Archive for October 19th, 2008

NEW TRADE THEORY’S VERY DARK SIDE.

October 19, 2008

WHERE NOBEL PRIZE WINNER PAUL KRUGMAN, IN HIS OWN WORDS, TELLS US WHAT WENT WRONG WITH “NEW TRADE THEORY”.
***

Abstract: The world financial system was highly leveraged, in hidden and mysterious ways, to serve the plutocracy. World finance was designed to provide so much profits to those who had conceived it, that it crashed. Can it get worse? Yes, because the entire world economy has been designed along similar lines, deliberately ignoring the intended consequence of maximizing the plutocracy.

The financial system allows the flow of property value, the economic system creates goods and services to which those values are attached. It turns out that the same Cosa Nostra that brought us flawed finance conceived the world economic system. The flawed world economics of “Globalization” rests on UNWARRANTED CONCLUSIONS FROM “NEW TRADE THEORY”, the greatest conclusion of which says that your job should go to China (dissidents shall be shot).

That interpretation of “New Trade Theory” we hear below from the horse’s mouth. 

We suggest it’s high time for a rethink: save the math, change the philosophy and deeply reorganize the thinking around globalization. It’s not enough to be for “free trade”, one should be for freedom in general, and that means power to the people, because there is no freedom without power. Hence people should have jobs as good as those they used to have. Reorganizing it does not mean that globalization should stop. Not at all. Globalization is good, and, well done, it is the best defense against World War.

Conversely, if GLOBALIZATION IS BADLY DONE, IT IS HIGHLY CONDUCIVE TO WORLD WAR. We are speaking from experience: it happened twice before. That is where we stand now: bad globalization. The next few months are crucial to reset not just finance, but the world economy, and that means sending the profits to the People rather than exclusively to organized crime and plutocracy. Otherwise, the usual program of mental devolution towards nationalism, fascism and idiocy will lead irresistibly to World War. Again. So here is the choice: big hard, new thinking now, or a holocaust tomorrow. It is high time for “liberals” and their “consciences” to understand this.
***

USING THE IVORY TOWER TO MISLEAD THE WORLD:

Socrates warned us against “sophists”, the professionals who (for base reasons) sold (biased) knowledge to the rich (for unsavory applications). As most may have noticed by now, the world financial system was flawed, it was a sham. Who built it up? Sophists (such as Mr. Scholes, see P/S). How was it bad? Because it allowed and encouraged the rise of a world plutocracy (initially led and based in the USA), a malignancy that grew liberally because the immune system of strict laws and regulations had been GLOBALLY suppressed. Most of the money went to a few people, and they ended up with so much power that they disintegrated finance, and now the economy, worldwide, while insuring through their pernicious intellectual influence that no one would understand their empire.

Although immensely rich, those worthies requested more money for themselves, so they would let the world economy live. They held the planet hostage. They whined: “Bro, we are getting stressed, we did some bad bets, do you have another 700 billions for us?” Because the greedy U.S. Congress is wrapped around their little fingers, they got their money. We did not see them giving back last year’s 100 billion Dollars in bonuses (that was just on Wall Street, and there are many other financial centers). In Europe, the “rescue” bill amounts so far to several trillions (1,700 billions from the Eurogroup alone; both it and Britain are nationalizing fiercely, though, and that means the goons are losing control).

Now to quote from the well respected British newspaper, the Guardian:

“Financial workers at Wall Street’s top banks are to receive pay deals worth more than $70bn (£40bn), a substantial proportion of which is expected to be paid in discretionary bonuses, for their work so far this year – despite plunging the global financial system into its worst crisis since the 1929 stock market crash, the Guardian has learned.

Staff at six banks including Goldman Sachs and Citigroup are in line to pick up the payouts despite being the beneficiaries of a $700bn bail-out from the US government that has already prompted criticism.” (Oct 17, 2008).

