The UK government led by Theresa May really is quite something, is it not?
Huawei is already embedded in Britain’s elite: in 2015 it appointed to head its UK board Lord Browne, the former chair of BP, who was ennobled by Tony Blair’s administration and served David Cameron too. At the same time, it appointed to its UK board as non-executive dierectors Dame Helen Alexander, formerly leader of the EU-loving Economist Group and Confederation of British Industry (now deceased), and Sir Andrew Cahn, a former civil servant who resigned from Cameron’s Trade and Investment Department in 2011 in order to chair Huawei’s new British advisory board.
May’s government is sacrificing national security, the special relationship, and Brexit in favour of Chinese money and EU integration.
The article is written by some chap called Bruce Newsome, and it makes a good deal of sense. Even if you are sceptical of some of his points about how accountable US intelligence operations are (not very, judging by what has been going on vis a vis Mr Trump) its contention that it makes more sense to trust the US rather than China seems correct to me. This current government is endangering the UK’s long-standing intelligence co-operation under the “Five Eyes” pact with the US, Australia, Canada and New Zealand. And it is being done by a government that failed to deliver on taking the UK out of the EU by 29 March, giving comfort to those who still dream of taking the UK more fully into a developing European state with its own military command structure, at odds, as it will inevitably be, with NATO.
The rollout of a 5-G network in the UK will, hopefully, bring major benefits to users, but you don’t need to watch a lot of scary thrillers to understand the risks in getting a firm involved that is so closely embedded with the Chinese state. (Sure, many Western firms are also embedded in their respective states, so it comes down to a judgement call on which states are less evil, and I think I know the answer to that).
Even those of an anarchist/minarchist turn of mind when it comes to intra-government intelligence sharing processes ought to worry that the UK seems keener to do deals with Chinese state-backed tech firms than protect an alliance that helped to win the Cold War. Such matters should not be discussed behind closed doors of government, but be out in the open.
As far as Theresa May is concerned, my contempt for this individual has gone from gale warning to hurricane-force levels, with no signs of improvement soon.
Unfortunately, the Trump administration is nowadays threatening to sanction allies who do not toe the American line on such things as JPCOA, Nord Stream, and now Huawei. This is likely to cause more damage to US alliances than any Huawei back door.
From a technical point of view if we cannot correctly commission (and check) communications equipment then Huawei is not the problem. I believe we can and we should distrust all such foreign hardware and software. USA equipment has been known to contain US Government code.
When US allies invite the Chinese state into their communications networks, that is the harm to the alliance, not the sanction.
The most remarkable thing I found about the story was the idea that they’d stop sharing 5-eyes intelligence with us if China had access to our internet, as if 5-eyes intelligence was routinely transmitted over the internet in the clear! Are these the same people who thought Hillary’s email server was nothing to worry about?!
It should be the default assumption by everyone that the internet is spied on. By everyone. The Chinese. The British. The French. The Americans. The Russians. The tech firms. The marketing companies. The Mafia and criminal underworld. The hackers and scammers. China’s routers are a drop in the ocean. Don’t think for a moment that if this deal is stopped, the internet will be safe and secure! Who makes the processor chips, and PCs, and hard drives, and network cards, and webcams, and mobile phones? Do you think they couldn’t embed this stuff in electronic gear that you don’t even think has a connection to the internet? If we’re not even bothered by an obvious spy device like ‘Alexa’ being sold to the public, why would we even notice or care about this?
You are spied upon. Take that for granted. Spying that you know about is easily dealt with. You can take precautions. It’s all the spying that you don’t know about that is the worry.
And don’t forget that Huawei just appointed a former Obama cybersecurity official as a lobbyist.
A long time ago, Sun Tzu wrote: “The supreme art of war is to subdue the enemy without fighting.” The leadership of China certainly remembers that — and they operate on a longer time-scale than the Western Political Class.
Moving much advanced manufacturing to China certainly gave Western companies a short-term profit boost and gave some Western consumers lower cost equipment. Did any Western politician think about the possibility of certain longer-term costs?
