you didn’t have communications systems that allowed for easy transfers of money all around the world, like we do today. So in the early nineteenth century, the assumption that labor is mobile and capital is immobile was more or less realistic—and on the basis of that assumption, you could try to prove things about comparative advantage and all this stuff you learn in school about Portugal and wine and so on [Ricardo’s most famous hypothetical for demonstrating how free trade could be mutually advantageous to participating countries involved England concentrating on selling cloth and Portugal wine]. Incidentally, if you want to know how well those theorems actually work, just compare Portugal and England after a hundred years of trying them out—growing wine versus industrializing as possible modes of development.

Take the fact that there is not a single case on record in history of any country that has developed successfully through adherence to “free market” principles: none. Certainly not the United States. I mean, the United States has always had extensive state intervention in the economy, right from the earliest days—we would be exporting fur right now if we were following the principles of comparative advantage. Look, the reason why the industrial revolution took off in places like Lowell and Lawrence is because of high protectionist tariffs the U.S. government set up to keep out British goods. And the same thing runs right up to today: like, we would not have successful high-tech industry in the United States today if it wasn’t for a huge public subsidy to advanced industry, mostly through the Pentagon system and N.A.S.A. and so on—that doesn’t have the vaguest relation to a “free market.”


pages: 540 words: 168,921

The Relentless Revolution: A History of Capitalism by Joyce Appleby

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1919 Motor Transport Corps convoy, agricultural Revolution, anti-communist, Asian financial crisis, asset-backed security, Bartolomé de las Casas, Bernie Madoff, Bretton Woods, BRICs, British Empire, call centre, collateralized debt obligation, collective bargaining, Columbian Exchange, commoditize, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, deskilling, Doha Development Round, double entry bookkeeping, epigenetics, equal pay for equal work, European colonialism, facts on the ground, failed state, Firefox, fixed income, Ford paid five dollars a day, Francisco Pizarro, Frederick Winslow Taylor, full employment, Gordon Gekko, Henry Ford's grandson gave labor union leader Walter Reuther a tour of the company’s new, automated factory…, Hernando de Soto, hiring and firing, illegal immigration, informal economy, interchangeable parts, interest rate swap, invention of movable type, invention of the printing press, invention of the steam engine, invisible hand, Isaac Newton, James Hargreaves, James Watt: steam engine, Jeff Bezos, joint-stock company, Joseph Schumpeter, knowledge economy, land reform, Livingstone, I presume, Long Term Capital Management, Mahatma Gandhi, Martin Wolf, moral hazard, Parag Khanna, Ponzi scheme, profit maximization, profit motive, race to the bottom, Ralph Nader, refrigerator car, Ronald Reagan, Scramble for Africa, Silicon Valley, Silicon Valley startup, South China Sea, South Sea Bubble, special economic zone, spice trade, spinning jenny, strikebreaker, the built environment, The Wealth of Nations by Adam Smith, Thomas L Friedman, Thorstein Veblen, total factor productivity, trade route, transatlantic slave trade, transatlantic slave trade, transcontinental railway, union organizing, Unsafe at Any Speed, Upton Sinclair, urban renewal, War on Poverty, working poor, Works Progress Administration, Yogi Berra, Yom Kippur War

Even in England it soured people on paper money and its use as an economic stimulant. A new orthodoxy congealed. The supply of money, the philosopher David Hume maintained, had nothing to do with prosperity, which depended upon real things in the economy, like shops, stores, and factories. Any increase in money would only produce inflation. This became the classic, academic position throughout the nineteenth century, articulated by David Ricardo and enshrined in the elegant writings of John Stuart Mill.20 The Dutch had actually created the first modern banking system, one that pioneered bills of exchange backed by gold in the bank vault. They also started the first stock exchange and worked out a way to lend money on the collateral of real estate, a forerunner of our mortgages. But it was not until the early nineteenth century, when the Netherlands acquired a king, that the Dutch developed a centralized taxing system.

The importance of these call centers to India can be gleaned from the predominance of work in the service sector of the economy. While the actual number of farmers has declined steadily to 24 percent of the population, the percentage of those in service work has grown to 50 percent. By comparison, China has become the world’s factory with almost 50 percent of its workers in industry. Each country has found its comparative advantage in the world market. And their investment in higher education reflects this difference. Fewer than 1 percent of Chinese men and women have had any college education, compared with 3 percent of Indians, both extremely low numbers for countries that want to be world leaders.39 Both countries have suffered from a brain drain as some of their most talented young people seek better jobs abroad.


pages: 695 words: 194,693

Money Changes Everything: How Finance Made Civilization Possible by William N. Goetzmann

