in defense of realisttic intl economics- free trade

8/10/2019 In Defense of Realisttic Intl Economics- Free Trade

http://slidepdf.com/reader/full/in-defense-of-realisttic-intl-economics-free-trade 1/7

In Defense of Realistic International

Economics: Free Trade

Francis W Rushing

The effective teaching of economics requires a framework in which the

concepts and the analysis are presented. Since Adam Smith, economists have

developed theories and tests of their application in the real world. These

theories provide the intellectual pegs upon which analysis of contemporary

problems can hang. Although they are theories, they are not synonymous

with universal truths. Therefore, theory is in a constant state of evolution.

The relationships that most theories establish are subject to constant tests

by reality, and from these tests the embryos of policy emerge. The policies

are not exclusively economic phenomena but, in a contemporary society, re-

flect political realities and social and cultural factors, as well as the natural

endowments of the country and its human and capital resources. Therefore,

there seems to be a need, if not a requirement, that some analytical frame-

work be adopted so that policy issues can be developed, analyzed, and

adapted to achieve the objectives established by the policy makers. John

C ulb ertso n's A Realistic Internatio nal Ec on om ics has focused primarily

on the problems of tra di t io na l international economics without provid-

ing a new framework to replace it. His criticisms of free trade and laissez-

faire economics reflect an American economist's perspectives on the reali-

ties of the 1980s. However, those realities alone are not an adequate data set

for establishing a theory of international economics for the next century,

the period for which we are now educating our youth.

ANOTHER VIEW OF INTERNATIONAL ECONOMICS

Let me address only a few of the problems I have with Professor Culbert-

son's presentation.

National Sovereignty and the General Welfare

A great deal of the paper focuses on the problems associated with unre-

stricted movement of goods and money across national boundaries. The un-

restricted movement that may be advocated by free-trade theory presuma-



of its pe op le. Additional consequences of free trade are the loss of domes

tic jobs and the reduction of the real income of the American worker. Fre

trade , under this analysis, cou ld do damage that would outweigh any ben

efits it could confer in technical production efficiency. This critique, in m

opinion, although containing some basis of truth, is an overstatement o

reality.

Economic interdependence does require loss of some sovereignty. Onl

economic autarky internalizes all decisions and insulates one country from

external economic influences. The reason nations permit and support trad

is that it broadens economic choices and, in so doing, makes a nation bette

off. What price would the U .S . economy pay to be energy independent

The oil embargoes of the 1970s forced hardships on Americans, and yet eco

nomics sets in process adjustments to those events. The 1980s have seen a

plunge in oil prices that required different adjustments. All nation-state

seek to serve national objectives that, to varying degrees, seek to maximiz

the general well-being of their populations. Free trade encourages the estab

lishment of a framework in which choices can be made and in which oppor

tunity costs can be assessed in both domestic and international markets. In

this economic environment, it is believed that U.S. citizens, both producer

and consumers, can seek their objectives within the political/economic envi

ronment that the government has created. Observing international speciali

zation, one could conclude that the world's output of goods and service

has been expanded over time and that those nations most involved in inter

national economic interaction have been some of the primary beneficiaries

Specialization may result in the diminution of economic activity in an in

dustry in one country. However, the decline of one industry does not re

strict the establishment and expansion of another. While some jobs in some

industries may be lost to free trad e, the expansion of production and impor

tation of lower-priced (and, in some cases, better-quality) goods, enhances

the real incomes of other citizens. So any analysis of the benefits and costs

of free trade has to attempt to measure the net benefits (or losses) that such

a policy produces. Nations, therefore, are measuring the extent to which

they will give up some political and economic sovereignty in exchange for

economic benefits through foreign trade.

International W age ifferentials

Professor Culbertson's concern that cheap foreign labor in overpopulated

nations will displace higher-paid laborers in the United States has substantial

evidence to support his observation. This analysis seems most appropriately ap-



must play a role. Such factors might be the expansion of an infrastructure

within Korea and Japan, as reflected in heavy expenditures on education and in

the development of institutions and organizations that effectively fuse together

economic, social, and cultural attributes of the society.

If one refiects on the future, one might be struck with the prospect that

labor, as an input into the production process, will become less and less a

critical factor. We may be seeing this in the emergence of the use of robots

and computer-directed production processes. We may find in the twenty-

first century that the economic activity that has migrated to low-wage na-

tions in the last two decades will refiect the narrowing of wage differences

among nations and the increased importance of capital intensity and close-

ness to markets as determinants of the location of production.

I, for one, do not find it uncomfortable that economic activity expands

more rapidly in some nations (developing) than others (developed), nor do I

believe that one can extrapolate such a performance over long periods of

time. National economies within the context of the world economy may enjoy

for some period the benefits of unique circumstances. However, long-term

growth and performance will rely on such factors as human and physical cap-

ital, institutional relationships within a country and among countries, pro-

ductivity, adaptability, research and development, organizational efficiency,

economic incentives, and time perspective.

Professor Culbertson's view of international trade seems to imply that

foreign low-wage countries can penetrate more affiuent high-wage econo-

mies by providing cheaper goods. Lower prices should enhance demand for

both domestic- and foreign-produced goods. However, all foreign goods

are

ot

cheaper. For instance, Japanese firms established themselves in the

U . S . market by exporting lower-priced goods. This is no longer true. Amer-

icans buy Japanese goods not because their prices are lower but because, in

the minds of consumers, they are better products as measured by quality per

dollar. Thus the question is not only. Why Japanese products? but also.

Why not American products? In what ways would the American consumer

benefit from restricting or eliminating foreign goods? The issues are much

more complex than ch ea p foreign la bo r.