I believe we can and we should distrust all such foreign hardware and software
Agreed. The problem with this government, and indeed the entire political class, is we cannot do stuff ourselves.
ARM in Cambridge has designed around 95% of Mobile Phone CPUs, and there are other Silicon Fen companies that more than punch above their weight involved in the semiconductor industry, it seems inconceivable that the government cannot commission a UK company to design high-security communications equipment and then get the US to make them.
“…it seems inconceivable that the government cannot commission a UK company to design high-security communications equipment and then get the US to make them”
How odd, I was thinking the exact opposite, with a newly independent UK manufacturing them.
“The leadership of China certainly remembers that — and they operate on a longer time-scale than the Western Political Class.”
Do you think so? Does nobody else find it ironic that the NSA and GCHQ and so on are shocked – shocked I say! – that any nation should use government-endorsed electronic subterfuge to spy on other nations?! Ed Snowden is probably rolling his eyes as we speak.
“it seems inconceivable that the government cannot commission a UK company to design high-security communications equipment and then get the US to make them.”
It seems inconceivable that they can’t design browsers and VPNs that encrypt and anonymise all data sent across them. We’ve got encryption algorithms, and anonymous broadcast algorithms, and onion routing, and steganography, and untraceable anonymous digital cash protocols, and peer-to-peer networks, and so on. It could all be made the default if we wanted to. So why don’t we?
That faint squishy sound you can hear is Ed Snowden is rolling his eyes at us again.
Parliament of dropouts and a government of traitors.
The behaviour of Prime Minister May is indeed terrible.
On national security Mrs May shows the same fatal combination of arrogance and ignorance that we have seen on other matters.
It should be remembered that Mrs May is a former Home Secretary – and proved unable to answer basic questions about a Bill on computer matters that she was pushing through the House of Commons.
If one is ignorant of a subject one should not make decisions about that subject – this is a basic rule that Mrs May just ignores.
CaptDMO: “How odd, I was thinking the exact opposite, with a newly independent UK manufacturing them.”
Let’s not get all dreamy about post-separation UK. UKGov could have decided to promote chip manufacturing in the UK any time it wanted, regardless of being part of the EU. The Oxbridge metropolitan PC set in UK politics don’t like messy manufacturing, and chose not to do that; post-Brexit, all we are likely to see is a Parliamentary reshuffling of the same old Oxbridge metropolitan PC set. Unless there is fundamental change in the governance of the UK post-separation, the most likely outcome is more of the same-old same-old. Looking at the UK from outside, there does not appear to be much discussion about that kind of necessary fundamental change.
It might be interesting to learn what percentage of key contributors in “Silicon fen” were born in the UK. If it is anything like the situation in the US, the answer is — lower than you would guess.
A lot of politicians ignore that rule when exercising the power they acquired by knowing something about politics. Mrs May’s distinction seems to be she is also ignorant of some political skills. She does not seem good at foreseeing “the optics”, for example.
However at the moment, I can only see anything that damages her brand further as – on balance and within (pretty wide) limits – a net advantage.
In far too much of the coverage of this story I hear people say “despite the risk of security breaches” and “despite the Chinese government’s involvement”. That’s not a bug it’s a feature. Since when has the British state been against spying? This contract had been given to the Chinese in order to spy on the British people. Oh well nice country we had once, not in my lifetime but still
It’s a funny circle, I read of the UK government giving compromised Engima-type machine to our Commonwealth allies, e.g. Australia and NZ after WW2, knowing that they could decode the traffic on the supposedly secure gifts.
Now we go to the greatest mass murderers in history to develop some supposedly womderful internet, I am reminded of a Matt cartoon of a BT engineer telling someone that their slow broadband is their best protection against Russian cyberattacks. If the government wanted economic growth, it would go away.
As for the PM, her epitaph should be ‘I did it Huawei‘.
Very nice.
