David Ricardo: comparative advantage

146 results back to index


pages: 453 words: 117,893

What Would the Great Economists Do?: How Twelve Brilliant Minds Would Solve Today's Biggest Problems by Linda Yueh

"Robert Solow", 3D printing, additive manufacturing, Asian financial crisis, augmented reality, bank run, banking crisis, basic income, Ben Bernanke: helicopter money, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bitcoin, Branko Milanovic, Bretton Woods, BRICs, business cycle, Capital in the Twenty-First Century by Thomas Piketty, clean water, collective bargaining, computer age, Corn Laws, creative destruction, credit crunch, Credit Default Swap, cryptocurrency, currency peg, dark matter, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, Deng Xiaoping, Doha Development Round, Donald Trump, endogenous growth, everywhere but in the productivity statistics, Fall of the Berlin Wall, fear of failure, financial deregulation, financial innovation, Financial Instability Hypothesis, fixed income, forward guidance, full employment, Gini coefficient, global supply chain, Gunnar Myrdal, Hyman Minsky, income inequality, index card, indoor plumbing, industrial robot, information asymmetry, intangible asset, invisible hand, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, laissez-faire capitalism, land reform, lateral thinking, life extension, low-wage service sector, manufacturing employment, market bubble, means of production, mittelstand, Mont Pelerin Society, moral hazard, mortgage debt, negative equity, Nelson Mandela, non-tariff barriers, Northern Rock, Occupy movement, oil shale / tar sands, open economy, paradox of thrift, Paul Samuelson, price mechanism, price stability, Productivity paradox, purchasing power parity, quantitative easing, RAND corporation, rent control, rent-seeking, reserve currency, reshoring, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, school vouchers, secular stagnation, Shenzhen was a fishing village, Silicon Valley, Simon Kuznets, special economic zone, Steve Jobs, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, total factor productivity, trade liberalization, universal basic income, unorthodox policies, Washington Consensus, We are the 99%, women in the workforce, working-age population

Still, the US experience with the reshoring of production holds lessons for Britain and others as to how to become more competitive in high-end manufacturing, which in turn has implications for what drives growth and also a nation’s trade position. In the previous chapter, we learned what Adam Smith would say about governments trying to rebalance their economies. But what about the related issue of setting trade policy? What would David Ricardo advise governments to do in the face of these trends and a large and persistent trade deficit? Ricardo’s theory of comparative advantage David Ricardo’s theory of comparative advantage states that each country should produce and trade what it is relatively least bad at. Even if China can produce everything more cheaply, America should still produce what it is relatively better at, and so should China. Thus, it is in the interests of every country to specialize in terms of what it produces and trade for what it no longer produces as much of.

How would he reconcile his affinity for manufacturing with an aversion to governments intervening in the workings of the ‘invisible hand’? An economist inspired by Adam Smith later became the father of international trade. In 1817 David Ricardo formalized the theory of comparative advantage that shows how every country benefits from free trade. This is true even if that country is worse than every other country in the world at producing everything. It should still focus on making what it was relatively less bad at, and specializing and trading would benefit it as well as the rest of the world. But, what if the result of trading on the basis of comparative advantage is that countries like America and Britain run persistent trade deficits, meaning that the value of the goods they import outstrips the value of their exports? What would Ricardo advise governments to do?

It was at that time that the seminal work on international trade was penned by David Ricardo. Ricardo’s On the Principles of Political Economy and Taxation is considered to be one of the classics in economics. So, what would Ricardo make of the persistent trade deficits experienced by the UK as well as other deindustrialized nations such as the US? Ricardo’s theory of comparative advantage, whereby countries gain from trade even if they are less efficient in all production than their trading partners, has transformed the thinking around international trade and showed why there are significant benefits from globalization. But to understand the context for Ricardo’s economic theory, we must first take a look at his life. The life and times of David Ricardo Although one of the most influential economists of all time, one whose ideas still permeate the profession today, David Ricardo never went to university.


pages: 374 words: 113,126

The Great Economists: How Their Ideas Can Help Us Today by Linda Yueh

"Robert Solow", 3D printing, additive manufacturing, Asian financial crisis, augmented reality, bank run, banking crisis, basic income, Ben Bernanke: helicopter money, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bitcoin, Branko Milanovic, Bretton Woods, BRICs, business cycle, Capital in the Twenty-First Century by Thomas Piketty, clean water, collective bargaining, computer age, Corn Laws, creative destruction, credit crunch, Credit Default Swap, cryptocurrency, currency peg, dark matter, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, Deng Xiaoping, Doha Development Round, Donald Trump, endogenous growth, everywhere but in the productivity statistics, Fall of the Berlin Wall, fear of failure, financial deregulation, financial innovation, Financial Instability Hypothesis, fixed income, forward guidance, full employment, Gini coefficient, global supply chain, Gunnar Myrdal, Hyman Minsky, income inequality, index card, indoor plumbing, industrial robot, information asymmetry, intangible asset, invisible hand, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, laissez-faire capitalism, land reform, lateral thinking, life extension, manufacturing employment, market bubble, means of production, mittelstand, Mont Pelerin Society, moral hazard, mortgage debt, negative equity, Nelson Mandela, non-tariff barriers, Northern Rock, Occupy movement, oil shale / tar sands, open economy, paradox of thrift, Paul Samuelson, price mechanism, price stability, Productivity paradox, purchasing power parity, quantitative easing, RAND corporation, rent control, rent-seeking, reserve currency, reshoring, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, school vouchers, secular stagnation, Shenzhen was a fishing village, Silicon Valley, Simon Kuznets, special economic zone, Steve Jobs, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, total factor productivity, trade liberalization, universal basic income, unorthodox policies, Washington Consensus, We are the 99%, women in the workforce, working-age population

Still, the US experience with the reshoring of production holds lessons for Britain and others as to how to become more competitive in high-end manufacturing, which in turn has implications for what drives growth and also a nation’s trade position. In the previous chapter, we learned what Adam Smith would say about governments trying to rebalance their economies. But what about the related issue of setting trade policy? What would David Ricardo advise governments to do in the face of these trends and a large and persistent trade deficit? Ricardo’s theory of comparative advantage David Ricardo’s theory of comparative advantage states that each country should produce and trade what it is relatively least bad at. Even if China can produce everything more cheaply, America should still produce what it is relatively better at, and so should China. Thus, it is in the interests of every country to specialize in terms of what it produces and trade for what it no longer produces as much of.

How would he reconcile his affinity for manufacturing with an aversion to governments intervening in the workings of the ‘invisible hand’? An economist inspired by Adam Smith later became the father of international trade. In 1817 David Ricardo formalized the theory of comparative advantage that shows how every country benefits from free trade. This is true even if that country is worse than every other country in the world at producing everything. It should still focus on making what it was relatively less bad at, and specializing and trading would benefit it as well as the rest of the world. But, what if the result of trading on the basis of comparative advantage is that countries like America and Britain run persistent trade deficits, meaning that the value of the goods they import outstrips the value of their exports? What would Ricardo advise governments to do?

It was at that time that the seminal work on international trade was penned by David Ricardo. Ricardo’s On the Principles of Political Economy and Taxation is considered to be one of the classics in economics. So, what would Ricardo make of the persistent trade deficits experienced by the UK as well as other deindustrialized nations such as the US? Ricardo’s theory of comparative advantage, whereby countries gain from trade even if they are less efficient in all production than their trading partners, has transformed the thinking around international trade and showed why there are significant benefits from globalization. But to understand the context for Ricardo’s economic theory, we must first take a look at his life. The life and times of David Ricardo Although one of the most influential economists of all time, one whose ideas still permeate the profession today, David Ricardo never went to university.


pages: 330 words: 77,729

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

"Robert Solow", Albert Einstein, banking crisis, Berlin Wall, Bretton Woods, business climate, business cycle, creative destruction, David Ricardo: comparative advantage, delayed gratification, experimental economics, financial independence, Financial Instability Hypothesis, full employment, Hernando de Soto, housing crisis, Hyman Minsky, inflation targeting, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Joseph Schumpeter, Kenneth Arrow, laissez-faire capitalism, liberation theology, liquidity trap, means of production, microcredit, minimum wage unemployment, money market fund, open economy, paradox of thrift, Pareto efficiency, Paul Samuelson, price stability, pushing on a string, rent control, Richard Thaler, rising living standards, road to serfdom, Robert Shiller, Robert Shiller, rolodex, Ronald Coase, Ronald Reagan, school choice, secular stagnation, Simon Kuznets, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, Tobin tax, unorthodox policies, Vilfredo Pareto, zero-sum game

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

Albert Einstein, barriers to entry, Berlin Wall, business cycle, collective bargaining, congestion charging, Corn Laws, David Ricardo: comparative advantage, decarbonisation, Deng Xiaoping, Fall of the Berlin Wall, George Akerlof, information asymmetry, invention of movable type, John Nash: game theory, John von Neumann, Kenneth Arrow, Kickstarter, market design, Martin Wolf, moral hazard, new economy, Pearl River Delta, price discrimination, Productivity paradox, race to the bottom, random walk, rent-seeking, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, sealed-bid auction, second-price auction, second-price sealed-bid, Shenzhen was a fishing village, special economic zone, spectrum auction, The Market for Lemons, Thomas Malthus, trade liberalization, Vickrey auction

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: 272 words: 83,798

A Little History of Economics by Niall Kishtainy

"Robert Solow", Alvin Roth, British Empire, Capital in the Twenty-First Century by Thomas Piketty, car-free, central bank independence, clean water, Corn Laws, creative destruction, credit crunch, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, Eugene Fama: efficient market hypothesis, first-price auction, floating exchange rates, follow your passion, full employment, George Akerlof, greed is good, Hyman Minsky, inflation targeting, invisible hand, John Nash: game theory, John von Neumann, Joseph Schumpeter, Kenneth Arrow, loss aversion, market clearing, market design, means of production, moral hazard, Nash equilibrium, new economy, Occupy movement, Pareto efficiency, Paul Samuelson, prisoner's dilemma, RAND corporation, rent-seeking, Richard Thaler, rising living standards, road to serfdom, Robert Shiller, Robert Shiller, Ronald Reagan, sealed-bid auction, second-price auction, The Chicago School, The Great Moderation, The Market for Lemons, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, trade route, Vickrey auction, Vilfredo Pareto, washing machines reduced drudgery, wealth creators, Winter of Discontent

Prebisch became the director of Argentina’s central bank and later an important official in the United Nations. Prebisch wasn’t as radical as Frank but his idea still contradicted conventional economics. It was to do with the prices that poor countries are able to sell their goods for. The conventional view of trade was based on the theory of the nineteenth-century British economist David Ricardo. If nations specialise in the production of goods that they’re relatively better at making (in other words, in their comparative advantage) and trade with other nations, then all nations are made better off, said Ricardo. If Cuba found it easier to grow sugar than to make cars, then Cuba should sell sugar to America and buy American cars. Free trade would help poor countries like Cuba to achieve standards of living closer to those of the rich countries, so the theory went.

Relatively speaking, your friend has an advantage over you in sweeping. She has a ‘comparative advantage’ in sweeping even if in absolute terms she’s worse at it. Together you’d finish the chore quickest if you stick to moving boxes, your friend to sweeping. The same logic implies that if Britain has a comparative advantage in iron and Russia in grain, then Britain should just make iron and import its grain from Russia, and Russia should just grow grain and import its iron from Britain. The idea is profound because every country has a comparative advantage in something and so every nation has the potential to gain by specialising and trading. It’s better for countries to open their borders to foreign trade than to try to be self-sufficient. Although a few economists have challenged it (see Chapter 12), Ricardo’s idea of comparative advantage became one of the most cherished principles of economists.

Capitalist farmers employed the labourers and produced crops to sell for a profit, not to eat themselves. New farming methods made it possible to produce a greater amount of food to feed the growing population in the cities. Then, as Manchester and towns like it filled with warehouses and factories, the basis of the country’s wealth shifted away from agriculture towards industry. People started to build up fortunes by investing in the industrial economy. One of them was David Ricardo (1772–1823), a leading British stockbroker (someone who trades in the stock market). After making himself a rich man, he turned to economics, displaying powers of logic never before seen in an economist. In the eighteenth century, boys from well-to-do families were tutored in Greek and Latin before going to university. Not so the young Ricardo. His father, a successful Jewish businessman, believed that a practical education was more important, so at the age of 14 Ricardo was sent to work in the stock market.


pages: 270 words: 73,485

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

"Robert Solow", 3D printing, bank run, banking crisis, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, BRICs, British Empire, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, correlation coefficient, correlation does not imply causation, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deindustrialization, demographic dividend, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, Fall of the Berlin Wall, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, German hyperinflation, Gunnar Myrdal, Home mortgage interest deduction, imperial preference, income inequality, inflation targeting, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, laissez-faire capitalism, liquidity trap, Long Term Capital Management, market bubble, market clearing, means of production, Mexican peso crisis / tequila crisis, mortgage debt, Myron Scholes, negative equity, Northern Rock, oil shale / tar sands, oil shock, open economy, Paul Samuelson, price stability, purchasing power parity, pushing on a string, quantitative easing, reserve currency, rising living standards, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, seigniorage, Silicon Valley, Simon Kuznets, 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, Tobin tax, too big to fail, women in the workforce

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.


Money and Government: The Past and Future of Economics by Robert Skidelsky

anti-globalists, Asian financial crisis, asset-backed security, bank run, banking crisis, banks create money, barriers to entry, Basel III, basic income, Ben Bernanke: helicopter money, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, collective bargaining, constrained optimization, Corn Laws, correlation does not imply causation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Graeber, David Ricardo: comparative advantage, debt deflation, Deng Xiaoping, Donald Trump, Eugene Fama: efficient market hypothesis, eurozone crisis, financial deregulation, financial innovation, Financial Instability Hypothesis, forward guidance, Fractional reserve banking, full employment, Gini coefficient, Growth in a Time of Debt, Hyman Minsky, income inequality, incomplete markets, inflation targeting, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, law of one price, liberal capitalism, light touch regulation, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, market clearing, market friction, Martin Wolf, means of production, Mexican peso crisis / tequila crisis, mobile money, Mont Pelerin Society, moral hazard, mortgage debt, new economy, Nick Leeson, North Sea oil, Northern Rock, offshore financial centre, oil shock, open economy, paradox of thrift, Pareto efficiency, Paul Samuelson, placebo effect, price stability, profit maximization, quantitative easing, random walk, regulatory arbitrage, rent-seeking, reserve currency, Richard Thaler, rising living standards, risk/return, road to serfdom, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, shareholder value, short selling, Simon Kuznets, structural adjustment programs, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, too big to fail, trade liberalization, value at risk, Washington Consensus, yield curve, zero-sum game

Princeton, NJ: Princeton University Press. Ricardo, D. (2005 (1810)), The High Price of Bullion, A Proof of the Depreciation of Bank Notes. In: P. Sraffa (ed.), The Works and Correspondence of David Ricardo (III) Pamphlets and Papers 1809–11. Indianapolis, Ind.: Liberty Fund, pp. 47–128. Ricardo, D. (2005 (1815)), The Works and Correspondence of David Ricardo (IV) Pamphlets and Papers 1815–1823. Indianapolis, Ind.: Liberty Fund. Ricardo, D. (2005 (1816)), The Works and Correspondence of David Ricardo (VII) Letters 1816–1818. Indianapolis, Ind.: Liberty Fund. Ricardo, D. (2005 (1817)), The Works and Correspondence of David Ricardo (I) On the Principles of Political Economy and Taxation. Indianapolis, Ind.: Liberty Fund. 452 Bi bl io g r a p h y Ricketts, L. R. and Waller, C. J. (2014), The Rise and (Eventual) Fall in the Fed’s Balance Sheet.

K. (1985), Epochs of Economic Theory. Oxford: Basil Blackwell. Daunton, M. (2012), The politics of British taxation, from the Glorious Revolution to the Great War. In: B. Yun-Casalilla and P. K. O’Brien (eds.), The Rise of Fiscal States: A Global History, 1500–1914. Cambridge: Cambridge University Press, pp. 111–42. Davey, B. (2017), Specialisation and trade: David Ricardo versus Fredrich List. Credo. Available at: www.credoeconomics.com/specialisation-andtrade-david-ricardo-versus-frederich-list/ [Accessed 7 May 2018]. Davidson, P. (1978), Money and the Real World. 2nd edn. London: Palgrave Macmillan Davidson, P. (1999), The case for capital regulation. In: R. Skidelsky, M. Lawson, J. Flemming, M. Desai and P. Davidson, Capital Regulation: For and Against. London: Social Market Foundation. Davies, H. (2010), Regulation since the crisis: what has changed and is it enough?

This reflects the limitations of my own knowledge, but it is not the xvii P r e fac e entire reason for my focus. For much of the period, and for many of the events covered by this book, Britain was the pacemaker and rulesetter for the global economy, an amazing achievement for a country with just 1 per cent of the world’s population (it went briefly up to 2 per cent in the 1850s). David Hume, Adam Smith, David Ricardo, John Stuart Mill, Alfred Marshall and John Maynard Keynes towered over the economics of their day; Britain was the first modern gold-standard nation, the first commercial society, and the first industrial nation. The City of London bestrode the world of international finance; the Victorian fiscal constitution provided a universal model of good government; and Britain possessed adequate hard power to enforce the rules of a liberal international trading order.


pages: 226 words: 59,080

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

airline deregulation, Albert Einstein, bank run, barriers to entry, Bretton Woods, business cycle, butterfly effect, capital controls, Carmen Reinhart, central bank independence, collective bargaining, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, distributed generation, Donald Davies, Edward Glaeser, endogenous growth, Eugene Fama: efficient market hypothesis, Everything should be made as simple as possible, Fellow of the Royal Society, financial deregulation, financial innovation, floating exchange rates, fudge factor, full employment, George Akerlof, Gini coefficient, Growth in a Time of Debt, income inequality, inflation targeting, informal economy, information asymmetry, invisible hand, Jean Tirole, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, labor-force participation, liquidity trap, loss aversion, low skilled workers, market design, market fundamentalism, minimum wage unemployment, oil shock, open economy, Pareto efficiency, Paul Samuelson, price stability, prisoner's dilemma, profit maximization, quantitative easing, randomized controlled trial, rent control, rent-seeking, Richard Thaler, risk/return, Robert Shiller, Robert Shiller, school vouchers, South Sea Bubble, spectrum auction, The Market for Lemons, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Thomas Malthus, trade liberalization, trade route, ultimatum game, University of East Anglia, unorthodox policies, Vilfredo Pareto, Washington Consensus, white flight

.‡ 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: 565 words: 164,405

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

Admiral Zheng, asset allocation, bank run, Benoit Mandelbrot, British Empire, call centre, clean water, Columbian Exchange, Corn Laws, David Ricardo: comparative advantage, deindustrialization, Doha Development Round, domestication of the camel, double entry bookkeeping, Eratosthenes, financial innovation, Gini coefficient, God and Mammon, ice-free Arctic, imperial preference, income inequality, intermodal, James Hargreaves, John Harrison: Longitude, Khyber Pass, low skilled workers, non-tariff barriers, Paul Samuelson, placebo effect, Port of Oakland, refrigerator car, Silicon Valley, South China Sea, South Sea Bubble, spice trade, spinning jenny, Steven Pinker, The Wealth of Nations by Adam Smith, Thomas L Friedman, Thomas Malthus, trade liberalization, trade route, transatlantic slave trade, transcontinental railway, upwardly mobile, working poor, zero-sum game

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: 554 words: 158,687

Profiting Without Producing: How Finance Exploits Us All by Costas Lapavitsas

"Robert Solow", Andrei Shleifer, asset-backed security, bank run, banking crisis, Basel III, borderless world, Branko Milanovic, Bretton Woods, business cycle, capital controls, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, computer age, conceptual framework, corporate governance, credit crunch, Credit Default Swap, David Graeber, David Ricardo: comparative advantage, disintermediation, diversified portfolio, Erik Brynjolfsson, eurozone crisis, everywhere but in the productivity statistics, financial deregulation, financial independence, financial innovation, financial intermediation, financial repression, Flash crash, full employment, global value chain, global village, High speed trading, Hyman Minsky, income inequality, inflation targeting, informal economy, information asymmetry, intangible asset, job satisfaction, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, liberal capitalism, London Interbank Offered Rate, low skilled workers, M-Pesa, market bubble, means of production, money market fund, moral hazard, mortgage debt, Network effects, new economy, oil shock, open economy, pensions crisis, price stability, Productivity paradox, profit maximization, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, race to the bottom, regulatory arbitrage, reserve currency, Robert Shiller, Robert Shiller, savings glut, Scramble for Africa, secular stagnation, shareholder value, Simon Kuznets, special drawing rights, Thales of Miletus, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, total factor productivity, trade liberalization, transaction costs, union organizing, value at risk, Washington Consensus, zero-sum game

., Maritime Traders in the Ancient Greek World, Cambridge: Cambridge University Press, 2003. Reuten, Geert, and Michael Williams, Value Form and the State, London: Routledge, 1989. Ricardo, David, The High Price of Bullion, in The Works and Correspondence of David Ricardo, vol. 3, ed. Piero Sraffa and Maurice Dobb, Cambridge: Cambridge University Press, 1951 (1810). Ricardo, David, Letters, in The Works and Correspondence of David Ricardo, vol. 6, ed. Piero Sraffa and Maurice Dobb, Cambridge: Cambridge University Press, 1951 (1810). Ricardo, David, On the Principles of Political Economy and Taxation, in The Works and Correspondence of David Ricardo, vol. 1, ed. Piero Sraffa and Maurice Dobb, Cambridge: Cambridge University Press, 1951 (1817). Rodrik, Dani, ‘The Social Cost of Foreign Exchange Reserves’, NBER Working Paper No. 11952, National Bureau of Economic Research, January 2006.

., ‘Electronic Finance: Reshaping the Financial Landscape Around the World’, Journal of Financial Research 22: 2002. 64 For a fuller analysis of the functioning and the form of world money in contemporary capitalism see Costas Lapavitsas, ‘Power and Trust as Constituents of Money and Credit’, Historical Materialism 14:1, 2006, pp. 129–54; and Costas Lapavitsas et al., Crisis in the Eurozone, London: Verso, 2012. 65 Marx, Capital, vol. 1, p. 242. 66 See, for instance, David Ricardo, Letters, in The Works and Correspondence of David Ricardo, vol. 6, ed. Piero Sraffa and Maurice Dobb, Cambridge: Cambridge University Press, 1951, pp. 64–5. 67 This view was clearly, and sharply, articulated by Thomas Tooke, An Inquiry into the Currency Principle, London: LSE Reprint Series, 1959. 68 John Maynard Keynes, The General Theory of Employment, Interest and Money, London: Macmillan, 1973. 69 The logical ordering of credit relations is examined in Itoh and Lapavitsas, Political Economy of Money and Finance, ch. 4, and is discussed in ch. 5. 70 See, for instance, Marx, Capital, vol. 3, ch. 30, 31, 32. 71—See, for instance, Steuart, An Inquiry into the Principles of Political Economy, vol. 3, book 4, part 2, ch. 8; and vol. 3, book 2, ch. 28. 72—Marx, Capital, vol. 1, p. 243. 73—Ibid., pp. 240–1. 74—See, for instance, Costas Lapavitsas, ‘Power and Trust as Constituents of Money and Credit’, Historical Materialism 14:1, 2006, pp. 129–54.