How did the rich become so rich as to roll over all of democracy, all over the world? They hid behind intellectuals on their payroll (the most prestigious U.S. universities are part of, and partial to, the high power money system). It was (erroneously, one could even say criminally) argued by academic scholars that IT DID NOT MATTER WHERE ECONOMIC PRODUCTION OCCURRED (as long as it occurred). Paul Krugman explains this clearly in his own words below. That intellectual principle was already presiding to the world’s destiny by the age of Clinton.

The emotional surrendering to such a ludicrous idea, that IT DID NOT MATTER WHERE ECONOMIC PRODUCTION OCCURRED, constituted the emotional ground for even more offensive and ludicrous ideas and their immediate generalizations, which all together, led to a world economic and financial system that was made to profit only a few. (The undoing of that con job is that it got to the point people revolted, and refused to pay their mortgages.)

Breaking one’s previous emotional set up has a huge impact on one’s logical system, and since it is much more difficult to change the emotional system, shattering changes in emotionality have very long term influences on the logic. A good enormous act is often all it takes to break the old emotional organization one has inside one’s mind (that’s why many murderous organizations require, as part of their initiations, to take part, say, in a murder). We are unveiling here such an emotional enormity. This time it’s just an idea. And that idea, that shatterer of worlds, is: “IT DOES NOT MATTER WHO GETS THE FACTORIES”. Although such a change of paradigm is here purely in the realm of thought, it has tremendous emotional consequences of the most practical type.
***

KRUGMAN’S “NEW TRADE THEORY”, ACCORDING TO KRUGMAN HIMSELF:

Paul Krugman just got the Nobel Prize in economics. Krugman, the modestly self described “conscience of a liberal”, works at the New York Times and Princeton University. He got the prize for the “NEW TRADE THEORY”. We are going to point out where and how THE “NEW TRADE THEORY” LENT ITSELF TO ASPECTS OF GLOBALIZATION THAT MANY FIND INAPPROPRIATE.

Made to understand Franco-German trade (which, frankly is none of America’s business), it was applied to the trade between the United States of America and the People’s Republic of China, which is of a completely different nature. Whereas Franco-German trade is among friends, trade with China is more reminiscent of the activity at a croc farm.

New Trade theory was applied in a deeply erroneous way on a PHILOSOPHICAL level. Eco-nomy means house-management. Top Athenian philosophers named and created the field as an object of theory. It is intrinsically philosophical, mathematics is secondary. Mathematics, in particular should not be allowed to overwhelm common sense. In the presently disintegrating world finance and economy, it has.

Let’s quote Mr. Krugman extensively, in all fairness, about why he got the Nobel Prize (from his blog, Oct. 15, 2008):

“Really, I don’t want to talk about me when the world is melting down, but I have had a number of requests for an informal explanation of what I got you-know-what for. So here’s an attempt.

It’s really about two related things: the “new trade theory” and the “new economic geography.”

OK, so what was the “old” trade theory? It’s what you probably learned if you took intro economics. Countries are different – they have different levels of productivity in particular industries, they have different resources, and those differences drive trade. Tropical countries grow and export bananas, temperate countries grow and export wheat. Countries with highly educated workers export high-tech goods, countries with less educated workers export shirts and pajamas.

The new trade theory starts with the observation that while this explains a lot of world trade, it also misses a lot. France and Germany sell lots of stuff to each other, even though they have similar climates and resources; so do the United States and Canada. What’s that about?

The answer is that there are many goods that aren’t like wheat or bananas, but are instead like wide-bodied jet aircraft. There are only a few places in which wide-bodied jets are produced, because of the enormous economies of scale – you only want a couple of factories worldwide. Those factories have to be somewhere, and those countries that get the factories export jets, while everyone else imports them.

BUT WHO GETS the aircraft factories, or the factory producing a specialized kind of machine tool, or the plant producing a particular model of car that selected consumers all over the world want? THE ANSWER OF NEW TRADE THEORY – and it was A TREMENDOUSLY LIBERATING ANSWER – IS THAT DOESN’T MATTER. There are many economies-of-scale goods; everyone gets some of them; and THE DETAILS, WHICH MAY BE LARGELY A STORY OF HISTORICAL ACCIDENT, AREN’T IMPORTANT.