I’m not worried about Trump’s cozying (sp?) up to the ChiComms as endangering the special relationship between the US and Britain: we are bound by 1000 years of blood, custom, and friendship (apart from a few notable episodes along the way). Trump and May (pity her name wasn’t “Will”?) can certainly do short term damage.
But that damage pales in comparison to the threat posed by China. As others have noted, they take a long view and we have ceased, on the Western side of the Atlantic, to even educate ourselves about the past. What hope do we have of thinking clearly about the future?
I fear there is yet another test coming regarding the role of Providence in the preservation of the United States–certainly our present actions won’t save us!
We are definitely selling them the rope they will use to hang us…question is, do they have enough rope already?
Greg: “We are definitely selling them the rope they will use to hang us …”
Sadly, in many cases we have been selling the rope manufacturing facility to the Chinese, on special easy financing terms where they pay back the loan by selling the rope they produce to us.
Today’s version should read — We are buying from the Chinese the rope they are using to hang us.
But, hey! Free trade, and all that. Some economist has a little equation that proves mathematically we are definitely doing the smart thing.
But, hey! Free trade, and all that. Some economist has a little equation that proves mathematically we are definitely doing the smart thing.
Cheap shot. Even at the height of the British Empire, when the UK had more or less a total free trade policy, a core responsibility of the British state at the time (taking only about 10-15% of GDP) was defence, mainly in the form of a large navy. Today’s equivalent state must devote some resources to cyber-security and that means ensuring enough domestic resources to provide said. We can of course source a lot of the materials from abroad (as “some economist” with a “little equation” would point out to you) as it makes sense to do so, but some capacity needs to be within these islands, even if it is only in the form of training enough technicians and engineers to handle whatever we bring in.
The controversy must absolutely not be used as cover for protectionism, as Trump has preposterously done with steel and aluminium (and his stance is actually hurting domestic US manufacturing), so those classical liberal economists with their clever laws of comparative advantage proving this is bunk should be applauded for so doing.
“But that damage pales in comparison to the threat posed by China.”
What threat are you talking about? What do you think they’re going to do?
“Today’s version should read — We are buying from the Chinese the rope they are using to hang us. But, hey! Free trade, and all that. Some economist has a little equation that proves mathematically we are definitely doing the smart thing.”
The problem is nothing to do with free trade, it’s to do with us spending more than we earn, and borrowing to cover the gap. Free trade is good, spending more than you earn is bad. It’s like running out to the shops and loading up with all sorts of goods on credit, and then blaming the shops that gave us credit for the resulting debt mountain. You’re saying we ought to board up the shop doorways so we can’t get in and buy stuff we can’t afford!
They’re willing to give us credit on the rope we’re intent on using to hang ourselves. But that’s freedom. It includes the freedom to do stupid and self-destructive things.
Johnathan: “… but some capacity needs to be within these islands …”
You do realize, dear Johnathan, that you are in violent agreement with the point I was making?
If you want to write a piece explaining how retaining manufacturing capacity is good while protectionism is doubleplusTrumpianbad, I for one will read it with interest.
NIV: “Free trade is good …”
Bilateral free trade between near-peers with similar regulatory burdens is good. Free trade between a relatively open economy and a mercantilist economy is so silly that only an economist could applaud. That kind of unidirectional ‘free trade’ brings short term benefits to some of the wealthy, short term costs to some of the workers, and long term costs to everyone.
“If you want to write a piece explaining how retaining manufacturing capacity is good while protectionism is doubleplusTrumpianbad, I for one will read it with interest.”
The point of a free market is that any producer can offer to sell a product, and consumers can choose any of the products on offer to buy. If the consumers pick local produce as best meeting their needs, that’s not considered a problem. And if there’s some objective reason why local produce is better, as judged by the consumers, a free market has no objection. Retaining local manufacturing capacity because it’s actually wanted/needed is good. Retaining local manufacturing capacity whether it’s needed or not, or the best or not, just for the sake of jobs or the local economy or whatever, not so much.