For related arguments by the Monthly Review current, see John Bellamy Foster, ‘The Financialization of Capitalism’, Monthly Review 58:11, 2007; and John Bellamy Foster and Fred Magdoff, The Great Financial Crisis: Causes and Consequences, New York: Monthly Review Press, 2009. 3 Robert Pollin, ‘Contemporary Economic Stagnation in World Historical Perspective’, New Left Review 219, 1996, p. 115. 4 Giovanni Arrighi, ‘Financial Expansions in World Historical Perspective: A Reply to Robert Pollin’, New Left Review 224, 1997. 5 Karl Marx, Capital, vol. 3, London: Penguin/NLR, 1981, ch. 19. 6 For further discussion of this issue see also Costas Lapavitsas and Iren Levina, ‘Financial Profit: Profit from Production and Profit Upon Alienation’, Discussion Paper No. 24, Research on Money and Finance, May 2011. 7 David Ricardo, On the Principles of Political Economy and Taxation, in The Works and Correspondence of David Ricardo, vol. 1, ed. Piero Sraffa and Maurice Dobb, Cambridge: Cambridge University Press, 1951, ch. 6; also pp. 48–51. 8 James Steuart, An Inquiry into the Principles of Political Economy, vol. 1, book 2, ch. 4, in Works, Political, Metaphysical, and Chronological, of the Late Sir James Steuart, London: Routledge, 1995. 9 Ibid., vol. 1, book 2, ch. 8. 10 Karl Marx, Theories of Surplus Value, part 1, London: Lawrence & Wishart, 1969, ch. 1. 11 The significance of ‘profit upon alienation’ to Marx’s economics has generally escaped Anglo-Saxon Marxism in the post-war years, though the concept was certainly noticed by Roland L.


pages: 356 words: 103,944

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

affirmative action, Asian financial crisis, bank run, banking crisis, bilateral investment treaty, borderless world, Bretton Woods, British Empire, business cycle, capital controls, Carmen Reinhart, central bank independence, collective bargaining, colonial rule, Corn Laws, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, currency manipulation / currency intervention, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, Doha Development Round, en.wikipedia.org, endogenous growth, eurozone crisis, financial deregulation, financial innovation, floating exchange rates, frictionless, frictionless market, full employment, George Akerlof, guest worker program, Hernando de Soto, immigration reform, income inequality, income per capita, industrial cluster, information asymmetry, joint-stock company, Kenneth Rogoff, land reform, liberal capitalism, light touch regulation, Long Term Capital Management, low skilled workers, margin call, market bubble, market fundamentalism, Martin Wolf, mass immigration, Mexican peso crisis / tequila crisis, microcredit, Monroe Doctrine, moral hazard, night-watchman state, non-tariff barriers, offshore financial centre, oil shock, open borders, open economy, Paul Samuelson, price stability, profit maximization, race to the bottom, regulatory arbitrage, savings glut, Silicon Valley, special drawing rights, special economic zone, The Wealth of Nations by Adam Smith, Thomas L Friedman, Tobin tax, too big to fail, trade liberalization, trade route, transaction costs, tulip mania, Washington Consensus, World Values Survey

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: 457 words: 125,329

Value of Everything: An Antidote to Chaos The by Mariana Mazzucato

"Robert Solow", activist fund / activist shareholder / activist investor, Affordable Care Act / Obamacare, Airbnb, bank run, banks create money, Basel III, Berlin Wall, Big bang: deregulation of the City of London, bonus culture, Bretton Woods, business cycle, butterfly effect, buy and hold, Buy land – they’re not making it any more, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, cleantech, Corn Laws, corporate governance, corporate social responsibility, creative destruction, Credit Default Swap, David Ricardo: comparative advantage, debt deflation, European colonialism, fear of failure, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, financial repression, full employment, G4S, George Akerlof, Google Hangouts, Growth in a Time of Debt, high net worth, Hyman Minsky, income inequality, index fund, informal economy, interest rate derivative, Internet of things, invisible hand, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labour market flexibility, laissez-faire capitalism, light touch regulation, liquidity trap, London Interbank Offered Rate, margin call, Mark Zuckerberg, market bubble, means of production, money market fund, negative equity, Network effects, new economy, Northern Rock, obamacare, offshore financial centre, Pareto efficiency, patent troll, Paul Samuelson, peer-to-peer lending, Peter Thiel, profit maximization, quantitative easing, quantitative trading / quantitative finance, QWERTY keyboard, rent control, rent-seeking, Sand Hill Road, shareholder value, sharing economy, short selling, Silicon Valley, Simon Kuznets, smart meter, Social Responsibility of Business Is to Increase Its Profits, software patent, stem cell, Steve Jobs, The Great Moderation, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Tobin tax, too big to fail, trade route, transaction costs, two-sided market, very high income, Vilfredo Pareto, wealth creators, Works Progress Administration, zero-sum game

His Theory of Moral Sentiments and The Wealth of Nations were not contradictory but part of his deep analysis of what drives human behaviour and how societies organize themselves, and why some societies might grow in wealth more than others. Smith's analysis of ‘free markets' was closely tied to his understanding of production, and the need to limit rent-seeking behaviour. David Ricardo: Grounding Smith's Value Theory In the 1810s, another towering figure of the English classical economic school used the labour theory of value and productiveness to explain how society maintains the conditions which enable it to reproduce itself. David Ricardo came from a Sephardic Jewish family which originated in Portugal and moved to Holland before settling in England. Ricardo followed his father as a London stockbroker, although he was later estranged from his family after becoming a Unitarian. He grew fabulously rich from his speculative activities, most notoriously by profiting from inaccurate information that was circulating on the Battle of Waterloo in 1815.

‘Disposable class' is the name that Turgot gave to the class of landowners (classe proprietaire/souveraine/distributive). 15. Quesnay, quoted in Steiner, ‘Wealth and power', p. 99. 16. Schumpeter, History of Economic Analysis, p. 230; Steiner, ‘Wealth and Power', p. 100. 17. Smith, The Wealth of Nations, Book IV, Introduction. 18. Ibid., Book I, ch. 1. 19. Ibid., Book V, ch. 1. 20. Ibid. 21. David Ricardo, The Works and Correspondence of David Ricardo, ed. P. Sraffa with the collaboration of M. H. Dobb, vol. 1: On the Principles of Political Economy and Taxation (Cambridge: University Press, 1951), p. 150. 22. Ibid., p. 151. 23. Karl Marx and Friedrich Engels, The Communist Manifesto (1848; London: Penguin Classics, 2010), ch. 1. 24. A. Marshall, Principles of Economics (1890; London: Macmillan, 1920), Book I, ch. 4, para. 4. 25.

Given the physiocrats' disregard for industry, it is hardly surprising that the most significant critique of their ideas came from the nation where it was already clear that value was not just produced in agriculture, but in other emerging sectors: a rapidly industrializing Britain. The most influential critic of all was Quesnay's contemporary, a man who had travelled in France and talked at length with him: Adam Smith. CLASSICAL ECONOMICS: VALUE IN LABOUR As industry developed rapidly through the eighteenth and nineteenth centuries, so too did the ideas of a succession of outstanding thinkers like Adam Smith (1723-90), David Ricardo (1772-1823) and Karl Marx (1818-83), a German who did much of his greatest work in England. Economists started to measure the market value of a product in terms of the amount of work, or labour, that had gone into its production. Accordingly, they paid close attention to how labour and working conditions were changing and to the adoption of new technologies and ways of organizing production.


pages: 325 words: 73,035

Who's Your City?: How the Creative Economy Is Making Where to Live the Most Important Decision of Your Life by Richard Florida

active measures, assortative mating, barriers to entry, big-box store, blue-collar work, borderless world, BRICs, business climate, Celebration, Florida, correlation coefficient, creative destruction, dark matter, David Brooks, David Ricardo: comparative advantage, deindustrialization, demographic transition, edge city, Edward Glaeser, epigenetics, extreme commuting, Geoffrey West, Santa Fe Institute, happiness index / gross national happiness, high net worth, income inequality, industrial cluster, invention of the telegraph, Jane Jacobs, job satisfaction, Joseph Schumpeter, knowledge economy, knowledge worker, low skilled workers, megacity, new economy, New Urbanism, Peter Calthorpe, place-making, post-work, Richard Florida, risk tolerance, Robert Gordon, Robert Shiller, Robert Shiller, Seaside, Florida, Silicon Valley, Silicon Valley startup, superstar cities, The Death and Life of Great American Cities, The Wealth of Nations by Adam Smith, Thomas L Friedman, urban planning, World Values Survey, young professional

That means that bigger and more competitive economic units—megaregions—have superseded cities as the real engines of the global economy. The Only Economic Unit That Matters We usually think about economic growth and development in terms of nation-states. The classical economists Adam Smith and David Ricardo both argued that nation-states are the geographic engines behind economic growth. As Ricardo famously theorized, discretely defined countries have incentive to specialize in different kinds of industries, which would allow them to gain and maintain “comparative advantage” over others.1 The first person to see this was the great urbanist Jane Jacobs, who is best known for her scathing critique of urban planning, The Death and Life of Great American Cities, and two other very important books, The Economy of Cities and Cities and the Wealth of Nations.2 In The Economy of Cities (1969) Jacobs refutes the long-standing theory that cities emerged only after agriculture had become sufficiently productive to create a surplus beyond what was needed to survive.

A dynamic city, according to Jacobs, integrates its hinterland and becomes a full-blown “city-region.” As nearby farmland is revolutionized by city-created technology and innovation, rural dwellers move closer to town to assume jobs in urban industry. As the city generates more output, more money becomes available for civic and infrastructure improvement as well as for new technology and innovation to aid the city’s outlying areas. The comparative advantage that economist David Ricardo first identified in the eighteenth century still matters today, but national borders no longer define economies. Instead, the megaregion has emerged as the new natural economic unit. It is not an artifact of artificial political boundaries, like the nation-state or its provinces, but the product of concentrations of centers of innovation, production, and consumer markets. Today’s megaregions, which are essentially agglomerations of contiguous cities and their suburbs, extend far beyond individual cities and their hinterlands.

Their benefits in terms of innovation and productivity far outweigh the higher costs of living and doing business there. Jane Said The study of economic growth is an arcane field that until recently has paid little attention to the importance of location. In 1776 Adam Smith published The Wealth of Nations, which argued that specialization, efficiency, and division of labor are the cornerstones of modern economic growth.2 Later, David Ricardo’s theory of comparative advantage argued that not just firms but countries gain advantage by specializing in certain kinds of economic activity.3 The far-seeing urbanist Jane Jacobs agrees that specialization has its uses, but she focuses on an even more fundamental source of economic growth—what she terms expansion. Like the great economist Joseph Schumpeter, she emphasizes the critical importance of innovation and entrepreneurship.


pages: 561 words: 87,892

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

Admiral Zheng, asset-backed security, barriers to entry, Berlin Wall, Bernie Madoff, Bretton Woods, BRICs, British Empire, business cycle, capital controls, Celtic Tiger, central bank independence, collateralized debt obligation, corporate governance, credit crunch, crony capitalism, currency manipulation / currency intervention, currency peg, David Ricardo: comparative advantage, demographic dividend, demographic transition, Deng Xiaoping, Diane Coyle, Fall of the Berlin Wall, financial deregulation, financial innovation, fixed income, Francis Fukuyama: the end of history, full employment, G4S, George Akerlof, German hyperinflation, Gini coefficient, hiring and firing, income inequality, income per capita, inflation targeting, invisible hand, Isaac Newton, knowledge economy, labour market flexibility, labour mobility, liberal capitalism, low skilled workers, market clearing, Martin Wolf, mass immigration, Mexican peso crisis / tequila crisis, Naomi Klein, new economy, old age dependency ratio, Paul Samuelson, Ponzi scheme, price mechanism, price stability, purchasing power parity, rent-seeking, reserve currency, rising living standards, Ronald Reagan, savings glut, Silicon Valley, Simon Kuznets, sovereign wealth fund, spice trade, statistical model, technology bubble, 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 for Lemons, The Wealth of Nations by Adam Smith, Thomas Malthus, trade route, transaction costs, Washington Consensus, women in the workforce, working-age population, Y2K, Yom Kippur War

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: 374 words: 111,284

The AI Economy: Work, Wealth and Welfare in the Robot Age by Roger Bootle

"Robert Solow", 3D printing, agricultural Revolution, AI winter, Albert Einstein, anti-work, autonomous vehicles, basic income, Ben Bernanke: helicopter money, Bernie Sanders, blockchain, call centre, Capital in the Twenty-First Century by Thomas Piketty, Chris Urmson, computer age, conceptual framework, corporate governance, correlation does not imply causation, creative destruction, David Ricardo: comparative advantage, deindustrialization, deskilling, Elon Musk, en.wikipedia.org, Erik Brynjolfsson, everywhere but in the productivity statistics, facts on the ground, financial intermediation, full employment, future of work, income inequality, income per capita, industrial robot, Internet of things, invention of the wheel, Isaac Newton, James Watt: steam engine, Jeff Bezos, job automation, job satisfaction, John Markoff, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, John von Neumann, Joseph Schumpeter, Kevin Kelly, license plate recognition, Marc Andreessen, Mark Zuckerberg, market bubble, mega-rich, natural language processing, Network effects, new economy, Nicholas Carr, Paul Samuelson, Peter Thiel, positional goods, quantitative easing, RAND corporation, Ray Kurzweil, Richard Florida, ride hailing / ride sharing, rising living standards, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Second Machine Age, secular stagnation, self-driving car, Silicon Valley, Simon Kuznets, Skype, social intelligence, spinning jenny, Stanislav Petrov, Stephen Hawking, Steven Pinker, technological singularity, The Future of Employment, The Wealth of Nations by Adam Smith, Thomas Malthus, trade route, universal basic income, US Airways Flight 1549, Vernor Vinge, Watson beat the top human players on Jeopardy!, We wanted flying cars, instead we got 140 characters, wealth creators, winner-take-all economy, Y2K, Yogi Berra

And, as I will show in later chapters, that depends a lot upon human tastes and preferences. Comparative advantage We can now bring all of this together with the help of a simple economic concept. At the root of exchange between both individuals and countries is what economists call comparative advantage. The essential idea is that even if one person (or country) is absolutely better and more efficient than another person (or country), at doing everything, it is better for both that the two should specialize in the activity at which they are relatively better and trade the surplus fruits of this activity for the surplus fruits of the other person (or country). Ever since the theory of comparative advantage was developed by David Ricardo in 1817, it has provided key insights into international trade. It has the hallmark of greatness: it is blissfully simple but utterly profound.

Admittedly, sometimes the switching of digital services between locations can have some surprising features. Recently, there has been a move to locate machines in colder climates – where the costs of keeping the servers cool are lower.29 Apparently, Iceland is a favorite location. Of course, the driver of international trade is differences in relative costs, as outlined by David Ricardo in his theory of comparative advantage 200 years ago. So, it will always be advantageous to trade rather than not to trade. Nevertheless, this principle does not establish the amount of trade that will be profitable (and desirable). And it may well be that in the new economic conditions, thinking in narrow terms and at the overall global level, a reduction in the amount of international trade would be beneficial.

Echoes of these attitudes and behavior continued throughout the nineteenth century and indeed continue even to the present. To this day, people who oppose technological developments are often branded “Luddites.” Nor was opposition to technological progress restricted only to those directly disadvantaged by it. In the third edition of his Principles of Political Economy and Taxation, published in 1821, the great economist David Ricardo added a new chapter, “On Machinery.”18 In it he said: “I am convinced that the substitution of machinery for human labour is often very injurious to the interests of the class of labourers.” There have been frequent echoes of this thinking throughout the subsequent 200 years. New jobs for old Great economist though Ricardo was, as things turned out, his pessimism was unjustified. Although many individual workers experienced loss of employment or diminished incomes as a result of technological advances, this is not the story of the economy as a whole.


pages: 850 words: 254,117

Basic Economics by Thomas Sowell

affirmative action, air freight, airline deregulation, American Legislative Exchange Council, bank run, barriers to entry, big-box store, British Empire, business cycle, clean water, collective bargaining, colonial rule, corporate governance, correlation does not imply causation, cross-subsidies, David Brooks, David Ricardo: comparative advantage, declining real wages, Dissolution of the Soviet Union, diversified portfolio, European colonialism, fixed income, Fractional reserve banking, full employment, global village, Gunnar Myrdal, Hernando de Soto, hiring and firing, housing crisis, income inequality, income per capita, index fund, informal economy, inventory management, invisible hand, John Maynard Keynes: technological unemployment, joint-stock company, Just-in-time delivery, Kenneth Arrow, knowledge economy, labor-force participation, land reform, late fees, low cost airline, low cost carrier, low skilled workers, means of production, Mikhail Gorbachev, minimum wage unemployment, moral hazard, offshore financial centre, oil shale / tar sands, payday loans, price discrimination, price stability, profit motive, quantitative easing, Ralph Nader, rent control, road to serfdom, Ronald Reagan, Silicon Valley, surplus humans, The Bell Curve by Richard Herrnstein and Charles Murray, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Thomas Malthus, transcontinental railway, Vanguard fund, War on Poverty

{xxxvii} But this was not always clear to their readers, and the classical economists’ own attention was seldom focused in that direction. David Ricardo Among the followers of Adam Smith was the great classical economist David Ricardo, the leading economist of the early nineteenth century who, among other things, developed the theory of comparative advantage in international trade. In addition to his substantive contributions to economic analysis, Ricardo created a new approach and style in writing about economics. Adam Smith’s The Wealth of Nations was full of social commentary and philosophical observations, and closed with a strong suggestion that Britain should not try to hold on to its American colonies that were in rebellion the same year that his treatise was published. By contrast, David Ricardo’s Principles of Political Economy in 1817 was the first of the great classic works in economics to be devoted to analysis of enduring principles of economics, divorced from social, political and philosophical commentary, and emphasizing those principles more so than immediate policy issues.

, p. 250. {988} Ibid., p. lvii. {989} Ibid., p. 325. {990} Ibid., p. 900. {991} Ibid., pp. 80–81, 365; Adam Smith, The Theory of Moral Sentiments (Indianapolis: Liberty Classics, 1976), p. 337. {992} Adam Smith, The Wealth of Nations, p. 423. {993} Sir James Steuart, The Works, Volume I, pp. 4, 15, 73, 88. {994} Adam Smith, The Wealth of Nations, p. 435. {995} David Ricardo, The Works and Correspondence of David Ricardo, Volume VII: Letters 1816–1818, edited by Piero Sraffa (New York: Cambridge University Press, 1952), p. 372. {996} Vance Packard, The Waste Makers (New York: D. McKay, Co., 1960), p. 7. {997} Jean-Baptiste Say, A Treatise on Political Economy (Philadelphia: Grigg & Elliot, 1834), p. 137. {998} Pierre François Joachim Henri Mercier de la Rivière, L’Ordre naturel et essentiel des sociétés politiques (London: Jean Nourse, 1767), Volume II, p. 272

Modern economics is often dated from 1776, when Adam Smith wrote his classic, The Wealth of Nations, but there were substantial books devoted to economics at least a century earlier, and there was a contemporary school of French economists called the Physiocrats, some of whose members Smith met while traveling in France, years before he wrote his own treatise on economics. What was different about The Wealth of Nations was that it became the foundation for a whole school of economists who continued and developed its ideas over the next two generations, including such leading figures as David Ricardo (1772–1823) and John Stuart Mill (1806–1873), and the influence of Adam Smith has to some extent persisted on to the present day. No such claim could be made for any previous economist, despite many people who had written knowledgeably and insightfully on the subject in earlier times. More than two thousand years ago, Xenophon, a student of Socrates, analyzed economic policies in ancient Athens.{982} In the Middle Ages, religious conceptions of a “fair” or “just” price, and a ban on usury, led Thomas Aquinas to analyze the economic implications of those doctrines and the exceptions that might therefore be morally acceptable.


pages: 403 words: 111,119

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

"Robert Solow", 3D printing, Asian financial crisis, bank run, basic income, battle of ideas, Berlin Wall, bitcoin, blockchain, Branko Milanovic, Bretton Woods, Buckminster Fuller, business cycle, call centre, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, choice architecture, clean water, cognitive bias, collapse of Lehman Brothers, complexity theory, creative destruction, crowdsourcing, cryptocurrency, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, dematerialisation, disruptive innovation, Douglas Engelbart, Douglas Engelbart, en.wikipedia.org, energy transition, Erik Brynjolfsson, Ethereum, ethereum blockchain, Eugene Fama: efficient market hypothesis, experimental economics, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, Financial Instability Hypothesis, full employment, global supply chain, global village, Henri Poincaré, hiring and firing, Howard Zinn, Hyman Minsky, income inequality, Intergovernmental Panel on Climate Change (IPCC), invention of writing, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, Kickstarter, land reform, land value tax, Landlord’s Game, loss aversion, low skilled workers, M-Pesa, Mahatma Gandhi, market fundamentalism, Martin Wolf, means of production, megacity, mobile money, Mont Pelerin Society, Myron Scholes, neoliberal agenda, Network effects, Occupy movement, off grid, offshore financial centre, oil shale / tar sands, out of africa, Paul Samuelson, peer-to-peer, planetary scale, price mechanism, quantitative easing, randomized controlled trial, Richard Thaler, Ronald Reagan, Second Machine Age, secular stagnation, shareholder value, sharing economy, Silicon Valley, Simon Kuznets, smart cities, smart meter, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, statistical model, Steve Ballmer, The Chicago School, The Great Moderation, the map is not the territory, the market place, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, too big to fail, Torches of Freedom, trickle-down economics, ultimatum game, universal basic income, Upton Sinclair, Vilfredo Pareto, wikimedia commons

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: 354 words: 105,322

The Road to Ruin: The Global Elites' Secret Plan for the Next Financial Crisis by James Rickards

"Robert Solow", Affordable Care Act / Obamacare, Albert Einstein, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, Bayesian statistics, Ben Bernanke: helicopter money, Benoit Mandelbrot, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bitcoin, Black Swan, blockchain, Bonfire of the Vanities, Bretton Woods, British Empire, business cycle, butterfly effect, buy and hold, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, cellular automata, cognitive bias, cognitive dissonance, complexity theory, Corn Laws, corporate governance, creative destruction, Credit Default Swap, cuban missile crisis, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, debt deflation, Deng Xiaoping, disintermediation, distributed ledger, diversification, diversified portfolio, Edward Lorenz: Chaos theory, Eugene Fama: efficient market hypothesis, failed state, Fall of the Berlin Wall, fiat currency, financial repression, fixed income, Flash crash, floating exchange rates, forward guidance, Fractional reserve banking, G4S, George Akerlof, global reserve currency, high net worth, Hyman Minsky, income inequality, information asymmetry, interest rate swap, Isaac Newton, jitney, John Meriwether, John von Neumann, Joseph Schumpeter, Kenneth Rogoff, labor-force participation, large denomination, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, Mexican peso crisis / tequila crisis, money market fund, mutually assured destruction, Myron Scholes, Naomi Klein, nuclear winter, obamacare, offshore financial centre, Paul Samuelson, Peace of Westphalia, Pierre-Simon Laplace, plutocrats, Plutocrats, prediction markets, price anchoring, price stability, quantitative easing, RAND corporation, random walk, reserve currency, RFID, risk-adjusted returns, Ronald Reagan, Silicon Valley, sovereign wealth fund, special drawing rights, stocks for the long run, The Bell Curve by Richard Herrnstein and Charles Murray, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Thomas Bayes, Thomas Kuhn: the structure of scientific revolutions, too big to fail, transfer pricing, value at risk, Washington Consensus, Westphalian system

Efficiency comes down to cost measurement, which presupposes a system of prices measured in money, and derived from markets. So the theory of comparative advantage relies entirely on a dense network of factors of production, costs, prices, markets, and money to work its will. If one of these network nodes is manipulated or distorted by policy or imperfection, the theory of comparative advantage does not work because there is no basis for comparison. Today every one of these nodes is distorted, imperfect, or both. Comparative advantage is a castle in the air—pleasant to imagine, yet totally unreal. Comparative advantage is the touchstone of the neoliberal consensus, the theoretical foundation for free trade, open capital accounts, and other facets of globalization. When David Ricardo, and earlier, Adam Smith, developed these free market and free trade ideas the world was on a gold standard; exchange rates were anchored to gold.

Monetarism has been intellectually dominant for about sixty years since it emerged from the University of Chicago under Milton Friedman in the 1960s. Eugene Fama’s efficient markets hypothesis percolated in academic studies in the 1960s, yet only started to exert market influence in the 1970s with the options pricing model of Fischer Black, Myron Scholes, and Robert Merton. The Black-Scholes model enabled derivatives and leverage. David Ricardo’s theory of comparative advantage is two hundred years old, yet was first implemented in a widespread rules-based way after 1947 in the General Agreement on Tariffs and Trade. The link between money and gold was abandoned in stages from 1971 to 1973, concurrent with the rise of floating exchange rate regimes. In short, the herd’s cognitive map is relatively new. None of these intellectual waypoints gained immediate allegiance.