What matters, instead, is the overall pattern of trade: the broad pattern of what countries produce is determined by things like resources and climate, but there’s a lot of additional specialization due to economies of scale, and there’s much more trade, especially between similar countries, than you would expect from a purely resource-based theory.

You may think all this is obvious, and it is – now. But it was totally not obvious before 1980 or so – except for some prescient quotes from Paul Samuelson, you really can’t find anyone describing trade this way until after the theory had been laid out in mathematical models. The plain English version came later.

And you should bear in mind that economists have been thinking and writing about international trade for a couple of centuries; to come along and say, “Hey, we’ve been missing half the story” was a pretty big thing.”
***

AND NOW THAT WE ARE MISSING HALF OF THE ECONOMY, IT’S AN EVEN BIGGER THING, ASSUREDLY UGLIER:

Did you notice what the all caps sentences meant? In Krugman’s liberal vision of the world it is “TREMENDOUSLY LIBERATING” that it “DOES NOT MATTER… WHO GETS THE FACTORIES. A first consequence of “New Trade Theory” is that U.S. factories got exported to China. This, of course, meant the end of America as a place of civilization. Just an unimportant detail of history.

For you, Mr. Buffet, a factory to manage in China, for you, Ms. Average American, you don’t get a factory in the USA, because it has gone to China. Instead, you get the lowest job that can be imagined. It does not matter, it’s tremendously liberating for those who get factories to China. And even for you, if you set your mind to it. No health care, no retirement, no house: you are “tremendously liberated”. But a job, always, you can get. Any job is a good job, as Reagan pointed out brilliantly, and he cracked the whip, and put thousands of air controllers in legs of iron, and exhibited them, weighted with chains, because they had gone on strike!

It is just a question of deregulating enough, said the American slave masters, and jobs there will be. Pushed just a bit further, hunting rats, and selling their meat, should be deregulated. Maybe that will be the last job left in the USA, after all other jobs have migrated to China. Rats are delicious, and one can bathe at the same time in the sewers. Tremendously liberated you will be, Ms. Average American rat chaser, with your new job! Go do your job, it does not matter where it is located, or what it is, says New Trade Theory.

Since you can’t swim to a factory in China, you may as well hunt rats, and what do you have against sewers anyway? Everybody needs sewers. Leave us academics, with our specialization in lofty thoughts, around our groomed campuses. To you the sewers, to us the Ivory Tower. It does not matter, says New Trade Theory. Get Zen. Watch the Dalai Lama, and take heed, be lame and proud. Tremendously liberating.

Why? According to Professor Krugman, ” … details, which may be largely a story of historical accident, aren’t important.” It’s a detail of history that your unimportant job went to China. What is it in this that you don’t get?

Some years ago, a politician heading the French extreme right was prosecuted (under the French holocaust denial law) for claiming publicly that “the gas chambers were just a detail of the history of the Second World War”. Unfortunate juxtaposition. Here we have something analogous, but with the roots of war, rather than its consequences. Major economic dislocations, worldwide, are presented as details of unimportant historical accidents. History begs to disagree: economic dislocation has always been one of the source of the greatest wars. Moreover dislocation increases in turn fear and aggression, two other major sources of war. We are dealing with bad stuff here, in the fullness of time. Moaning about holocausts is good, preventing future ones is much more moral, and wiser.
***

IT MATTERS WHERE THE FACTORIES ARE, SAYS THE PLUTOCRACY:

As far as the plutocracy was concerned, the devil was in the details, they were important. So was history. Historically, plutocracy, the natural enemy of democracy, got restrained by regulation and taxation, and that was painful. Factories were exported to China because U.S. and E.U. regulations are not respected in China, and Chinese workers, paid a tiny fraction, cost much less. So exporting the factories to China allowed the plutocracy to make like bandits (China as a country makes only a small profit, relatively speaking, most of the profit goes to the international plutocracy).

