Arnold Kling  

Economic Education

Case for Globalization... Economics and Moral Intuition...

Tyler Cowen recommends James Buchanan's "The Soul of Classical Liberalism," an essay published three years ago. As Cowen points out, Buchanan is wrestling with tough philosophical issues. Here, I just want to focus on a few sentences that bear on the issue of teaching economics. First, he despairs of training everyone to understand economic science.

the economic scientists by themselves do not possess either the formal or the informal authority to impose on others what may seem to be only their own opinions. Members of the body politic, the citizenry at large, must also be brought into the ranks. And they cannot, or so it seems to me, become sophisticated economic scientists, at least in large enough numbers. The expectation that the didactic skills of the academic disciplinarians in economics would make scientists of the intelligentsia, the "great unwashed," or all those in between was an expectation grounded in a combination of hubris and folly.

Buchanan suggests instead attempting to foster a vision of the liberal economic order.

In the idealized operation of an extended market order, each person confronts a costless exit option in each market, thereby eliminating totally any discretionary power of anyone with whom such a person might exchange. Coercion by another person is drained out; individuals are genuinely "at liberty."

He suggests that this vision of the noncoercive nature of market interactions is what should be used to defend free markets, rather than their ability to improve the standard of living.

What I am suggesting is that the relevant arguments in support of particular proposals for change are those that emphasize conformity with the integrating philosophy of the liberal order, that locate the proposals in the larger context of the constitution of liberty rather than in some pragmatic utilitarian calculus.

In terms of my previous posts on making the case for globalization and using math in explaining economics, I take Buchanan as arguing against trying to train the general public in the 2x2x2 model of international trade. Instead, he would make a case for the inherent beauty of free markets, where the consumer has the opportunity to turn down any proposal that is not to his or her benefit.

For Discussion. Suppose that Buchanan were to say that there is beauty in an economic system that gives participants the freedom to choose whether or not to purchase software development services from India, and that the coercion required to prevent outsourcing is inimical to liberty. Is that any more persuasive than the utilitarian argument?

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The author at Knowledge Problem in a related article titled I'VE MISSED SOME GOOD STUFF writes:
    Vacation was lovely; we hiked into Haleakala crater and swam with sea turtles. More on that later, after I've recovered from taking the redeye back. Meanwhile, I was very interested in Arnold Kling's economics education take on Tyler Cowen's post... [Tracked on December 22, 2003 12:45 PM]
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Steve writes:

Yes, of course protectionism is anti-liberty, but so is tax collection so that roads to cities you're never going to visit, but we are okay with that. So is collecting money from ME to go on a crusade to avenge Shrub's father in Iraq, but I'm not allowed to be angry about that, am I?

You see, sometimes for the good of the country or for the good of mankind in general, we have to do things that are anti-liberty. Protecting vital industries is simply one example of this.

jjayson writes:

I don't think we have to teach the electorate about economics. Each person lives economics and we learn for ourselves. We learn about taxing and regulations from parental discipline and those begging for toys in the store and tantrums we gave. By the time somebody enters the workforce, they are well versed in the basic concepts of supply and demand, over-reguation, dimishing return, and every other major economic term. We may not be able to explain it, but we act it. This breads a general natural distrust of over-taxation and over-regulation where we feel we are paying too much for the services given too us.

This summer the Alabama electorate voted against a proposition that would have (on paper) lowered taxes for many of them while raising taxes on the wealthiest. It was pushed using the the rhetoric of Jesus and being cheerful givers, but the electorate clearly saw though the ploy and soundly rejected it by a 2 to 1 margin.

California's Prop 13 is an excellent study too. While Prop 13 passed, follow-on legislation that tried to either soak the rich or soak business, while leaving private residences alone (such as Prop 167) have all been rejected. And attempts to reduce the taxes further have also failed (Prop 36, I believe).

Individual groups may push for preferential treatment and one of the worst things our government does (and also one of its most undemocratic) is giving in to special interest legislation, instead of following the will of all the people, it tries to follow the will of each person.

I hardly see a problem with having to educate the public in economic though. I am more scared of people that have been educated in economic though (although, I am one of the latter I guess I have to admit to).

Lawrance George Lux writes:

The construct of Economic thought varies, and retraining costs would be too high. The determinant of this Estimate relies on the difference in Economic function, dependent on alternating Populations of economic participation intermixed with variations of Resource supplies. Economic thought only stays relevant until structural values change. Trying to educate the entirety of the Public in Economics, remains only the insistence on teaching them eventual errornous Economic dictates. lgl

TL writes:


You're comparing the funding of public goods (defense and transportation infrastructure) to the cost of shielding private industry from competition.

The definition, of "vital industries" in need of protection, has always been subject to abuse. Even mohair producers successfully lobbied for import restrictions against foreign mohair on the grounds that mohair was used to make military uniforms and was therefore a stragic commodity.

Eric Krieg writes:

Where's that quote from? Katrina Van De Ley in The Nation?

The quote is silly. As the Indians themselves posting to this site told you, Indian wages are low because the Indian economy and Indian workers are unproductive.

Now, maybe by dumb luck, the Indian government has created a pool of programmers that is internationally competitive. But I hardly think that means that all work outside of McDonalds and Wal-Mart is going offshore.

