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Paul Samuelson Attacks a Dogma

by Christa Luft Thursday, Nov. 24, 2005 at 5:49 AM

The best-known economist of the world doubts that shifting services to india and buying cheap goods from China bring advantages to Americans when the income of workers falls through foreign competition. The rich North will lose its monopoly profits under the conditions of globalization.


By Christa Luft

[This 2005 article is translated from the German on the World Wide Web,

Ms. Luft, b. 1938, is an expert economist for the PDS party, the party of Democratic Socialism in Germany.]

In Germany, export is seen as the economic motor. For export to play this role, the heads of trade associations, representatives of the neoliberal economic guild and the black-yellow opposition urge lower labor costs, extended working hours and reduction of the social state standards. In this way, the economic location Germany should become more attractive under the conditions of globalization.

That the stagnating demand does not revive and unemployment is dismantled and not developed is indifferent to the DAX corporations. They realize their profits abroad and also invest them there. Businesses do not ask whether booming profits from international exchange enhance social and ecological prosperity for society as a whole. The statistical “foreign contribution” to GDP growth is also not a useful indicator.

As a result, reflection on alternatives to the dominant neoliberal economic policy must include examining how far the political conditions oriented mainly in the export interests of the “global players” lead to improved public welfare or conflict with the public interest. Not everything that is rational in foreign trade affairs from a business view is also rational from an aggregate economic perspective.

This problematic is not only interesting in leftist circles that have long thematicized “export as a drug” (Reuter 1996, Afheldt 2003). Renowned non-Marxist economists criticize globalization fetishism and staunch export-centered policy. For example, the 89-year old US Nobel Prize winner Paul A. Samuelson shocked the neoliberal world with his thesis shaking a dogma: it is an illusion to assume that globalization, unbridled free trade and shifting production and services to developing- and threshold countries – so-called outsourcing – will always bring advantages to the industrial states as high-wage countries.

In the example of the US, the best-known economist of the world shows that international trade can even be disadvantageous to the aggregate economy under certain conditions. He doubts that shifting services to India or buying cheap goods from China brings advantages to Americans when the incomes of workers fall through foreign competition. While people can buy some food more cheaply from low-price chains, this will not necessarily be enough to compensate for the wage losses. (2004)

The Nobel Prize winner argues that the United States could lose its traditional comparative advantages in the production of these goods if China raises its productivity in manufacturing certain technological goods. Thus the international terms of trade could deteriorate to the disadvantage of the US. The result is that the profits from international trade will not longer suffice to offset the income losses of many Americans. What Samuelson emphasizes here is a problem of Europe’s developed countries, not only a US problem. For Germany, the index of export prices between 1995 and 2002 rose from 100 to 105.3 while the index of import prices in the same period rose strikingly from 100 to 109.3. Thus the terms of trade deteriorated. That the index of imports grew more quickly for goods from developing- and transformation countries than for goods from EU (European Union) countries is remarkable. This is true for the price boost for raw materials and for technology goods imported from this region.

Unlike some of his shocked critics, I do not see any plea for protectionism or self-sufficiency in the thesis of the mentor of economics. There is also no scare mongering of a Chinese or Indian “danger.” Rather Samuelson’s thesis calls attention that the rich North will lose its monopoly profits under the conditions of globalization. These profits were gained in the past from manufacturing high-tech goods in the South. Given the productivity thrusts in threshold- and transformation countries, amassing these profits in the future is not automatic. The following fact shows that the predictions are already actual: In 2004 China exported more goods than its neighbor Japan and has risen to the third-largest worldwide exporter behind Germany and the US. A decade ago the kingdom of the middle was still an insignificant trading nation. The export world master Germany and the US must expect strong competition. China will surpass Germany in 2005 in one prestigious key industry and main German export branch – auto production.

Samuelson’s thesis urges reexamining the nearly 200-year old theory of comparative cost advantage (1817/1979) named after the classical English economist David Ricardo. According to Ricardo, the free exchange of goods and services across borders always brings a net gain to all participating countries since they can specialize in producing goods in which their productivity is greater than the other countries. They exchange these goods for products manufactured by others. Countries that are more productive in the entire production palette than all others can profit when they specialize in producing those products in which their productivity advantage is greatest compared to others and exchange these goods for others.

Why is this classical theorem questioned that was drummed into the heads of generations of economists like a Bible sentence (Sarkar 2002)? The answer is that Ricardo like Adam Smith described an historical period of the world economy, the world economy of his day. However cardinal changes have occurred for a long time.