Prices and Competition

I n foreign trad e, the price system and competition work perversely, ac-

cording to Professor Culbertson. To economists, prices are valid if they per-

mit choices to be made among alternatives. Therefore, both consumers' and

producers' goods produced in developing economies refiect the cost structure

in the nation of origin. If it is true that not all costs—direct, indirect, and so-



developing coun try m ay be considerably less than in a developed cou ntry suc

as the United States. Prices, therefore, may still accurately reflect relativ

costs. How could the United States force prices of goods produced in othe

nations to reflect U.S. values such as aversion to pollution? Should this be

function of some Foreign Go ods Prices Equalization B oa rd ?

Market prices do reflect costs within the market system. Prices can and d

also reflect state subsidies for export, production subsidies, and so forth. Th

latter price interference is much more troublesome within international eco

nomics and trade policy than is Professor Culbertson's concern over the ab

sence of ext erna lities in the structure of prices.

Th e real concern in contem porary international trade is not the per ve rse

prices and dog-eat-dog perverse competition, as described by Professo

Culbertson, but rather the increasing interference in the international produc

tion and distribution of goods by nation-states seeking to protect and pro

mote their individual interest. Free trade and its benefits (and costs) seem

worthy point of departure for building an environment to facilitate economic

intercourse. What has happened, and at an increasing pace in recent years, i

that nations are putting up tariff and nontariff barriers that have a detri

mental effect on the trading environment and, over the long run, on the well

being of each nation.

CONCLUSION

Professor Culbertson's realistic international economics would seem to

freeze the economies of the world in the status quo. Growth would result only

from developments within a country. Markets of the higher-paid worker na

tions must be closed to protect the past gains. Only dire necessity would force

trade, and it would be bilateral trade, as opposed to multilateral trade. Eco

nomic history seems to provide evidence that international trade promote

growfth and economic well-being. Although the benefits to trade have no

been shared equally among the trading partners, each has, over the long run

become be tter off. Industrialized natio ns trad e with oth er industrialized n a

tions, or, to say it differently, the rich are the best customers. It would seem

that in international economics all parties have potential benefits as nation

grow and increase in per capita income.

The reader, by this time, will not be surprised to leam that I am an advo-

cate of traditional neoclassical international economics as an important poin

of departure for preparing a student for the contemporary world economy

Free trade theory isn't flawless, nor does it weave all the institutional charac-



within an economy, and among economies? Are there real costs to returning

to barter economics and/or expanding countertrade?

Professor Culbertson's process of making internat ional economics more

realistic falls short in one important way. If free trade and comparative ad-

vantage are to be aba nd on ed for lack of relevance, wh at is the subs titute

framework? What new analytical constructs will supersede the old laissez

faire? Can it be so loose a construct as government protection and interven-

tion? What guides these decisions, and whose preference functions dom-

inate? What are the long-run consequences should this guide to behavior be

adopted? The key issue in international trade is. How do you establish rules

of conduct that will facili tate, not discourage, international trade? The rules

of the game should be recognized and adopted by all the players. There

would still be roo m for ha nd ic ap pi ng some developing countries in order

to recognize their unique problems. Exceptions to the rule (as in English

grammar) become rules themselves and are understood by those within the

system.

I believe Professor Culbertson has made one significant point: No longer

can we as economists rely solely on David Ricardo and comparative advan-

tage. Reality is reflected in MITI, OPEC, IMF, subsidies, tariffs, and so

forth. Institutions and polit ical factors help shape economic decisions and

environments. These realit ies can supplement and be integrated into tradi-

t ional economics. American students should be introduced to internat ional

economics early in their education. The importance of foreign trade has

grown rapidly and will continue to do so. The theory of trade should find its

place among the primary concepts taught and, l ike supply and demand,

should be demonstrated in the realit ies of the world. Students should learn

that trade causes disruptions and that i t also has benefits. There are eco-

nomic costs to the dynamics of growth, both domest ic and internat ional ,

but the costs of stagnation are even greater.

A Framework for Teaching the Basic Concepts 2d edition, outlines the

principal concepts in international economics. I believe its treatment of ab-

solute and comparat ive advantage, barriers to t rade, exchange rates and the

balance of payments, and international aspects of growth and stabili ty is

adequate, if by necessity, brief These are the mainstream core concepts that

should be taught in introductory courses in economics. Some classroom dis-

cussion of current institutions and practices in international trade should

supplem ent these con cep ts. W e, as teachers, need to introduce more rea l-

ism into our internat ional economics presentat ions. Eco nom ic theory and

sterile international trade accounts cannnot be expected to stimulate young

m inds. After al l , econom ics is jo bs , incom e, consum ption, and econom ic

well-being. Therefore, discussions in international economics must be made



international trade topics necessitates that students at the precollege and

college levels be exposed to some international trade theory and practice.

REFERENCES

Co hen, R. B . , R. W . Ferguson, a nd M . F. Oppenh eimer. 1986.

Non tariff barriers to high

technology trade Boulder, CO: Westview Press.

Heertje, A., F. W. Rushing, and F. Skidmore. 1983. Economics New York: Dryden Press.

Rushing, F. W. 1985. High tech trade—are we losing the war?

Business

Ju ly /Aug. /Sep t . ) :

36-42.

Rush ing, F. W ., and C. G. Brow n, edito rs. 1986. National policies for developing high

technology industries: International comparisons

Boulder, CO: Westview Press.

Samuelson, P. A. , and W. D. Nordhaus. 1985. Economics 12th ed. New York: McGraw-Hill

Book Co.

in defense of realisttic intl economics- free trade

Documents