The exportation of U.S. jobs overseas got so grotesque that Boeing, with the rest of aerospace, long the most important pillar of the U.S. economy, is now forced (and incapable) to build its next plane using contractors, worldwide. Boeing used to have thousands of sub contractors, all located in the USA, doing maximally added value work. But no more.

No doubt that some foreign companies have some products superior to any found in the USA, justifying legitimate trade. So Boeing should trade with them. French companies such as Dassault Systemes (which provides the Computer Assisted Design of the 787) and Thales (a giant military electronic company) no doubt make superior products second to none, and Boeing should, and does, use them, very correctly so.

But when MOST OF the plane is built overseas, as it is, obviously what is going on is that Boeing management has decided to escape “high cost” in the USA, and delocalize itself worldwide. American workers are not needed, as far as unregulated Wall Street manipulators are concerned, they just eat profit margins.

Instead they should go eat rats in the forest. Next, of course, the last American engineer will not be needed either. That maybe fine, as long as it is fine to turn the USA back to a jungle with religiously fundamentalist natives chanting in the forests, hunting moose. One could always export American religious fundamentalism, as Saudi Arabia does. Someday the Chinese will be so much richer than the Americans that it will be worthy to employ Americans again. The wheel of fortune would have turned. (But of course the whole decay process will not be tolerated by the affected populations, and fascism and war will not let the wheel of fortune pleasantly roll all over everybody! It’s going to get much more conflictual. )
***  

IN DEFENSE OF TRADE:

We are not on a rampage against trade here, far from it. Just, like evil, trade is in need of some restraint. Before people make a theory of the free market, they have to define what’s going to be in the market to start with, and what is fair. The only market that should have no restraint is the market of ideas. Selling hominids’ meat on the market, or trying to export the entire economy to China are bad ideas. Globalization is a good idea, pauperization is not. Plutocracy is a terrible idea, democracy, the source of all ideas.

We have detailed descriptions of trade in Australia over gigantic distances at least 40,000 years ago (archeology is easier in Australia because of its dry climate and no glaciations). Prehistoric men, before the discovery of metals, used stones for tools and especially weapons. And that for millions of years. Not all places have all stones, though. Weapons required special stones (flint, obsidian, dense crystals) that sometimes could only come from thousands of miles away. So trade came to be, and has existed probably for millions of years. The Economy Nobel Prize often describes long established practices (but when the Nobel Prize got to be used to justify ill-constructed financial derivatives, it helped engineer world society into a plutocratic instrument.)

Crete, the first thalassocracy, mistress of Mediterranean trade, became the most advanced civilization. In Greco-Roman times international trade got enormously developed (thousands of large ships sailed around at any given moment for centuries), even food and wine were massively transported.

Theoretical economists pointed out that any given place should be better capable of producing some peculiar good, or service, and thus should be able to trade it. That was called the “comparative advantage” as found in Ricardo’s “Old Trade Theory”. But then a country such as France produces all goods and all services that Germany produces, and still they trade ever more, although the only thing they do not have much of, oil, neither of them produces. 
***

HISTORY SAYS MORE ABOUT FRANCO-GERMAN INTEGRATION THAN THE NEW TRADE THEORY DOES:

Conventional economists, lost in their silly American Ivory Tower were unable to understand why 52% of Germany’s exports to France are things France also produces and exports to Germany. In something called the Dixit-Stiglitz model, subtly differentiated firms compete for variety-loving consumers. Equivalently, American economists could have lived in France and Germany, gone shopping, and learned the history.

A detailed analysis explains what is going on. Basically, France and Germany integrated together form a bigger market, allowing bigger economies of scale while boosting variety: if there is no drain on fundamental resources, the more one produces of a good, the cheaper it gets. Overall, Franco-German integration has doubled the number of equally finished products French and German consumers have at their disposal. Any shopper can understand that, no need for math.

