One for those seeking parallels with the Great Depression

The Central Bank
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The WTO talks collapse. I am generally an optimist on matters of economics, but this news sent a shiver up my spine.

One of the central causes of the Great Depression was the spiral into trade protectionism that occurred in the early 1930s. Countries believed in Mercantilist theories, that trade was a type of war one waged with other countries. If you export you win if you import you lose. Unfortunately, they didn’t realise they were wrong and everyone lost.

It would give me pause should this event spark similar reactions between coutries.

A brief note on trade, because this is one of the areas where very well established thinking in the field of economics has failed to reach the overwhelming majority of the population, who remain mercantilist in their attitudes.

Ask 100 people and more than 90 would probably instinctively tell you that exports are good and imports are bad. However, economists see exports good and imports good. The reason is that trade is a positive sum game. Two economies/countries generate more income/output between them by trading than they do on their own. Each of the countries generates more income/ouput by trading than it does by not trading.

In short, it is a win-win game.

How does it work? It comes down to relative comparative advantage, which is not what most people think it means. It is nothing to do with the “competitiveness” that you hear people rabbit on about all the time. It is about doing what you do best - specialisation. It means that even if one country, say the US, produces everything more efficiently and cheaply than in another country, say Ireland, it is still in Ireland’s interests to trade. Ireland will be better off trading, than trying to keep out the cheaper imports - which in this case is everything. Sounds strange doesn’t it. At first glance it is counter intuitive, but after a while it becomes self evident.

Imagine there are only two goods produced, say computers and cars. Say the US can produce a car in 10 man hours and a computer in 5 man hours. Ireland can produce the identical car in 15 man hours and the identical computer in 10 man hours.

It looks as if trade would leave Ireland with 100% unemployment. Who will buy a computer or a car made in Ireland. US cars are 33% cheaper and US computers are 50% cheaper. Surely Ireland needs trade barriers to block out these imports to protect jobs. Well no. Think a bit more deeply. The trick is of course that there is a limited amount of labour available. Production will naturally gravitate to the most efficient allocation of that resource, because that will provide the greatest reward.

US workers can produce 2 computers for every car.
Irish workers can only produce 1.5 computers for every car.

Ireland’s has a ***relative ******advantage in producing cars compared ***to the US. Irish. US cars cost 2 computers, while Irish cars cost only 1.5 computers. Ireland will be better off by making cars, because the US will be willing to buy them for anything less than 2 computers (the alternative is to give up 2 computers if they are prduced in America). Ireland of course will be more than happy to take computers from the US for anything less than 2/3 of a car. So they will trade cars and computers at a price somewhere between 1.5 and 2 computers per car. Each will be at full employment and each will have more computers and cars than if it didn’t trade.

So even though the US can produce everything more efficiently (cheaply) than Ireland, it makes sense for Ireland to trade. Ireland benefits from the trade and so does the US. They get more computers and cars between them ***and ***each because they specialise in what they do best and then swap. Win-win.

So much for the famed “race to the bottom”. What actually happens is that every country can find its niche and use trade to make itself better off. Even in this extreme case, which by design hints at the great threat of low wage economies. Of course it isn;t a threat at all, these are countries waiting to trad ewith Ireland to allow increased opportunities for specialisation through trade and higher income for all.

Als, note that imports are good. The imports are the way by which your trading partners can buy things from you and excecise this specialisation. Another way to think aobut it is that there is no such thing as imports, only exports from a different side.

So that is why trade is good. That is why imports are good. Go tell your friends. Go tell those bloody farmers dancing in the street tonight at the failure of a process that improves prosperity for all.

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Great post Gekko and very well put :slight_smile: One to send to your local farmer or SIPTU representative.

I have long advocated more basic economics being taught in schools. The concepts are not difficult and many simple examples exist to help get the message across.

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Cheers Geckko.
Like Yoggy, you’re smarter than the average bear. :wink:
It’s great to get information like this into the open.
I’m currently reading Principles of economics. Great book, very easily understood. While I’m not completely dim it explained comparable and absolute advantage very well. I’m looking forward to getting onto the section on exchange rates and interest rates.
Keep the words of wisdom coming.

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But what can we do?
How can we convince farmers of the errors of their ways?