Free trade is another myth, and a costly one. The modern theoretical case against ostensibly free trade is newer than the critique of efficient markets, with even less support among elite economists. Acquaintance with this critique is needed to understand why elites are defensive, and why the herd’s sense of dread is spreading. The theoretical foundation for free trade is found in the theory of comparative advantage articulated by David Ricardo in The Principles of Political Economy and Taxation (1817). It is no dishonor to Ricardo that his theory fails in conditions of globalization. His ideas were brilliant for their time, and advanced the then-young science of economics toward its classical phase. The same can be said of Sir Isaac Newton, whose ideas on celestial mechanics were surpassed by Albert Einstein’s relativity.


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

addicted to oil, air freight, banking crisis, big-box store, BRICs, business cycle, 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: 202 words: 58,823

Willful: How We Choose What We Do by Richard Robb

activist fund / activist shareholder / activist investor, Alvin Roth, Asian financial crisis, asset-backed security, Bernie Madoff, capital asset pricing model, cognitive bias, collapse of Lehman Brothers, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, delayed gratification, diversification, diversified portfolio, effective altruism, endowment effect, Eratosthenes, experimental subject, family office, George Akerlof, index fund, information asymmetry, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, lake wobegon effect, loss aversion, market bubble, market clearing, money market fund, Pareto efficiency, Paul Samuelson, Peter Singer: altruism, principal–agent problem, profit maximization, profit motive, Richard Thaler, Silicon Valley, sovereign wealth fund, survivorship bias, the scientific method, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, transaction costs, ultimatum game

It is a deep understanding of crucial information like that held by Hayek’s man on the spot that leads to profitable action. To act on such opportunities, even the best-informed investor must take a leap. Because a unique event cannot be understood as an abstraction to which simple rules apply, investing with a likelihood of beating the market requires, as Richard Zeckhauser argues, an engagement with the “unknown and unknowable.” Zeckhauser tells a story about the economist David Ricardo, who bought British government bonds before the Battle of Waterloo on a hunch that the Duke of Wellington and his Prussian allies would defeat Napoleon. What was the probability of such a victory? What previous battle could have served as a comparison? It was a river that the world would step in only once. Ricardo made his bet and won big.2 If pressed for a reason, Ricardo might have argued that British government bonds offered a high potential reward for the risk.

But while facing high-stakes scenarios can make work feel meaningful, it can’t be the only way to create that feeling—if it were, we’d all be emergency room doctors or firefighters. Work, then, must provide a sense of meaning in other ways. Why Do We Work? Is work really a burden and retirement the reward at the end, the sooner the better? Plenty of evidence suggests that we’re not as eager to give up work as we might imagine or pretend. Consider the current global bull market in protectionism. Could this be a widespread failure to grasp David Ricardo’s two-hundred-year-old story of the wine maker from Portugal and the cloth maker from England, in which both countries benefit from trading? Of course, English vintners and Portuguese weavers may not benefit, but the gains from trade should be large enough to compensate the losers so that everyone ends up better off.17 The Ricardo solution would not satisfy U.S. workers left behind by the loss of manufacturing jobs.

They’ll relax their reflexive commitment to the “best practices” of the purposeful realm: metrics, market efficiency, mathematical models, attributing expected returns to various risk factors, and analysis based on measures of risk and reward. Instead, they’ll accept that real opportunities are unique. Each one stands for itself. Individuals who have “on the spot” knowledge that cannot be fully transmitted to others need to be able to act. This was what David Ricardo did when he bought British government bonds on the eve of Waterloo, and what many other successful investors have done before and since. How can an institution take similar for-itself leaps without descending into recklessness? This, too, comes down to the specifics. There is, and there can be, no general answer. Beyond improving our results as we seek to gratify desires, acknowledging the for-itself gives us license to embrace specific conduct that we can’t credibly explain to ourselves or others in terms of purposeful choice.


pages: 502 words: 128,126

Rule Britannia: Brexit and the End of Empire by Danny Dorling, Sally Tomlinson

3D printing, Ada Lovelace, Alfred Russel Wallace, anti-communist, anti-globalists, Big bang: deregulation of the City of London, Boris Johnson, British Empire, centre right, colonial rule, Corn Laws, correlation does not imply causation, David Ricardo: comparative advantage, deindustrialization, Dominic Cummings, Donald Trump, Edward Snowden, en.wikipedia.org, epigenetics, Etonian, falling living standards, Flynn Effect, housing crisis, illegal immigration, imperial preference, income inequality, inflation targeting, invisible hand, knowledge economy, market fundamentalism, mass immigration, megacity, New Urbanism, Nick Leeson, North Sea oil, offshore financial centre, out of africa, Right to Buy, Ronald Reagan, Silicon Valley, South China Sea, sovereign wealth fund, spinning jenny, Steven Pinker, The Wealth of Nations by Adam Smith, Thomas Malthus, University of East Anglia, We are the 99%, wealth creators

Quoted in Robinson, J. (1979) Aspects of Development and Underdevelopment, Cambridge: Cambridge University Press, p. 103. 8 Personal correspondence with Ann Pettifor, June 2018, director of Policy Research in Macroeconomics, author of The Production of Money (2017), London: Verso. 9 Dizikes, P. (2012) ‘Economists find evidence for famous hypothesis of “comparative advantage”’, MIT News, 20 June, http://news.mit.edu/2012/confirming-ricardo-0620. Note: Arnaud Costinot and David Donaldson, working at the Massachusetts Institute of Technology, tried to find proof that David Ricardo’s theory of comparative advantage worked. They dated Ricardo’s theory to 1817 and explained: ‘Neat as this explanation may seem, it is by definition hard to prove. If England does not make wine, and Portugal does not make cloth, it is very hard to say how efficiently they could produce those goods. The same applies to any country not manufacturing any given product.

Adam Smith, Thomas Malthus and James Mill are remembered now, perhaps unfairly, for talking about the magical invisible hand of the market (Smith), the problem of poor people having too much sex (Malthus), and how India was a basket case until the British arrived (Mill).5 Their ideas all had great influence, but none of those ideas have actually survived the test of time as much as those of their contemporary David Ricardo and his theories about free trade.6 David Ricardo, son of a Dutch stockbroker, was born in London in 1772. His grandest theory is now best remembered for a story about wine and wool in Portugal and England. Ricardo suggested that both countries would grow rich if Portugal concentrated on what it was best at – making wine – and England concentrated on wool and weaving that into clothing and carpets. The two countries could then trade their surplus stock, and each would have as much finished wine and woven wool as they could wish for, and would be far better off than had they not traded.

In 1979, one of the first widely recognised female economists, Joan Violet Robinson, a professor at the University of Cambridge, explained: ‘In reality, the imposition of free trade on Portugal killed off a promising textile industry and left her with a slow-growing export market for wine, while for England, exports of cotton cloth led to accumulation, mechanization and the whole spiralling growth of the industrial revolution.’ When she wrote, Robinson was able to cite the evidence-based work of Sandro Sideri, unlike David Ricardo with his armchair (and evidence-free) theory of free trade.7 ‘Free trade benefiting all’ was and remains just a theory. It is not a truth. It is one of many classical economic theories that are unsubstantiated yet somehow still gain credence. People may say that the EU is about free trade, but it was initially as much about promoting peace and preventing war. That is partly done by ensuring economies become interdependent – not because such interdependency is necessarily terribly efficient, but because we better understand each other if we work for each other and buy from each other.


pages: 334 words: 98,950

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

affirmative action, Albert Einstein, Big bang: deregulation of the City of London, bilateral investment treaty, borderless world, Bretton Woods, British Empire, Brownian motion, business cycle, 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, Kickstarter, land reform, liberal world order, liberation theology, low skilled workers, market bubble, market fundamentalism, Martin Wolf, means of production, mega-rich, moral hazard, Nelson Mandela, 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

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, business cycle, 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, Kickstarter, land reform, liberal world order, liberation theology, low skilled workers, market bubble, market fundamentalism, Martin Wolf, means of production, mega-rich, moral hazard, Nelson Mandela, 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

"Robert Solow", bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Black Swan, bonus culture, Bretton Woods, BRICs, business cycle, buy and hold, 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, Kickstarter, laissez-faire capitalism, Long Term Capital Management, mandelbrot fractal, market design, market fundamentalism, Martin Wolf, money market fund, moral hazard, mortgage debt, Nelson Mandela, 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.”


pages: 290 words: 76,216

What's Wrong with Economics? by Robert Skidelsky

"Robert Solow", additive manufacturing, agricultural Revolution, Black Swan, Bretton Woods, business cycle, Cass Sunstein, central bank independence, cognitive bias, conceptual framework, Corn Laws, corporate social responsibility, correlation does not imply causation, creative destruction, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, disruptive innovation, Donald Trump, full employment, George Akerlof, George Santayana, global supply chain, global village, Gunnar Myrdal, happiness index / gross national happiness, hindsight bias, Hyman Minsky, income inequality, index fund, inflation targeting, information asymmetry, Internet Archive, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Arrow, knowledge economy, labour market flexibility, loss aversion, Mark Zuckerberg, market clearing, market friction, market fundamentalism, Martin Wolf, means of production, moral hazard, paradox of thrift, Pareto efficiency, Paul Samuelson, Philip Mirowski, precariat, price anchoring, principal–agent problem, rent-seeking, Richard Thaler, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, shareholder value, Silicon Valley, Simon Kuznets, survivorship bias, technoutopianism, The Chicago School, The Market for Lemons, The Nature of the Firm, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Thomas Malthus, Thorstein Veblen, transaction costs, transfer pricing, Vilfredo Pareto, Washington Consensus, Wolfgang Streeck, zero-sum game

But to model an open system as though it were a closed system ‘introduces a damaging rift between ontology and epistemology – i.e. between the way the social world actually is, and the way it is represented in economic models. Once in place, the rift cannot be healed.’4 Economists use many techniques to ‘close’ open systems, of which the following are the most important. First is ceteris paribus – working out the consequences of a particular change by ‘freezing’ the other variables specified in the model. David Ricardo’s Essay on Profits (1815) is an early explicit example of its use: ‘We will . . . suppose that no improvements take place in agriculture, and that capital and population advance in the proper proportion . . . that we may know what peculiar effects are to be ascribed to . . . the extension of agriculture to the more remote and less fertile land.’ This technique gives you a single starting point leading to a single destination.

When neoclassical economists talk of the need for macroeconomics to be properly ‘microfounded’, they mean that it should be possible to explain patterns of behaviour by reference to individual intentions alone, that these patterns are nothing but the sum of such intentions. For example, GNP is merely the weighted average of all the individual transactions in the economy. However, it might make just as much sense to talk of ‘macro-founding’ microeconomics, that is, showing how individual intentions are shaped by individuals’ economic or social positions. David Ricardo and Karl Marx did just that with their theories of class interest. That one’s ‘position’ in society affects one’s choices is obvious to anyone not thoroughly trained in neoclassical economics. An anonymous friend of Donald Trump’s told CNN that ‘I always thought that once he understood the weight of the office, he would rise to the occasion. Now I don’t.’ The phrase ‘the weight of the office’ clearly evokes the idea that the ‘office’ of US president is an entity separate from its temporary incumbent.

The labour theory of value was intended to isolate that part of price which wasn’t value, but represented rent. Economic rent was a price that had no basis in real cost but was purely a free lunch for the owners of land and money. The classic medieval unjust price was usury – taking interest on loans. Why was it unjust? Because it was seen as making money from money. Lending out money for which you had no use cost nothing and was therefore not entitled to a reward. Adam Smith and David Ricardo both accepted labour effort as an explanation of long-run or normal prices, in contradiction to ‘market prices’ which fluctuated round them: that is, they distinguished between the ‘natural’ price (the price of labour effort) and the market price. Smith posed the famous ‘diamond-water paradox’: why were diamonds so expensive and water so cheap, when diamonds were useless and water vital for life?


pages: 251 words: 69,245

The Haves and the Have-Nots: A Brief and Idiosyncratic History of Global Inequality by Branko Milanovic

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.


Nuclear War and Environmental Catastrophe by Noam Chomsky, Laray Polk

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.


pages: 606 words: 87,358

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

"Robert Solow", 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, Kickstarter, 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: 377 words: 97,144

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

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, Norman Macrae, pattern recognition, Peter Thiel, phenotype, placebo effect, prisoner's dilemma, profit maximization, Ray Kurzweil, recommendation engine, reversible computing, 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, twin studies, 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: 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 Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, Thorstein Veblen, trickle-down economics, Uber and Lyft, uber 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: 312 words: 91,835

Global Inequality: A New Approach for the Age of Globalization by Branko Milanovic

"Robert Solow", Asian financial crisis, assortative mating, Berlin Wall, bitcoin, Black Swan, Branko Milanovic, Capital in the Twenty-First Century by Thomas Piketty, centre right, colonial exploitation, colonial rule, David Ricardo: comparative advantage, deglobalization, demographic transition, Deng Xiaoping, discovery of the americas, European colonialism, Fall of the Berlin Wall, Francis Fukuyama: the end of history, full employment, Gini coefficient, Gunnar Myrdal, income inequality, income per capita, invisible hand, labor-force participation, liberal capitalism, low skilled workers, Martin Wolf, means of production, mittelstand, moral hazard, Nash equilibrium, offshore financial centre, oil shock, open borders, Paul Samuelson, place-making, plutocrats, Plutocrats, post scarcity, post-industrial society, profit motive, purchasing power parity, Ralph Nader, Second Machine Age, seigniorage, Silicon Valley, Simon Kuznets, special economic zone, stakhanovite, trade route, transfer pricing, very high income, Vilfredo Pareto, Washington Consensus, women in the workforce

I have already mentioned that national accounts will become less relevant and that monetary policy may no longer be conducted by states. (And one can think in addition of the role that private monies such as Bitcoin may play.) But even essential economic concepts like comparative advantage, which is based on an implicit assumption of methodological nationalism, that is, of national accounting and immobility of some factors of production, may have to be revised. In a single market both wine and cloth would be, as in David Ricardo’s famous example, produced in Portugal because workers and machines would all move there (and none would stay in England). As the world changes and becomes more integrated, our ways of thinking and the tools we use to understand the world become obsolete. New ways to look at reality in the age of globalization are needed.

For modern societies, the argument that war can be a force for equality, if an unwelcome one, recently received much attention in Piketty’s Capital in the Twenty-First Century. It was already present in Piketty’s earlier work on French inequality (2001a), which showed how inequality was affected by World War I and its aftermath. War reduces inequality through physical destruction of capital and inflation (creating real losses for creditors), resulting in a general decrease of income received from property. David Ricardo, in the famous chapter 31 of his Principles of Political Economy and Taxation (1817), proposed another channel, which has not been much explored, through which war reduces inequality. Government war spending, financed out of additional taxes paid by the rich, creates a greater demand for labor than does the normal consumption pattern of the rich. Thus, a given amount of money, now in the hands of the government rather than capitalists, is used to hire more people, many of them as soldiers, increasing the overall demand for labor, raising wages, and reducing inequality.

Our data here, based on Gini values calculated from the social tables (see Milanovic, Lindert, and Williamson 2011), are practically identical to the results given by Lindert and Williamson (1982, 1983). Feinstein (1988), however, has argued that English inequality was very high, but stable, for at least a century before the Industrial Revolution. Hence, Feinstein’s data do not show the upswing in the Kuznets curve that should in principle be coincidental with the Industrial Revolution. 26. Clark (2005) shows a doubling of English real wages between the time of publication of David Ricardo’s On the Principles of Political Economy and Taxation (1817) and Karl Marx’s Das Kapital (1867), with real wage growth continuing and accelerating into the latter part of the nineteenth century. Feinstein (1988) finds a slower but nevertheless perceptible increase. 27. The income level at which the Spanish peak occurred is similar to the British and American level of about $2,500 (in the same PPPs).


pages: 462 words: 150,129

The Rational Optimist: How Prosperity Evolves by Matt Ridley

"Robert Solow", 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, hedonic treadmill, 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, Kickstarter, 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, Thales and the olive presses, Thales of Miletus, 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’.


pages: 385 words: 111,807

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

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, Nelson Mandela, 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: 196 words: 53,627

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

affirmative action, business cycle, 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, longitudinal study, low skilled workers, 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: 626 words: 167,836

The Technology Trap: Capital, Labor, and Power in the Age of Automation by Carl Benedikt Frey

"Robert Solow", 3D printing, autonomous vehicles, basic income, Bernie Sanders, Branko Milanovic, British Empire, business cycle, business process, call centre, Capital in the Twenty-First Century by Thomas Piketty, Clayton Christensen, collective bargaining, computer age, computer vision, Corn Laws, creative destruction, David Graeber, David Ricardo: comparative advantage, deindustrialization, demographic transition, desegregation, deskilling, Donald Trump, easy for humans, difficult for computers, Edward Glaeser, Elon Musk, Erik Brynjolfsson, everywhere but in the productivity statistics, factory automation, falling living standards, first square of the chessboard / second half of the chessboard, Ford paid five dollars a day, Frank Levy and Richard Murnane: The New Division of Labor, full employment, future of work, game design, Gini coefficient, Hyperloop, income inequality, income per capita, industrial cluster, industrial robot, intangible asset, interchangeable parts, Internet of things, invention of agriculture, invention of movable type, invention of the steam engine, invention of the wheel, Isaac Newton, James Hargreaves, James Watt: steam engine, job automation, job satisfaction, job-hopping, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Joseph Schumpeter, Kickstarter, knowledge economy, knowledge worker, labor-force participation, labour mobility, Loebner Prize, low skilled workers, Malcom McLean invented shipping containers, manufacturing employment, mass immigration, means of production, Menlo Park, minimum wage unemployment, natural language processing, new economy, New Urbanism, Norbert Wiener, oil shock, On the Economy of Machinery and Manufactures, Pareto efficiency, pattern recognition, pink-collar, Productivity paradox, profit maximization, Renaissance Technologies, rent-seeking, rising living standards, Robert Gordon, robot derives from the Czech word robota Czech, meaning slave, Second Machine Age, secular stagnation, self-driving car, Silicon Valley, Simon Kuznets, social intelligence, speech recognition, spinning jenny, Stephen Hawking, The Future of Employment, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, Thomas Malthus, total factor productivity, trade route, Triangle Shirtwaist Factory, Turing test, union organizing, universal basic income, washing machines reduced drudgery, wealth creators, women in the workforce, working poor, zero-sum game

A 1915 article published in Literary Digest confidently predicted that with electrification, it “will become next to impossible to contract disease germs or get hurt in the city, and country folk will go to town to rest and get well.”9 Edison himself was convinced that electricity would help us overcome the greatest hurdle to further progress: our need to sleep. Technology was the new religion of the people. There was the sense that there was no problem that technology could not solve. In hindsight, and in the light of the gains brought by technology, it is astounding to think that economists of the early nineteenth century like Thomas Malthus and David Ricardo did not believe that technology could improve the human lot. The technological virtuosity of the nineteenth and early twentieth centuries took some time to trickle down to the economics profession. But in the 1950s, Robert Solow, who would go on to win the Nobel Prize in Economics in 1987, found that virtually all economic advance over the twentieth century had been thanks to technology. And others documented that those gains had been widely shared.

Eden declared: Many persons complain of the introduction of machines into the woollen manufacture; and are of the opinion, that the engines for spinning, and carding wool, do not only deprive the industrious Poor, here, of employment, but are a great national disadvantage: I confess, that, to me, all the arguments I ever heard on the subject, would go to prove, that the land should be dug by labourers, and not cultivated by plows, and horses.… It is a great national misfortune that the woollen spinner can, by means of machines, do ten times the work he could perform without them.20 As mechanization picked up in industry and agriculture, concerns over the so-called machinery question intensified over the course of the early nineteenth century. Among economists, David Ricardo argued that “the opinion entertained by the labouring class, that the employment of machinery is frequently detrimental to their interests, is not founded on prejudice and error, but is conformable to the correct principles of political economy.”21 His famous chapter On Machinery, which asserted that machines reduce the demand for undifferentiated labor and lead to technological unemployment, prompted a number of theoretical approaches to prove that such unemployment was only a short-term problem.22 Yet fear of machines, if anything, picked up over the following decades.

The period 1900–1970 has rightly been regarded the “the greatest levelling of all time.”53 Incomes were rising for virtually everyone, and they were growing even faster at lower ranks. As Americans in the middle and at the lower end of the income distribution became the prime beneficiaries of progress, inequality went into reverse. Along with every other industrialized nation, America saw the share of income accruing to people at the top, fall. It may be telling that unlike economists of the Industrial Revolution (like Thomas Malthus, David Ricardo, and Karl Marx) who were all fond of apocalyptic economic predictions, economists living in the aftermath of the Second Industrial Revolution were largely optimistic—perhaps overly so. In any event, the idea that industrialists grew rich on the misery of workers had evidently fallen out of fashion. In the 1950s, Robert Solow advanced a model of a balanced growth path, in which progress delivered equal benefits for every social group; Kaldor put forward his stylized facts of economic growth, showing that the labor share of income had remained roughly constant, at two-thirds of national income, despite rapid mechanization; and Simon Kuznets advanced his hugely optimistic theory of economic progress in which inequality automatically decreases, regardless of economic policy choices.54 Their optimism surely seemed warranted at the time.


pages: 614 words: 174,226

The Economists' Hour: How the False Prophets of Free Markets Fractured Our Society by Binyamin Appelbaum

"Robert Solow", airline deregulation, Alvin Roth, Andrei Shleifer, anti-communist, battle of ideas, Benoit Mandelbrot, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business cycle, capital controls, Carmen Reinhart, Cass Sunstein, Celtic Tiger, central bank independence, clean water, collective bargaining, Corn Laws, correlation does not imply causation, Credit Default Swap, currency manipulation / currency intervention, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, desegregation, Diane Coyle, Donald Trump, ending welfare as we know it, financial deregulation, financial innovation, fixed income, floating exchange rates, full employment, George Akerlof, George Gilder, Gini coefficient, greed is good, Growth in a Time of Debt, income inequality, income per capita, index fund, inflation targeting, invisible hand, Isaac Newton, Jean Tirole, John Markoff, Kenneth Arrow, Kenneth Rogoff, land reform, Long Term Capital Management, low cost airline, manufacturing employment, means of production, Menlo Park, minimum wage unemployment, Mohammed Bouazizi, money market fund, Mont Pelerin Society, Network effects, new economy, oil shock, Paul Samuelson, Philip Mirowski, plutocrats, Plutocrats, price stability, profit motive, Ralph Nader, RAND corporation, rent control, rent-seeking, Richard Thaler, road to serfdom, Robert Bork, Robert Gordon, Ronald Coase, Ronald Reagan, Sam Peltzman, Silicon Valley, Simon Kuznets, starchitect, Steve Jobs, supply-chain management, The Chicago School, The Great Moderation, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, transaction costs, trickle-down economics, ultimatum game, Unsafe at Any Speed, urban renewal, War on Poverty, Washington Consensus

The English economist William Petty, whom Karl Marx called the “founder of political economy,” made himself useful, first to the Commonwealth and then to King Charles II, by taking the measure of private wealth to inform and justify the state’s growing reliance on taxation.20 Partisans began to rely on the language of economics to muster public support for their views, and to shift government policy. The first great work of economics, published in 1776, was called The Wealth of Nations because Adam Smith had a recipe for increasing that wealth: free markets and free trade. A few decades later, in 1817, the economist David Ricardo sharpened the point, arguing that nations could prosper by abandoning production of some goods and focusing on areas of “comparative advantage.” The other stuff could then be imported. This insight electrified opponents of Britain’s Corn Laws, which limited imports of grain.* They spread Ricardo’s gospel using a new technology, the postage stamp, which facilitated distribution of a new magazine, The Economist.21 The 1846 decision by Prime Minister Robert Peel to end the Corn Laws is probably the first significant example of economists reshaping public policy.

