El super clasico: trade and technology duke it out at CUNY

Graduate Center CUNY organized yesterday (April 26) a star-studded discussion of the effects of trade on US jobs and wages. The participants were David Autor and Ann Harrison, both authors of seminal economic papers on the effects of China’s imports on US employment and wages (and professors at respectively MIT and Wharton), Brad DeLong, a polymath and former high Treasury official in Clinton’s administration (and professor at Berkeley), and Paul Krugman, Nobel Prize winner, professor at the Graduate Center CUNY, and probably one of the three most influential economists in the world.

The discussion was started by David Autor who pointed out that although US manufacturing employment was on a downward trend since 1943 (when it accounted for almost 40% of the labor force), what happened in the early 2000s with China’s accession to the WTO was a sharp (“off-the-cliff”) decrease in the number of manufacturing jobs. Between the late 1990s and today some 5 million manufacturing jobs were lost. While Autor thought that technological change was indeed a big factor explaining longer term trends the most recent drop cannot be dissociated from trade (import penetration from China).

Next, in the opening statements, Ann Harrison, referring to two very important papers which she coauthored, argued that the effects of trade are visible when one follows workers by occupation much more than when one looks simply at a given industry. Thus, people displaced by trade, even if they ultimately get reemployed, lose some 25% of their wage. The second paper of Ann Harrison carries a possibly slightly different message: many jobs were lost because capital goods became cheaper, and machines thus substituted for labor. It is a technology story with a twist: technological change responded to the change in relative prices. Harrison said that her position on the technology-trade (TT) debate is probably closer to the presumed position that Brad DeLong (the next speaker) would take than David Autor’s.  

Indeed, in his opening statement DeLong supported the technology explanation although, since he made this point after a long detour through his family history, it was not too clear to me whether it still applied to the current situation and China in particular.

Paul Krugman (the statements were made in alphabetical order), referred to the similar TT discussions in the 1990s where the consensus was that some 2/3 or more of the job and wage effects were due to technology. But, Krugman said, economists might have been right on trade’s limited role then; yet keeping the same opinions now was wrong since the boost in trade that has occurred in the past 20 years was much greater than what the US witnessed in the 1990s. He thought that trade today has a massive impact but that it is one-off event, linked to China, and unlikely to be replicated.

If soccer-like I were to summarize the positions, I would say that Autor and Krugman were of the opinion that “trade matters” while Harrison and DeLong tended to favor technological explanation. But that classification is too rough. Autor’s own work, of which he briefly spoke later, shows huge importance of technology, especially in displacing routine labor. (My favorite paper of Autor, Dorn and Hanson is the one which pits the trade vs. technology stories against each other and finds that both…matter.) Similarly, as I mentioned, Harrison does find incontrovertible impact of trade too.

There were at least three areas where the panelists seemed to agree.

(1) Withdrawing from globalization would be extremely costly for the US and the world. DeLong pointed out to the asymmetric effects of NAFTA. While he argued that NAFTA (trade with Mexico) had a miniscule impact on US job loss, withdrawing from NAFTA today would have an enormous negative impact because of the number and density of trade links that have been established in the past two decades. Everybody agreed that it was madness to withdraw from globalization and to go back to protectionism.

(2) Everybody agreed that economists underestimated the impact of trade. As Autor put it, the benefits of trade (cheaper goods) are diffuse, but the costs are concentrated (aka you lose your job). Krugman thought that this was because economists, enamored by the “jewel in the crown of economics”, theory of comparative advantage, tend to look at average effects, not at the heterogeneity of effects. He thought that this was changing now.

On a more philosophical note, Autor added that workers are people (yes) and that even if the compensating mechanisms for job loss were effective (Ann Harrison said they were not), people desire to have meaningful jobs and high wages rather than to subsist on  handouts.

(3) The China effect will not reoccur. As I mentioned, the point was made by Krugman in the opening statement, but was expanded on by both DeLong and Autor. DeLong thought that China will be the last example of export-driven development, made possible by the willingness of the US to be open to Asian imports (Japan and Korea before) and by the eagerness of the rest of the world to cover US deficits by squirreling the money in the United States. DeLong thus touched upon the global political economy issues which paradoxically made the richest economy in the world be capital importer rather than exporter. (Yet another example, in my opinion, of how with globalization many of the nostrums of the mid-century neoclassical economics got overturned.)   But the one-off effect of China (no Indias, Ethiopias, Burmas waiting in the wings) means that the current trade effects on US labor are not going to be repeated.

It was a great evening. The top economists in perhaps the hottest area of economic policy dispute today duked it out in a very fair way,  and came out to a fairly consensual position. We are back to 1817 where trade and technology (the famous Chapter XXXI) played such a great role in Ricardo’s “Principles”.  

A theory of the rise and fall of economic leadership: review of Bas van Bavel’s “The Invisible Hand?”

The recently published “The invisible hand?: How market economies have emerged and declined since AD 500” (Oxford University Press, 2016, 330 pages) by Bas van Bavel has, like all important books, a relatively simple core theory which Van Bavel, a well-known economic historian teaching at the University of Utrecht, illustrates on five historical examples:  Iraq between 500 and 1100, Central and Northern Italy 1000-1500, the Low Countries 1100-1800, England 1800-1900, and the United States 1800-today. (The first three cases are discussed in detailed separate chapters, each running  to 50-60 pages, while the last two, to which Western Europe may be appended, are discussed in a single chapter called “Epilogue”).