If they relied on subsidies we might have a bit of leverage, but farming is a completely self reliant and profitable industry. The farmers can just tell us to get lost.

I dunno, it’s a pickle.

-Rd

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Yeah its a pickle alright, the sooner tariffs are removed and these guys learn to stand on their two feet then the better. They cannot compete with countries like Argentina from a scale perspective then they will have to find a niche market in terms of quality or orgasmic farming or something. But STOP throwing money at them as you are subsidising them for scratching their arses, if they have no incentive to think for themselves and are not forced to either accept or work their way out of a problem they will continue to sit back and hoover up the cash.
They are parasites whose inability to accept the inevitable is costing the tax payer and costing joe public in terms of higher prices. Typical goombeen politics.

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Hmmm.
Pardon my ignorance but…
Are the farmers not complaining that competing with South American beef is unfair as they (the south americans) do not have to meet the same animal welfare and hygiene standards as European producers?

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a great niche if you can get into it :laughing:

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So they are happy to accept Australian or New Zealand lamb then? What about US beef?

aahh, the politics of trade. :wink:

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What to do what to do…

Especially when they are able to deliver such important electoral clout to the government, like mobilising a vote to win a referendum…errrr… :wink:

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Although Irish farmers may be dancing, they are not the cause of the failure of the DOHA round. Specifically, it was the refusal of the US to agree to the levels of emergency tariffs poor countries wanted to be able to introduce to protect subsistance farmers in the event that their market was flooded with dumped produce from wealthy nations.

Irish farmers are just like any other vested interest group, whether they be civil servants, hospital consultants, barristers or bus drivers. They will fight like cats to preserve their own parochial interests.

Personally, Ireland’s willingness to sacrifice its agricultural (and fisheries) industries in favour of services strikes me as blinkered. This country should be looking for ways for both sectors to thrive, not playing one off against the other.

I agree with Gekko that this is an ominous development for the future of multilateral trade agreements and is the last thing a global economy reeling under a credit crunch needs right now. It was interesting to see how oil continued to plummet yesterday while food commodities rallied.

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I agree septic. And from what I read the EU wasn’t the immediate catalyst for collapse (this time).

But imagine if all those Irish ministers attending these negotiations and dealing with other EUI countries were pushing to relax obstacles to trade in the EU.

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Taking the win-win trade explaination above, it’s clear that if Ireland is going to have a niche, it’s likely to be in the high quality food area.

Can someone explain this to me though.

How is it cheaper/preferable for Tesco to bring strawberries from the USA, when we grow perfectly good strawberries in Wexford?

I happened to be in Tesco at the weekend and apart from a few Rasberries I couldn’t find a single piece of fruit from Ireland, or even from the EU.

South Africa, USA, Brazil, New Zealand, Mexico all there in force.

I’m not expecting Oranges from Offaly, but the things we can grow here, I’d expect to be able to buy.

If I hear back from Tesco themselves I’ll let you know, but in the meantime, any guesses why USA strawberries are preferred to Wexford ones.

I’m thinking illegal immigrant pickers is the secret.
Although that can only be true if Irish growers are paying a lot more now than they were when I was a kid. Yes, Irish growers have been known to use child labour.

Luckily this child labourer had the freedom to decide after 1 day that hours in the sun for a few pence isn’t worth it.

-Rd

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Probably lots of reasons. Tesco are getting economies of scale they can’t always leverage by sourcing from Ireland alone. But I bet in some areas they do use Irish produce.

By comparison, someone like Dunnes who needs far fewer units can get the scale they need in Ireland.

Maybe because it cost 10 times as much per acre to plant the things in Ireland?

So what is your difficulty here? Do you not want to eat foreign fruit?

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No, no problem with that, I ended up buying some South African Apples.

Given the choice if they had Irish Fruit and Foreign Fruit, I’d pay a little more for Irish fuit, and if they had EU fruit or non EU fruit I’d pay a little more for EU Fruit.

And I’d rather buy Irish Strawberries driect from a grower than buy US strawberries from Tesco.

Not because of safety concerns or anything like that. Just a preference.
I grew up being able to go and pick fruit directly off the bushes myself, so that might be something to do with it.