It was also the recipe Alexander Hamilton wrote down for the young United States in his famous “Report on Manufactures” in 1791. “By enhancing the charges on foreign articles,” Hamilton wrote, policy makers can “enable the national manufacturers to undersell all their foreign competitors.” Modern economics began as a protest movement against this idea, which was known as mercantilism. The British economist David Ricardo insisted nations would prosper by opening their borders to trade. He famously advised Portugal to focus on making wine and to buy its cloth from England. But Ricardo’s proof that trade was more efficient than protectionism only applied to a moment in time. A nation that followed Ricardo’s advice might remain a nation of winemakers, while a nation that invested in development might achieve greater prosperity.

The Nobel laureate James Buchanan wrote in the Wall Street Journal that allowing evidence to contradict theory was a disgrace. For good measure, he described his ideological opponents as “a bevy of camp-following whores.” See Jonathan Schlefer, The Assumptions Economists Make (Cambridge: Harvard University Press, 2012), 4. 29. The idea that wages are set by social custom was propounded by early economists, notably David Ricardo, and remains, in my view, the most compelling theory of wage determination. For the argument that labor policies are a major driver of wage stagnation, see Frank S. Levy and Peter Temin, “Inequality and Institutions in 20th Century America,” 2007, MIT Department of Economics Working Paper 07-17. 30. The projections, by the Bureau of Labor Statistics, are for the period between 2016 and 2026.


The Economics Anti-Textbook: A Critical Thinker's Guide to Microeconomics by Rod Hill, Anthony Myatt

American ideology, Andrei Shleifer, Asian financial crisis, bank run, barriers to entry, Bernie Madoff, business cycle, cognitive dissonance, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, different worldview, endogenous growth, equal pay for equal work, Eugene Fama: efficient market hypothesis, experimental economics, failed state, financial innovation, full employment, gender pay gap, Gini coefficient, Gunnar Myrdal, happiness index / gross national happiness, Home mortgage interest deduction, Howard Zinn, income inequality, indoor plumbing, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Arrow, liberal capitalism, low skilled workers, market bubble, market clearing, market fundamentalism, Martin Wolf, medical malpractice, minimum wage unemployment, moral hazard, Pareto efficiency, Paul Samuelson, Peter Singer: altruism, positional goods, prediction markets, price discrimination, principal–agent problem, profit maximization, profit motive, publication bias, purchasing power parity, race to the bottom, Ralph Nader, random walk, rent control, rent-seeking, Richard Thaler, Ronald Reagan, shareholder value, The Myth of the Rational Market, the payments system, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, ultimatum game, union organizing, working-age population, World Values Survey, Yogi Berra

This parallels the demonstration of comparative advantage by David Ricardo in 1817, and for that reason is often called the Ricardian model of trade. Comparative advantage and the gains from trade Suppose that one unit of labour can produce 5 bushels of wheat or 10 yards of cloth in England; whereas one unit of labour can produce 100 bushels of wheat or 50 yards of cloth in Canada. These data are shown in Table 2.1 below. table 2.1 Labour’s productivity in England and Canada One unit of labour can produce: Wheat Cloth (bushels) (yards) England Canada 5 100 Opportunity cost of 1 yard of cloth 10 50 ½ a bushel of wheat 2 bushels of wheat Clearly, Canadian labour is more efficient in both industries; so Canada has an absolute advantage in both. But England has a comparative advantage in the production of cloth.

In reality, they will trade using money and they will need to convert English pounds and Canadian dollars at the going exchange rate. What’s to say that the exchange rate will be at the appropriate level such that England’s exports of cloth will just pay for its imports of wheat? Exchange rates are influenced by many things. One of the most important is international flows of capital. When the principle of comparative advantage was discovered by David Ricardo in 1817, these flows of capital were of negligible importance. Now they are a dominant factor. They allow a country like the United States to run increasingly large trade deficits for decades. Beginning at around $200 billion in 1997, these trade deficits ballooned to nearly $1 trillion in 2006.11 That is a lot more imports than exports. No wonder there are persistent complaints in the United States about job loss to Mexico, China and India.

Hourly wage Marginal labour cost Labour supply Minimum wage $10 figure 8.4 Monopsony with minimum wage $9 MRP 4 5 Quantity of workers Monopsony and unions A few texts also explain that a union could offset the market power of the monopsonist. Figure 8.3 shows that the monopsonist could 176 1.6 The returns to capital The distribution of national income between wages on the one hand and interest, profits and rents on the other is known as the ‘functional’ distribution of income. It was a major preoccupation of the classical economists. Indeed, David Ricardo called it ‘the principal problem in Political Economy’ (Glyn 2007). The classical economists explained it using an aggregate production function ­assuming two homogeneous factors of production – labour and capital. This aggregate model is still a key analytical tool in macroeconomics, and while it is largely absent from microeconomics, it does make an occasional cameo appear­ance – for ex­ample, when deriving the production possibility frontier, when explaining the benefits of trade, and when explaining the return to capital – our current concern.


pages: 395 words: 116,675

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

"Robert Solow", affirmative action, Affordable Care Act / Obamacare, Albert Einstein, Alfred Russel Wallace, AltaVista, altcoin, anthropic principle, anti-communist, bank run, banking crisis, barriers to entry, bitcoin, blockchain, Boris Johnson, 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, 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, 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, twin studies, uber lyft, 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: 555 words: 80,635

Open: The Progressive Case for Free Trade, Immigration, and Global Capital by Kimberly Clausing

2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, active measures, Affordable Care Act / Obamacare, agricultural Revolution, battle of ideas, Bernie Sanders, business climate, Capital in the Twenty-First Century by Thomas Piketty, carbon footprint, corporate social responsibility, creative destruction, currency manipulation / currency intervention, David Ricardo: comparative advantage, Donald Trump, floating exchange rates, full employment, gig economy, global supply chain, global value chain, guest worker program, illegal immigration, immigration reform, income inequality, index fund, investor state dispute settlement, knowledge worker, labor-force participation, low skilled workers, Lyft, manufacturing employment, Mark Zuckerberg, meta analysis, meta-analysis, offshore financial centre, open economy, Paul Samuelson, profit motive, purchasing power parity, race to the bottom, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, Silicon Valley, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transfer pricing, uber lyft, winner-take-all economy, working-age population, zero-sum game

These examples rely on comparative advantage rather than absolute advantage; gains from trade occur even when one country is better at everything, as long as its margin of superiority is not the same across all goods. These ideas are familiar to students of introductory economics. The main insights stretch back in time to David Ricardo’s 1817 work, On the Principles of Political Economy and Taxation. The Ricardian theory of trade is an oversimplified theory that neglects how gains from trade are distributed throughout society; this important issue is the topic of the next chapter. Still, the notion of comparative advantage provides powerful insights for understanding how trade affects countries. One of Ricardo’s essential insights is that international trade is not a zero-sum game. This is important to reassert, since the rhetoric of today’s protectionists is not much different from the mercantilists of Ricardo’s time; both hold a common belief that, in international trade, one country’s gain is another country’s loss.

Historically, mercantilists argued that national power and prestige were dependent on a high volume of exports, a low volume of imports, and large stores of precious metals, or treasure. As articulated by East India Company director Thomas Mun, mercantilists seek for the country to sell more to “strangers” than consuming of theirs in value, so that the kingdom accumulates treasure.17 The mercantilist devotion to this doctrine has echoes in today’s debate surrounding the trade deficit. But the logic of David Ricardo’s theory of comparative advantage shows that, by specializing and trading, nations have access to a more diverse, cheaper set of goods. Every country can gain; there need be no losers. Going back to our simple example, when Japan makes cars and trades them for Chinese bicycles, both China and Japan end up with more products than if they each tried to make both products themselves. In addition to showing the gains from trade, these simple theories show how high-wage countries can compete.

However, it is easy to show that if Karen spends all her time hunting and Peter spends all his time gathering, the household will have more of both products then if they did not specialize.16 Similar reasoning suggests that the college president should not shelve library books, even if she is better at shelving than anyone on the library staff. Her comparative advantage likely lies in fund-raising or management, where her skill superiority is even larger. The college will have more resources if she devotes her time toward these ends, and the books are shelved by someone else. Exactly the same logic applies to countries. Imagine Japan is better at car production than China, in that Japanese workers make more four times more cars per year than their Chinese counterparts, and Japanese workers can also make bicycles with twice the speed of their Chinese counterparts. If Japan specializes in cars, and China in bicycles, then both countries can have more of both goods through international trade. These examples rely on comparative advantage rather than absolute advantage; gains from trade occur even when one country is better at everything, as long as its margin of superiority is not the same across all goods.


Work in the Future The Automation Revolution-Palgrave MacMillan (2019) by Robert Skidelsky Nan Craig

3D printing, Airbnb, algorithmic trading, Amazon Web Services, anti-work, artificial general intelligence, autonomous vehicles, basic income, business cycle, cloud computing, collective bargaining, correlation does not imply causation, creative destruction, data is the new oil, David Graeber, David Ricardo: comparative advantage, deindustrialization, deskilling, disintermediation, Donald Trump, Erik Brynjolfsson, feminist movement, Frederick Winslow Taylor, future of work, gig economy, global supply chain, income inequality, informal economy, Internet of things, Jarndyce and Jarndyce, Jarndyce and Jarndyce, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, John von Neumann, Joseph Schumpeter, knowledge economy, Loebner Prize, low skilled workers, Lyft, Mark Zuckerberg, means of production, moral panic, Network effects, new economy, off grid, pattern recognition, post-work, Ronald Coase, Second Machine Age, self-driving car, sharing economy, Steve Jobs, strong AI, technoutopianism, The Chicago School, The Future of Employment, the market place, The Nature of the Firm, The Wealth of Nations by Adam Smith, Thorstein Veblen, Turing test, Uber for X, uber lyft, universal basic income, wealth creators, working poor

What do the long run data of population growth, employment growth, hours of work, earnings per hour worked since the industrial revolution tell us? What do they actually show? Most people treat the Luddite fear of net job loss as a prediction that turned out wrong, but why they were wrong and how wrong were they? Given careful ceteris paribus conditions, the Luddites were correct, as indeed David Ricardo recognised in his essay ‘On Machinery’. According to a recent McKinsey Global Institute report, 50% of time spent on human work activities in the global economy could, theoretically, be automated today, though the current trend suggests a maximum of 30% by 2030, depending on speed. However, estimates of jobs at risk tell one nothing about net job outcomes. The most widely held view is that there will be net job losses, or tech­ nological employment, but these will be temporary or transitional.

As Lenin was to put it with his customary bluntness: under communism Kto ne rabotaet, tot ne est: ‘Who does not work shall not eat’. By the same token though, any reduction in this cost by the use of machinery opened up a brighter future: more output and therefore more money for less effort. The increase and improvement of machinery was inextricably linked both to the denial of satisfaction in work and to the promise of more and better consumption. Economists unanimously welcomed the dawn of the machine age. As David Ricardo explained in the first edition of his Principles of Political Economy and Taxation (1817): If, by improved machinery, with the employment of the same quantity of labour, the quantity of stockings could be quadrupled, and the demand for stockings were only doubled, some labourers would necessarily be discharged from the stocking trade; but as the capital which employed them was still in being, and as it was the interest of those who had it to employ it productively, it appeared to me that it would be employed on the production of some other commodity useful to society, for which there could not fail to be a demand; for I was, and am, deeply impressed with the truth of the observation by Adam Smith, that ‘the desire for food is limited in every man by the narrow capacity of the human stomach, but the desire of the conveniences and ornaments of building, dress, equipage, and household furniture, seems to me to have no limit’ And, then, as it appeared to me that there would be the same demand for labour as before, and that wages would be no lower, I thought that the labouring class would, equally with the other classes, participate in the advantage, from the general cheapness of commodities arising from the use of machinery.4 4 Principles, 3rd ed., ed.

Collective Capabilities to Innovate Finally, the concept of social capabilities is discussed to explain the important role of societies in driving diversification and the transition into the Golden Age, and the empirical observation that countries differ significantly in their patterns and pace of innovations, and thus, in their net-­ jobs creation. Mainstream economic literature highlights differences in factor endowment, productive capacity, industrial structure and comparative advantages in explaining differences across countries as these factors determine cost structures and, therefore, which technologies and products are profitable. However, the more fundamental issue is what enables a society to create those institutions that allow labour markets to adjust to disruptive impact of process innovations, to mobilize creativity and entrepreneurial spirit, develop new products, industries and jobs, and to effectively trigger and manage economic transition.


pages: 280 words: 74,559

Fully Automated Luxury Communism by Aaron Bastani

"Robert Solow", autonomous vehicles, banking crisis, basic income, Berlin Wall, Bernie Sanders, Bretton Woods, capital controls, cashless society, central bank independence, collapse of Lehman Brothers, computer age, computer vision, David Ricardo: comparative advantage, decarbonisation, dematerialisation, Donald Trump, double helix, Elon Musk, energy transition, Erik Brynjolfsson, financial independence, Francis Fukuyama: the end of history, future of work, G4S, housing crisis, income inequality, industrial robot, Intergovernmental Panel on Climate Change (IPCC), Internet of things, Isaac Newton, James Watt: steam engine, Jeff Bezos, job automation, John Markoff, John Maynard Keynes: technological unemployment, Joseph Schumpeter, Kevin Kelly, Kuiper Belt, land reform, liberal capitalism, low earth orbit, low skilled workers, M-Pesa, market fundamentalism, means of production, mobile money, more computing power than Apollo, new economy, off grid, pattern recognition, Peter H. Diamandis: Planetary Resources, post scarcity, post-work, price mechanism, price stability, private space industry, Productivity paradox, profit motive, race to the bottom, RFID, rising living standards, Second Machine Age, self-driving car, sensor fusion, shareholder value, Silicon Valley, Simon Kuznets, Slavoj Žižek, stem cell, Stewart Brand, technoutopianism, the built environment, the scientific method, The Wealth of Nations by Adam Smith, Thomas Malthus, transatlantic slave trade, Travis Kalanick, universal basic income, V2 rocket, Watson beat the top human players on Jeopardy!, Whole Earth Catalog, working-age population

Aristotle 4 Full Automation: Post-Scarcity in Labour Productivity is for robots. Kevin Kelly When Capital Becomes Labour In 2011 the Economist, in circulation since 1843, posed its readers a question: ‘What happens when … machines are smart enough to become workers? In other words, when capital becomes labour?’ While early giants of classical political economy, such as Adam Smith and David Ricardo, did not view capitalist society as defined by conflict between classes, they did presume that labour would always remain distinct from ‘capital stock’, and that workers could never equate to human-made goods used in production such as machinery, tools and buildings. Yet nearly 250 years after Smith wrote The Wealth of Nations, the publication most committed to defending his legacy was now uncertain whether one of the central premises of his thinking would endure for much longer.

The information it expresses is the value of all economic transactions within a fixed period of time, usually a year. That is, all the goods and services that are produced, sold and purchased. Given its centrality in any discussion of what kind of economic model is preferable, it’s easy to presume that the idea of GDP is as old as capitalism itself – that it was perhaps contrived by the likes of Adam Smith or David Ricardo. Yet to the contrary, it is a relatively recent development, devised by the economist Simon Kuznets in the 1930s in response to the Great Depression. It turns out that the central imperative of modern societies – that economic growth should be pursued as an end in itself – only started to reign supreme a century and a half after the Second Disruption began. Perhaps even more surprising is that scepticism of it is almost as old as the measure itself.

Because it turns out that under the Third Disruption it isn’t just information and labour which want to be free – it’s energy, too. 6 Mining the Sky: Post-Scarcity in Resources The Earth is a crumb in a supermarket filled with resources. Peter Diamandis A Finite World The issue of resource scarcity and depletion is, alongside climate change, one of the central challenges of our age. While the sun may furnish us with more energy than we can possibly use, minerals like lithium and cobalt – needed to store solar energy in any post-carbon system – are ultimately limited. Which means that for any comparative advantages renewable energy does possess, it ultimately suffers the same problem as fossil fuels: ours is a finite world and we are fast approaching its limits. Regardless of the experience curve for solar cells, LEDs and lithium-ion batteries, without more minerals to build them, our future will still be one defined by scarcity. Regardless of where our energy comes from, the problem of diminishing resources is now more pressing than ever.


pages: 470 words: 130,269

The Marginal Revolutionaries: How Austrian Economists Fought the War of Ideas by Janek Wasserman

Albert Einstein, American Legislative Exchange Council, anti-communist, battle of ideas, Berlin Wall, Bretton Woods, business cycle, collective bargaining, Corn Laws, correlation does not imply causation, creative destruction, David Ricardo: comparative advantage, different worldview, Donald Trump, experimental economics, Fall of the Berlin Wall, floating exchange rates, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, Gunnar Myrdal, housing crisis, Internet Archive, invisible hand, John von Neumann, Joseph Schumpeter, laissez-faire capitalism, liberal capitalism, market fundamentalism, mass immigration, means of production, Menlo Park, Mont Pelerin Society, New Journalism, New Urbanism, old-boy network, Paul Samuelson, Philip Mirowski, price mechanism, price stability, RAND corporation, random walk, rent control, road to serfdom, Robert Bork, rolodex, Ronald Coase, Ronald Reagan, Silicon Valley, Simon Kuznets, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Thomas Malthus, trade liberalization, union organizing, urban planning, Vilfredo Pareto, Washington Consensus, zero-sum game, éminence grise

Even if Menger and the other marginalists saw their work as groundbreaking, a gradualist picture better characterizes the social scientific landscape.21 At the turn of the nineteenth century, political economy developed rapidly, primarily under the influence of Scottish and English scholars such as Adam Smith, Thomas Malthus, and David Ricardo. Their work introduced a new level of abstraction and theorization to questions of trade, industry, and exchange. These classical economists sought to explain the fundamental principles of human interaction: how human self-interest benefited society, how the division of labor led to greater productivity and wealth, how competition in the marketplace ensured the best prices and outcomes for producers and consumers. They pursued universal laws, emulating the natural sciences. They also looked to mathematics to formalize their work. This process reached its apotheosis with Ricardo, who offered rigorous models of comparative advantage and theories of rent and wages. While nineteenth-century economists still had much to discover, many areas generated consensus.

Haberler was born to a well-to-do Austrian bureaucratic family with connections to the aristocracy in Liechtenstein, and his early work defended the gold standard and cast a jaundiced eye at index numbers, early statistical measures used to quantify the economy. Inspired by the Geist-Kreis, Haberler argued that spirit, or Geist, rather than statistical regularities, were at the core of economic activity and social science. He defended free trade using David Ricardo’s idea of comparative advantage and insisted that markets be allowed to self-correct after a downturn. This meant lower tariffs and lower wages and more international trade. People, goods, and capital all had to flow as if borders did not exist if worldwide conditions were to improve.19 By the mid-1930s, Haberler was probably the best-regarded member of the younger Austrian School, yet he had begun to modify his positions.

Understanding these interactions may permit us to change our world for the better. 1 THE PREHISTORY AND EARLY YEARS OF THE AUSTRIAN SCHOOL In the orthodox telling of the Austrian School story, in the beginning was Carl Menger: “In 1871 Carl Menger founded the Austrian School in Vienna with his pathbreaking Principles of Economics.”1 His Principles offered a significant reformulation of core economic concepts like value, price, and production, contributing to an incipient transformation in economics called the marginal revolution. Alongside French, English, and American scholars, the Viennese thinker overturned a century of received wisdom from “classical” political economists such as Adam Smith and David Ricardo. In Vienna, Menger spawned a movement with his words. Historians of economic thought have noted, however, that an Austrian School of economics did not spring fully formed from Menger’s mind or from the pages of Principles. In fact, Principles was poorly distributed, found a limited readership, received middling reviews, and played a minor role in the vibrant economic discussions of the 1870s.


pages: 420 words: 124,202

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

"Robert Solow", 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, James Hargreaves, James Watt: steam engine, John Harrison: Longitude, Joseph Schumpeter, Joseph-Marie Jacquard, knowledge economy, moral hazard, Network effects, Panopticon Jeremy Bentham, 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?


pages: 192

Kicking Awaythe Ladder by Ha-Joon Chang

Asian financial crisis, business cycle, central bank independence, clean water, colonial rule, Corn Laws, corporate governance, creative destruction, David Ricardo: comparative advantage, fear of failure, income inequality, income per capita, joint-stock company, joint-stock limited liability company, land reform, liberal world order, moral hazard, open economy, purchasing power parity, rent-seeking, short selling, Simon Kuznets, The Wealth of Nations by Adam Smith, trade liberalization, Washington Consensus

In its quest for this Liberal world order, Britain's ultimate weapon was its economic success based on a free-market/free-trade system; this made other countries realize the limitations of their mercantilist policies and start to adopt free (or at least freer) trade from around 1860. However, Britain was also greatly helped in its project by the works of its classical economists such as Adam Smith and David Ricardo, who theoretically proved the superiority of laissez-faire policy, in particular free trade. According to Willy de Clercq, the European Commissioner for External Economic Relations during the early days of the Uruguay Round (1985-9): Only as a result of the theoretical legitimacy of free trade when measured against widespread mercantilism provided by David Ricardo, John Stuart Mill and David Hume, Adam Smith and others from the Scottish Enlightenment, and as a consequence of the relative stability provided by the UK as the only and relatively benevolent superpower or hegemon during the second half of the nineteenth century, was free trade able to flourish for the first time [in the late nineteenth century].2 This Liberal world order, perfected around 1870, was based on: laissezfaire industrial policies at home; low barriers to the international flows of goods, capital and labour; and the macroeconomic stability, both nationally and internationally, which was guaranteed by the Gold Standard and the principle of balanced budgets.

Second, some manufacturing activities were outlawed. For example, the construction of new rolling and slitting steel mills in America was outlawed, which forced the Americans to specialize in the low-valueadded pig and bar iron, rather than high-value-added steel products.207 Some historians argue that this kind of policy did not actually damage the US economy significantly at the time, as the country did not have comparative advantage in manufacturing.208 It seems reasonable to argue, however, that such policy would have become a major obstacle, if not an insurmountable barrier, to US industrial development if the country had remained a British colony beyond the early (mainly agrarian and commercial) stages of development.209 Third, exports from the colonies that competed with British products were banned. We have already mentioned that the cotton textile industry of India was dealt a heavy blow in the eighteenth century by the British ban on cotton textile imports from India ('calicoes'), even when the latter's products were superior to the British ones (see section 2.2.1 above).210 Another example of this came in 1699, when Britain banned the export of woollen cloth from its colonies to other countries (the Wool Act), essentially destroying the Irish woollen industry.


pages: 772 words: 203,182

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 cycle, business process, buy and hold, 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, disruptive innovation, 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, 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, Social Responsibility of Business Is to Increase Its Profits, 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.


pages: 223 words: 10,010

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

"Robert Solow", 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 cycle, 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, Everybody Ought to Be Rich, 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.


pages: 470 words: 148,730

Good Economics for Hard Times: Better Answers to Our Biggest Problems by Abhijit V. Banerjee, Esther Duflo

"Robert Solow", 3D printing, affirmative action, Affordable Care Act / Obamacare, Airbnb, basic income, Bernie Sanders, business cycle, call centre, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, charter city, correlation does not imply causation, creative destruction, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, decarbonisation, Deng Xiaoping, Donald Trump, Edward Glaeser, en.wikipedia.org, endowment effect, energy transition, Erik Brynjolfsson, experimental economics, experimental subject, facts on the ground, fear of failure, financial innovation, George Akerlof, high net worth, immigration reform, income inequality, Indoor air pollution, industrial cluster, industrial robot, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), Jane Jacobs, Jean Tirole, Jeff Bezos, job automation, Joseph Schumpeter, labor-force participation, land reform, loss aversion, low skilled workers, manufacturing employment, Mark Zuckerberg, mass immigration, Network effects, new economy, New Urbanism, non-tariff barriers, obamacare, offshore financial centre, open economy, Paul Samuelson, place-making, price stability, profit maximization, purchasing power parity, race to the bottom, RAND corporation, randomized controlled trial, Richard Thaler, ride hailing / ride sharing, Robert Gordon, Ronald Reagan, school choice, Second Machine Age, secular stagnation, self-driving car, shareholder value, short selling, Silicon Valley, smart meter, social graph, spinning jenny, Steve Jobs, technology bubble, The Chicago School, The Future of Employment, The Market for Lemons, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, total factor productivity, trade liberalization, transaction costs, trickle-down economics, universal basic income, urban sprawl, very high income, War on Poverty, women in the workforce, working-age population, Y2K

Wouldn’t China simply swamp all markets with its products, leaving other countries with nothing to show for themselves? David Ricardo argued in 1817 that even if China (or in his era, Portugal) was more productive at everything, it could not possibly sell everything, because then the buyer country would sell nothing and would have no money to buy anything from China or anywhere else.7 This implied that not all industries in nineteenth-century England would shrink if there was free trade. It was then evident that if any industries in England were to shrink because of international trade, it should be the least productive ones. Based on this argument, Ricardo concluded that even if Portugal was more productive than England at producing both wine and cloth, once trade between them opened up, they would nonetheless end up specializing in the product for which they had a comparative advantage (meaning where their productivity was high relative to their productivity in the other sector: wine for Portugal, cloth for England).