India simply needs too much infrastructure and is too bureaucratic to take over the world.

Gautam writes:

Yes Eric,

I completely agree with you, there is a joke that most educated Indian's savour about just such a thing. They say that the onlything that India has given the world is "Zero", and that is just about all that we can.

Though I'd like to hope that there is a possibility to improve India's standing in the world, in the economic sense, there are deep rooted problems, that stand like very high walls between India and any kind of global domination.

Gautam writes:


Steve writes:

Guys--Let me give you some insight into programming. If you go more than 3-4 months without writing a line of code (in ANY language, none in particular) you will LOSE all your knowledge and skill that you gained over the years, and it takes years to recover what has been lost.

If we do not protect my industry and WWIII comes around (likely us vs. the world), we have NOBODY who can create software for defense purposes. We will have nobody to protect the internet from government-funded hackers. Nobody to write software for businesses because even our beloved friends in India will be against us (and they've got NUKES!) Heck, since M$ is moving offshore, government backed workers in China and India have probably already placed backdoors into Windows for just such a reason.

I don't know for sure, but I would have to assume that steelmaking is the same way. They idea that we should let all of our mills die and mothball a few near naval shipyards is CRAZY. Men with 30 years of steelmaking experience don't just grow on trees, and we're not replacing the old or dead with new steelmakers. In one generation we will no longer have the ability to do this. That scares the heck out of me.

Eric, the quote was just something a random techie posted to (pretty much the original blog for techies). It fully explains how the tech industry is seeing the world right now.

Have you read anything from Alan Tonelson (author of "Race to the Bottom")? Tell me how he's wrong. I haven't read the book, but I've scoured the website: and he has very many valid points. Yes, I know he has ulterior motives (ie: trying to sell his book), but his points are valid nonetheless.

Steve writes:

The quote I was refering to is on another subject here (the globalization subject):

I wasn't quoting anything above, that was just my thoughts on liberty vs. protectionism. Nobody has addressed the fact that stealing $87 billion from my pocket and giving to a certain oil rich country with NO provision to repay it is much more anti-liberty than my crusade to save a few techie jobs, not to mention the $100 billion already spent to avenge the "father of the shrub".

Gautam writes:

There are people in Mumbai who feel that their jobs should get preferential treatment from the Government and Private Enterprise, because they belong to the majority Marathi speaking community. They see migrant workers from Bihar as a threat to their ability to earn a living. They went to the extent of catching hold of people in the suburban trains who looked like "Biharis" and beat them up. Similarly at the other end of the country in Assam, some militants rounded up Bihari labourers and shot them dead, because they felt that their local ethnicity was threatened by an infusion of these "foriegners". In Bihar people who don't go away die of starvation, floods, Caste wars and political rivalries.

It is very easy to say that your own cause is greater than that of others, and most people who do, look for common cause with other disaffected groups. Politics makes for strange bedfellows, and there have been stranger ones than IT professionals and Steel workers.

Flaming economists for telling the truth as they see it, is like this lady who changed her doctor because she scolded her for not feeding her child properly. Getting an economist to say what you want to hear, is hardly a solution to economic problems.

Indian economists have been saying exactly what their patron the government wants them to say, and we have been dragging along on the brink of disaster. Hopefully some American economists will continue to see and speak the truth about free trade.

Lawrance George Lux writes:

What is the truth about Free Trade? There are many truths, differing by placement and perception. I have read an article which states Business Profits rose consistently through the last Recession, and is rebounding well in the last few Quarters. The loss of Labor Income, though, has been spiraling downwards; it has yet to hit bottom. Arnold's question is answered, if the Article proves true.

Bush will not see the creation of 300,000 jobs a month, as he predicted with his Tax Cuts, within his administration. Economists are proclaiming a Recovery, yet We pull only around 60,000 new Jobs a month; these Jobs are less pay than Middle-Class average.

Labor has refinanced all its mortgages, extended their Consumer Credit lines, and acquired more debt. The Goods, which Economists proclaim are so much cheaper with Free Trade, continue to inflate in price at the same rates as in the Boom 1990s. Adjusted for Inflation the Recovery of Capital Equipment consumption reminds of the Reagan administration, after the S&L Bailout. The National Debt is going through the roof, expected to double within a decade.

Business and Economist want the burden of taxation thrust on the Consumer, by elimination of Business taxes and increases of Consumption taxes. Are Economist and Business willing to raise Wages the average $8 per hour, in order to pay for the taxes of the increased Government debt?

I have tried to be polite to all in response, but to proclaim the success of Free Trade is akin to saying: The Operation was successful, though the Patient died. lgl

Lost Cause writes:

Now that we've established that capitalism doesn't work, it's time to vote Green Party folks. They plan to put the largest US corporations under government ownership should work out nicely.

