|[SANE Views Vol.4, No.12]
AMERICAN NOBEL LAUREATE mainstream economist Paul Samuelson's textbook has been staple to generations of economists. But at age 89 he published an article in the Journal of Economic Perspectives to show that the theory of comparative advantage no longer justifies free trade as a process advantageous to all. His work is elaborated by Paul Craig Roberts, Chair of the American Institute for Political economy, and a former Assistant secretary to the US Treasury. He demonstrates that the US economy is currently in an advanced state of decline, because that theory is outdated.
The theory of comparative advantage says in essence that if we all concentrate on what we do relatively better and cheaper than others - and then exchange our output - we will all benefit. But that holds between countries only as long as the things that go into production are more or less immobile. If people and skills and capital are transferable, there will be no advantage attaching to a country or area. So in the global market, where even high technology skills, as well as capital, moves between countries there is no such thing as comparative advantage. There is only absolute advantage, and the winners will take all.
That explains the disjuncture between economic theory and reality for three decades. Africa, Latin America, most of Asia and Eastern Europe have all clearly suffered when free trade was foisted on them, because the US and Western Europe had absolute advantage.
But that is changing: the developed countries are losing absolute advantage to the large Asian economies. According to comparative advantage, the American economy should do well by expanding employment in hi-tech as it loses labour intensive jobs. But hi-tech can now be done anywhere in the world, and the corporations are shifting out. Between 2001 and 2004 the US lost 2.6 million jobs in the private sector. That included 28.2% of all jobs in computer equipment, 36.8% of jobs in semiconductors and electronic components, nearly 40% in communications equipment, 38% in Internet publishing, 23% in electrical equipment, 24% in metals and 21.5% in machinery.
The outsourcing of these jobs has the same effect on the US economy as being out-competed by foreign rivals: hence the expanding trade deficit. All of the jobs that are being created are in poorly paid service areas that cannot be outsourced - domestic work, janitors, waiters, cleaners, fast food cooks, salespeople. The average American family is worse off than three years ago. Free trade is turning out to be seriously bad for the US.