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Sandpit

July 3rd, 2017

A new sandpit for long side discussions, conspiracy theories, idees fixes and so on.

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  1. Greg McKenzie
    July 4th, 2017 at 09:15 | #1

    The question of Fair Trade versus Free Trade seems to be up for discussion at the up coming G20 summit in Germany. The need then arises to define Fair Trade. I have not found a good definition. Free Trade was defined by David Ricardo almost 200 years ago. His Principal of Comparative Advantage, defines Free Trade as a bi-lateral trade agreement based on resource allocations, where trade maximises opportunity costs in any two way – export versus import – comparative test. But Fair Trade requires a precise definition, to avoid emotive rhetoric distorting any discussions. Does anyone have such a definition?

  2. pablo
    July 4th, 2017 at 20:29 | #2

    Does anyone know the current status of drink container deposit legislation in NSW?
    My understanding from the previous Baird regime was that a 10 cent container figure to match that of SA would come in by July 1, 2017. Have we been duped now that Mike (the greyhound) Baird has gone? Media have seemed to be playing dead on this one. The drinks industry hate it of course but SA is celebrating 40 years! WTF!

  3. Blair Phillips
    July 5th, 2017 at 09:01 | #3

    @pablo
    Implementation of the drink container deposit scheme has been postponed till 01-Dec-2017 “to ensure the best possible scheme for NSW that meets community expectations.”
    Hope the forces of darkness don’t manage to kill it in the meantime.

  4. Ernestine Gross
    July 5th, 2017 at 09:08 | #4

    @Greg McKenzie

    Ricardo’s theory of comparative advantage does not ‘define’ free trade but rather provides conditions under which there are gains from trade (relative factor endowments, technology).

    (Your ” trade maximises opportunity costs in any two way – export versus import – ” doesn’t seem to be right.)

  5. derrida derider
    July 5th, 2017 at 09:45 | #5

    Yep, that should be “MINIMISES opportunity costs”. Hecksher-Ohlin’s rather than Ricardo’s framing of the argument is better – both more rigorous and (not coincidentally – its the sort of thing formal rigour helps with) more insightful as to the necessary conditions than Ricardo’s.

  6. Ernestine Gross
    July 5th, 2017 at 10:29 | #6

    Both, Ricardo and Heckscher-Ohlin models do not include the financial sector of ‘an economy’ and they do not include multinational corporations or any corporation.

    IMHO, representing (characterising) ‘a country’ like an ‘individual’ (with or without production technology) and trade between ‘countries’ like two individuals trading over the fence is not satisfactory, given contemporary technological knowledge in theoretical model building. This is not to say that looking at relative factor endowments and technology (paying due respect to the literature) can’t provide insights into why some trading relationships (‘domestic’ or ‘international’ or ‘regional’) aren’t ‘fair’ by any notion of ‘fairness’ or some other practically relevant questions at a particular time and place.

  7. derrida derider
    July 5th, 2017 at 13:36 | #7

    Of course, Ernestine – though you are creating straw men here. I don’t mind criticism of mainstream economics per se – I’d share some of them – but the critics’ tendency to assume it is entirely populated by unworldly fools in the pay of plutocrats whose dogmatism blinds them to the obvious is something that gets under my skin.

    In fact the neoclassical paradigm is a rich and notably diverse one, with a good deal of methodological sophistication too. When that approach fails it is usually because the problems are genuinely tough (starting with the fact that the future is – surprise – uncertain), rather than because those tackling them are stupid or evil.

    All your points have been long addressed in international trade models. Its the lack of a finance sector in representative agent DSGEs (a framework grossly misused) that caused some trouble a few years ago, not multi-country or multi-sector trade models.

  8. pablo
    July 5th, 2017 at 17:06 | #8

    @Blair Phillips
    Thanks BP…fingers crossed.

  9. Ernestine Gross
    July 5th, 2017 at 17:51 | #9

    derrida derrider, I haven’t created straw men, I haven’t criticised ‘mainstream economics’ (this term itself does not enjoy a generally agreed meaning – policy or academic?). I hinted at why Ricardo’s theory and the Heckscher-Ohlin theory is still taught. And I hinted at technological progress in theoretical model building.

    It seems to me you are making assumptions, possibly based on the writings of people other than me, which get under your skin.