Lawrance George Lux writes:

Lost Cause,
I do not happen to belong to the Green Party, nor do I deride the capacity and capablity of free market forces. I will provide a Blog commentary, though, which I will hope you can integrate:

Business Profits have maintained an impressive increase throughout the last Recession, estimated to be over 2.3% yearly average increase. Labor Income has decreased dramatically since the last Recession, and shows no sign of increasing. Bush foretold the Economy would generate 300,000 Jobs per month, if he could get his Tax Cuts. He has not even gained such increase over his entire administration, not counting the overall Job loss, and is unlikely to gain this level in the rest of his term. The American economy would need 3.2 million new Jobs, to return to the Labor Income present before his administration. This is a highly debateable estimate, but other Economists fail to account the relative Wage loss in the new Job creation. I believe George W. Bush will gain equal infamy with Herbert Hoover, though with a difference; Hoover never deserved the insult to his character and administration. lgl

I think some of my reservations as to the efficacy of Free Trade find expression here. lgl

Gautam writes:

The answer to Deficits, may lie in cutting back on government spending, which is evidently quite politically unpalatable. But if the budget is burgeoning, why just keep funding it with debt and taxes, why not cut back on spending. Incidentally this is the prescription with the IMF gives to countries that it is bailing out.

Free Trade is an element of the entire economic process. Today government plays such a significant role, that ranging from interest rates to prices everything is determined by its indicative leadership of the economy. International free trade cannot be expected to deliver positive results while government debt programs and spending patterns remain unwieldly.

I don't know how many people have read Hazlitt's small reader "Economics in One Lesson" ( ), but it seems a fairly clear non-mathematical exposition of Classical Liberal Economics. In my view it quite carefully states the problems of panacean Govt. intervention in the Economy.

Steve writes:

Gautam--You claim to be an economics student, yet you know NOTHING about Keynsian economics. When we have yet to immerge from a recession (at least in terms of the labor market recession, which is the only one that friggin matters), it is the PERFECT time to run deficits. We should have upwards of 7% of GDP as deficits to get us out of this and economists know this, yet they do not have the political stomach to do this. When there is no inflation, and no crowding out, deficits don't matter. They only matter when they matter, and you only have to worry about them when there's something to worry about (something Yogi Berra would have said).

Free trade: Hurts millions of people in very, VERY visible ways (job loss, soup lines, etc), but helps hundreds of millions of people in invisible ways (socks are $1 cheaper at WalMart, can buy a Ford Focus for $100 less than otherwise, and you can buy tainted Canadian meat at the grocier for $.10 less per pound than otherwise). You guys are also forgetting that the Hepititis scare in New Jersey? a few months ago was caused by an oinion that was a product of free trade with south America. That killed 3-4 people who ate at certain resturants out there. I'm sure they never realized that free trade killed them, but it did.

Steve writes:

If free trade is so great, why are we the only country that does it? Why does EVERY other country have high tariffs on everything? If you think this is one of my "black heliocopter theories", explain away the gigantic MERCHENDISE TRADE DEFICIT that we run with the rest of the planet? Investment is NOT the answer to that question, it is tariffs in other countries.

Why does japan have a 5.5% unemployment rate if tariffs cause unemployment? They have the highest tariff barriers of any developed country in the world, and our leaders have YET to say "boo" about it, they prefer to go on crusades to avenge Bush 41 than get their citizens back to work.

Do our leaders like to consume their young for food?

Lawrance George Lux writes:

I have contended in several of my works, the proposition that Keynesian theory has ever worked. My basic thesis holds Transfer payments are never effective, as they do not raise the actual purchasing power of the Receiptents. Government contracts do no generate ongoing Consumption, except in high Wages paid for Infrastructure construction. Weapons contracts, etc., are effective stimilus only if Resource recovery rates are less than 60% of potential. There is no case for Deficit spending, when actual Resource recovery is not suppressed.

Government deficits place false inflationary pressure on Prices, far worse for Consumption than collection of sufficient taxes. The proscription for economic stimilus under the current economic situation becomes emplacement of a two (2%) percent tariff, reemplacement of Corporate and Business taxes, and sharp reduction of Government expenditure (I live for the day when this expenditure is less than 14.3% of GDP).

There has been dead silence about the Christmas season Sales numbers, since initial comments about lack of Consumer Demand; leading Relays of Consumer data obviously do not wish to comment. A reliable Retail source has told me this Weekend crowd resembled a late weekend in January, rather than the last weekend before Christmas.

Such information is in full conformance to my belief that the Bush Tax and Economic policy is in error. lgl

Steve writes:

I can assure you that the folks who work for Boeing are making real money and consuming real goods. Government spending becomes someone's salary and someone's salary becomes consumption which becomes my salary. When a link in the chain is broken (such as Boeing laying people off), that person stops consuming and I stop drawing a salary, which causes me to stop consuming, etc. The government must prime the pump in this situation and force new spending to create new consumption.

It's just that simple, my friend. We agree on many things. I assumed that Keynsian economics would be a lowest common denominator that most people outside of the ivory towers of Chicago and Austria could agree on.

What, praytell, do you believe caused the end of the Great Depression if it wasn't Keynsian economics? Even if you think the New Deal itself was a sham, WWII forced FDR to deficit spend, thereby bringing and end to the G.D.