-Rd

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Very interesting post geckko.
Only one part I have a problem with

Places like India and China have oodles and oodles of labour available. Enough surely to make both computers and cars.

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Dean Baker had this to say:

I generally agree with the view that free trade is a good idea. However, I am not convinced that we need the same deal in each economic sector - the developing world looks for lower agricultural tariffs as a quid pro quo for lower services barriers. In the first place, developing countries (to use that totally inaccurate phrase, but I can’t think of another) have more to fear from other developing countries for agricultural dumping, in my view. Secondly, what are these barriers to services? I have been operating in developing countries in Asia for the past while and I have yet to come across them. Thirdly, shouldn’t these agreements be on a sectoral basis - a multilateral agreement for agricultural products, one for industrial products, one for services or indeed as many as you like, but with a level playing field in each area?

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Yes, but the Cars and Computers represented a fake global economy with only two products.

Ultimately if India and China try to do everything, then their labour will become expensive, and the rest of the world will have lots of skilled people with nothing to do.

Also, India and China by definition can’t do everything.

Let’s see them make Bachelors In Trouble DVD’s for example.
waterford-news.com/news/stor … cwkfsnauoj

-Rd

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I don’t know who that character is, but this claim:

I strange. It has always been about allowing prices to do what they will, not secure higher or lower prices. He might be confusing some of the indirect affects of the type of policies employed by the EU, whereby they pay farmers ludicriously high prices to produce, which they then do, leaving surplus output that can’t be sold outside the EU because it is too expensive so they “donate” it as “aid” to impovrished countries, thereby leading to a collapse in the price of food in those markets and destroying the agriculture sector there.

One thing to note about the WTO though. It was supposed to be a vehicle to removing regulations, rules, barriers and tarrifs on a multilateral basis.

Of course politics means it has become a rule making machine, which has been instutionalising barriers and obstacles to trade in many areas. The complete opposite of what it should be doing.

Just think, it is commonly writtent he the WTO is an organisation that is “regulate international trade”, completely the opposite of what is was supposed to do (after evolving out of the GATT rounds) and the opposite of what it should do.

This is one reason why economics gets a bad name, in this case unfairly. Politicians and lobby groups take control and barstardise things.

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They do have limited mount of hours avaialable to do stuff. It might be on a bigger scale, but it is the same.

Think of Ireland in comparison to Lichtenstein.

And although my exposition was necessarily simple, add more and more goods and the result is the same.

If you have trouble getting you head around it still. Think of this counter-factual.

Assume the nature of trade was as believed by Mercantilists (i.e. those people who say imports are bad, or buying Irish protects jobs etc. etc.), then a country would make itself better off by restricting imports from outside its borders.

So would people who live in Leinster be better off by not buying things produced in Munster, or Ulster? Those are imports of course. If the Mercantilist view is true, then that must be so; Leinster and Ulster and Munster and Connaught would all be better off by not importing anything from each other, in the same way Ireland would be better off not importing anything from another country.

Of course, that is absurd. The Mercantilist premise is false.

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i think i remember this was actually taught in school… i think it was the law of comapartive advantage or something. maybe you weren’t in that day :wink:

i’m not a supporter of the IFA or anything, and think some subsidies are probably unnecessary, but isnt it a good thing for a country to have a solid agricultural base that would be in some way sufficient to feed its citizens in case of a severe world crisis like a war or something? in this type of scenario, focusing a specific relative or comparative advantage or whatever would be the worst thing a country might have done as you cant eat cars/computers etc… surely, with all the rumblings in iran and so forth, a reasonabe degree of self-sufficiency (even if it is slightly uncompetitive) in agriculture is preferable to putting all the eggs in one basket, as many here have argued people did with property, as a fail-safe for the economy/country?
if the unthinkable happened in terms of a serious conflict that had global implications, any countries that lacked a sound agricultural base would be at a severe relative/comparative disadvantage compared to those who had sufficient agriculture to feed its population.

while we might not like subsidies etc, surely there is an argument that a food source for a country i.e. agriculture, should not be rendered impotent due to its vital importance to an island that would find it difficult to import foodstuffs in any severe international conflict? an unlikely and rare scenario, i know, but nonetheless, the very remote possibility that something like this could happen must mean that we should be prepared for such a scenario?