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Albert Einstein, Andrei Shleifer, asset allocation, asset-backed security, banking crisis, Benoit Mandelbrot, Black Swan, Black-Scholes formula, Bretton Woods, Brownian motion, capital asset pricing model, Cass Sunstein, collective bargaining, colonial exploitation, compound rate of return, conceptual framework, corporate governance, Credit Default Swap, David Ricardo: comparative advantage, debt deflation, delayed gratification, Detroit bankruptcy, disintermediation, diversified portfolio, double entry bookkeeping, Edmond Halley, en.wikipedia.org, equity premium, financial independence, financial innovation, financial intermediation, fixed income, frictionless, frictionless market, full employment, high net worth, income inequality, index fund, invention of the steam engine, invention of writing, invisible hand, James Watt: steam engine, joint-stock company, joint-stock limited liability company, laissez-faire capitalism, Louis Bachelier, mandelbrot fractal, market bubble, means of production, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, new economy, passive investing, Paul Lévy, Ponzi scheme, price stability, principal–agent problem, profit maximization, profit motive, quantitative trading / quantitative finance, random walk, Richard Thaler, Robert Shiller, Robert Shiller, shareholder value, short selling, South Sea Bubble, sovereign wealth fund, spice trade, stochastic process, the scientific method, The Wealth of Nations by Adam Smith, Thomas Malthus, time value of money, too big to fail, trade liberalization, trade route, transatlantic slave trade, transatlantic slave trade, tulip mania, wage slave

Eventually, a great recession in the industrialized economies would stir the proletariat to seize the means of production from the capitalists. In the meantime, capitalism would relentlessly and systematically drain the life blood of the working class. KAPITAL IN A NUTSHELL In Marx’s world, the value of everything is a function of the labor expended to create it. Marx adapted this view from the work of David Ricardo—a brilliant and influential political economist of the early nineteenth century who proposed a theory of value based on human input to the production process. In Marx’s reformulation of Ricardian theory, money is bad, because it conceals the amount of labor required for the production of a given commodity. Arbitrageurs who profitably buy and sell commodities exploit money’s distorting role. Corporate dividends are derived from paying meager subsistence wages to laborers and then turning around and selling goods at higher money prices that no longer reflect their labor value.

As with Venice and the Italian city-states, Toulouse’s political history during the twelfth and thirteenth centuries was intertwined with its financial history. However, financial development in Toulouse took a very different turn than in the northern Italian republics. Its evolution is not bound up with maritime trade but with a very different enterprise: the milling of grain. If Genoa and Venice had the comparative advantage of access to the sea, Toulouse’s advantage was access to the Garonne River. FIGURE 22. View of the Bazacle mill on the Garonne River today. A VISIT TO THE BAZACLE The campus of the Toulouse School of Social Sciences stands just outside the bounds of the ancient city wall, fronting a picturesque canal. The school is renowned in Europe as a center for the study of corporate finance and capital markets.


pages: 687 words: 189,243

A Culture of Growth: The Origins of the Modern Economy by Joel Mokyr

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Andrei Shleifer, barriers to entry, Berlin Wall, clockwork universe, cognitive dissonance, Copley Medal, creative destruction, David Ricardo: comparative advantage, delayed gratification, deliberate practice, Deng Xiaoping, Edmond Halley, epigenetics, Fellow of the Royal Society, financial independence, framing effect, germ theory of disease, Haber-Bosch Process, hindsight bias, income inequality, invention of movable type, invention of the printing press, invisible hand, Isaac Newton, Jacquard loom, Jacquard loom, Jacques de Vaucanson, James Watt: steam engine, John Harrison: Longitude, Joseph Schumpeter, knowledge economy, labor-force participation, land tenure, law of one price, Menlo Park, moveable type in China, new economy, phenotype, price stability, principal–agent problem, rent-seeking, Republic of Letters, Ronald Reagan, South Sea Bubble, statistical model, survivorship bias, the market place, The Structural Transformation of the Public Sphere, The Wealth of Nations by Adam Smith, transaction costs, ultimatum game, World Values Survey, Wunderkammern

There was considerable doubt about the desirability of technological progress. In the age of mercantilism, which was receding slowly but was still very much in force by the early nineteenth century, it was believed above all that employment and jobs were a central responsibility of ecnomic policy and thus often felt ambivalent about labor-saving technological progress because it was feared that such advances might lead to unemployment (Berg, 1980). Even David Ricardo, one of the great prophets of liberal political economy, expressed a deep concern that technological progress could throw workers out of work and that the “discovery and use of machinery may be attended with a diminution of gross produce; and whenever this is the case, it will be injurious to the labouring class as some of their number will be thrown out of employment” (Ricardo, [1821] 1971, p. 382).

In nearly all cases, members of the Republic of Letters cared little about the religion of the originator of an intellectual innovation. 12 Mersenne tried to persuade himself that both Galileo and the Catholic Church were right, and he famously stated that there were 50,000 atheists in Paris in 1630, to which a wag responded that his circle of friends must have been quite wide (Caton, 1988, p. 78). 13 Kuhn feels that after Newton, British mathematics has no figure that can compare to such Continental figures as Euler, the Bernoullis, and Laplace, while Continental experimentalists comparable to the best British ones such as Boyle, Black, Hales, and Priestley are absent before 1780 (Kuhn, 1976, p. 25). This seems, however, more of a matter of minor differences in comparative advantage than of essence, and in the end modern chemistry, the ultimate Baconian triumph, was mostly a Continental product. It was France that produced Lavoisier and his students such as Berthollet and Chaptal, though the contributions of Joseph Priestley and John Dalton illustrate the transnational character of the project. 14 For a recent restatement of this view, see Jacob and Stewart (2004, p. 119). 15 The French Académie was in large part patterned after the Académie Française, founded in 1635, which was in charge of setting rules for the French language under the auspices of Cardinal Richelieu.