I’m not sure I agree with the supposed benefit of making security products locally, though. The actual customer requirement is for assurance that the product doesn’t contain any hidden spyware. The temptation to put that sort of thing in is not delineated along national lines. Commercial businesses have their own motivations for collecting customer data, irrespective of national loyalties. There are other dividing lines of trust and loyalty even within a nation – political or religious for example. There’s the question of competence – most security holes are not deliberate but due to accidental oversights by programmers, and there’s no reason to suppose local businesses are more competent than the best you can find globally. And if the concern is pressure from a government to insert back doors into products, well for many people there may be a far bigger risk of that from their own government than a foreign one. If you was a Chinese citizen for example, would you rather trust a security product made by a Chinese firm, operating within the jusdiction of the Chinese government, or an American or British one? Or one by some anonymous hacker in the free software movement? Or do you think you can trust any of them?
“Free trade between a relatively open economy and a mercantilist economy is so silly that only an economist could applaud.”
Agreed. Bilateral free trade is better than unilateral free trade is better than bilateral protectionism. Trade barriers impose a cost on both sides of the trade.
@Gavin L
“UKGov could have decided to promote chip manufacturing in the UK any time it wanted, regardless of being part of the EU. ”
It did. Look up the history of Inmos. £200m in, never showed a profit. Oxbridge snobbery was never the issue, it is more that government and entrepreneurship are fundamentally incompatible – see the book ‘Picking Losers?’ by John Burton, publ IEA
What China is doing within her own borders is appalling.
I just cannot see how any Western company with even a minimum sense of decency can help to prop up such a regime. Apparently the most fundamental human rights to freedom from force, fraud, and the threats of same do not matter to these people.
It’s nice if the regime is allowing more private ownership of firms, but torture and imprisonment and murder of innocent people still goes on as a part of Chinese ruling tactics (apparently), and the round-the-clock surveillance of people’s communications in order to discourage Wrongthink is nothing that liberty-loving people should encourage, nor help the regime to do.
See the first two articles from the South China Morning Post at
https://www.scmp.com/podcasts/article/3005878/inside-china-tech-how-live-streaming-china-monitored-and-censored
.
“Western countries” includes Israel. I don’t know what the Israelis have been thinking of, letting her dig her way so deeply into their commerce, financial, manufacturing, agricultural interests. There’s an interesting article about this by the CFR (American Council for Foreign Relations) from June of last year. I take the CFR with several pillars of salt, but it’s the most comprehensive piece I’ve seen.
“What’s Behind Israel’s Growing Ties With China?”
https://www.cfr.org/expert-brief/whats-behind-israels-growing-ties-china
.
Re Britain:
Also, from March 14:
“British universities wrestle with anxiety over links to Chinese tech giant Huawei: investigation”
https://www.scmp.com/week-asia/geopolitics/article/3001649/british-universities-anxious-over-links-chinese-tech-giant
And on the U.S. on May 1, we have this from the World Socialist Website (!):
“US threatens UK over Huawei involvement in 5G network”
https://www.wsws.org/en/articles/2019/05/01/huaw-m01.html
I have no idea whether this interesting comment by “Kalen” is tinfoil-hat stuff or Right On, but FWIW:
Personally I am unconvinced that any Chinese firm, let alone big important ones like Huawei, are not free from governmental demands such as building in technologies that are not in the best interest of its customers … foreign or domestic. Especially if the firm’s employees, CEO, etc. are subject to the Social Credit surveillance ….
I’m afraid I do not trust the Chinese regime.
.
Johnathan, a very good posting. I agree. Thank you.
‘Fraid I’ve committed the Sin of the Four Links. Please stay tuned. 🙂
Robbo: “… government and entrepreneurship are fundamentally incompatible – see the book ‘Picking Losers?’ by John Burton, publ IEA”
An excellent book on that topic is ‘Slide Rule’, by Nevil Shute, published around 1954, dealing with a competition that took place in the 1920s. There is nothing new under the sun! UKGov had decided to build airships to expedite transport throughout the then globe-spanning British Empire. They commissioned two airships, R100 and R101, one from a government-run facility and one from the commercial company in which young Nevil was an aeronautical engineer. You can guess the outcome.