Example of Franco-German integration: cars. Germany tends to produce luxury gas guzzlers, France cheaper, most efficient cars. So, sometimes, the most sold car model in Germany was a French car. Reciprocally uppity French with spare cash love a good BMW, Porsche, Mercedes or Audi. Careful consideration of the different models show that some Germans will import Renaults, Peugeots or Citroens, even as the French import Volkswagens (the car companies themselves make models accordingly, targeting them carefully). That is what NTT is all about. It is full of rigorous equations, but the real economy is a giant subject, and a lot of it is not reducible to equations. It’s just elementary psychology monkeys have long figured out, without getting confused by equations and irrelevant graphs.

The Franco-German economic trading case is not grounded by equations, and not by the NTT. For many decades Franco-German trade has been dominated by conscious political decisions, by the Franco-German will to power, hence by the will to Franco-German unification. To a great extent it started when Hitler, who wanted to eradicate France, was forced by his Nazi subordinates to treat her not too harshly, because he was told that otherwise he would surely lose the war, because German production was clearly not enough to win. An enraged, confused, self contradicting Hitler was forced to allow French products to be sold in Germany as the bulk of German production became military.
***

HERE IS A RADICALLY NEW TRADE THEORY; CIVILIZATION AS PRODUCT:

After the Nazis lost, it was agreed by France and Germany that this sort of fascist, mass murdering demented circus should not happen again, so the steel and coal French and German industries were immediately integrated. This was a success, and further Franco-German integration has proceeded to this day (after lurching around during the first weeks of the world credit crisis, because an electoral defeat led her to strike national poses, Kanzler Merkel quickly resumed her usual tight cooperation with President Sarkozy, and she adopted the same measures). Now France and Germany are attenuated nation-states inside a supra national Union. The EXISTENCE OF THE EUROPEAN UNION, per se, SHOULD BE VIEWED AS AN ULTIMATE GOOD THAT NEEDS TO BE PRODUCED. This new product, the European Union, is strong magic to prevent intra European war and suffering. That is what that product does: it cures all wars. Can it be traded? Sure. The European model of society can be exported. But I am digressing, let’s go back to our friends, the plutocrats, their brainy servants, and their global plot.
*** 

AMERICAN NOBEL PRIZE ECONOMICS, OR THE WORLD AS JURASSIC PARK:

Sometimes, when they explain trade, economists explain what man practiced long ago. But sometimes their role is much less innocuous, because they excuse with their long winded, obscure rationalizations in academic journals what is obviously condemnable, and should NOT be tolerated. The economy (hence society) of the planet has been organized in recent decades according to the ideas of some autistic, but influential American economists, many of them from the University of Chicago, many of them Nobel Prizes winners.

These distinguished professors tried to demonstrate that a WORLDWIDE JURASSIC PARK WAS BEST: THOSE WHO DON’T GET EATEN GET STRONGER. As the debris sink down the ocean, the bottom feeders profit too. (Some of these Economy Nobel Prizes protested against the system, true, but just enough to make the Nobel Prize system look good, fair and balanced, so, instead of looking like the growling wolf it is, it looks like a bleating sheep, and the people think it is a friend. Still we are thankful for the protest of Sen, Stiglitz, Krugman, among others.)

Of course, mathematical economists will point out that the equations of New Trade Theory are right, and that right is right. So are the equations of a car crash. They are right. But it’s still a car crash. So are the equations of a bubble, but it’s still a bubble. The equations of a bubble are way more complicated than that of the New Trade Theory, but that does not make them way more right. An equation may be right, but that does not mean that a philosophy grafted onto it is right. The philosophy of the New Trade Theory was that of the globalization of profits, and the subjugation, or extinction of the locals.

Trade between the USA and China is not like trade between France and Germany. France and Germany were founded as the same country, 15 centuries ago, they are basically two regions of an even much older polity, equal and identical in nearly every respect (especially now that Germany has been democratic for two generations).
***

NOT ROME ALL OVER AGAIN, PLEASE:
The right to work should be enshrined in the Constitution.

