Wednesday, November 23, 2005

Believe in Santa Claus?

I equate believing in free trade like believing in Santa Claus.
Why? Because, like Santa, it was established in the stone-ages that the reasons why free trade doesn't work lie in its noble but utopian assumptions.
For instance, free trade is based partly upon the economic theory of the Heckscher-Ohlin model (H-O model), combined with a few other assumptions that delve into the shark infested waters of political economic policy.

What is the H-O model?

Generlly speaking, the model can be understood as follows:

"Relative endowments of the factors of production (land, labour, and capital) determine a country's comparative advantage. Countries have comparative advantage in those goods for which the required factors of production are relatively abundant. This is because the prices of goods are ultimately determined by the prices of their inputs. Goods that require inputs that are locally abundant will be cheaper to produce than those goods that require inputs that are locally scarce.
For example, a country where capital and land are abundant but labour is scarce will have comparative advantage in goods that require lots of capital and land, but little labour - grains, for example. Since capital and land are abundant, their prices will be low. Those low prices will ensure that the price of the grain that they are used to produce will also be low - and thus attractive for both local consumption and export.
Labour intensive goods on the other hand will be very expensive to produce since labour is scarce and its price is high. Therefore, the country is better off importing those goods."

My contention with this model:

Well, I suppose that the HOS model - like many other economic theories - are for ideal markets where we have perfect information, perfect competition, perfect everything. Markets in which the market itself determines prices, etc. Sometimes, conditions are condusive for the HOS model to be seen to be holding. But more often that not, it doesn't.

Why? A quick stab in the dark would be that if the HOS model held perfectly, then the outcomes of globalisation would be all fantastic. The land and labour intensive countries would dominate that part of the market and the capital intensive (mostly western) countries would dominate that side of trade. Everyone would be a winner. However, globalisation is creating some segregation in the world. By that I mean that some regions appear to be left out and there doesn't seem to be a clear way as to how these isolated regions can be reintegrated and kept within the globalised system.

See the Leontief paradox. It just summises my point that in social science, there is generally too much assumption that the markets are rational, perfect, etc . Once political failure/agenda are considered, the economic models become disconnected from reality because they are not programmed to account for the "human condition" - a real stochastic element.

A free trade world is a world without international trade tariffs or barriers, with free movement of labour between countries, free movement of capital between countries and no trade-distorting policies such as subsidies.
WOW, that sounds like the biblical paradise to me. Perhaps we should all stick to pursuing fair trade, which is far more realistic and achievable.

Friday, November 11, 2005

French riots; an egalitarian lack

Full political and social equality for all. That is what the ideal society model should be based on.
Before I comment on the French riots, allow me to present a context.
The power of stereotypes that support prejudice comes, in part, from a more neutral dynamic in the brain that makes all types of stereotypes self-confirming. People remember more readily instances that support a stereotype, while subconsciously tend to discount the numerous instances that challenge it. For instance, on meeting in a bar, an emotionally warm and open Englishman, who unconfirms the stereotype of the cold, reserved Briton, people may resign themselves to think that he's just unusual or that he's been drinking.
What's my point?
The tenacity of subtle biases may explain why, over the many decades, racial attitudes have become increasingly more visibly tolerant, whilst more subtle forms of bias persist. When asked, such people say they feel no bigotry, but in an ambiguous situation, still act in a biased way, though they give a rationale other than prejudice. Such a situation is now visible in France, though it persists in many other countries, like ours, the USA, etc, sitting just under the surface, hardly visible but very feelable.
I have previously referred to this subtle bias as "undercurrent" in my previous posts. (see an example)
Why is it explosive?
Because the unfortunate recipients of subtle racial bias - that can be endemic in a "highly tolerant" society - have a difficult task proving discrimination.
The outcome is that subtle prejudice spreads like a virus and becomes embedded in society like it is today (institutions). When a situation like France's arises, it is merely a trigger to the stockpiles of many years of hurt and subtle maltreatment, consequences of which are - more often than not - poverty and its by products.
Before we examine the spec in our neighbour's backyard, let us examine the log in ours.
Further reading:
Reading 1