Thirty-three percent agreed.3 But, more generally, the sentiment seems to be, both on the right and on the left, that the United States is too open to goods from other countries. Fifty-four percent of our respondents agreed that using higher tariffs to encourage producers to produce in the US would be a good idea. Only 25 percent disagreed. Economists mostly talk about the gains of trade. The idea that free trade is beneficial is one of the oldest propositions in modern economics. As the English stockbroker and member of Parliament David Ricardo explained two centuries ago, since trade allows each country to specialize in what it does best, total income ought to go up everywhere when there is trade, and as a result the gains to winners from trade must exceed the losses to losers. The last two hundred years have given us a chance to refine this theory, but it is a rare economist who fails to be compelled by its essential logic. Indeed, it is so rooted in our culture that we sometimes forget the case for free trade is by no means self-evident.

THE PAINS FROM TRADE 1 “Steel and Aluminum Tariffs,” Chicago Booth, IGM Forum, 2018, http://www.igmchicago.org/surveys/steel-and-aluminum-tariffs. 2 “Import Duties,” Chicago Booth, IGM Forum, 2016, http://www.igm chicago.org/surveys/import-duties. 3 Abhijit Banerjee, Esther Duflo, and Stefanie Stantcheva, “Me and Everyone Else: Do People Think Like Economists?,” MIMEO, Massachusetts Institute of Technology, 2019. 4 Ibid. 5 The Collected Scientific Papers of Paul A. Samuelson, vol. 3 (Cambridge, MA: MIT Press, 1966), 683. 6 Ibid. 7 David Ricardo, On the Principles of Political Economy and Taxation (London: John Murray, 1817). 8 Paul A. Samuelson and William F. Stolper, “Protection and Real Wages,” Review of Economic Studies 9, no. 1 (1941), 58–73. 9 P. A. Samuelson, “The Gains from International Trade Once Again,” Economic Journal 72, no. 288 (1962): 820–29, DOI: 10.2307/2228353. 10 John Keats, “Ode on a Grecian Urn,” in The Complete Poems of John Keats, 3rd ed.


pages: 72 words: 21,361

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

"Robert Solow", Amazon Mechanical Turk, Any sufficiently advanced technology is indistinguishable from magic, autonomous vehicles, business cycle, 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, 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: 497 words: 144,283

Connectography: Mapping the Future of Global Civilization by Parag Khanna

"Robert Solow", 1919 Motor Transport Corps convoy, 2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, 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, disruptive innovation, diversification, Doha Development Round, edge city, Edward Snowden, Elon Musk, energy security, Ethereum, 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, LNG terminal, low cost airline, low cost carrier, low earth orbit, 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.


pages: 482 words: 149,351

The Finance Curse: How Global Finance Is Making Us All Poorer by Nicholas Shaxson

activist fund / activist shareholder / activist investor, Airbnb, airline deregulation, anti-communist, bank run, banking crisis, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, Blythe Masters, Boris Johnson, Bretton Woods, British Empire, business climate, business cycle, capital controls, carried interest, Cass Sunstein, Celtic Tiger, central bank independence, centre right, Clayton Christensen, cloud computing, corporate governance, corporate raider, creative destruction, Credit Default Swap, cross-subsidies, David Ricardo: comparative advantage, demographic dividend, Deng Xiaoping, desegregation, Donald Trump, Etonian, failed state, falling living standards, family office, financial deregulation, financial innovation, forensic accounting, Francis Fukuyama: the end of history, full employment, gig economy, Gini coefficient, global supply chain, high net worth, income inequality, index fund, invisible hand, Jeff Bezos, Kickstarter, land value tax, late capitalism, light touch regulation, London Whale, Long Term Capital Management, low skilled workers, manufacturing employment, Mark Zuckerberg, Martin Wolf, Mont Pelerin Society, moral hazard, neoliberal agenda, Network effects, new economy, Northern Rock, offshore financial centre, old-boy network, out of africa, Paul Samuelson, plutocrats, Plutocrats, Ponzi scheme, price mechanism, purchasing power parity, pushing on a string, race to the bottom, regulatory arbitrage, rent-seeking, road to serfdom, Robert Bork, Ronald Coase, Ronald Reagan, shareholder value, sharing economy, Silicon Valley, Skype, smart grid, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, sovereign wealth fund, special economic zone, Steve Ballmer, Steve Jobs, The Chicago School, Thorstein Veblen, too big to fail, transfer pricing, wealth creators, white picket fence, women in the workforce, zero-sum game

In it he declared, ‘The growing obsession in most advanced nations with national competitiveness should be seen, not as a well-founded concern, but as a view held in the face of overwhelming contrary evidence. And yet it is clearly a view that people very much want to hold.’ Krugman raked through various things ‘national competitiveness’ might possibly mean: trade surplus, terms of trade, labour costs, David Ricardo’s (very different) concept of comparative advantage, or simply the question of national power and global economic heft. He concluded that – being as charitable as possible – the concept boiled down to ‘a funny way of talking about productivity’. Not relative to other countries, mind, just plain old productivity. ‘If we can teach undergraduates to wince when they hear someone talk about “competitiveness”, we will have done our nation a great service,’ he continued.

This is where the finance curse concept comes back into play: if too much finance reduces economic growth and causes other damage to your country, then the pursuit of more finance through policies that follow that agenda will most likely make things worse. Language has proved a fabulous tool for bamboozlement here. One is the standard confusion that conflates the market competitiveness of firms and the ‘competitiveness’ of nations: two very different things. Others think it is something to do with the nineteenth-century British economist David Ricardo’s similar-sounding, but very different, concept of ‘comparative advantage’ – a concept that suggests that a country should focus on nurturing its most productive strengths and trade with other nations to import the goods and services in sectors where it is relatively weaker. Or take the very British idea of ‘UK plc’ – a term that reimagines the whole economy as a business. This is wielded to tremendous rhetorical effect to show that there is a ‘need’ to make ‘tough choices’ and cut back health, education and disability benefits, in order to free up the resources to help ‘our’ giants compete on a world stage.

This looks at the substantial academic literature which followed Tiebout, is somewhat sympathetic to the idea of ‘Tiebout sorting’ but also outlines several other weaknesses in the original model. 3 Britain’s Second Empire 1. See for instance Ha-Joon Chang, Economics, especially the sections ‘Britain: the pioneer of protectionism’ and ‘The United States: Champion of protectionism’, pp.61–4. See also Dani Rodrik’s Straight Talk on Trade: Ideas for a Sane World Economy, Princeton Press, 2017, especially p.210, which draws the distinction between the two main arguments for trade: first, David Ricardo’s that trade encourages specialisation and efficiency and delivers benefits through imports; second, the mercantilist position – that the benefits come from exports creating jobs. 2. For a country with such a large financial centre relative to its population, Britain has nearly the lowest rate of investment among large industrial economies. See for instance ‘Time for Change: A New Vision for the British Economy, Interim Report of the IPPR Commission on Economic Justice’, Institute for Public Policy Research, 2017, pp.37–9.


pages: 339 words: 95,270

Trade Wars Are Class Wars: How Rising Inequality Distorts the Global Economy and Threatens International Peace by Matthew C. Klein

Albert Einstein, Asian financial crisis, asset allocation, asset-backed security, Berlin Wall, Bernie Sanders, Branko Milanovic, Bretton Woods, British Empire, business climate, business cycle, capital controls, centre right, collective bargaining, currency manipulation / currency intervention, currency peg, David Ricardo: comparative advantage, deglobalization, deindustrialization, Deng Xiaoping, Donald Trump, Double Irish / Dutch Sandwich, Fall of the Berlin Wall, falling living standards, financial innovation, financial repression, fixed income, full employment, George Akerlof, global supply chain, global value chain, illegal immigration, income inequality, intangible asset, invention of the telegraph, joint-stock company, land reform, Long Term Capital Management, Malcom McLean invented shipping containers, manufacturing employment, Martin Wolf, mass immigration, Mikhail Gorbachev, money market fund, mortgage debt, New Urbanism, offshore financial centre, oil shock, open economy, paradox of thrift, passive income, reserve currency, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, Scramble for Africa, sovereign wealth fund, The Nature of the Firm, The Wealth of Nations by Adam Smith, Tim Cook: Apple, trade liberalization, Wolfgang Streeck

As Smith put it back in 1776, “It is the maxim of every prudent master of a family never to attempt to make at home what it will cost him more to make than to buy. . . . If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry employed in a way in which we have some advantage” rather than pay extra for a locally made version.3 David Ricardo was born half a century after Smith. Whereas Smith was a Scottish academic moral philosopher, Ricardo was a Jewish financier who had become so wealthy after betting correctly on the outcome of the Battle of Waterloo that he was able to buy a seat in Parliament. After reading Wealth of Nations, Ricardo decided to spend his leisure time writing about economics and published On the Principles of Political Economy and Taxation in 1817.

Kenneth Austin, “Communist China’s Capitalism: The Highest Stage of Capitalist Imperialism,” World Economics, January–March 2011, 79–94. ONE From Adam Smith to Tim Cook 1. Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, 2 vols., ed. Edwin Cannan (London: Methuen, 1904), vol. 1, bk. 1, chap. 1, available at https://oll.libertyfund.org/. 2. R. H. Coase, “The Nature of the Firm,” Economica 4, no. 16 (November 1937): 386–405. 3. Smith, Wealth of Nations, vol. 1, bk. 4, chap. 2. 4. David Ricardo, On the Principles of Political Economy and Taxation, 3rd ed. (London: John Murray, 1821), chaps. 7, 27, available at https://oll.libertyfund.org/. 5. Ricardo, Principles, chap. 7. 6. Cameron Hewitt, “Brits on the Douro: A Brief History of Port,” Rick Steves’ Europe, https://www.ricksteves.com/watch-read-listen/read/articles/the-history-of-port. 7. Ricardo, Principles, chap. 7. 8. “President’s Address to Both Houses of Congress,” Annals of Congress, 1st Cong., 2d sess., January 8, 1790. 9.

Under the right conditions, the new United States could transform itself into a manufacturing superpower—but those conditions needed to be created by a strong state to encourage the market to create the right sort of manufacturing capacity. Hamilton’s insight was that countries could only capture the productivity gains from the division of labor by rejecting the concept at the international level. The benefits of internal economic diversity were incompatible with national specialization. It was a rebuttal to Ricardo before the theory of comparative advantage had even been written. Hamilton admitted that Americans might want to focus on farming in a world with perfect free trade and zero regulations. He was quick to point out, however, that in the real world, “the United States cannot exchange with Europe on equal terms.” American exports were discriminated against even though the United States levied few tariffs on imports. The difference in treatment stemmed from the fact that Europeans did not depend on American farm output the way that Americans depended on European manufactures.


pages: 414 words: 101,285

The Butterfly Defect: How Globalization Creates Systemic Risks, and What to Do About It by Ian Goldin, Mike Mariathasan

"Robert Solow", air freight, Andrei Shleifer, Asian financial crisis, asset-backed security, bank run, barriers to entry, Basel III, Berlin Wall, Bretton Woods, BRICs, business cycle, butterfly effect, clean water, collapse of Lehman Brothers, collateralized debt obligation, complexity theory, connected car, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deglobalization, Deng Xiaoping, discovery of penicillin, diversification, diversified portfolio, Douglas Engelbart, Douglas Engelbart, Edward Lorenz: Chaos theory, energy security, eurozone crisis, failed state, Fellow of the Royal Society, financial deregulation, financial innovation, financial intermediation, fixed income, Gini coefficient, global pandemic, global supply chain, global value chain, global village, income inequality, information asymmetry, Jean Tirole, John Snow's cholera map, Kenneth Rogoff, light touch regulation, Long Term Capital Management, market bubble, mass immigration, megacity, moral hazard, Occupy movement, offshore financial centre, open economy, profit maximization, purchasing power parity, race to the bottom, RAND corporation, regulatory arbitrage, reshoring, Silicon Valley, six sigma, Stuxnet, supply-chain management, The Great Moderation, too big to fail, Toyota Production System, trade liberalization, transaction costs, uranium enrichment

Ian Goldin and Tiffany Vogel, 2010, “Global Governance and Systemic Risk in the 21st Century: Lessons from the Financial Crisis,” Global Policy 1 (1): 4–15. INTRODUCTION 1. We are most grateful to an anonymous referee for suggesting this introduction for the book. 2. See David Ricardo, 1817, On the Principles of Political Economy, and Taxation (London: John Murray). Ricardo argued that two countries should specialize in producing goods and services in which they have a comparative advantage in terms of labor productivity. This amounts to saying that two parties should produce whichever goods or services have the lower marginal or opportunity costs in relation to others. Ricardo’s theory of comparative advantage shows that as long as the parties specialize according to their relative efficiencies, they will both benefit from trade—even if one party has an absolute efficiency advantage in producing the goods and services traded.

To politicians, local concerns may often appear more important than global developments. Foreigners do not share a common history, background, or nationality, and laws, borders, and other restrictions separate global citizens. But whether we live in Manhattan, Moscow, or Mumbai, we are connected by an increasingly dense and complex web of overlapping and intertwined links. These are both physical and virtual and have allowed us to take the principle of comparative advantage to levels that David Ricardo could not have imagined when he was writing his path-breaking insights on global development in 1817.2 Although many are critical of globalization, few would deny the gains from integration and exchange. In this book we focus on neglected aspects of accelerated integration, notably the systemic risks that arise from globalization. Following earlier waves of globalization (from about 1820 to 1914 and 1960 to 1980, respectively), the period since around 1990 has been associated with innovative leaps in information and transport technologies—alongside a fundamental reshaping of international politics and the global economy.3 The haphazard development of a range of integrated global relationships and systems—such as those associated with infrastructure, finance, transport, information, economics, and business—means that the context of individual and other choices is constantly widening and becoming more complex.

Had the Icelandic ash cloud not affected 3 of the world’s 10 busiest airports, the cost of the eruption would have been significantly lower. The geographical choices we make when we globalize are, like so many other factors today, sources of uncertainty. GLOBALIZATION: A DOUBLE-EDGED SWORD Advocates of unfettered globalization point to the positive impacts of expanding flows of goods, services, money, people, information, and culture, which enables every one of us to benefit from exploiting our comparative advantage. Yet critics point to the shortcomings of globalization and the dangers associated with this simplistic view. In this book we recognize that globalization is a double-edged sword that can be a force for progress as well as a source of great harm. There are numerous reasons to be concerned about globalization. Our focus is on the systemic risk that is embedded in the current wave of globalization and the complexity it engenders, which give rise to uncertainty and unintended consequences, including the erosion of the responsibilities of individuals and firms.


The State and the Stork: The Population Debate and Policy Making in US History by Derek S. Hoff

"Robert Solow", affirmative action, Alfred Russel Wallace, back-to-the-land, British Empire, business cycle, clean water, creative destruction, David Ricardo: comparative advantage, demographic transition, desegregation, Edward Glaeser, feminist movement, full employment, garden city movement, George Gilder, Gunnar Myrdal, immigration reform, income inequality, income per capita, invisible hand, Jane Jacobs, John Maynard Keynes: technological unemployment, Joseph Schumpeter, labor-force participation, manufacturing employment, mass immigration, New Economic Geography, new economy, old age dependency ratio, Paul Samuelson, peak oil, pensions crisis, profit motive, Ralph Waldo Emerson, road to serfdom, Ronald Reagan, Scientific racism, secular stagnation, Simon Kuznets, The Chicago School, The Wealth of Nations by Adam Smith, Thomas L Friedman, Thomas Malthus, Thorstein Veblen, trickle-down economics, urban planning, urban sprawl, wage slave, War on Poverty, white flight, zero-sum game

Less ambiguously, the Malthusian framework was a pillar of classic economics.71 Indeed, economist Ralph Hess was correct when he wrote nearly a century ago, “A combination of the Malthusian doctrine of population and the Ricardian theory of rent [the economic return to land] constitutes the foundation of modern theories of economic welfare and wealth distribution.”72 Moreover, conservative presumptions about the limited efficacy of social reform are rooted in Malthusian population doctrine. Englishman David Ricardo, the towering figure in classical economics most famous for developing the theory that nations ought to specialize in exports in which they have a “comparative advantage,” challenged Malthus’s late-career work on economic value but extended his basic model of demographically induced scarcity. Ricardo refined the Malthusian formula that workers are doomed to perpetual poverty into an “iron law of wages”: the cost of labor is that which allows workers to survive without either an increase or decrease in their numbers.

And marginal utility characteristically diminishes—that first bunch of cashews is worth more than the second and so forth. The marginalists anticipated the mathematical emphasis of today’s economics by devising new quantitative methods of analyzing the subjective and psychological variables surrounding human decision-making.7 As we have seen, a theory of diminishing returns, espoused most starkly by Malthus and best by his contemporary David Ricardo, was central to classical economics.8 Examining their predominantly nonindustrial world through an agricultural lens, the classical economists observed that newer land brought under cultivation yields less than older and better land—diminishing returns to a factor of production, often shortened to simply diminishing returns. From this land-based observation, they extrapolated a more general principle that ramping up any economic activity leads to increasingly smaller gains in production—diminishing returns to scale.9 the birth of the modern population debate 47 The economists who launched marginalism, however, were of mixed minds on the theories of diminishing returns and diminishing returns to scale.

Sherwood, “Engels, Marx, Malthus, and the Machine,” American Historical Review 90 (October 1985): 842. 71. I flatten a complicated and uneven process. Ricardo struggled with Malthus’s theories, especially those regarding the nature of rent and surplus—and his friendly critique of them identified virtually all of the key issues in the classical theoretical tradition. See The Works and Correspondence of David Ricardo, ed. Piero Sraffa with the collaboration of M. H. Dobb (Cambridge: Cambridge University Press, 1951), esp. vol. 1, On the Principles of Political Economy and Taxation (reprint of 3d, 1821 edition), chap. 32, and vol. 2, Notes on Malthus. Marx—who must be regarded as a classical economist—had nothing but contempt for Malthus. 72. Ralph H. Hess, “Conservation in its Relation to Industrial Evolution” (chap. 1 of his “Conservation and Economic Theory” section), in The Foundations of National Prosperity: Studies in the Conservation of Permanent Natural Resources, ed.


pages: 767 words: 208,933

Liberalism at Large: The World According to the Economist by Alex Zevin

activist fund / activist shareholder / activist investor, affirmative action, anti-communist, Asian financial crisis, bank run, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business climate, business cycle, capital controls, centre right, Chelsea Manning, collective bargaining, Columbine, Corn Laws, corporate governance, corporate social responsibility, creative destruction, credit crunch, David Ricardo: comparative advantage, debt deflation, desegregation, disruptive innovation, Donald Trump, Edward Snowden, failed state, Fall of the Berlin Wall, financial deregulation, financial innovation, Francis Fukuyama: the end of history, full employment, Gini coefficient, global supply chain, hiring and firing, imperial preference, income inequality, interest rate derivative, invisible hand, John von Neumann, Joseph Schumpeter, Julian Assange, Khartoum Gordon, land reform, liberal capitalism, liberal world order, light touch regulation, Long Term Capital Management, market bubble, Martin Wolf, means of production, Mikhail Gorbachev, Monroe Doctrine, Mont Pelerin Society, moral hazard, Naomi Klein, new economy, New Journalism, Norman Macrae, Northern Rock, Occupy movement, Philip Mirowski, plutocrats, Plutocrats, price stability, quantitative easing, race to the bottom, railway mania, rent control, rent-seeking, road to serfdom, Ronald Reagan, Rosa Parks, Snapchat, Socratic dialogue, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, trade liberalization, trade route, unbanked and underbanked, underbanked, unorthodox policies, upwardly mobile, War on Poverty, WikiLeaks, Winter of Discontent, Yom Kippur War, young professional

I, p. 27. 14.League Circular, No. 7, July 1839, p. 6. 15.J. R. McCulloch, The Literature of Political Economy: A Classified Catalogue, London 1845, p. 80. 16.‘How few of us there were, who, five years ago, believed that, in seeking repeal, we were also seeking the benefit of the agriculturalists!’ Richard Cobden, Speeches on Questions of Public Policy, London 1870, Vol. II, p. 98. 17.Wilson, Influences of the Corn Laws, p. 95. 18.David Ricardo, Works of David Ricardo, eds. Pierro Sraffa and M. H. Dobb, Vol. IV, Cambridge 1951, p. 197. 19.Ibid., 17–18, 37. There was a religious, millenarian dimension to Wilson’s conception of free trade. Its optimism about economic growth, however, was a departure from evangelical expectations: see Hilton, The Age of Atonement, pp. 54, 69, 246–47. 20.Wilson sympathized. ‘Sweets once tasted, advantages once enjoyed, are not easy to relinquish.’

After a year at an Essex seminary he wrote home to his parents, ‘I would rather be the most menial servant in my father’s mill than be a teacher.’ He and his older brother were apprenticed instead to a hatmaker, a business their father eventually bought them. It was during this period, from ages sixteen to nineteen, that Wilson seems to have read most of the authors on whom he would later draw as editor. Adam Smith, James Mill, Thomas Tooke, David Ricardo and the Frenchman Jean-Baptiste Say supplied a mix of moral philosophy and political economy.8 The title he later chose for his paper indicates how far these fields of inquiry overlapped. ‘Economist’ had yet to acquire its modern meaning; its sense was ‘the economizer’, he who does not waste money and manages resources efficiently. Wilson was a talented economizer. Walter Bagehot described his approach to intellectual matters in a memorial.

‘I think you have lost sight of one gain to the aristocratic land-lords … the political power arising out of the present state of their tenantry – and political power in this country has been pecuniary gain.’13 Whatever its flaws, however, the pamphlet proved strategically invaluable. The League and the Leeds Mercury (a leading voice of provincial Whiggism) reprinted it. Cobden praised Wilson for ‘labouring to prove to the Landlords that they may safely do justice to others without endangering their own interests.’14 J. R. McCulloch, the chief disciple of David Ricardo, called it ‘one of the best and most reasonable of the late tracts in favour of unconditional repeal’.15 It was even quoted by certain Tories, then the party of protection, including the prime minister Sir Robert Peel. Such was its power to transform debate and attract formerly committed foes of free trade in the countryside that, for a time, even Cobden adopted its language. ‘I am afraid, if we must confess the truth, that most of us entered upon this struggle with the belief that we had some distinct class interest in the question, and that we should carry it by a manifestation of our will’, he told a Manchester crowd in 1843.