In Rome, the plutocracy used the trick of distributing gold, bread and games to the population, so that the inhabitants of what was the most populous city on earth, with a five hundred years old republican tradition got used to do nothing, and be thankful for it.

The interest for the Roman plutocracy was that the POPULUS kept quiet, and forgot to make a revolution to reestablish the republic in a timely manner. Like a boa slowly constricting its prey, basic rights were removed from the Romans, AS THE PLUTOCRACY DELOCALIZED POWER OUT OF ROME. For the Roman plutocrats it did not matter where the factories were, as long as they were NOT in the City of Rome. Finally Constantinople was made capital. 

All this carries over to the present day, on a more global scale. Power is removed out of the USA by the American plutocracy, as its army roams the world. OK, the capital has not been moved to Shanghai yet.
***

Conclusion: OFF WITH THEIR IDEAS!

Krugman finds the New Trade Theory “tremendously liberating”, but it’s mostly plutocracy that has been liberated. Thanks to a perverse interpretation of New Trade Theory, in which Paul Krugman himself apparently believes, the world economy was organized so as to allow the growth of a worldwide, unregulated ownership system by the few and the hidden (not to say hideous!). With the enthusiastic cooperation of U.S. universities and government, U.S. plutocracy pushed that theory onto the world, as an imperial and leveraging invasion device.

The basics of “New Trade theory” are not wrong (instead, they are mostly obvious). What is wrong is the way Krugman expressed himself above. Now, it’s more than a typo, more than a lapsus, more than a Freudian slip. It has become a policy. And if Krugman himself celebrates it, one can expect the political servants of the plutocracy to do much more. Thus besides asking politely Professor Krugman to reconsider his dreadful conclusions, one should seriously reconvene to have the WORLD reconsider where to put the big industrial centers. It should be the object of careful negotiations. Industrial policy should not restrict its worries to the number of Iranian centrifuges. Defense is not just about that.

The guiding principle of correct globalization should not be that people get an equal opportunity to do whatever anywhere. Because it is impossible to do this; the failure of the USSR, or Cuba, or other command economies, was in part caused by trying to make everything themselves, and that means they could not do anything well. Besides, of course, they were dictatorships, but notice that plutocracy is also dictatorship, and that Stalin, besides being a mass murderer (he had excuses), could be viewed as the world’s biggest, nastiest plutocrat.

The guiding principle of correct globalization should be that (average) individuals get the opportunity to improve their living conditions. Everywhere. That has been clearly violated by plutocratic globalization we have now.

Two generations ago, all US citizens got the opportunity for the best education, and the best jobs, worldwide (OK, that was violated for minorities, but this is mostly another story). Globalization deprived most US citizens of access to the best education and best jobs. True, Harvard is still here, attending to the rich, but the primary and secondary education systems are shells of their former selves. True, there has been golden boys on Wall Street, racking most of the money, but the median US citizen is increasingly impoverished. Some will say: who cares? Well, it will end up with stress, fear, anger, fascism, and world war, and then everybody will care. Alternatively, one can decide to care now, and think a way out.
***
Patrice Ayme,

Tyranosopher.
***

P/S: Even at this late hour, a Nobel such as Scholes comes out to defend the total deregulation of derivatives (the technical core of what caused the credit crisis). He is the co-inventor of an equation that serves as justification to price some derivatives. The funny (sort of) part is that the ENTIRE MATHEMATICS OF DERIVATIVES IS FALSE. Or then, if it is right, it is right the way Nazi genetics was right (namely right for a few profiteers). This is not an exaggerated comparison: a world war now may kill billions of people, and would be an inescapable derivative from unrestricted derivatives’ trading. Financial manipulators, by playing with the world economy in the giant casino they built for themselves, have been playing with the future of humankind. This year they caused worldwide famine (by transforming food into fuel they speculate on) and a crash. Our patience should have run out by now.


Follow

Get every new post delivered to your Inbox.

Join 324 other followers