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Needed: An Institution Like Japan's MITI
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20580 |
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Section : |
MODERN THOUGHT
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| Issue
Date : |
11 / 1992 |
4,616 Words |
| Author
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William R. Hawkins
William R. Hawkins is a policy analyst at the U.S. Business
and Industry Council. |
The origin of the modern system of international trade and investment dates back some five centuries to the era when the Portuguese rounded Africa's southern tip and Columbus discovered the Americas.
The term global economy now is used, however, to connote a supposedly new "interdependence" that will render obsolete the traditional view of this world order as being dominated by competing nation-states. Thus, the word global is preferred to international.
This has been an appealing vision, as it seems to mark the arrival of the peaceful world of mutual cooperation predicted so long ago by Immanuel Kant and other classical liberals. Oddly, it is a vision embraced by many conservatives, who might have been expected to reject its utopianism. They have done so because of the role that classical economic theory has played in providing conservatives with arguments against socialism. This was clearly demonstrated by the Reagan administration, which, being heavily staffed by libertarian economists, refused to consider the trade deficits of the 1980s or America's declining share of world industrial markets as problems.
The Failure of Classical Economic Theory
Yet, at the same time that "globalism" was becoming popular, a growing number of professional economists were discovering that the world was not working according to the models of classical or neoclassical theory. Classical trade theory, as laid down by David Ricardo almost two hundred years ago, assumed complementary trade between countries based on factor endowments (mainly raw materials, climate, and population). Formulated at the dawn of the Industrial Revolution, this view was filled with examples drawn from agriculture, where nature provided the basis for specialization and trade. Thus, England's comparative advantage in textile manufacturing was just as natural (and immutable) as Portugal's advantage in wine production. It was beyond the ability of either firms or governments to change these patterns without paying an enormous price in lost efficiency.
The neoclassical reformulation, which bases comparative advantage on the relative abundance of a larger list of factors including capital, technology, and management skill, still assumes that optimum complementary trade patterns are a given, to be discovered rather than created. This fits the classical model of perfect competition, where the market is assumed to be too large to be changed by the actions of the participants, who must
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