Hopes and Prospects by Noam Chomsky

"Robert Solow", Albert Einstein, banking crisis, Berlin Wall, Bretton Woods, British Empire, capital controls, colonial rule, corporate personhood, Credit Default Swap, cuban missile crisis, David Ricardo: comparative advantage, deskilling, en.wikipedia.org, energy security, failed state, Fall of the Berlin Wall, financial deregulation, Firefox, Howard Zinn, Hyman Minsky, invisible hand, liberation theology, market fundamentalism, Martin Wolf, Mikhail Gorbachev, Monroe Doctrine, moral hazard, Nelson Mandela, new economy, nuremberg principles, one-state solution, open borders, Plutonomy: Buying Luxury, Explaining Global Imbalances, Ralph Waldo Emerson, RAND corporation, Ronald Reagan, structural adjustment programs, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, trade liberalization, uranium enrichment, Washington Consensus

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.


pages: 419 words: 109,241

A World Without Work: Technology, Automation, and How We Should Respond by Daniel Susskind

3D printing, agricultural Revolution, AI winter, Airbnb, Albert Einstein, algorithmic trading, artificial general intelligence, autonomous vehicles, basic income, Bertrand Russell: In Praise of Idleness, blue-collar work, British Empire, Capital in the Twenty-First Century by Thomas Piketty, cloud computing, computer age, computer vision, computerized trading, creative destruction, David Graeber, David Ricardo: comparative advantage, demographic transition, deskilling, disruptive innovation, Donald Trump, Douglas Hofstadter, drone strike, Edward Glaeser, Elon Musk, en.wikipedia.org, Erik Brynjolfsson, financial innovation, future of work, gig economy, Gini coefficient, Google Glasses, Gödel, Escher, Bach, income inequality, income per capita, industrial robot, interchangeable parts, invisible hand, Isaac Newton, Jacques de Vaucanson, James Hargreaves, job automation, John Markoff, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, John von Neumann, Joi Ito, Joseph Schumpeter, Kenneth Arrow, Khan Academy, Kickstarter, low skilled workers, lump of labour, Marc Andreessen, Mark Zuckerberg, means of production, Metcalfe’s law, natural language processing, Network effects, Occupy movement, offshore financial centre, Paul Samuelson, Peter Thiel, pink-collar, precariat, purchasing power parity, Ray Kurzweil, ride hailing / ride sharing, road to serfdom, Robert Gordon, Sam Altman, Second Machine Age, self-driving car, shareholder value, sharing economy, Silicon Valley, Snapchat, social intelligence, software is eating the world, sovereign wealth fund, spinning jenny, Stephen Hawking, Steve Jobs, strong AI, telemarketer, The Future of Employment, The Rise and Fall of American Growth, the scientific method, The Wealth of Nations by Adam Smith, Thorstein Veblen, Travis Kalanick, Turing test, Tyler Cowen: Great Stagnation, universal basic income, upwardly mobile, Watson beat the top human players on Jeopardy!, We are the 99%, wealth creators, working poor, working-age population, Y Combinator

It would assuredly bring to them ruin by depriving them of employment, thus making them beggars.”13 Then there is the tragedy of Anton Möller, who had the bad luck to invent the ribbon loom in 1586—bad luck because rather than simply refuse a patent, the city council in his hometown of Danzig is said to have responded to his triumph with an order that he be strangled, hardly the warm reception that we reserve for today’s entrepreneurs.14 But it was not only workers and the state who were anxious. As time passed, economists also started to take the threat of automation seriously. As noted before, it was Keynes who would popularize the term “technological unemployment” in 1930. But David Ricardo, one of the founding fathers of economics, struggled with this issue more than a century before him. In 1817, Ricardo published his great work, Principles of Political Economy and Taxation. Within four years of publication, though, he released a fresh edition with a new chapter, “On Machinery.” In it, he made a significant intellectual concession, declaring that he had changed his mind on the question of whether technological progress would benefit workers.

See Anni Albers, On Weaving (Princeton, NJ: Princeton University Press, 2017), p. 15; and Eric Broudy, The Book of Looms (Hanover, NH: University Press of New England, 1979), p. 146, for two competing accounts of the murder. Others say Möller was drowned in the Vistula River by a rabble of weavers who feared the competition. I first came across this story in Ben Seligman, Most Notorious Victory: Man in an Age of Automation (New York: Free Press, 1966). 15.  The first edition was published in 1817, the third edition, with the new chapter, in 1821. See David Ricardo, Principles of Political Economy and Taxation (New York: Prometheus Books, 1996). 16.  “Automation and Anxiety,” Economist, 25 June 2016; and Louis Stark, “Does Machine Displace Men in the Long Run?,” New York Times, 25 February 1940. 17.  For President Obama’s farewell speech, see Claire Cain Miller, “A Darker Theme in Obama’s Farewell: Automation Can Divide Us,” New York Times, 12 January 2017.

The most influential institutes and think tanks—from the IMF to the World Bank, from the OECD to the International Labour Organization—have relied on it to decide which human endeavors are at risk of automation.34 Mark Carney, the governor of the Bank of England, has echoed it in a warning of a “massacre of the Dilberts”: new technologies, he believes, threaten “routine cognitive jobs” like the one that employs Dilbert, the cubicle-bound comic strip character.35 President Obama similarly warned that roles “that are repeatable” are at particular risk of automation.36 And large companies have structured their thinking around the idea: the investment bank UBS claims that new technologies will “free people from routine work and so empower them to concentrate on more creative, value-added services”; the professional services firm PwC says that “by replacing workers doing routine, methodical tasks, machines can amplify the comparative advantage of those workers with problem-solving, leadership, EQ, empathy, and creativity skills”; and Deloitte, another professional services firm, reports that in the UK “routine jobs at high risk of automation have declined but have been more than made up for by the creation of lower-risk, non-routine jobs.”37 Magazine writers and commentators have also popularized the concept. The Economist, for instance, explains that “what determines vulnerability to automation, experts say, is not so much whether the work concerned is manual or white-collar but whether or not it is routine.”


pages: 151 words: 38,153

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

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.


pages: 603 words: 182,826

Owning the Earth: The Transforming History of Land Ownership by Andro Linklater

agricultural Revolution, anti-communist, Anton Chekhov, Ayatollah Khomeini, Big bang: deregulation of the City of London, British Empire, business cycle, colonial rule, Corn Laws, corporate governance, creative destruction, Credit Default Swap, crony capitalism, David Ricardo: comparative advantage, facts on the ground, Francis Fukuyama: the end of history, full employment, Gini coefficient, Google Earth, income inequality, invisible hand, James Hargreaves, James Watt: steam engine, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kibera, Kickstarter, land reform, land tenure, light touch regulation, market clearing, means of production, megacity, Mikhail Gorbachev, Mohammed Bouazizi, Monkeys Reject Unequal Pay, mortgage debt, Northern Rock, Peace of Westphalia, Pearl River Delta, plutocrats, Plutocrats, Ponzi scheme, profit motive, quantitative easing, Ralph Waldo Emerson, refrigerator car, Right to Buy, road to serfdom, Robert Shiller, Robert Shiller, Ronald Reagan, spinning jenny, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, too big to fail, trade route, transatlantic slave trade, transcontinental railway, ultimatum game, wage slave, WikiLeaks, wikimedia commons, working poor

government posts as property: Owning administrative posts as property did not end until the early nineteenth century. For the life and career of Spencer Perceval, see Andro Linklater, Why Spencer Perceval Had to Die: The Assassination of a Prime Minister (New York and London: Bloomsbury, 2012). The transition was made obvious in: The far-reaching nature of David Ricardo’s theory, most completely advanced in The Principles of Political Economy, and Taxation (1817), of the comparative advantage enjoyed by one means of production over another, where each employs equal quantities of capital and labor, tends to obscure its important context: Ricardian economics is grounded in rural, rather than mercantile, capitalism. His definition of rent as “that portion of the produce of the earth which is paid to the landlord [by the tenant] for the use of the original and indestructible powers of the soil” also applies to industrial production, as do his theories on taxation—that a tax on the economic rent, or unearned increase in value, of land cannot be passed on.

Not only did the landowners use their political dominance to loot communally owned land, but from the mid-eighteenth century they increasingly treated government posts as property that could be mortgaged and inherited: in 1762, the earl of Egmont secured the post of Registrar to the High Court of the Admiralty, a position that paid £12,000 a year and was later passed on to his elder son, Lord Arden. His younger and less fortunate son, the future prime minister Spencer Perceval, only got the job of Surveyor to the Meltings of the Mint, worth a paltry one hundred pounds a year. Almost seamlessly, the three rural divisions passed into the classic structure of free-enterprise business—shareholders, managers, workers. The transition was made obvious in David Ricardo’s Principles of Political Economy and Taxation, his pioneering work in 1817 on the laws of profit and value in a free-enterprise economy. In it he equated the providers of the three basic elements of industrial production—capital, machinery, and labor—with “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.”

There would be an enhanced two-way trade between the colonies and the home country, and where Australia was concerned, the chance of opening up a three-way network exporting cereals to China, Chinese tea to Britain, and British manufactures to Australia. Wakefield’s analysis of the colonies’ economic potential was grounded in the theories of the era’s two preeminent free-market economists, David Ricardo and Thomas Malthus. Ricardo’s theories on profit made it clear that the high price of British property rendered its purchase an inefficient use of capital compared with investing it in cheaper, productive land elsewhere. Malthus’s stark warning of overpopulation focused more closely on the wastage of labor in the unemployed poor: “Increase the demand for agricultural labour by promoting cultivation, and with it consequently increase the produce of the country, and ameliorate the condition of the labourer, and no apprehensions whatever need be entertained of the proportional increase of population.”


pages: 504 words: 126,835

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

"Robert Solow", Airbnb, Albert Einstein, American ideology, asset allocation, autonomous vehicles, barriers to entry, Basel III, Bernie Madoff, bitcoin, Black Swan, blockchain, BRICs, Burning Man, business cycle, 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, laissez-faire capitalism, 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 Rise and Fall of American Growth, 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, uber lyft, 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: 436 words: 76

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

"Robert Solow", Albert Einstein, Asian financial crisis, Barry Marshall: ulcers, Berlin Wall, Big bang: deregulation of the City of London, business cycle, 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, 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 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.


pages: 134 words: 41,085

The Wake-Up Call: Why the Pandemic Has Exposed the Weakness of the West, and How to Fix It by John Micklethwait, Adrian Wooldridge

Admiral Zheng, Affordable Care Act / Obamacare, basic income, battle of ideas, Berlin Wall, Bernie Sanders, Boris Johnson, carried interest, cashless society, central bank independence, Corn Laws, coronavirus, COVID-19, Covid-19, creative destruction, David Ricardo: comparative advantage, Deng Xiaoping, Dominic Cummings, Donald Trump, Etonian, failed state, Fall of the Berlin Wall, global pandemic, Internet of things, invisible hand, Jones Act, knowledge economy, laissez-faire capitalism, McMansion, night-watchman state, offshore financial centre, oil shock, Panopticon Jeremy Bentham, Parkinson's law, pensions crisis, QR code, rent control, road to serfdom, Ronald Reagan, school vouchers, Shoshana Zuboff, Silicon Valley, smart cities, trade route, universal basic income, Washington Consensus

His father, James Mill, was a believer in “liberty,” “reason,” and “effort,” all of which were being frustrated by the establishment—and he raised his son to be “a reformer of the world.”18 John Stuart’s godfather was Jeremy Bentham, who pioneered the utilitarian idea that every institution should be measured by how well it advanced the greatest happiness of the greatest number, and he was surrounded by radicals such as David Ricardo, the economist who invented the notion of “comparative advantage,” and John Wade, the compiler of The Extraordinary Black Book, which listed all the nepotistical abuses of government, rotten boroughs, sinecures, and all. John Stuart Mill’s focus was on ideas, particularly on liberty, the title of his most famous work, though he did spend three years as Liberal MP for Westminster in 1865–68, driving the Tories mad by describing them as “the stupid party.”


Adam Smith: Father of Economics by Jesse Norman

"Robert Solow", active measures, Andrei Shleifer, balance sheet recession, bank run, banking crisis, Basel III, Berlin Wall, Black Swan, Branko Milanovic, Bretton Woods, British Empire, Broken windows theory, business cycle, business process, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, centre right, cognitive dissonance, collateralized debt obligation, colonial exploitation, Corn Laws, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, David Brooks, David Ricardo: comparative advantage, deindustrialization, Eugene Fama: efficient market hypothesis, experimental economics, Fall of the Berlin Wall, Fellow of the Royal Society, financial intermediation, frictionless, frictionless market, future of work, George Akerlof, Hyman Minsky, income inequality, incomplete markets, information asymmetry, intangible asset, invention of the telescope, invisible hand, Isaac Newton, Jean Tirole, John Nash: game theory, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, lateral thinking, loss aversion, market bubble, market fundamentalism, Martin Wolf, means of production, money market fund, Mont Pelerin Society, moral hazard, moral panic, Naomi Klein, negative equity, Network effects, new economy, non-tariff barriers, Northern Rock, Pareto efficiency, Paul Samuelson, Peter Thiel, Philip Mirowski, price mechanism, principal–agent problem, profit maximization, purchasing power parity, random walk, rent-seeking, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Coase, scientific worldview, seigniorage, Socratic dialogue, South Sea Bubble, special economic zone, speech recognition, Steven Pinker, The Chicago School, The Myth of the Rational Market, The Nature of the Firm, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Thomas Malthus, Thorstein Veblen, time value of money, transaction costs, transfer pricing, Veblen good, Vilfredo Pareto, Washington Consensus, working poor, zero-sum game

The effect of this narrowing was to make the analysis simpler and more tractable; Malthus was able to theorize more generally by making radical assumptions about deep aspects of human nature and abstracting away from incidental features, anecdote and individual cases. Less than a decade after Adam Smith’s death, he had taken a first step towards what we now think of as homo economicus. A further step was taken twenty years later by David Ricardo. Ricardo is best known today for one very brilliant and counter-intuitive idea: the principle of comparative advantage. It is not hard to see how, if two countries each have lower costs in different areas of production, they can both gain from trading with each other: this is a basic Smithian insight. But Ricardo took the idea much further. In his Principles of Political Economy (1817), he pointed out that, in theory at least, it can be mutually advantageous for two countries to trade with each other even if one of them has lower costs than the other in every single product.

It is interesting to note that Michel Foucault associates ‘homo oeconomicus’ as a cultural phenomenon with Ricardo and not Smith, and with a post-Kantian awareness of human limitations and the fact of scarcity: ‘Homo oeconomicus is not the human being who represents his own needs to himself, and the objects capable of satisfying them; he is the human being who spends, wears out, and wastes his life in evading the imminence of death.’ Foucault, The Order of Things: An Archaeology of the Human Sciences, repr. Routledge 2002 Principle of Comparative Advantage: David Ricardo, On the Principles of Political Economy, and Taxation, John Murray 1817, Ch. 7, ‘On Foreign Trade’ Jevons on market exchange and equilibrium: W. S. Jevons, The Theory of Political Economy, Macmillan 1888, Ch. 4 ‘Higgling’: see WN I.v.4; for Edgeworth’s overall critique of Walras, see his ‘Review of Léon Walras, Éléments d’économie politique pure’, Nature, 40.1036, September 1925 Transformation of political economy into economics: although Alfred Marshall is often credited with the shift in name, it is worth noting that he and Mary Paley Marshall had already scouted the change eleven years earlier, in their book The Economics of Industry of 1879 Effect of mathematical and physical models on economics: see Philip Mirowski, More Heat than Light, Cambridge University Press 1989 Politics as epiphenomenon: the exact relations between politics and economics in Marx’s thought remain a matter of scholarly debate.

In his simple worked example, if England is more efficient at producing cloth than wine, and Portugal more efficient at producing wine than cloth, then it can make sense for them to trade with each other, even if Portugal is in fact able to produce both cloth and wine at lower cost than England. Why? Because trading with each other frees up resources in both countries to produce more of the product in which it has a comparative advantage: in this case, cloth for England and wine for Portugal. Production in both countries is thereby maximized. In effect, Ricardo had taken the Smithian theory of exchange and looked more closely and systematically at its effects on production. But, again, Ricardo’s thought operates through processes of abstraction, at two levels. In the first place, perhaps surprisingly in a businessman, he is remarkably unconcerned with specific facts or individual cases.


pages: 515 words: 142,354

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

bank run, banking crisis, barriers to entry, battle of ideas, Berlin Wall, Bretton Woods, business cycle, buy and hold, 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, 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 Shiller, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, Silicon Valley, sovereign wealth fund, the payments system, The Rise and Fall of American Growth, 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.


pages: 165 words: 47,193

The End of Work: Why Your Passion Can Become Your Job by John Tamny

Albert Einstein, Andy Kessler, asset allocation, barriers to entry, basic income, Bernie Sanders, cloud computing, commoditize, David Ricardo: comparative advantage, Downton Abbey, future of work, George Gilder, haute cuisine, income inequality, Jeff Bezos, knowledge economy, Mark Zuckerberg, Peter Thiel, profit motive, Saturday Night Live, Silicon Valley, Stephen Hawking, Steve Ballmer, Steve Jobs, There's no reason for any individual to have a computer in his home - Ken Olsen, trickle-down economics, universal basic income, upwardly mobile, Yogi Berra

Achatz is the beneficiary of a dramatic rise in prosperity that has given enough people the discretionary income and leisure to support him in the pursuit of his passion for haute cuisine. It’s an economy that allowed Danny Meyer’s Eleven Madison Park to hire a “coffee director” who personally prepares diners’ twenty-four-dollar cups of coffee at their tables.21 This kind of wealth also allows individuals to concentrate on what they do best, what the nineteenth-century economist David Ricardo called “comparative advantage.” Each of us does what he’s good at while “importing” everything else from others. The fruits of one’s labor are exchangeable for everything one needs. Meyer recalls that before the restaurant boom he “had always noticed how many servers seemed to apologize for their work, with remarks like: ‘I’m actually an actor. I’m just waiting tables until I land a real job.’”22 If economic growth stays strong, waiters won’t be embarrassed about starting off in a field that rewards creativity and flair.

I wrote good prospecting letters and was able to get meetings with a lot of rich people, but I ignored the advice from management to find an existing team to work with. That was the direction that Goldman PCS was heading in, and it would have benefited someone like me, who lacked quantitative skills. Why not join a team so that I could focus on getting prospects in the door while more numerate but shyer team members formulated asset-allocation pitches? Comparative advantage works in all walks of life. Instead, I foolishly went it alone, expecting people to entrust the fruits of their life’s work to a kid in his twenties with no real financial and market knowledge. I was good at getting meetings but had little interest in the actual Goldman products. Rather, I remained interested in policy. My favorite part of the week was Friday afternoon after the markets had closed—not because the weekend was ahead, but because I’d watch my hero Larry Kudlow debate inflation with Bill Wolman and the Wall Street Journal’s Jacob Schlesinger on CNBC.


pages: 477 words: 135,607

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

"Robert Solow", air freight, anti-communist, barriers to entry, Bay Area Rapid Transit, British Empire, business cycle, call centre, collective bargaining, conceptual framework, David Ricardo: comparative advantage, deindustrialization, deskilling, Edward Glaeser, Erik Brynjolfsson, full employment, global supply chain, intermodal, Isaac Newton, job automation, Jones Act, knowledge economy, Malcom McLean invented shipping containers, manufacturing employment, Network effects, New Economic Geography, new economy, oil shock, Panamax, Port of Oakland, post-Panamax, Productivity paradox, refrigerator car, South China Sea, trade route, Works Progress Administration, Yom Kippur War, zero-sum game

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: 607 words: 133,452

Against Intellectual Monopoly by Michele Boldrin, David K. Levine

"Robert Solow", accounting loophole / creative accounting, agricultural Revolution, barriers to entry, business cycle, 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

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, business cycle, buy and hold, 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, stocks for the long run, stocks for the long term, 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: 495 words: 138,188

The Great Transformation: The Political and Economic Origins of Our Time by Karl Polanyi

agricultural Revolution, Berlin Wall, borderless world, business cycle, central bank independence, Corn Laws, currency manipulation / currency intervention, David Ricardo: comparative advantage, Fall of the Berlin Wall, full employment, inflation targeting, joint-stock company, Kula ring, land reform, land tenure, liberal capitalism, manufacturing employment, new economy, Panopticon Jeremy Bentham, price mechanism, profit motive, Republic of Letters, road to serfdom, Ronald Reagan, the market place, The Wealth of Nations by Adam Smith, trade liberalization, trade route, trickle-down economics, Washington Consensus, Wolfgang Streeck, working poor, Works Progress Administration

Robert Owen, in 1819, republished Bellers’s more than 120-year-old plan for the setting up of Colleges of Industry. Sporadic destitution had now grown into a torrent of misery. His own Villages of Union differed from Bellers’s mainly by being much larger, comprising 1,200 persons on as many acres of land. The committee calling for subscriptions to this highly experimental plan to solve the problem of unemployment included no less an authority than David Ricardo. But no subscribers appeared. Somewhat later, the Frenchman Charles Fourier was ridiculed for expecting day by day the sleeping-partner to turn up who would invest in his Phalanstère plan, which was based on ideas very similar to those sponsored by one of the greatest English experts on finance. And had not Robert Owen’s firm in New Lanark—with Jeremy Bentham as a sleeping-partner—become world famous through the financial success of its philanthropic schemes?

Clearly, a society in which distribution depended upon the possession of such tokens of purchasing power was a construction entirely different from market economy. We are not dealing here, of course, with pictures of actuality, but with conceptual patterns used for the purposes of clarification. No market economy separated from the political sphere is possible; yet it was such a construction which underlay classical economics since David Ricardo and apart from which its concepts and assumptions were incomprehensible. Society, according to this layout, consisted of bartering individuals possessing an outfit of commodities—goods, land, labor, and their composites. Money was simply one of the commodities bartered more often than another and, hence, acquired for the purpose of use in exchange. Such a “society” may be unreal; yet it contains the bare bones of the construction from which the classical economists started.

Truly free markets for labor or goods have never existed. The irony is that today few even advocate the free flow of labor, and while the advanced industrial countries lecture the less developed countries on the vices of protectionism and government subsidies, they have been more adamant in opening up markets in developing countries than in opening their own markets to the goods and services that represent the developing world’s comparative advantage. Today, however, the battle lines are drawn at a far different place than when Polanyi was writing. As I observed earlier, only diehards would argue for the self-regulating economy, at the one extreme, or for a government run economy, at the other. Everyone is aware of the power of markets, all pay obeisance to its limitations. But with that said, there are important differences among economists’ views.


pages: 464 words: 139,088

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

"Robert Solow", 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, business cycle, 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, lateral thinking, 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, The Rise and Fall of American Growth, 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: 807 words: 154,435

Radical Uncertainty: Decision-Making for an Unknowable Future by Mervyn King, John Kay

"Robert Solow", Airbus A320, Albert Einstein, Albert Michelson, algorithmic trading, Antoine Gombaud: Chevalier de Méré, Arthur Eddington, autonomous vehicles, availability heuristic, banking crisis, Barry Marshall: ulcers, battle of ideas, Benoit Mandelbrot, bitcoin, Black Swan, Bonfire of the Vanities, Brownian motion, business cycle, business process, capital asset pricing model, central bank independence, collapse of Lehman Brothers, correlation does not imply causation, credit crunch, cryptocurrency, cuban missile crisis, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, demographic transition, discounted cash flows, disruptive innovation, diversification, diversified portfolio, Donald Trump, easy for humans, difficult for computers, Edmond Halley, Edward Lloyd's coffeehouse, Edward Thorp, Elon Musk, Ethereum, Eugene Fama: efficient market hypothesis, experimental economics, experimental subject, fear of failure, feminist movement, financial deregulation, George Akerlof, germ theory of disease, Hans Rosling, Ignaz Semmelweis: hand washing, income per capita, incomplete markets, inflation targeting, information asymmetry, invention of the wheel, invisible hand, Jeff Bezos, Johannes Kepler, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Snow's cholera map, John von Neumann, Kenneth Arrow, Long Term Capital Management, loss aversion, Louis Pasteur, mandelbrot fractal, market bubble, market fundamentalism, Moneyball by Michael Lewis explains big data, Nash equilibrium, Nate Silver, new economy, Nick Leeson, Northern Rock, oil shock, Paul Samuelson, peak oil, Peter Thiel, Philip Mirowski, Pierre-Simon Laplace, popular electronics, price mechanism, probability theory / Blaise Pascal / Pierre de Fermat, quantitative trading / quantitative finance, railway mania, RAND corporation, rent-seeking, Richard Feynman, Richard Thaler, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Coase, sealed-bid auction, shareholder value, Silicon Valley, Simon Kuznets, Socratic dialogue, South Sea Bubble, spectrum auction, Steve Ballmer, Steve Jobs, Steve Wozniak, Tacoma Narrows Bridge, Thales and the olive presses, Thales of Miletus, The Chicago School, the map is not the territory, The Market for Lemons, The Nature of the Firm, The Signal and the Noise by Nate Silver, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Bayes, Thomas Davenport, Thomas Malthus, Toyota Production System, transaction costs, ultimatum game, urban planning, value at risk, World Values Survey, Yom Kippur War, zero-sum game

Following Savage, we describe these as ‘small world’ models. From its very beginnings, useful economic theory has generally been of this kind. Adam Smith began The Wealth of Nations by illustrating the concept of the division of labour through a stylised description of a pin factory. There is no evidence that he was describing a real pin factory. In the early nineteenth century, David Ricardo proposed a model of international trade based on comparative advantage which continues to be among the central insights of economics. Two hundred and fifty years before Donald Trump’s presidency, Adam Smith had refuted the mercantilist view of foreign trade as a zero sum game in which one country gained at the expense of a weaker or foolish partner – trade could benefit both parties. 3 Ricardo developed Smith’s argument to show that a country that was more efficient than another country in producing everything could still benefit from trade with the less efficient country, and vice versa. 4 In the style of his times, he illustrated his thesis with a story based on a numerical example.

