International Trade doesn’t work for poor people

9 Dec

My mind was blown today with a critical fact of Economics.

Returns to scale are a market imperfection in competitive markets.

The entire theory of competition, markets, and trade is based on the assumption of constant or decreasing returns to scale. This concept defines all trade theory, and largely defines the policy that affects entire countries and allocation of the great bounty of the world’s resources.
But returns to scale are a fundamental aspect of international business. Returns to scale, the idea that cost is cheaper as a firm produces more, is what leads to giant consolidated multinationals, concentrated market power (and lobbying clout), and factory agriculture. These are the industries that dominate in foreign countries, the ones that can take advantage of returns to scale. In fact, when we tell developing countries to open themselves to foreign investment, it’s these types of industries that are built.

Governments acting for free trade is acting for industry.

Then we have returns to capital. The people who own more, are more likely to grow. What if allocation of resources is originally uneven? And information is uneven? That might lead to initial conditions being exaggerated in the form of country inequality: rather than poor countries being able to catch up they are already behind on the big scalable high-wage jobs.

What about comparative advantage? Poor people have no comparative advantage. There is no perfect awareness among non-Americans, as Winters et. al write “there is evidence that poorer households are less able to protect themselves or take advantage of positive opportunities by trade reform” (emphasis mine). Who produces these comparative-advantage goods? Savvy foreign entrepreneurs who CAN take advantage of opportunity. For them, they see cheap labor. And bring in technology that raises total country output/head. The poor not only lose what they were doing to import competition, but get unskilled, low wage jobs, the benefits of which go to capital owners and middle men who understand international systems, and their resources are used more intensively, not for them. Inequality is exaggerated (returns to scale, again) and most of the profit is siphoned into foreigners hands or reinvested in growth (capitalists are rarely satisfied to just make a profit). For what end does this growth aim? “Those that do benefit directly increase their input consumption, production, and consumption of goods and services.” The winners get to consume more. But CEOs and developed countries consistently score the saddest on international surveys! By making money, the poor remain a given (their wage will increase once everyone in the world’s does…) and externalize the things that do matter in the name of increased world consumption.

Jobs do not equal growth. Poor are not creators in capitalism. Those who earn more do not know happiness.

All free trade is based on fundamental assumptions. Decreasing returns to scale is one of them. In International Economics, everyone has perfect awareness of opportunities, and access to international demand if your idea is good enough. Unfortunately they’re stuck behind learning curves, and we tell them not to subsidize their domestic industry. This dynamic inequality impacts thousands of millions of people; the international flow of all goods and capital is based on a lie.

How can this fundamental feature be overlooked at phase 1 of Economic theory? How can the concepts of increasing returns to scale and market power be an oversight before any microeconomics graph is drawn? This changes everything.

I don’t know whether to cry or be angry at the institutions we’ve created. Thousands of people are starving, while their countries make exports for rich people. Poor people are told they can’t farm, because rich farmers and plantation owners are better at cutting costs. Poor people are not creators. And helping them isn’t profitable for business. Then we’d have to pay them more for our jobs.

-Eddie Miller
Boston University
A Global Organic Mindset: eddiemill.wordpress.com/

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9 Responses to “International Trade doesn’t work for poor people”

  1. eddiemill December 10, 2008 at 1:32 am #

    Sarah Klein fails at WordPress:

    “Comparative advantage in poor countries is a joke. it means replacing any industry with a prospect of further profit and creating a demand for skilled labor with an increasing number of unskilled workers who are essentially tenant farmers for MNCs. And seriously, what is a comparative advantage in rice or corn going to get you, I mean relative to any industry, the demand for rice/corn/etc is relatively demand inelastic so unless entrepreneurs in these LDCS are the ones who create the MNCs, then it just slightly improves the standard of living of the poor up to a certain point where they will hit a ceiling, and lowers inequality because everyone in the country move away from higher paying skilled positions?? korea had the right idea in going out and emulating successful agricultural industries in other countries.

    as for your point on CEOs/industrialized countries scoring the saddest, their are a lot of videos floating around on youtube in which the Dali Lama comments that the happiest people he meets are often the poorest, who, given their lifestyle, are forced to place more of an emphasis on kindness and meaningful connections with other human beings, rather than 80 hour work weeks pulling in a couple million a year”

    Thanks, Sarah!

  2. Alex Bernson December 10, 2008 at 3:32 am #

    I think a lot of what your saying about the failing of economist’s understanding is tied to the rise of the corporation as a discrete political entity afforded comparable if not greater rights than the average citizen in the late 20th/early 21st century. As far as my limited understanding of hard economics allows me to see it, these increasing returns to scale come because corporations are allowed to act in ways that are detrimental to huge numbers of people. These corporations are allowed to do this because of another common failing of general understanding/deliberate hoodwinking of the citizenry depending on how you look at it: there is a myth that somehow the exercise of vast corporate influence at the national and international level is not a radical impediment to democratic functioning. In other words, because our capitalist world measures power as money, and the corporations have the money, there voice, their interests are given radically more attention and accommodation by the government than those of the citizens. The check on ever increasing returns to scale based on ever increasing oppression and evil is government, and when that government is the puppet (to a greater or lesser or extent, with greater or lesser deliberateness depending on your views) of the corporations, this check is removed.

  3. eddiemill December 10, 2008 at 5:15 am #

    Well, there is nothing in economic theory that says that firmscan define the rules that they play in. Corporate lobbyists are a huge return on investment for them, because they serve as a voice in the ear of legislators: “growth, jobs, efficiency…” Unfortunately, corporations are not only given the same rights as people, they are much more powerful when conflicts of interest arise because people are generally speaking not organized enough to speak out on specific policy!

  4. eddiemill December 10, 2008 at 5:15 pm #

    Very interesting news stories on the subject: you couldn’t get these conclusions from these sources 5 years ago!

    Washington Concensus Dead Wrong for Agriculture in Poor Countries
    http://www.bloomberg.com/apps/news?pid=20601101&sid=aSueX0nYxMrg&refer=japan

    Kevin Gallagher, IR Professor at BU. Writes a column for the Guardian on international trade, usually with a negative connotation.
    http://www.guardian.co.uk/profile/kevingallagher

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