The question underlying this thread is whether there are considerations in purchasing in addition to cost, quality, performance. If the only manufacturers who can supply complex electronic equipment are all Chinese, does this leave UKGov exposed on matters of national security? The related question is what kind of premium should a country be prepared to pay for security of supply and trust in equipment? If someone believes that (contrary to the lessons of history) everyone else just wants to Buy the World a Coke, then the answer for that person would clearly be zero premium.
“I just cannot see how any Western company with even a minimum sense of decency can help to prop up such a regime.”
Yes. A lot of people share the sentiment. The big question though is how do you get them to change? With the carrot, or with the stick? Hearing about what goes on there makes people angry, and when people are angry, their thoughts always turn first to the stick. But China’s leadership is too powerful to easily intimidate that way, and in any case they know that game. It’s how they operate themselves. And so long as you use sticks to get your way, they’ll continue to believe that’s the way the world works and they’ll do the same. We have to teach them the benefits and advantages of using carrots to get people’s cooperation, and we can hardly do that if we don’t believe in it ourselves.
The theory is that you get them tied into the global economic system, so they profit more from its continued health, and so that war would be as much of a disaster for them as for us. The theory is that you give them enough to keep them wanting more, but let them know that progress is slowed by their behaviour. The theory is that you interact culturally with them, so that your culture rubs off on them. You can never beat anyone into truly changing their minds, although they might pretend. To win hearts and minds you have to seduce them. And you have to get their people educated and skilled, because that gives ordinary people the power and resources to demand change. So long as there are more people than jobs they can do, workers will be stuck on the bottom rung. Only when there are more jobs than people who can do them do people have the freedom to pick and choose who they want to work for, to get better safety, better conditions, better pay. Only then can they gain from freedom.
The Chinese government’s argument is that China as it is today is unstable. It is too big and too poor to work as a single nation. If you granted freedom tonight, by tomorrow it would have broken up into warring factions as oligarchs and warlords fought for dominance. And the result of war is famine and disaster, and the collapse of whatever civilised values currently exist. Their argument is that liberalisation has to be managed in stages – first develop the economy and the internal trade network sufficiently to hold the nation together, and only then grant political freedoms. The cultural infrastructure of a democratic ‘Western’ economy cannot be imposed, and certainly will not automatically self-assemble out of people with no knowledge or experience of such, but must be grown organically, over as long as it takes. Obviously this is a self-interested argument on their part – it means they keep their power and privilege for the time being. But they’re not stupid, and they’re as aware of the history of freedom’s growth in the Western nations, and it was not achieved through the will and generous magnanimity of the ruling classes, but was seized when the people became prosperous and powerful enough. They know their time is limited – their hope is to effect the transition peacefully, and with a minimum of bloodshed.
It’s a point of view, anyway. There is an ongoing argument between those who think we’re offering too much carrot and not enough stick, and those who plan to profit from a longer game. But as JS Mill said: “He who knows only his own side of the case, knows little of that. His reasons may be good, and no one may have been able to refute them. But if he is equally unable to refute the reasons on the opposite side; if he does not so much as know what they are, he has no ground for preferring either opinion.”
“Personally I am unconvinced that any Chinese firm, let alone big important ones like Huawei, are not free from governmental demands such as building in technologies that are not in the best interest of its customers … foreign or domestic.”
Personally I’m unconvinced that any American or British firm is, either.
NIV: “The big question though is how do you get them [the Chinese government] to change? With the carrot, or with the stick?”
That would have been a reasonable question to ask in the 1980s. Today, the question is — What carrots does the West have left to offer? China has the largest automobile manufacturing industry in the world, largest steel industry, largest shipbuilding industry, largest electronics manufacturing industry, largest nuclear industry. China has a plethora of graduates trained at the best universities in the West, and Western universities are eagerly training the next generation of Chinese students. What exactly can the West offer to a nation which can land a spacecraft on the far side of the Moon?
