Straw man economics

Jagdish Bhagwati is a 70 year-old professor of economics at New York's Columbia University and a senior fellow of the Council on Foreign Relations. He is also an advocate of globalisation, so his heart's in the right place. One would expect anything he wrote to be the product of serious thought and well worth reading.

"There is no proof that economic health depends on manufacturing: Services are not less technologically progressive or less vital", posted today on CiF, disabuses one of that assumption rather rapidly. He writes of a revival of the "manufactures fetish" in the US and Great Britain.

The latest flirtation with supporting manufactures has come from the current crisis, especially in the financial sector, and is therefore likely to have greater prospects for survival. The fetish is particularly rampant in the US, where the Democrats in Congress have gone so far as to ally themselves with lobbyists for manufactures to pass legislation that would provide protection and subsidies to increase the share of manufactures in GDP.

Because of the financial crisis, many politicians have accepted the argument, in a virtual throwback to Adam Smith, that financial services are unproductive - even counterproductive - and need to be scaled back by governmental intervention. It is then inferred that this means that manufactures must be expanded. But this does not follow. Even if you wanted to curtail financial services, you could still focus on the multitude of non-financial services. Diesel engines and turbines are not the only alternatives; many services, like professional therapy, nursing, and teaching are available. The case for a shift to manufacturing remains unproven, because it cannot be proved.

Now the "manufactures fetish" is as fine an example of the "straw man" logical fallacy as one could wish for. The case for globalisation and against protectionism rests on Ricardo's thesis of Comparative Advantage, which argued that the gains from trade follow from allowing an economy to specialise. A country does not have to be best at anything to gain from trade. The gains follow from specializing in those activities the country is relatively better at, even though it may not have an absolute advantage in them.

Nobel laureate Paul Samuelson was once challenged by an eminent mathematician to name one true and non-trivial proposition in all of the social sciences. Samuelson replied that Comparative Advantage met the test. "That it is logically true need not be argued before a mathematician; that is is not trivial is attested by the thousands of important and intelligent men who have never been able to grasp the doctrine for themselves or to believe it after it was explained to them." 

Although Bhagwati's article fails to make what a first year economics student would know to be the killer argument against protectionism - possibly because trade in professional therapy, nursing, teaching and the like is so culturally limited - it is his slighting reference to Adam Smith that causes one to wonder how he gained his academic eminence. In The Wealth of Nations IV.2, Smith partially anticipated Ricardo:

What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage. The general industry of the country, being always in proportion to the capital which employs it, will not thereby be diminished . . . but only left to find out the way in which it can be employed with the greatest advantage.