Gautam writes:


I suggest that you look up Hazlitt, and Bastiat's Economic Sophisms in the EconLib ( especially his Petition (Ch. 1.7). Your suggestion of Keynes Style Deficit Spending is extremely ill conceived and falls into the category of the famous "Broken Window Fallacy". If we extend your hypothesis America should go to War everytime there is a depression, blood and iron.. Heil Shrub.. ;-)

And also carefully look at Post World War 2 American Economic History, when America was following the advice of the Keynesians, the country slipped slowly into the period of Stagflation (zero growth, inflation and unemployment). Telling an economist to continue to take Keynes and the Keynesians at face value, is like telling a Computer Engineer, that they should never have stopped programming using punch cards. Keynes revolutionised economic science that does not mean that he was right about everything or for that matter anything. He presented very old ideas, those of the mercantilists who steered the reigns of state policy before Adam Smith rocked their boat.

Keynes primarily addressed the Closed Economy (A theoretical non trading economy), the Mundell-Fleming Model is reputed to have buried many of the extended applications to Open Economies that had been sought by Keynesians.

One approach to the Balance of Payments called the Polak-IMF Model, which we just covered in class today, examines how trade deficits can be created by excess spending at home. So what Americans are doing and have been encouraged to do over the last few years has been to spend, this has been induced by low interest rates and easy money policies (as best as I can tell). Since Americans are spending more, they have been importing more, because they are importing more, they need more money to buy those imports with, since they aren't saving enough, they have to depend on inbound Capital Flows to compensate for these temporary shortfalls. The Dollar, the Printing Press, and the Easy Money Policy are the enemies you should be addressing, not Indians (who incidentally make up less than 1% of total world trade)and Free Traders. Externalising the problem is not going to solve the long term problems that have been creates by decades of Short-term solutions.

Please read Bastiat!

[PS: We have bad infrastructure, and some very bad teachers, but our syllabus here is pretty up to date, so you can drop the assumption that I have not heard about Friedman, and of my own interest I do know a bit about the Austrians. Peace]

Steve writes:

Clearly your knowledge of economics is vastly superior to mine, I bow before your superior knowledge.

Without our spending, the world would have slipped into a depression the likes of which we haven't seen in 70+ years. Are you saying that BECAUSE of our spending, we are going to cause a depression in the near future the likes of which hasn't been seen in 70+ years?

Why isn't investing considered savings from an Economic standpoint? Why is everyone so focused on our low savings rate instead of our high rate of stock ownership? Is stock ownership bad compared to savings?

Bernard Yomtov writes:


The trouble is the two arguments are not the same, and do not come to the same conclusions. The argument Buchanan advances is not an economic argument at all, but a moral one. It regards the economic liberty of the individual as a paramount good, and presumably is willing to sacrifice economic efficiency to it. And this argument does not lead necessarily to optimum resource allocation.

The other argument for markets - the utilitarian one - holds that markets are , in general, the best way to organize economic activity in order to advance society's economic well-being. But I think it also recognizes the importance of cases where this rule does not apply, and takes a wider view of the effects of economic arrangements and their consequences.

The two are often conflated, but they may lead to much different conclusions about, for example, the role of government in the economy.

Lawrance George Lux writes:

One of the serious problems I watch is the expansion of Stock ownership, this not because it is an innate problem in itself; it becomes a problem in how it is being accomplished--through Stock expansion by Stock Options and Corporate Stock sales solely to maintain Stock pricing. This Stock expansion dilutes not only current Profits, but future Profits by wide dispersion. Most Economists dismiss this trend, saying it is normal Capitalization activity. It is not! It is a shell game run by Managers, for the purpose of diverting Investment into their own personal gain. Investors lose actual Capital acquisition through Corporate Stock Inflation.

Explanation of the effect can be simplified: The Capital base of 100 share of GM stock in 1960 allowed for a certain net worth. Adjusting for Inflation and Price changes, the identical Capital base today would require many more shares--I have not done a Base evaluation, but it would require much more than 800 shares. This records a rate much higher than the Monetary inflation, and notice that Stock price change do not equate even to the Monetary Inflation rate. lgl

Bernard Yomtov writes:


Savings and financial investments, like stocks, are two sides of the same coin, so to speak. When we save money we typically invest it in financial instruments like stocks, bonds, CD's, etc. This serves to make our savings available for real investment - investment in machinery, R&D, etc. In fact, the most important function of financial markets is to make savings available for investment in this fashion.

So when we talk about a low savings rate we are talking about a "low investment rate," as well. Note that I have not said anything here about government, which needs to be included in determining the national savings rate. Deficit spending is dissaving, while running a budget surplus contributes to national savings.

Steve writes:


That's what I have always thought, but people seem to draw a distinction between savings and investing. For instance, they claim our national savings rate is near 4% (let's say). Well, we automatically put 14% of our income into Social Security trust fund, so clearly that is not counted. Also, lots of us put at the very least 1-2% into 401(k) which clearly isn't counted. I'm just wondering aloud "are they only counting SAVINGS accounts as savings?"

I also wonder aloud if low savings is a "bad" thing at all? I mean, more spending by me leads to more income to you, and more spending by you means more income for someone else, etc etc.... Why is a low savings rate "bad" in a consumption-driven society from a macro standpoint. That is to say, aside from the obvious (rainy day, injury, spousal departure, etc) what are the BIG picture ramifications of a low savings rate?


