Re: Comparative Advantage and TN

["Peter.Dorman" <23215MGR@xxxxxxx>]

I hate to sound like a broken record (or CD with a loop?), but this is an
important topic, and there is a phenomenal amount of misunderstanding out
there.

(1) Capital mobility is not a problem for orthodox trade theory.  Pick up any
leading textbook and read the chapter that covers capital mobility.  They
cover it.  You may not like the way they cover it, but that's a different
story. Simply adding DFI or mobile portfolio capital to a neoclassical model
does not change the fundamentals.  (Note: Daly and Cobb, who strike me as very
good people, are quite wrong on this point.)

(2) Paul Davidson is absolutely right about the affinity between comparative
advantage and Say's Law.  This is one big hint toward the reconstruction of a
sensible trade theory.

(3) The key to the critique of trade theory is to look closely at the proposed
adjustment mechanisms, both for what they assert and what they leave out.
They assert a type of pure price equilibration that is empirically
disconfirmed every day.  They leave out macroeconomic adjustment!

(4) Orthodox trade theory is also innocent of any of the important innovations
in general equilibrium theory in the past generation.  In particular, there is
nothing on multiple equilibria or the effects of disequilibrium trading on the
adjustment process.

(5) The theories of state behavior employed by orthodox trade theorists are
extremely naive: either the state is the omniscient maximizer of aggregate
welfare or the passive object of rent-seeking.  There is nothing approaching a
realistic theory of political conflict over distributional shares, etc.  (In a
world of marginal productivity pricing of factors, of course, there is nothing
to fight over except artificially generated rents.)

Trade theory shares the dual honor of being the most backward cranny of
mainstream economics and the most politically influential.  We urgently need a
careful, rigorously thought-out and empirically supported critique.  In the
meantime, all we can do is be clear-eyed about the shortcomings of the
existing doctrine.

Peter Dorman