Smith was not writing about the manufacture of pins, any more than Akerlof had been describing the activities of the members of the Retail Motor Federation, or Tucker the functioning of the American criminal justice system. They were using these models as illustrations of principles of much more general applicability. Economics subsequently made advances through a whole series of small-world models of this type. Two decades after Smith, Thomas Malthus provided a notorious model of population and growth, which we discuss further in chapter 20 . In addition to his principle of comparative advantage, David Ricardo developed a model of economic rent: the amount received by the supplier of an input in excess of the amount necessary to ensure its supply (many people in the sports and financial services industries would surely work there for lower rewards than they currently receive). It is no longer fashionable to tell a story with illustrative calculations in the manner of Smith and Ricardo.

At first sight, the proposition that it is beneficial to trade with less efficient countries might seem counter-intuitive – as does, at first sight, the proposition that it is possible to trade with more efficient countries. But Ricardo’s model showed that trade can bring significant benefits whenever there are differences in capabilities either between individuals or between countries. A country’s absolute advantage in producing different goods and services was less important than its comparative advantage: in which sector or sectors was the country relatively more productive? The model does not enable us to forecast the volume of trade, but does help us understand why, in the absence of artificial impediment, trade has flourished between countries at very different stages of economic development. And how untutored intuition can mislead. Even those without any formal training in economics understand that prices are set by the interplay between supply and demand.


pages: 187 words: 55,801

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

Atul Gawande, business cycle, 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: 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, Kickstarter, 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: 868 words: 147,152

How Asia Works by Joe Studwell

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: 809 words: 237,921

The Narrow Corridor: States, Societies, and the Fate of Liberty by Daron Acemoglu, James A. Robinson

Affordable Care Act / Obamacare, agricultural Revolution, AltaVista, Andrei Shleifer, bank run, Berlin Wall, British Empire, California gold rush, central bank independence, centre right, collateralized debt obligation, collective bargaining, colonial rule, Computer Numeric Control, conceptual framework, Corn Laws, corporate governance, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Dava Sobel, David Ricardo: comparative advantage, Deng Xiaoping, discovery of the americas, double entry bookkeeping, Edward Snowden, en.wikipedia.org, equal pay for equal work, European colonialism, Ferguson, Missouri, financial deregulation, financial innovation, Francis Fukuyama: the end of history, full employment, income inequality, income per capita, industrial robot, information asymmetry, interest rate swap, invention of movable type, Isaac Newton, James Watt: steam engine, John Harrison: Longitude, joint-stock company, Kula ring, labor-force participation, land reform, Mahatma Gandhi, manufacturing employment, mass incarceration, Maui Hawaii, means of production, megacity, Mikhail Gorbachev, Nelson Mandela, obamacare, openstreetmap, out of africa, PageRank, pattern recognition, road to serfdom, Ronald Reagan, Skype, spinning jenny, Steven Pinker, the market place, transcontinental railway, War on Poverty, WikiLeaks

As late as 1841, conservative politician and three-time prime minister Lord Stanley could observe, “When any man attempted to estimate the probable result of a county election in England, it was ascertained by calculating the number of the great landed proprietors in the county and weighing the number of occupiers under them.” Indeed, in rural England, big landowners controlled a sufficiently large fraction of the voting population that their control determined the outcome of an election. As in 1950s Chile, if an “occupier” went against his landlord, there was going to be trouble. The great British economist David Ricardo recognized this in 1824, writing, “It is the most cruel mockery to tell a man he may vote for A or B, when you know that he is so much under the influence of A, or the friends of A, that his voting for B would be attended with the destruction of him. It is not he who has the vote, really and substantially, but his landlord, for it is for his benefit and interest that it is exercised in the present system.”

For an analysis of state building under the Frei administration, see Valenzuela and Wilde (1979). They and Valenzuela (1978) tend to interpret the Frei program as disastrous, since the attack on clientelism undermined the ability to make deals when Allende came to power. Our interpretation sees it as a natural part of the Red Queen effect. Lord Stanley is quoted from Kitson-Clark (1951, 112), and David Ricardo is quoted from Ricardo ([1824], 1951–1973, 506). Kennedy’s speech launching the Alliance for Progress can be found at https://sourcebooks.fordham.edu/mod/1961kennedy-afp1.asp. The text of Allende’s Statute of Guarantees can be found at http://www.papelesdesociedad.info/IMG/pdf/estatuto_de_garantias_democraticas.pdf. The interview of Salvador Allende by Régis Debray can be found at https://www.marxists.org/espanol/allende/1971/marzo16.htm.

“Assembly Politics in Western Europe from the Eighth Century to the Twelfth.” In The Medieval World, edited by Peter Linehan and Janet L. Nelson. London and New York: Routledge. Rhodes, Peter J. (2011). A History of the Classical Greek World: 478–323 BC. Oxford: Wiley-Blackwell. Ricardo, David ([1824] 1951–1973). “Defense of the Plan of Voting by Ballot.” In The Works and Correspondence of David Ricardo, edited by Maurice H. Dobb and Piero Sraffa, vol. 5. Cambridge: Cambridge University Press. Richards, John F. (1993). The Mughal Empire. New York: Cambridge University Press. Ritter, E. A. (1985). Shaka Zulu: The Biography of the Founder of the Zulu Nation. London: Penguin. Roach, Levi (2013). Kingship and Consent in Anglo-Saxon England, 871–978: Assemblies and the State in the Early Middle Ages.


pages: 219 words: 61,720

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

2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, 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, low earth orbit, 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: 586 words: 159,901

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

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, business cycle, 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).


Globalists: The End of Empire and the Birth of Neoliberalism by Quinn Slobodian

Asian financial crisis, Berlin Wall, bilateral investment treaty, borderless world, Bretton Woods, British Empire, business cycle, capital controls, central bank independence, collective bargaining, David Ricardo: comparative advantage, Deng Xiaoping, desegregation, Dissolution of the Soviet Union, Doha Development Round, eurozone crisis, Fall of the Berlin Wall, floating exchange rates, full employment, Gunnar Myrdal, Hernando de Soto, invisible hand, liberal capitalism, liberal world order, market fundamentalism, Martin Wolf, Mercator projection, Mont Pelerin Society, Norbert Wiener, offshore financial centre, oil shock, open economy, pattern recognition, Paul Samuelson, Pearl River Delta, Philip Mirowski, price mechanism, quantitative easing, random walk, rent control, rent-seeking, road to serfdom, Ronald Reagan, special economic zone, statistical model, The Chicago School, the market place, The Wealth of Nations by Adam Smith, theory of mind, Thomas L Friedman, trade liberalization, urban renewal, Washington Consensus, Wolfgang Streeck, zero-sum game

It would not be desirable even if it ­were pos­si­ble. The Ruhr Valley would become unbelievably crowded, and the Alps would empty out entirely: “One need not be a nationalist for such ­things to be undesirable.” Haberler proposed that he could prove that “­free trade is beneficial for all even when ­there is no freedom of migration and the ­peoples remain firmly rooted in their countries.”97 He did so by revisiting David Ricardo’s idea of comparative advantage but recasting it without the discredited ­labor theory of value. In his version, workers did not need to be mobile over national borders as long as prices ­were. If prices accurately reflected the relative supply and demand on markets, then t­ hese would guide entrepreneurs to the most efficient use of their resources. For prices to serve their function, however, they must not encounter re­sis­tance.

In one of his first published works, Mises asked as a young student in 1906 ­whether “En­glish and German workers may have to descend to the lowly standard of life of the Hindus and coolies to compete with them.”62 In 1919 he provided a mixed answer: on the one hand, in the world economy he ­imagined the Eu­ro­ pean worker would certainly earn less than he had become accustomed to. On the other hand, the “Hindus and coolies” of the world would earn more. Once one abandoned David Ricardo’s odd hesitation at expanding the scope of the spatial division of l­abor, Mises wrote, “then one sees a tendency prevail over the entire earth ­toward equalization of the rate of return on capital and of the wage of ­labor. Then, fi­nally, ­t here no longer are poorer and richer nations but only more densely and less densely settled and cultivated countries.”63 A W o r l d of W alls 43 The primary prob­lem was the most obvious one: the unwillingness of Eu­ro­pean workers to accept lower wages for the sake of ­either the higher law of liberalism or, as in Mises’s argument, the benefit of a distant, likely nonwhite, foreign worker.


pages: 247 words: 64,986

Hive Mind: How Your Nation’s IQ Matters So Much More Than Your Own by Garett Jones

centre right, clean water, corporate governance, David Ricardo: comparative advantage, en.wikipedia.org, experimental economics, Flynn Effect, Gordon Gekko, greed is good, hive mind, invisible hand, Kenneth Arrow, law of one price, meta analysis, meta-analysis, prediction markets, Robert Gordon, Ronald Coase, Saturday Night Live, social intelligence, The Bell Curve by Richard Herrnstein and Charles Murray, The Wealth of Nations by Adam Smith, Thorstein Veblen, wikimedia commons, zero-sum game

Caplan and Miller then ran a contest: Which was the better predictor of pro-market attitudes in the General Social Survey, IQ or years of education? Overall, IQ was the winner, though not by a large margin. When it came to freer international trade, education did a better job predicting pro-market attitudes, for instance, so perhaps modern American schooling really does make you friendlier toward people in other countries or perhaps education helps people understand the Victorian-era economist David Ricardo’s unintuitive “law of comparative advantage,” the bedrock idea underlying the argument for free trade. But in general, IQ was a good predictor of pro-market attitudes, winning the IQ versus education race. Higher cognitive skills apparently help people think more like economists. And if economists genuinely have more information about the economy than the average person—I’ll leave that for you to decide—then higher cognitive skills mean better informed voters.

., 159–60 Pakistan: income-IQ relationship in, 44 Palestine: average cognitive ability score in, 169; average IQ score in, 169 Pande, Rohini, 129–30 paradox of IQ, 32; defined, 5, 6–7, 167 patience: Barro and Sala-i-Martin on, 77–79; and conformity, 13; in politics, 105, 111–16; Ramsey on, 71, 167; relationship to cooperation, 91, 92, 96, 110; relationship to IQ scores, 1, 65–66, 67–73, 80–81, 84, 91, 92, 96; and savings, 71–73, 74, 75, 77–79, 84; as virtue, 76–81 peer effects, 152; and IQ scores, 59–60, 146–47 perceptiveness, social: and IQ, 91–92, 94–96; relationship to cooperation, 91–92, 96, 110 Peri, Giovanni, 159–60 personality tests, 28–29, 151 Philippines: average cognitive ability score in, 9, 169; average IQ score in, 169; GDP per person and cognitive ability in, 9; lead exposure in, 49–50 Philips, Jennifer, 146 pie-growing, 108, 112; relationship to IQ scores, 3–4, 100, 101; vs. pie-grabbing approach, 2–4 PIRLS (Progress in International Reading Literacy Study), 6, 7–9, 46, 47, 170 PISA (Programme for International Student Assessment), 6, 7–9, 10, 45, 46, 47, 166, 170 Pleeter, Saul, 69 Poland: average cognitive ability score in, 169; average IQ score in, 47, 169; da Vinci Effect in, 47 politics: accountability of politicians, 130–31; and Coase Theorem, 108–9, 110, 111–13, 118, 166; corruption in, 1, 2, 84, 110–11, 117, 130, 162; epistocracy, 136–37, 162; government policies regarding IQ scores, 5, 50, 56, 58–59, 60, 62–64, 167; government promises, 114–16; government quality and IQ scores, 116–18, 129–31, 162; inflation temptation, 114–15; informed voters, 122–31, 136–37, 162, 165, 167; IQ scores of politicians, 118–19, 125; and long time horizons, 104–5; patience in, 105, 111–16; political attitudes and IQ scores, 127–29; political attitudes and social conformity, 132–34; political regimes, 105–6; prosperity and cooperation in, 105; relationship to immigration, 161–63; relationship to national standardized test scores, 1, 2; repeated prisoner’s dilemmas (RPDs) in, 105–6; and self-interest, 87; speech of politicians, 150; time inconsistency in government planning, 114–15 Portugal: average cognitive ability score in, 169; average IQ score in, 169 Potrafke, Niklas, 117, 166 poverty: and immigration, 161; and IQ scores, 1, 9, 43, 45, 56–57 Prescott, Ed: on time inconsistency in government planning, 114–15 prisoner’s dilemma, 86–94, 113, 116; as one-shot game, 89, 100–101, 104, 109; repeated prisoner’s dilemmas (RPDs), 88–94, 96–100, 103–6, 110, 176nn4, 10 productivity: as GDP per person, 7–9, 19; O-ring theory of, 139–47, 152, 153; relationship to cognitive skill levels, 165–66; relationship to division of labor, 151–52; relationship to education, 30–31; relationship to imitation, 144–46; relationship to IQ scores, 1, 2, 5, 8–9, 11, 12, 13, 34, 35–36, 40, 43, 57, 96, 146–47, 149, 152, 167–68; relationship to savings rate, 13, 76; relationship to wages, 30–31, 140–41, 144, 156 pro-market attitudes and IQ scores, 13, 83–84, 124–26, 127, 129 property rights, 105–6, 117, 118, 166 psychological testing firms, 39–40 public goods game, 94 public opinion: regarding economic policies, 123–26; vs. expert opinion, 121–22, 123–24; relationship to social conformity, 131–36; role of education in, 122–29; regarding toxicology, 121–22, 124 Putterman, Louis, 94 Qatar: average cognitive ability score in, 9, 169; average IQ score in, 169; GDP per person and cognitive ability in, 9 Qian, Rong: on East Asian savings rates, 80 Quimbo, Stella, 49 racism, 129 Ramsey, Frank: on imagination, 71; on mathematical theory of saving, 71–72, 84; on patience, 71, 167; Ramsey growth model, 71; on saving and investment, 71–72, 74, 77 Raven’s Progressive Matrices, 27, 35–36, 44, 58, 92, 99, 129; and Lynn’s databases, 39, 40; and MSCEIT, 33–34; as multiple choice, 20–21, 61; popularity of, 21; and verbal similarities tests, 51, 57; and vocabulary tests, 23, 33 reaction time studies, 27–28 reading tests, 1, 6, 7–9, 23, 37, 45, 46 reciprocity, 98–99, 177n13 relationship between measures: as modest/moderate, 23, 24–25, 28, 30, 32, 33, 47–48, 72, 97, 118, 119; as nearly/almost perfect, 22, 46, 172n6; as strong/robust, 22–23, 28, 46, 97, 117, 171n7; as weak, 23–24, 25, 27, 32, 33, 36, 66, 147, 152, 153–54 repeated prisoner’s dilemmas (RPDs), 88–94, 96–100, 103–6, 110, 176nn4, 10 reputation, 115–16 reverse digit span, 57, 70 Ricardo, David: on law of comparative advantage, 125 Rindermann, Heiner, 118–19, 129; on cognitive ability, 7–9, 46, 47, 166, 170, 171n5 Risk, 82 Roberts, Russ, 109 Romania: average cognitive ability score in, 169; average IQ score in, 169 Rosenstone, Steven J., 128 Russia: average cognitive ability score in, 169; average IQ score in, 169 Rustichini, Aldo, 92–93, 99 Sailer, Michael, 9, 47, 170 Sala-i-Martin, Xavier: Economic Growth, 76–79, 130; on international capital flows, 77–79; on patience, 77–79 Sass, Tim R., 60 SAT, 3, 4, 61, 100; relationship to cooperation, 96–97 Saudi Arabia: average cognitive ability score in, 169; average IQ score in, 169 savings rate: cross-country comparisons regarding, 72–73, 80–81; defined, 175n8; relationship to conformity, 73–74; relationship to investment, 13, 71–72, 74–76, 77–81; relationship to IQ scores, 13, 68, 71–73; relationship to patience, 71–73, 74, 75, 77–79, 84 Schmidt, Frank, 28 Schneider, Joel, 11, 40, 47–48 Scholastic Aptitude Test.


pages: 242 words: 68,019

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

"Robert Solow", Ada Lovelace, Albert Einstein, Arthur Eddington, assortative mating, business cycle, 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, Joi Ito, 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

"Robert Solow", Albert Einstein, Bayesian statistics, Black-Scholes formula, Bretton Woods, Brownian motion, business cycle, 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, 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, Thales and the olive presses, Thales of Miletus, 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.


pages: 193 words: 63,618

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

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: 935 words: 267,358

Capital in the Twenty-First Century by Thomas Piketty

"Robert Solow", accounting loophole / creative accounting, Asian financial crisis, banking crisis, banks create money, Berlin Wall, Branko Milanovic, British Empire, business cycle, 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, twin studies, 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: 209 words: 80,086

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

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, disruptive innovation, 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, 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, shared worldview, 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: 1,205 words: 308,891

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

Airbnb, Akira Okazaki, big-box store, Black Swan, book scanning, British Empire, business cycle, buy low sell high, Capital in the Twenty-First Century by Thomas Piketty, clean water, Columbian Exchange, conceptual framework, correlation does not imply causation, Costa Concordia, creative destruction, crony capitalism, dark matter, Dava Sobel, David Graeber, David Ricardo: comparative advantage, deindustrialization, demographic transition, Deng Xiaoping, Donald Trump, double entry bookkeeping, en.wikipedia.org, epigenetics, Erik Brynjolfsson, experimental economics, Ferguson, Missouri, fundamental attribution error, Georg Cantor, George Akerlof, George Gilder, germ theory of disease, Gini coefficient, God and Mammon, greed is good, Gunnar Myrdal, Hans Rosling, Henry Ford's grandson gave labor union leader Walter Reuther a tour of the company’s new, automated factory…, Hernando de Soto, immigration reform, income inequality, interchangeable parts, invention of agriculture, invention of writing, invisible hand, Isaac Newton, Islamic Golden Age, James Watt: steam engine, Jane Jacobs, John Harrison: Longitude, John Maynard Keynes: technological unemployment, Joseph Schumpeter, Kenneth Arrow, knowledge economy, labor-force participation, lake wobegon effect, land reform, liberation theology, lone genius, Lyft, Mahatma Gandhi, Mark Zuckerberg, market fundamentalism, means of production, Naomi Klein, new economy, North Sea oil, Occupy movement, open economy, out of africa, Pareto efficiency, Paul Samuelson, Pax Mongolica, Peace of Westphalia, peak oil, Peter Singer: altruism, Philip Mirowski, pink-collar, plutocrats, Plutocrats, positional goods, profit maximization, profit motive, purchasing power parity, race to the bottom, refrigerator car, rent control, rent-seeking, Republic of Letters, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Coase, Scientific racism, Scramble for Africa, Second Machine Age, secular stagnation, Simon Kuznets, Social Responsibility of Business Is to Increase Its Profits, spinning jenny, stakhanovite, Steve Jobs, The Chicago School, The Market for Lemons, the rule of 72, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, total factor productivity, Toyota Production System, transaction costs, transatlantic slave trade, Tyler Cowen: Great Stagnation, uber lyft, union organizing, very high income, wage slave, Washington Consensus, working poor, Yogi Berra

Another million—especially those with the money to do so, or relatives established abroad—escaped to Boston or Liverpool, to Canada or Chile. Irish population has never recovered its level in 1845, unless you include the tens of millions of Irish descendants in land-rich places abroad, such as my father’s family. Malthus was confirmed. Diminishing returns on labor applied to fixed land would always be immiserizing, said the Malthus of 1798. The notion was taken up with grim enthusiasm by other classical economists, such as David Ricardo and Karl Marx. True, Malthus in later editions, beginning in 1803, as the historian of economic thought Ross Emmett has argued, believed that a rational restraint on procreation could permit some modest growth of income. “Biology could never be conquered,” Emmett writes, “but within the right institutional context, reason could interrupt its career.” For a time, that is. But the classical economists came to believe that there would soon be an end to conquering, a “stationary state.”

In 1616 Rabbi Uziel (lately of Fez in Morocco) remarked with gratitude that the Jews “live peaceably in Amsterdam,” where “each may follow his own belief,” though he “may not openly show that he is of a different faith from the inhabitants of the city.”4 It is the melting-pot formula of not being permitted to wear special clothing, of the sort that in 2003 a fiercely secular France affirmed in respect of head scarves for Muslim schoolgirls. Jews in Holland in the seventeenth century suffered no locking up in ghettos at night, as, for example, in Venice or Frankfurt at the time; no expropriations and expulsions, as in 1290 in England—an England supposed, especially by Englishmen with scant knowledge of other places, to be the nursery of every free institution. In England the practicing Jews (“practicing” lets out David Ricardo and Benjamin Disraeli) were not entirely emancipated to serve in Parliament until 1861. The earliest significant case of religious toleration was in Hungarian Transylvania, whose Diet in the town of Torda declared in 1568 that “no one is permitted to threaten to imprison or banish anyone because of their teaching, because faith is a gift from God.”5 The act would have applied even to a Unitarian, such as Thomas Aikenhead of Edinburgh or, secretly, Isaac Newton of Cambridge, had they had the good fortune to live in Transylvania.

Financial capitalists they were, spectacularly so in the case of the Rothschilds in the age of emancipation, but not improvers beyond the countinghouse.3 Until their emancipations beginning in the eighteenth century, Mokyr argues (as a secular Israeli-American himself, tough on the orthodox), the Jews were too devoted to honoring the past and the Torah. “Jews are conspicuously underrepresented in the pantheon of great inventors before the modern industrial age. Jewish traditional culture was inherently backward-looking and conservative and thus did not encourage revolutionary ideas and thinking outside the box.”4 Well, except for Marx and Freud, David Ricardo and Georg Cantor, George Gershwin and Lenny Bruce—who nonetheless make Mokyr’s point, having invented ideas, not machines. A similar point can be made about the origins of the French Enlightenment in the debate between the ancients and the moderns, or of the Scottish Enlightenment in the ending of Calvinist rule. In the same 2011 paper, Mokyr points out in Judaism before haskala (enlightenment, biblical higher criticism) the “large amount of obedience and respect for tradition and the wisdom of the past generations.”


pages: 238 words: 73,824

Makers by Chris Anderson

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, IKEA effect, 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, private space industry, profit maximization, QR code, race to the bottom, 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, business cycle, 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: 477 words: 75,408

The Economic Singularity: Artificial Intelligence and the Death of Capitalism by Calum Chace

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, post-work, precariat, prediction markets, QWERTY keyboard, railway mania, RAND corporation, Ray Kurzweil, RFID, Rodney Brooks, Sam Altman, 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, uber lyft, 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.