Bernard Yomtov writes:


We don't put 14% of our income into SS. We put 14% of our wages, upto a limit, into SS. Furthermore, this is part of the government budget, so it counts in the government's saving (actually, dissaving, since there is a deficit).

Steve writes:


The way things are going, I will always put 14% of my wages into SS. Haven't you heard? Wages are stagnant, but the limit keeps rising.

Lawrance George Lux writes:

Steve and Bernard,
It should be remembered that SS contributions are serving a vital function today, due to the Bush Tax Cuts. The Government deficit would be much larger without these contributions, as it is the primary tax revenue of the Federal Government now. We would be collecting more Deficit than tax revenues, without Social Security. The only question to be asked is what benefit is derived by the Payees? lgl



-- $7 billion = India's sales of software (services and products) to US in 2003

-- $400 billion = Size of software industry in US in 2003 (services and products)

Maybe I need to go back to math class, but
as per the numbers above, fears that there will be "nobody (in the US) to write software for businesses" are a tad premature.

Steve writes:

The only reason the dollar amounts are smaller is that Indians work for 1/10th what we do here in the states. Think about it: OF COURSE THE NUMBERS ARE LOWER, THAT'S THE IDEA. It's called a "deflationary spiral". No very little software is being developed in the US, and likely soon none will be. Just like the microchips we can't build for ourselves anymore and have to rely on a neo-communist nation to provide for us. Just like the clothes we cannot make for ourselves anymore and have to rely on child labor from the aformentioned Communist country to provide for us.

Steve writes:

...and another thing, Prashant. When Microsoft develops the entire next generation operating system in India, then sells the CD-ROMs from distribution centers in Redmond, were those sales considered part of the $7 billion or part of the $400 billion? Gee, let me think, probably the $400B, even though India got 100% of the benefits, salaries, etc.

India and China are sucking the life out of the United States tech worker.
It is time we take our jobs back.

Gautam writes:


You are mixing up hysteria and economics. Savings are a very good thing, spending is also a good thing, because it creates demand. But arguing that You need to either only spend without saving or vice versa are dangerous propositions.

Let us take a scenario where people spend everything that they earn. This means zero savings and zero investment, so only that investment which has been made in the past and which is depreciating with time and use will be available. If someone wants to make any investment even to offset depreciation, they will have to borrow from abroad.

Also I don't wholly get what you expect to happen exactly, maybe you should post here or elsewhere a detailed explanation of your perspective, explaining the causes, processes and outcomes of the apocalyptic sucking dry of the American Economy. Because from where I stand you sound like a fresh recruit of an apocalyptic cult, thumping the bible of impending doom. ;-) If you could present a clear and coherent outline of your ideas , possibly with empirical and historical instances of how the world has grown worse off because of free trade and been enriched by protectionism, I'd really like to read what you have to say.

Gautam writes:

This page says that India has a trade deficit with the US. i.e. India Imports more from the US than it Exports on Net.

Steve writes:

Look at the graph again and tell me how it's possible that the US has a positive balance of trade with India?

20. India $-2073000000
21. Korea, South $-2353800000
22. Japan $-16366600000
23. China $-24670400000

Perhaps you need to learn how to read graphs, too! India is as Mercantillistic as Japan or China! And you come on this board and preach about free trade, then try to pull a fast one on us and tell us that India doesn't work over its trading parters like Japan and China do?

Steve writes:

Gautam- I don't expect impending doom, and I didn't say you were sucking the life out of the whole economy, just the tech industry. Don't preach the benefits of free trade until you've had to practice them.

Here's something I'd like explained to me: Why on Earth can't you folks create your own jobs instead of stealing our jobs? Why would it be so difficult to create your own demand instead of relying on the strong arm of the WTO and the weakness of any sort of organization in tech labor?

Yes, low prices are good, but when you're racing to the bottom at 500,000 lost jobs or so per year, nobody's going to be able or willing to buy your stuff pretty soon.

I didn't say the WORLD was worse off, just the country I love and will never leave is worse off. The rest of the world is just fine, thanks to 19 votes that the EU gets in the WTO voting.

Here's a figure for you. Although IBM has admitted to offshoring 4,500 programmers in early '04, Reuters has documented that IBM is working very hard to offshore 40,000 of their 160,000 US employees by '05. If it such a great thing for MY economy and such a great thing for investors/employees/the public at large, why isn't IBM screaming from the rooftops about their plans to destroy 1/4 of their American employees' lives?

...and this just in under the "race to the bottom" headline: AT&T is freezing salaries for all non-union folks until April 2005.

Is this go-go economy GW and the WTO created for us going to go-go ANYWHERE? Bring back Clinton. At least the biggest thing we had to worry about then was his silly romps about the whitehouse with an intern.

Bernard Yomtov writes:


Speaking only for myself, and not for Arnold, Gautam, or Prashant, I would like to say that the xenophobic language of some of your posts is both offensive and unwarranted.

I disagree with your views on trade, as do many others here, but that is irrelevant to my point. Neither Gautam nor Prashant, nor the state of India for that matter, are responsible for American economic problems. To hurl accusations like "you folks are stealing our jobs," does not help anyone understand the situation, insults other participants in this discussion, and reflects badly on you and on other Americans such as myself.