Van Bavel’s key idea is as follows.  In societies where non-market constraints are dominant (say, in feudal societies), liberating factor markets is a truly revolutionary change. Ability of peasants to own some land or to lease it, of workers to work for wages rather than to be subjected to various types of corvées, or of the merchants to borrow at a more or less competitive market  rather than to depend on usurious rates, is liberating at an individual level (gives person much greater freedom), secures property, and unleashes the forces of economic growth. The pace of activity quickens, growth accelerates (true, historically, from close to zero to some small number like 1% per year) and even inequality, economic and above all social, decreases. This is the period so well recognized and analyzed by Adam Smith. Van Bavel, in a nod to Braudel, shows that very similar “essors”  have existed in the pre-medieval Iraq (then the most developed part of the world), medieval Central and Northern Italy (Florence, Venice, Milan, Genoa..) and on the cusp between the late medieval Europe and early modern period in the Low Countries.

But the process, Bavel argues, contains the seeds of its destruction. Gradually factor markets cover more and more of the population: Bavel is excellent in providing numerical estimates on, for example, the percentage of wage-earners in Lombardy in the 14^th century or showing that in Low Countries wage labor was, because of guilds, less prevalent in urban than in rural areas.  One factor market, though, that of capital and finance, gradually begins to dominate. Private and public debt become most attractive investments, big fortunes are made in finance, and those who originally asked for the level playing field and removal of feudal-like constraints, now use their wealth to conquer the political power and impose a serrata, thus making the rules destined to keep them forever on the top. What started as an exercise in political and economic freedom begins to look like an exercise in cementing the acquired power, politically and economically. The economic essor is gone, the economy begins to stagnate and, as happened to Iraq, Northern Italy and Low Countries, is overtaken by the competitors.*

As this short sketch shows, Bavel’s theory has many links, or can be juxtaposed, to several contemporary views of economic history. Bavel is dismissive of a unilinear view that regards the ever widening role of factor markets, including the financial, as leading to ever higher incomes and greater political freedom. His view, although not fully cyclical (on which I will say a bit  more at the very end of the review) is “endogenously curvilinear”: things which were good originally, when they hypertrophy, become a hindrance to further growth. It is thus a story of the rise and fall where, like in Greek tragedies, the very same factors that brought the protagonists grandeur, eventually hurl them into the abyss.

Bavel’s view is at variance with recent theories proposed by Acemoglu and Robinson as well as by Landes, or even by McCloskey (although I write this based on the reviews and a couple of short articles; I have not read her “Bourgeois Virtues”). Unilineal theories are, according to Bavel, ahistorical and unduly Euro-centric. They ignore very similar developments in other parts of the world and, while he does not discuss it in the book, Bavel mentions, Roman Empire, Song China and Byzantium. By focusing on Europe only, and its increase in real income which parallels the growing marketization of the economy from the 18^th century to today, such theories fail to acknowledge the elements of economic decadence.

This brings me to a point where, in my opinion, Bavel’s approach could have been made more effective. In the introduction and in the very detailed discussion of the three cases, Bavel speaks of a real-income rise and decline, that is of the economies that have become rich and then declined and got impoverished. This is especially evident for Iraq and Northern Italy, and slightly less so for the Low Countries. But when he discusses even the Low Countries at the end of their “Golden Age” and all the later cases, the decline is a relative one, that is compared to other competitors. Thus, the Low Countries were overtaken by England, the latter is overtaken by the United States, and (we are led to extrapolate) the United States will be overtaken by China. Thus, in my reading of the book, Bavel discusses the rise and fall of economic powers which would be a more effective way to present his central thesis and to solve a facile (and in my opinion wrong, but to some perhaps  fatal) objection that the Netherlands or England can hardly be said to have declined if their today’s real incomes are twenty or more times greater than what they were at their (relative) “peaks”.

It is not only the plausibility of the mechanism of decline that gives strength to Bavel’s thesis; it is also that he lists the manifestation of the decline, observable in all six cases. Financial investments yield much more than investments in the real sector, the economy begins to resemble a casino, the political power of the financiers becomes enormous. The richest among the financiers either directly or indirectly enter politics, they become patrons of arts,  sponsors of sports and education,  and we witness simultaneously (1) oligarchic politics, (2) slower growth and lower level of real investments, (3) higher inequality, (4) domination of finance and (5) artistic efflorescence.  What the ancient writers describe as “decadence” clearly sets it, but, as Bavel is at pains to note, it is not caused by moral defects of the ruling class but by the type of economy that is being created.  Extravagant bidding for assets whose quantity is fixed (land and art) is a further manifestation of such an economy: the bidding for fixed assets reflects lack of alternative profitable investments as well as the expectation that, as inequality increases, there would be some even crazier and richer investors who would pay even more for a work of art, thus enabling the realization of a capital gain.

The readers will not be remiss in seeing clear analogies to today’s West.

Let me end with the point about the cycles. Bavel’s theory is not fully cyclical, in the way that (say) Plato‘s was where each political system led to another one, in an endless cycle. In Bavel, after the relative fall, the economies do not seem to recover, although it is possible to imagine that, if the shackles of finance and inequality were broken, a Phoenix-like recovery should not be excluded (leading perhaps in its turn to another decadence). So not everything is yet lost!

In my own notes, I summarized the book thus: prerequisite for growth is more or less equal distribution of assets coupled with factor markets. But factor markets generate inequality.

* Strictly speaking, Van Bavel distinguishes three stages: market economy (output markets and security of property), accumulation (wage labor, capital accumulation, and growth), capitalism (dominance of the financial sector, use of the state by capitalists, monopolization).