Green Economics: An Introduction to Theory, Policy and Practice by Molly Scott Cato

Albert Einstein, back-to-the-land, banking crisis, banks create money, basic income, Bretton Woods, Buy land – they’re not making it any more, carbon footprint, central bank independence, clean water, Community Supported Agriculture, congestion charging, corporate social responsibility, David Ricardo: comparative advantage, deskilling, energy security, food miles, Food sovereignty, Fractional reserve banking, full employment, gender pay gap, income inequality, informal economy, Intergovernmental Panel on Climate Change (IPCC), job satisfaction, land reform, land value tax, Mahatma Gandhi, market fundamentalism, mortgage debt, passive income, peak oil, price stability, profit maximization, profit motive, purchasing power parity, race to the bottom, reserve currency, the built environment, The Spirit Level, Tobin tax, University of East Anglia, wikimedia commons

In this section we will first explore the economic theories that have been used to justify global free trade, particularly the theory of comparative advantage. The following section explores who are the winners and losers in the global trade game. We then come to the heart of the matter from the perspec- 124 GREEN ECONOMICS tive of a green economist: the impossibility of persisting with the present volume of movement of goods during this era of climate change and movement towards lower use of fossil fuels. Finally we explore policies and practices for greening trade at the local and global levels. Whose comparative advantage? The earliest attempt to formalize a discussion of the benefits of trade within economic theory was made by David Ricardo, whose ‘theory of comparative advantage’, first published in 1817, is still relied on by mainstream economists.

Deskilling and reskilling Greening production and distribution 55 56 59 61 64 vi GREEN ECONOMICS 5 Money The politics of money Money and global injustice Money creation: Financially and ecologically unstable How money wastes people Local currencies for a localized world Conclusion 71 72 74 77 79 81 85 6 Green Business: From Maximizing Profits to a Vision of Conviviality Limitations of market and technological solutions Issues of scale and ownership Learning to switch the lights off Low-carbon growth as the flourishing of the convivial economy 89 90 92 95 98 PART III POLICIES FOR A GREEN ECONOMY 7 The Policy Context The ecological modernization discourse Policy responses to climate change What’s wrong with GDP? Measuring what we value 105 106 109 113 116 8 Globalization and Trade Whose comparative advantage? How free is free trade? Trade in the era of climate change and peak oil Greening trade locally Greening trade globally 123 124 126 129 131 134 9 Relocalizing Economic Relationships Localization to replace globalization Political protection for local economies Self-reliant local economies on the ground The next step: The bioregional economy Conclusion 139 139 142 144 150 153 10 Green Taxation Theory of green taxation Strategic taxation Taxes on commons Ecotaxes 157 157 160 162 164 CONTENTS vii 11 Green Welfare Green approaches to social policy What is poverty?

It was made in contrast to the theory of absolute advantage, which suggests that if a country can produce one good more efficiently than another country it would gain economically if it concentrated its efforts on its best good and traded this with other countries for goods that they produced more efficiently. This is intuitively reasonable. The next step is to argue that, even if one country produces everything less efficiently than its neighbour, it is still better placed to concentrate on the good it produces most efficiently itself and trade for other goods with its neighbours. This theory of comparative advantage is counter-intuitive, because it contains crucial theoretical flaws, although it can be made to appear convincing when demonstrated using a specific numerical example, as was done by Ricardo and repeated in countless economic textbooks since his day. Ricardo based his argument on two goods where the UK and Portugal obviously have absolute advantages: woollen cloth and wine. During a recent trip to Lisbon I realized why he used these examples and thereby began to understand the true meaning of the theory.


pages: 301 words: 89,076

The Globotics Upheaval: Globalisation, Robotics and the Future of Work by Richard Baldwin

agricultural Revolution, Airbnb, AltaVista, Amazon Web Services, augmented reality, autonomous vehicles, basic income, business process, business process outsourcing, call centre, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, commoditize, computer vision, Corn Laws, correlation does not imply causation, Credit Default Swap, David Ricardo: comparative advantage, declining real wages, deindustrialization, deskilling, Donald Trump, Douglas Hofstadter, Downton Abbey, Elon Musk, Erik Brynjolfsson, facts on the ground, future of journalism, future of work, George Gilder, Google Glasses, Google Hangouts, hiring and firing, impulse control, income inequality, industrial robot, intangible asset, Internet of things, invisible hand, James Watt: steam engine, Jeff Bezos, job automation, knowledge worker, laissez-faire capitalism, low skilled workers, Machine translation of "The spirit is willing, but the flesh is weak." to Russian and back, manufacturing employment, Mark Zuckerberg, mass immigration, mass incarceration, Metcalfe’s law, new economy, optical character recognition, pattern recognition, Ponzi scheme, post-industrial society, post-work, profit motive, remote working, reshoring, ride hailing / ride sharing, Robert Gordon, Robert Metcalfe, Ronald Reagan, Second Machine Age, self-driving car, side project, Silicon Valley, Skype, Snapchat, social intelligence, sovereign wealth fund, standardized shipping container, statistical model, Stephen Hawking, Steve Jobs, supply-chain management, TaskRabbit, telepresence, telepresence robot, telerobotics, Thomas Malthus, trade liberalization, universal basic income

In Britain, where modern globalization first saw the light of day, it was a push factor for agriculture since food imported from the US and elsewhere was cheaper. Food imports boomed from the mid-1800s. But globalization is always a push-pull pair. Jobs tend to move out of the sectors competing with imports, but move into sectors that export. In the case of the United Kingdom, booming imports of food were matched by equally booming exports of textiles and other manufactured goods. The principle guiding this impact is David Ricardo’s famous principle of comparative advantage, which, roughly put, says: “Do what you do best; import the rest.” In nineteenth-century Britain, the “best” meant manufacturing. British competitiveness in manufacturing had a huge head start by the 1800s and its edge over other nations was still growing, so globalization allowed Britain to become the workshop of the world. The booming exports of manufactured goods kept the pile of work growing faster than efficiency of workers, and this pulled workers into industry.

These were generic machines—lathes, drills, and the like—that were controlled by a program that could be changed to deal with different jobs. At first, the controlling instructions were fed in using a one-inch-wide punched tape. A “controller unit”—a sort of computer—read and interpreted the instructions and converted them into mechanical motions by the machine tool. The newfound flexibility of machine tools destroyed one part of humans’ comparative advantage in factories—namely, their ability to learn new tasks, adapt to evolving situations, and react flexibly. The 1973 Milestone Dating exactly when the continental divide was crossed is difficult since progress is a process, not an event. Nonetheless, 1973 is a convenient starting date since it is the year that Texas Instrument employees Gary Boone and Michael Cochran patented the first “computer on a chip.”


pages: 365 words: 88,125

23 Things They Don't Tell You About Capitalism by Ha-Joon Chang

"Robert Solow", affirmative action, Asian financial crisis, bank run, banking crisis, basic income, Berlin Wall, Bernie Madoff, borderless world, Carmen Reinhart, central bank independence, collateralized debt obligation, colonial rule, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deindustrialization, deskilling, ending welfare as we know it, Fall of the Berlin Wall, falling living standards, financial deregulation, financial innovation, full employment, German hyperinflation, Gini coefficient, hiring and firing, Hyman Minsky, income inequality, income per capita, invisible hand, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, labour market flexibility, light touch regulation, Long Term Capital Management, low skilled workers, manufacturing employment, market fundamentalism, means of production, Mexican peso crisis / tequila crisis, microcredit, Myron Scholes, North Sea oil, offshore financial centre, old-boy network, post-industrial society, price stability, profit maximization, profit motive, purchasing power parity, rent control, shareholder value, short selling, Skype, structural adjustment programs, the market place, The Wealth of Nations by Adam Smith, Thomas Malthus, Tobin tax, Toyota Production System, trade liberalization, trickle-down economics, women in the workforce, working poor, zero-sum game

Therefore, if you gave the poor voting rights, they would want to maximize their current consumption, rather than investment, by imposing taxes on the rich and spending them. This might make the poor better off in the short run, but it would make them worse off in the long run by reducing investment and thus growth. In their anti-poor politics, the liberals were intellectually supported by the Classical economists, with David Ricardo, the nineteenth-century British economist, as the most brilliant of them all. Unlike today’s liberal economists, the Classical economists did not see the capitalist economy as being made up of individuals. They believed that people belonged to different classes – capitalists, workers and landlords – and behaved differently according to their classes. The most important inter-class behavioural difference was considered to be the fact that capitalists invested (virtually) all of their incomes while the other classes – the working class and the landlord class – consumed them.

But of all the then potential castles in the desert, South Korea’s plan to build an integrated steel mill, hatched in 1965, was one of the most outlandish. At the time, Korea was one of the poorest countries in the world, relying on natural resource-based exports (e.g., fish, tungsten ore) or labour-intensive manufactured exports (e.g., wigs made with human hair, cheap garments). According to the received theory of international trade, known as the ‘theory of comparative advantage’, a country like Korea, with a lot of labour and very little capital, should not be making capital-intensive products, like steel.1 Worse, Korea did not even produce the necessary raw materials. Sweden developed an iron and steel industry quite naturally because it has a lot of iron ore deposits. Korea produced virtually no iron ore or coking coal, the two key ingredients of modern steel-making.

Chang, The East Asian Development Experience: The Miracle, the Crisis, and the Future (Zed Press, London, 2006). 6 For comparison of the quality of institutions in today’s rich countries when they were at similar levels of development with those found in today’s developing countries, see H-J. Chang, Kicking Away the Ladder (Anthem Press, London, 2002), ch. 3. THING 12 1 For a user-friendly explanation and criticism of the theory of comparative advantage, see ‘My six-year-old son should get a job’, ch. 3 of my Bad Samaritans (Random House, London, 2007, and Bloomsbury USA, New York, 2008). 2 Further details can be found from my earlier books, Kicking Away the Ladder (Anthem Press, London, 2002) and Bad Samaritans. THING 13 1 The sixteen countries where inequality increased are, in descending order of income inequality as of 2000, the US, South Korea, the UK, Israel, Spain, Italy, the Netherlands, Japan, Australia, Canada, Sweden, Norway, Belgium, Finland, Luxemburg and Austria.


pages: 322 words: 87,181

Straight Talk on Trade: Ideas for a Sane World Economy by Dani Rodrik

3D printing, airline deregulation, Asian financial crisis, bank run, barriers to entry, Berlin Wall, Bernie Sanders, blue-collar work, Bretton Woods, BRICs, business cycle, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, central bank independence, centre right, collective bargaining, conceptual framework, continuous integration, corporate governance, corporate social responsibility, currency manipulation / currency intervention, David Ricardo: comparative advantage, deindustrialization, Donald Trump, endogenous growth, Eugene Fama: efficient market hypothesis, eurozone crisis, failed state, financial deregulation, financial innovation, financial intermediation, financial repression, floating exchange rates, full employment, future of work, George Akerlof, global value chain, income inequality, inflation targeting, information asymmetry, investor state dispute settlement, invisible hand, Jean Tirole, Kenneth Rogoff, low skilled workers, manufacturing employment, market clearing, market fundamentalism, meta analysis, meta-analysis, moral hazard, Nelson Mandela, new economy, offshore financial centre, open borders, open economy, Pareto efficiency, postindustrial economy, price stability, pushing on a string, race to the bottom, randomized controlled trial, regulatory arbitrage, rent control, rent-seeking, Richard Thaler, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, Sam Peltzman, Silicon Valley, special economic zone, spectrum auction, Steven Pinker, The Rise and Fall of American Growth, the scientific method, The Wealth of Nations by Adam Smith, Thomas L Friedman, too big to fail, total factor productivity, trade liberalization, transaction costs, unorthodox policies, Washington Consensus, World Values Survey, zero-sum game, éminence grise

They have also known that the economic benefits of trade agreements that reach beyond borders to shape domestic regulations—as with the tightening of patent rules or the harmonization of health and safety requirements—are fundamentally ambiguous. Nonetheless, economists can be counted on to parrot the wonders of comparative advantage and free trade whenever trade agreements come up. They have consistently minimized distributional concerns, even though it is now clear that the distributional impact of, say, the North American Free Trade Agreement or China’s entry into the World Trade Organization was significant for the most directly affected communities in the United States. They have overstated the magnitude of aggregate gains from trade deals, though such gains have been relatively small since at least the 1990s. They have endorsed the propaganda portraying today’s trade deals as “free trade agreements,” even though Adam Smith and David Ricardo would turn over in their graves if they read the details of, say, the Trans-Pacific Partnership on intellectual property rules or investment regulations.

On the other hand, it is supposed to increase exports and jobs by increasing access to trade partners’ markets. The first of these is the conventional comparative-advantage argument for trade liberalization; the second is a mercantilist argument. The difficulty is that the comparative advantage and mercantilist goals are contradictory. In the comparative advantage perspective, the gains from trade arise from imports: exports are what a country must give up in order to afford those imports. And these gains accrue to all countries, as long as trade expands in a balanced fashion. In the mercantilist worldview, exports are good and imports are bad. Countries that expand their net exports gain, while the others lose. From the comparative advantage vantage point, trade agreements do not create jobs; they simply reallocate them across industries. From the mercantilist vantage point, they can create jobs, but only to the extent that they destroy jobs in other countries.

One study identified strong “gravity” effects on the Internet: “Americans are more likely to visit websites from nearby countries, even controlling for language, income, immigrant stock, etc.”26 For digital products related to music, games, and pornography, a 10 percent increase in physical distance reduces the probability that an American will visit the website by 33 percent—a distance elasticity even higher (in absolute value) than for trade in goods. Despite the evident reduction in transportation and communication costs, the production location of globally traded products is often determined by regional agglomeration effects. When the New York Times recently examined why Apple’s iPhone is manufactured in China, rather than in the United States, the answer turned out to have little to do with comparative advantage. China had already developed a massive network of suppliers, engineers, and dedicated workers in a complex known informally as Foxconn City that provided Apple with benefits that the United States could not match.27 More broadly, incomes and productivity do not always exhibit a tendency to converge as markets for goods, capital, and technology become more integrated. The world economy’s first era of globalization produced a large divergence in incomes between the industrializing countries at the center and lagging regions in the periphery that specialized in primary commodities.


pages: 279 words: 87,910

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

"Robert Solow", 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, 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: 291 words: 81,703

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

Amazon Mechanical Turk, Black Swan, brain emulation, Brownian motion, business cycle, 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, Johannes Kepler, 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, P = NP, 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: 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, business cycle, 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, Kickstarter, 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, The Rise and Fall of American Growth, 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: 94,153

More From Less: The Surprising Story of How We Learned to Prosper Using Fewer Resources – and What Happens Next by Andrew McAfee

back-to-the-land, Bartolomé de las Casas, Berlin Wall, bitcoin, Branko Milanovic, British Empire, Buckminster Fuller, call centre, carbon footprint, clean water, cleantech, cloud computing, Corn Laws, creative destruction, crony capitalism, David Ricardo: comparative advantage, decarbonisation, dematerialisation, Deng Xiaoping, Donald Trump, Edward Glaeser, en.wikipedia.org, energy transition, Erik Brynjolfsson, failed state, Fall of the Berlin Wall, Haber-Bosch Process, Hans Rosling, humanitarian revolution, hydraulic fracturing, income inequality, indoor plumbing, intangible asset, James Watt: steam engine, Jeff Bezos, job automation, John Snow's cholera map, joint-stock company, Joseph Schumpeter, Khan Academy, Landlord’s Game, Louis Pasteur, Lyft, Marc Andreessen, market fundamentalism, means of production, Mikhail Gorbachev, oil shale / tar sands, Paul Samuelson, peak oil, precision agriculture, profit maximization, profit motive, risk tolerance, road to serfdom, Ronald Coase, Ronald Reagan, Scramble for Africa, Second Machine Age, Silicon Valley, Steve Jobs, Steven Pinker, Stewart Brand, telepresence, The Wealth of Nations by Adam Smith, Thomas Davenport, Thomas Malthus, Thorstein Veblen, total factor productivity, Uber and Lyft, uber lyft, Veblen good, War on Poverty, Whole Earth Catalog, World Values Survey

It would have made sense for England to concentrate on manufacturing even if it were more productive than mainland Europe at both farming and manufacturing. “Comparative advantage” is the counterintuitive idea that even if country A is more efficient at producing both of two products than country B, the best thing is for it to produce only one of those products—the one where its comparative advantage in efficiency is bigger—and trade for the other one with country B. This arrangement is in the self-interest of both countries and leaves them both better off. Comparative advantage was first described by the English political economist David Ricardo in 1817. The Nobel Prize–winning economist Paul Samuelson tells the story that he was once asked by the mathematician Stanislaw Ulam to “name me one proposition in all of the social sciences which is both true and non-trivial.”

The Nobel Prize–winning economist Paul Samuelson tells the story that he was once asked by the mathematician Stanislaw Ulam to “name me one proposition in all of the social sciences which is both true and non-trivial.” Samuelson’s answer, which he only thought of years later, was comparative advantage. As he wrote, “That it is logically true need not be argued before a mathematician; that it is not trivial is attested by the thousands of important and intelligent men who have never been able to grasp the doctrine for themselves or to believe it after it was explained to them.” IV. I had a vague memory that Marx also wrote about “the machinery of capitalism being oiled with the blood of the workers.” When I tracked down that quote, though, I learned that it comes from Homer Simpson. V. Marx thought workers’ situations would be bad even if they had high wages because the prices they would have to pay for things would be even higher.

Møller-Maersk, 257 Apollo 8 mission, 53–54 apparent consumption, 78–79 Apple, 102, 111, 169, 235, 257 Applebaum, Anne, 218 Arab oil embargo, 161 Ardekani, Siamak, 75 artificial intelligence, 205 Asch, Solomon, 226 Atacama Desert, 17 “Atoms for Peace,” 58–59 Audubon, John James, 43, 258 Austin, Benjamin, 254 Ausubel, Jesse, 4–5, 75, 76, 78, 183 authoritarianism, 174, 217–18, 220 automobiles, 161–63 back to the land movement, 67–68, 91–93 bananas, 24 Baron, Jonathan, 127 BASF, 31 Beach, Brian, 41 beefalo, 182 Bergius, Friedrich, 31 Berzin, Alfred, 164 Bezos, Jeff, 206 Bhattacharjee, Amit, 127 Bishop, Bill, 227 Bismarck, Otto von, 225 bison, 44–46, 96, 152–53, 183 Blake, William, 40–41 Blomqvist, Linus, 270 Bloom, Paul, 210 blue whales, 47 Borlaug, Norman, 31–32, 262 Bosch, Carl, 31 Boulding, Kenneth, 63–65 Boulton, Matthew, 15–16, 20, 121, 206 Bowling Alone (Putnam), 213 Brand, Stewart, 67–68, 182, 183 Brandeis, Louis, 259 Brazil, 173, 174 Brynjolfsson, Erik, 112, 205 Bump, Philip, 224 cap-and-trade programs, 143–44, 145, 187, 188 capitalism, 2–3, 4, 5, 36, 99–123, 113, 125–39, 141, 151, 158–59, 161, 167–68 critiques of, 126–31 defining of, 115–18 negatives of, 142–43 spread of, 170–73 carbon capture systems, 187 carbon dioxide, 185, 188–89 carbon offsets, 259–60 carbon taxes, 187, 249–50, 252, 257, 259 Caro, Robert, 29n Case, Steve, 256 CBS Evening News with Walter Cronkite, 53 central planning, 116, 122, 170 cerium, 107 Chávez, Hugo, 134–35 Chicago and North Western Railway, 105–06 child labor, 35, 38–39, 167 child mortality, 196–97 China, 85, 93–94, 106, 110, 133, 145, 154, 172, 174, 185 chlorofluorocarbons, 149–50, 185, 228, 249 cholera, 22–23, 26 Christensen, Clay, 265 Christmas Carol, A (Dickens), 24 chromium, 72 Church, George, 182 Cichon, Steve, 101–02 circle of sympathy, 176 Civil War, US, 38 Clapham, Phillip, 163 Clark, Gregory, 10–11, 20 Clean Air Act, 66, 95, 122, 143, 147, 161 Clean Water Act (1972), 66, 190, 252–53 climate change, 60, 158, 185, 228, 243, 248, 257, 269, 274 Clinton, Hillary, 201, 224 Closing Circle, The (Commoner), 64 coal, 16, 18, 19, 40, 41, 56 as finite resource, 48–49 Coal Question, The (Jevons), 48, 49 Coase, Ronald, 143 collusion, 129 colonialism, 35, 39–40, 167 Commoner, Barry, 64 commons, 183–84 communism, 133, 172 Communist Manifesto, The (Marx and Engels), 21 comparative advantage, 19n competition, 109–10, 116, 129, 203 computer-aided design, 113 computers, 141 concentration, 199–210, 218, 224 economic, 202–03 industrial, 204 of wealth, 205–07 Condition of the Working Class in England, The (Engels), 21 Congo Free State, 39 conservationists, 95–96 conspicuous consumption, 152 Constitution, US, 38 consumption, 63–64, 88–90 contract enforcement, 116 Cooke, Earl, 60 Coors, 101 copper, 79, 80, 90, 107, 120 coprolite, 18 Cordier, Daniel, 106–07 Corn Laws, 18, 172 Corporate Average Fuel Economy (CAFE) standards, 162 corporatism, 129 corruption, 175 cotton industry, 38 cotton textiles, 19 Cramer, Kathy, 221 CRIB, 62–68, 87–97 cronyism, 129 Crookes, William, 30 crude oil, 58 “Crude Oil” (GAO), 103 Crutzen, Paul, 150 Cuba, 133 Cutler, David, 28 Cutter, Bo, 105 Cuyahoga River, 54 Daimler, Gottlieb, 26–27 Dana, Jason, 127 Davenport, Thomas, 27 de-extinction movement, 182 death penalty, 176 deaths of despair, 214, 216, 219–20, 247 Deaton, Angus, 210, 213–14, 220 DeepMind, 239–40 deforestation, 43, 184–85 degrowth, 63–64, 88 demand, 50–51 dematerialization, 4–5, 71, 72–73, 75–85, 87, 125, 141, 144, 151–52, 160, 167, 168, 235, 247–48, 259 causes of, 99–123 paths to, 110–11 Demick, Barbara, 94 democracy, 174 Democracy in America (Tocqueville), 89–90 democratic socialism, 133–34 Deng Xiaoping, 170 Denmark, 117–18 developing countries, 56 Devezas, Tessaleno, 73 Dickens, Charles, 24 digital tools, 234–35 Dijkstra, Lewis, 199 Dimon, Jamie, 256 Ding Xuedong, 253 disconnection, 211–29, 247, 253–54, 255, 270–71 diversity, 216–17 Dodge, Irving, 45 Donora, Pa., 41, 55, 66, 145 Dragusanu, Raluca, 268 data centers, 240 Duolingo, 236 DuPont, 149 Durkheim, Emile, 215–16, 219 Earth Day, 3, 53, 60–61 Earthrise, 53–54 Ecology as Politics (Gorz), 63–64 Edison, Thomas, 27 education, 177, 195, 256 Ehrlich, Paul, 55, 59, 62, 65, 71–72, 75, 151, 244–45 Eisenhower, Dwight, 58 electrical power, 26–28, 29, 30, 36 Elephant Graph, 221–23 elephants, 153–54 Elop, Stephen, 102 Emancipation Proclamation, 38 emancipative values, 176 energy consumption, 58–60, 59 Energy Information Administration, US, 103 Engels, Friedrich, 21 Engels Pause, 20, 23 England, 18–20, 22, 38 abolitionist movement in, 37 air pollution in, 41 population of, 10–11 population versus wages in, 20 Enlightenment, 122–23 Enlightenment Now (Pinker), 37, 176, 179 environmental movement, 53, 65, 68, 122 Environmental Protection Agency, 66, 95 ephemeralization, 70–71 epidemiology, 22 Essay on the Principle of Population, An, (Malthus), 8–9, 10, 13 Evans, Benedict, 173 externalities, 142 extinctions, 35, 36, 42–43, 61, 96, 151–52, 167, 181–82 Factfulness (Rosling), 179 Factory Act (1833), 38 factory ships, 47 Fair Trade certification, 268 false imprisonment, 175 famine, 12, 13, 61, 62, 69 Famine 1975!


pages: 355 words: 92,571

Capitalism: Money, Morals and Markets by John Plender

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, business cycle, 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

"Robert Solow", 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 cycle, business intelligence, business process, call centre, Charles Lindbergh, 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, G4S, 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, post-work, price stability, Productivity paradox, profit maximization, Ralph Nader, Ray Kurzweil, recommendation engine, Report Card for America’s Infrastructure, Robert Gordon, Rodney Brooks, Ronald Reagan,