Steve writes:

I see that you guys don't like seeing views that differ from your own. I guess this will be my last post here for a while, probably forever. Because I want my country to keep high paying jobs, that makes me a Xenophobe. Makes a lot of sense, buddy.

Thanks for stifiling any sort of debate. Go with your friends to the ivory towers and talk it up about how great free trade is while the whole country goes to pot. That's fine by me.

Goodbye folks...

Gautam writes:

I'm sorry about the graph, I guess I got carried away while trying to prove my point.

Steve, I personally differentiate between you and the American Government. I beleive what you are proposing is a Mercantilist policy. What India does is something different from what it should be doing. I think India should engage free trade policies, not to collect large amounts of Dollars in Reserves, but to improve lives and livelihoods.

No Indian Tech worker that i have met has specifically intended to take away the job of an American or anyone else. They just want jobs as much, and maybe more deperately than you do.

I will stress again, the monetary policies of your government are as much responsible for this mess as anything that the Indians or the Indian Government could have done.

If you are continuing to read these posts, I would like to stress, that though you sound xenophobic, I would put it down more to your Nationalistic beleifs. I have met many well meaning people, who beleive that it is ok for the rest of the world to suffer and even for their own nations to suffer, as long as, some sense of pride is salvaged for themselves. America is a big country, but if it closes its borders it has as much to lose as the rest of the world.

Your statistics about IBM and AT&T may be alarming, if you consider that the world is going to stop progressing from here on. But the world is going to keep moving forward, new technologies, new methods of production are going to emerge, which will pay more for less work, which will improve the standards of living beyond what we can imagine today. Closing borders does not let the winds of change blow as fast as they should.

I for one think that having this discussion with you has sharpened many of my beleifs and broadened my understanding about the difficulties that Free Traders face when trying to build a case for themselves. I still hope though that you would at some point strongly reconsider what you have to say about jobs and trade.

In the meantime, Merry Christmas and a Happy New Year, Peace :-)

Bernard Yomtov writes:


No one is tryng to censor your views. No one is unwilling to listen to what you have to say about economic policy.

The only thing I object to is what I read as attacks on other commenters that seem to blame them for the consequences of what you consider bad American policies.

Suppose you are right, and it would be in the US interest to adopt much stronger protectionist policies. Then it's not India's fault we haven't done it, it's our own. And to some degree it's the fault of protectionism advocates such as yourself who have failed to make a sufficiently convincing case.

So by all means, argue your case, but blaming our troubles on foreign devils won't help.

Steve writes:

I know I promised that I'd stop raining on your Libertarian parade, but I lied and for that I'm sorry.

Gautam--Yes, I am a NATIONALIST. I would love it if folks from India would IMMIGRATE here and pay US taxes while acquiring US jobs. The H1B is NOT citizenship. I feel that if you want to work in America, you should become a citizen and be forced to renounce your citizenship in your home country. I'm also glad that my fear and pain has given you more ammunition to fight against me in a cause that I hold dear. That's wonderful.

Bernard--You're right, it's not Gautam's fault, nor any others that our policies are destroying the futures of our children and ourselves. I connect the Indian government with the average Indian worker because THEIR INTERESTS ARE ALIGNED. In the US, the government's interests are aligned with the RICH and the rich's interests are not aligned with the workers. Won't be long before there is nobody left to buy the "stuff" being marketted to us. You folks (meaning Economists) just don't care because all you want is cheap "stuff" to be sold here. That cheapness comes at a very expensive cost to workers, but you just plain don't care. You also don't care that the WTO forces us to open our markets without doing the same to France, Germany, China, India, or any other nation. Why is that?

Free trade and free markets requre a leap of faith. Free traders claim that higher paying jobs will be right around the corner if we stab ourselves and send the currently high paying jobs offshore. Gosh, I just don't know why Steve is so sceptical of this idea, could it be because there are 2.5 BILLION Asians ready to work for peanuts while more and more Americans get paid less and less in order to compete.

Would you guys prefer to lose something you never knew you had (like these "future jobs") or lose something that you have currently and rely upon ("current job")? I'd rather not lose current employment with a roll of the dice on future employment.

Since you are so closed minded that you won't accept that there are REAL costs to free trade, namely psycological costs related to job "displacement".

Lawrance George Lux writes:

One of the persistent problems when dealing with Trade issues, lies in the attitude of all Individuals: who insist on absolutely Free Trade, or those who insist on over-regulation. Neither avenue will work effectively.

Steve's, and my own, position is vindicated by the current Christmas Season Sales figures. One glaring aspect of a Economy which relies on Investor consumption for Sales consists in the lack of Sales volume. Investors utilize only about half the Income as used by Labor, for the purpose of Retail Goods. Labor Income drives Consumption, not Investor confidence. The goal cannot be Goods at the lowest price to generate Investment, as there will be nothing to invest in.

Tariffs and Trade limits are equally as dangerous, forestalling effective Competition and exchange of technology. American Drug companies are a prime example of the evils of monopoly; they overcharge American Consumers excessively, and are angered that American Consumers re-import their own Products ay World wholesale prices. Check out the NY Times article today, 'Indian Generic Drugs incite Turf Battles', American Drug companies are outraged that Indian Drug companies are using American law to establish Competition for the American Consumer dollar.