    My points expanded on my initial comment addressed to Greg McKenzie. How big a step should one take, given the initial proposition? I prefer small steps, one at the time. I don’t believe I have mis-characterised this first step.

    (The lack of a financial system is not the only problem with DSGEs – when markets are incomplete, the assumption of equalisation of MRSs on which aggregate – macro – general equilibrium models rest is invalid.)

  10. Greg McKenzie
    July 6th, 2017 at 08:50 | #10

    Thanks for all that Ernestine and derrida derider, but as to a clear and concise definition of Fair Trade, only Thomas Piketty seems to offer guidelines. Now the G20 countries can look after themselves. And, as President Trump keeps saying, it’s now “America First” in multinational agreements. But bilateral trade between G20 countries and non-G20 countries seems to be the issue here. David Ricardo’s Principle of Comparative Advantage presupposes either, dominance by one party, or, equality of bargaining power. Herein lies the problem of Free Trade. If it is the former presumption, of one party dominance, what is to stop an “unfair” trade outcome? You see how hard it is to analyse this imbalance without rigour if there is no precise definition of what is fair trade? That is my dilemma!

  11. Ernestine Gross
    July 6th, 2017 at 11:11 | #11

    Indeed, Greg McKenzie, theoretically demonstrating gains from trade (under certain conditions) does not answer the question who gets the (conditional) gains from trade and therefore even a discussion of ‘fairness’ is strictly speaking not possible without empirical data.

  12. derrida derider
    July 6th, 2017 at 14:41 | #12

    The traditional answer to that, Ernestine is that so long as one party does not actual go backwards (ie no party gets MORE than 100% of the gains) its a Pareto improvement, and in a traditional static supply-demand framework the trade will not take place unless both parties get something from it. To get where one party loses from trade you have to assume force or fraud (in which case it’s not trade but theft), assume economies of scale large enough to generate natural monopoly (the Dixit-Krugman stuff that is not true for most products or industries, but is for some) or have large information asymmetries in a game theoretic search/matching framework (which however plausible for trade of things like labour between individuals is unlikely for international trade).

    Outside these the basic insight that trade will not take place unless there’s something in it for both traders, and therefore comparative advantage holds, is true.

  13. Ernestine Gross
    July 6th, 2017 at 16:38 | #13

    “The traditional answer to that, Ernestine is that so long as one party does not actual go backwards (ie no party gets MORE than 100% of the gains) its a Pareto improvement”

    The Pareto improvement criterion does not answer Greg McKenzie’s question.

    “..and in a traditional static supply-demand framework the trade will not take place unless both parties get something from it.”

    ‘party’ A gets zero of something and ‘party’ B gets 1. Greg McKenzie’s queries the ‘fairness’ of this possible outcome and he rightly refers to the empirical data provided by Thomas Piketty (among others) regarding time profiles (‘dynamic’).

    So, negotiation ‘party’ of ‘country A’ gets a promotion and more of whatever the something is and the rest of the population of ‘country A’ gets a little less because the ‘successful negotiator’ gets a little more.

    “Outside these the basic insight that trade will not take place unless there’s something in it for both traders, and therefore comparative advantage holds, is true.”

    I agree if and only if the ‘traders’ are two individuals exchanging say apples and oranges across the fence.

    Empirically, most international trade is carried out by multinational firms (if one takes the concept of ‘location’ seriously and assumes a ‘country’ has at least one ‘location’ then, on the theoretical level all international trade is carried out by multi-country firms. Introducing producers and more than 2 ‘parties’ (‘countries’) then new theoretical questions arise: What if a multinational producer makes strictly positive profits in ‘country A’ and ‘country B’, and uses these profits to acquire inputs to produce a ‘commodity’ made available only in ‘country C’?

    I can send you the theorem (including the proof or you can look it up in the Fisher Library).

    ‘Traditional answer’ – what is this supposed to mean?

    Greg McKenzie’s question is non-trivial.

  14. Greg McKenzie
    July 8th, 2017 at 09:41 | #14

    Thanks Ernestine! You have stated my concerns correctly and helped me immensely. Thanks for your help and guidance.

  15. Ernestine Gross
    July 8th, 2017 at 10:33 | #15

    Ha, Greg, in this case we had a ‘fair’ non-monetary exchange over JQ’s blog because questions like yours help to keep my grey matter alive.

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