Firstly, Ricardo assumed that all participants have equal rights, participate voluntarily in exchange and only seek to realize advantages through fair trade. He could not envision the possibility or historical reality that powerful states like the US, above all transnational corporations, could conquer or control the markets of economically weaker states with economic and military means to plunder the natural resources and human resources. A minimum of self-supply of basic foods is imperative for all countries given the importance of food security and the fact that grain deliveries can be used as a political weapon or means of blackmail. The theory’s assumption that politics plays no role in trade has long been unfounded. Politically motivated embargoes, boycotts, preferences and other measures vouch for that.

Secondly, the theory starts from smoothly functioning national economies in which prices and wages can quickly adjust and no involuntary unemployment exists. It assumes the full utilization of worker potentials, production capacities and financial resources. However the assumptions do not correspond to capitalist practice. Economic instability and fortified unemployment are part of the daily routine. Given the mass unemployment, preserving or creating jobs through political acts in branches where there is a comparative disadvantage (for example, fruit- and vegetable cultivation) to give more people the possibility of life and to reduce the total fiscal costs of unemployment – between 70 and 83 billion Euros from 1997 to 2003 – can be rational from an aggregate economic perspective.

Thirdly, there are no longer guarantees today that the unemployed of branches abandoned on account of corporate disadvantages will find work in areas flourishing because of their comparative advantage. But that was Ricardo’s basic assumption.

Fourthly, transportation costs do not enter in the classical theorem. However producing vital, energy-intensive goods with a country’s own resources or a regional border-crossing economic association is rational from supply-policy, security-policy and economic standpoints.

Fifthly, Ricardo started from the international immobility of capital with the greater mobility of goods. He spoke of capital’s difficulty moving from one country to another in its search for more profitable investment possibilities. But in today’s world, capital can flow unhindered across national borders. In most cases, workers do not want this. The free flow of capital has the consequence that investments are decided by absolute profitability, not by a comparative advantage.

Paul A. Samuelson’s objection can be seen as a warning of the results of the spontaneous approach to the worldwide division of labor and international exchange determined by narrow economic utility. He pleads for a total economic view. The social and ecological consequences of profit-maximizing entrepreneurial action like dismissal of workers, pressure on wages with negative effects for the domestic purchasing power, evading minimum social standards or environmental damages through long transport routes must be included in the calculation of the total economic utility of international exchange.

Even when the terms of trade are positive, they can be displaced by costs or losses in other areas – like support grants for the unemployed and the working poor, for public investments in an infrastructure mainly serving foreign trade objectives and for environmental protection like costs for removing marine pollution by oil tankers or cargo ships and air pollution by air traffic. Internalizing these social and ecological costs incurred through foreign trade and preventing a global competition to lower labor and environmental standards are imperative. As the gross domestic product altogether is inadequate as a prosperity indicator, the foreign contribution must also be subject to reexamination in judging the national economic effectiveness of international exchange.

Samuelson’s recent spectacular objection can be understood as a warning about ignoring regional economic cycles and the domestic market in which 80% of German employees are engaged for example. Tax deductions could stimulate expanding internal small- and medium-sized businesses, research, development, production and education instead of investing in other countries or speculating on financial markets. Spending for health care may not be opened up to worldwide competition to avoid dumping practices burdening indigenous workers. Intensive paid labor trades and businesses could survive more easily amid cheap foreign competition and reduce their proneness to bankruptcy if the sales tax rate were lowered. Removing tax exemption for kerosene would make the cultivation of fruits and vegetables more competitive compared with the supply flown in from the most remote countries. Subsidies for long-distance goods traffic are generally counter-productive. These subsidies make distance into an artificial burden of regional economies. Publically promoted businesses must be obligated to repay funds when they shift their production abroad. Such measures would be advantageous for the community.

The US economist emphasizes that industrial countries may no longer profit as in the past from the technological backwardness of the countries of the third world and the East. Advantages from international trade may not be simply secured in the future through wage competition or reduced working hours without equalizing wage co0mpensation. Industrial countries must invest in school education and vocational training, in research and development, science, culture and social infrastructure to profit economically in export from technological leads and innovations. In this area Germany has fallen behind in the past years.

Except for armaments, maximizing the total economic effects of international exchange cannot be decreed or brought about with export- or import prohibitions. Whether Afheldt’s idea of a “division of the world market in large regional markets with rules matching the different national economies of this earth” (2003) could be useful must be debated further. Attac followers also stress this idea (Attac memorandum 2004). This does not involve a restoration of protectionism, uncoupling from international markets or striving for self-sufficiency. Rather limiting the narrow economic striving for the greatest possible capital exploitation through international exchange where aggregate economic losses occur is crucial. “Free trade is desirable as a form of peaceful exchange between nations and regions with equal rights. On the other hand, free trade as a form of a corporate-controlled economy is free from political and social responsibility for nature and future generations. Markets need a democratic national and international framework that guides and maintains.” The capacity for improving local living standards only restrictedly involves international competitiveness. Domestic factors have a greater significance than export success for an open national economy.

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