There is nothing morally wrong with demands that foreign Imports underwrite American Government expenditures, by avenue of a uniform, low tariff. It is also not economically wrong, as American labor contends American law should nullify the advantages gained by foreign production, due to the lower Standard of Living in the foreign-producing nations.

Economists always make everything a Either/Or proposition, when only a Middle-of-the-Road approach has any economic value. lgl

Gautam writes:


The Middle-of-the-Road, is often not so much the middle as it seems. You illustrate that American Drug companies should not be allowed to retain their domestic monopolies, because they are overcharging consumers. Is it not possible then that American Labour is overcharging Employers, because they exist in what works out to be a Protected Market. I think if there were not so
many barriers to Immigration into the US, the wage levels may have been lower, because labour from places like India would more easily flow where the Jobs were available, much like the Indian Drugs flow where they are demanded.


>>Free trade and free markets requre a leap of faith.

Bernard Yomtov writes:


I am anything but a libertarian. I do believe that free trade is a good idea, for largely utilitarian reasons, but I also agree with you that the distribution of those benefits may be a problem.

I am not an economist either, but I know that you will have a hard time finding one who isn't aware that increasing trade will help some people and hurt others. The challenge, if you will, is to see to it that those who are harmed are treated fairly. I agree with you that the current government strongly favors the well-off in our society, and isn't going to try very hard to help workers.

One improtantpoint is that any government trade policy helps some people and hurts others. If we put a huge tariff fence around the country lots of prices would rise, lots of people would be out of work. The advantage of free trade isthat because it tends to increase overall prosperity it provides means to help those who are harmed. If we are not doing a good job of that, then work on those policies, instead of urging new measures that help some people at the expense of others.

Steve writes:

Guatam--Sometimes the simple answer is the correct one. It's very simple: if you want people to become engineers (as every government does), protect engineering jobs. If you don't do that, we'll all have to flip burgers, cut hair, or perform plumbing jobs for a living. But who's going to buy your services when everyone else is out of work?

What do you do for a living where you need not worry about trade/offshoring and can just sit back and observe as you do? That's the kind of job I want. Of course, utility says that free trade is better for people who have jobs like yours that are protected for one reason or another.

Bernard Yomtov writes:


May I recommend that you go over to Brad DeLong's blog at and read his post entitled "Outsourcing Again." It's the second one down as I write.

DeLong is no raving Libertarian, and he explains things better than I can.

Lawrance George Lux writes:

Why does no one but I understand there are disadvantages to Free Trade, in the economic sense? DeLong attacked the issue of Job Outsourcing from one angle, but one Supply-Side Economists will ignore. Let's get in a little deeper!

Mexican workers are losing from Job outsourcing to China and India. These are the Ones who were to benefit from Nafta. A article today reported 300,000 jobs lost since 2000. What ae the economic costs?

The first and worst economic cost is the duplication of Capital equipment and Plant, with both closed much before full economic utilization. There is the economic cost of Transportation capitalization and fuel, which rapidly increased in cost. There is the cost of retraining Workers to the same task--literally double with each transfer. There is the economic cost of welfare transfer payments, which is always incurred with Job losses from Plant transfers, no matter whether this occurs in Safety net Countries or completely predatory Economies. Remember--the Mexican Government owns most of the housing of displaced Workers along the border.

Free Traders do not recognize the above economic costs as Production costs. These Costs are present, though, and have to be paid; the serial charges of these Costs are much in excess, of the Trade advantage of a few cents cheaper product.

Government action can be taken to amortize these excess costs, and Taxation by tariff is far preferable to Regulation. lgl

Gautam writes:


Maybe you are taking a very static view, if you introduce the elements of time, and risk, then the economic costs change in charachter. Over time the outsourcing of jobs would realise gains that would generate net benefits for the nations that are "losing out". And those economic losses created by duplication of capital are in fact the risk taken by the investors in these units in the first place.

The argument that duplication of capital is a bad thing, is one very typical of Indira Gandhi's India, where the "limited resources" of the nation were licensed through an elaborate and corrupt authority. Duplication of Capital is a very good thing, it brings down the cost of the Capital, and the cost of the output.

The costs I see in free trade are purely frictional costs, these are seen in an economy whether there is free trade or not, it happens with new technology, business down turns and so on. The costs of tariffs and trade regulation are far greater, because there are many implicit costs of undone/unseen deals, which are not calculable.

What is so different about these changes coming about through Free Trade and similar changes coming about through Technological Progress?

Steve writes:

Technological progress doesn't cause wild, uncontrolled falls in ones' currency value like a 5% current account deficit will. Technological progress doesn't cause countries to stop using your currency as their reserves. Technological progress doesn't cause Russia to start pricing oil in Euros.

Lawrance George Lux writes:

The net gains which you advocate are relative to each Economy. An undercapitalized Economy will see a net gain in Jobs and standard of living, but a capitalized Economy will always be presented with a net loss of Jobs and Wage scales. Labor training can be placed on a Bell Curve. You and other Free Trade advocates think to exploit the Gains potential of the right half of the Bell Curve, but do so at the expense of the left half of the Bell Curve. The expense of the Retraining Costs and incapacities of Labor on the left half of the Curve will always lead to overall losses to the overall Economy, in excess of the net gains of Trade. Only a new Generation of Labor will alter the Mix, and yet; they will establish their own Bell Curve, affected by the eliminations of Free Trade.

The only Curative remains, not Regulation, but a low, univeral tariff on all Trade Products. This will invariably average Wage levels between trading Nations, as the tariff will amplify, due to each Country's own Distribution, Transportation, and Retail Costs. The tariff does not have to be, and should not be, very large; I advocate only a two percent tariff. lgl

Steve writes:

Technological change also creates more new jobs to USE the new technologies. Outsourcing destroys jobs in the "losing" country and creates jobs in the "winning" country.

Sure, white collar outsourcing will free me up to do other stuff, but WHAT other stuff cannot also be outsourced? Hair cutting, burger flipping, WalMart greeting, and trial lawyering are the only few that come to mind.

Gautam writes:

I don't yet agree that the net benefits from trade over time would be negative. If this was neccessarily true, then why did America gain from trade with Japan and Europe after World War 2. And more specifically with Japan, in the field of automobiles after the 1970s. Also could you quantify the losses over time that arise from Free Ttrade between any two diversely capitilised countries, I mean could you point me to some study that shows that such losses arise?

The creation of the Europe Union has created a market that is as Large as the United States. Couple that with the explicit policy of devalueing the Dollar, which makes Imports more expensive, makes it a less desirable reserve currency, and a less reliable Unit of Account.

If you are pricing something for a Market and you had to choose between Gold and Silver say, you know that Gold has had a fairly stable price over the last few years, and Silver has been falling, you would consider going with Gold, especially if most of what you sell is to Gold-holding people.

I will like to forward a theory put forward by the Indian PM. "If people are not allowed to go where the Jobs are, then the Companies will come where the People are". So if there had been freer immigration rules, maybe Americans would have had many more Indian neighbours, which again would not neccessarily have been a good thing, because Americans would have lost jobs and Wages would have come down, then people would be screaming "Send 'em Injuns back". ;-) Peace.

and a Happy New Year to everyone.


Steve writes:


Technological change didn't cause us to need to lower our currency value. Currency manipulation by the Chinese, Japanese and likely the Indian government has caused the need. Not the mention WalMart and the insaciable appetite that the rich overclass in this coutry has for imported BMWs, MBs, etc..

Gautam writes:


You are rather quick to exonerate Al Greenspan and his Boys at the Fed, and the US Treasury Department and the Bush Administration which wanted to run a war in Iraq. I think I mentioned earlier, poiting fingers ain't going to solve America's problems.

Also, the market evaluates the currency not the government (atleast in the current regime), though the Fed does determine the total quantity of the currency available and thus exercises a fairly large influence on its value.

Actually the Indian, Chinese and other governments have been supporting the US government by buying its bonds. Which means that the dollar and denominated intrustments have not really lost all their value as a reserve currency.

Steve writes:

The fed generally works in the interest of the majority of Americans, the Chinese government does not. This is why the fed gets a free pass in my view of "what's wrong" with what is happening right now.

Gautam writes:

How does one man and his instituition, which has not been elected by popular vote, decide the fate of the entire American nation and the world. Does that not contradict the democratic antecedents of America?

If one man knew what to do then what is the value of democracy and freedom, why not have some central agency define everyones role in society and then everything would work in order and discipline, everyone would have jobs and no one would be allowed to take them away, unless ofcourse the central agency decided it was in everyones interests.

But then the Fed knows best, why should anyone question the Fed?

Animal Farm, George Orwell
1984, George Orwell
Road to Serfdom, Friedrich A. von Hayek

Steve writes:

Our president wasn't even elected by a popular vote, why does it matter that Greenspan wasn't?

Should I put any more trust in the village idiot from Texas who runs the show in my country than a PhD economist who sets monitary policy for my country?

Christophe writes:


As a newcomer in this debate, in order to follow the thoughts being developed on economic education here, one should better bear in mind what the subjective point of view of the participants appear to be…

What I mean by that has already been addressed by Steve in his question concerning Bernard’s job (Posted by Steve on December 26, 2003 05:38 PM)… He is criticizing him for arguing too far away from reality, locked in his ivory tower, together with the “Austrians”. Apparently, Steve himself has something to do with the US software industry but still tries to involve others in a more general debate over Keynes, while Gautam on the contrary is a student in economics, with some affection for Indian problems … thus inclined to study all theories, yet who makes an effort to visualize the more concrete problems in the industry. And LGL is a specialized writer, so he’s in-between the practical and the theoretical approach.

LGL, Steve, Gautam, Bernard, …

Why do you need to fight each other so vehemently (still, in a quite civilized way) over government policy? None of you is actually involved in the Government, probably not even on the list of a political party (maybe not even LGL), and has to defend his own choices in court, right?

Here's my point: it seems to me some of you fight to defend a certain relative material wealth (job, social infrastructure) while the others fight to keep a certain relative spiritual wealth (freedom, democracy, truth … the inherent beauty of free markets sounds phony though!)

The problem seems to me though that if you are not ready to fight simultaneously for both, nobody will ever agree on what’s an important policy. What on earth can there be, objectively, that would make you prefer one ideal over the other?

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