Too many of us in the West still think of China in terms of rickshaws and bicycles; we need to recognize that the ground has shifted below our feet. There are not many carrots left (maybe aircraft manufacturing, but China is catching up fast), and taking a stick to the largest industrialized nation in the world could ruin your whole day.
Julie: “Apparently the most fundamental human rights to freedom from force, fraud, and the threats of same do not matter to these people.”
Julie, my only direct exposure to China has been a project in unfashionable Western China, that nominally underdeveloped part of China dotted with cities larger than London that most of us have never heard of. There was free commerce everywhere, and my impression was that the quality of life for ordinary people in those cities was probably higher than that for ordinary people in London. I did not see any indications of fearful behavior. The most amazing sight was free associations of people literally dancing in the streets in the evening, some for exercise and some for the sheer joy of it.
It is a valid criticism of China that people there have no real democracy, no real influence on their government. But what would a doughty Brexiteer say about his democracy, his influence on his government?
Gavin, maybe I need to clarify. By “these people,” I meant the leaders at Google, Apple, and so forth, and also the Israelis.
And however delighted gazillions of Chinese might be with their new “freedoms” (and if they are less fear-ridden than formerly, I am glad for them), there are also a whole lot of ‘regular folks’ who are subjected to kidnapping, torture, murder at the hands of their rulers. And don’t please tell me that the situation here is just as bad, because it most certainly is not.
And we are also not subjected to the horrible constant individual surveillance that the regime uses to, among other things, build its “Social Credit” system.
But there are people here who seem bent on putting this system into place in the U.S., and IMO we ought to take that very seriously indeed.
A predeliction for treason has been built into British Intelligence and associated “civil service” and political circles since at least the 1920s.
The soviets owned much of SOE during WW2, with tragic consequences in many countries.
Anyone familiar with the names; Philby, Burgess and McLean? Then there were also Gow and Rees.
Five Eyes? How about Five spies?
“What carrots does the West have left to offer?”
Trade. Cooperation. All the usual reasons for taking part in the global economy. Do you think industrial civilisation stops here? Do you think we’ve achieved everything there is to achieve?
A nation that can land a spacecraft on the moon will want a moonbase, and moon factories, and moon holiday resorts, and so on. Mankind is going to progress far beyond where we are now, the West are currently at the front of the pack, and China wants to be a part of that. But it’s going to need a global economy to do it.
Industrial progress used to be all about manufacture – but the big jump in manufacturing was not about the cleverness of the techniques used, but about the organisation. Mass production is based on the ideas of the economies of scale, and specialisation. You break the task down into tiny parts, and have each sub-task done by a specialist at it. The modern economy extends the same principle beyond the bounds of a factory, beyond the company, beyond even the nation. The broader the marketplace in which you can seek specialists, the more efficient the process becomes. One bit is done in Germany, another bit in China, another bit in America, and so on. And each participant does its specialist job for the entire world, and so can do it at scale.
All of mankind’s progress from hunter-gatherer on up is built on trade-based cooperation among groups, and the larger the group, the more advanced and prosperous the resulting civilisation. To get to where we’re going, the economy has to go global. We have to dissolve national boundaries (for trade, at least) and cooperate.
China still have a way to go to catch up. GDP/capita is about 2-3 times higher in the West than in China. They can do manufacture now, but they still can’t do the even more productive jobs in design and innovation that the West leads on. They still need to copy our designs. We still have plenty of high-paying jobs – implying that we don’t have enough people with the skills to do them. So they’ve still got a lot to learn. Also, it’s a moving target – we’re still advancing faster and faster ourselves. There’s plenty of carrot.
“There was free commerce everywhere, and my impression was that the quality of life for ordinary people in those cities was probably higher than that for ordinary people in London. I did not see any indications of fearful behavior.”
China has changed a lot since the days of the Cultural Revolution, which was indeed truly horrific. My understanding is that the Chinese government are not bad so long as you fit in and keep your head down, but they stamp quickly on any signs of outright rebellion. Dissidents loudly demanding democracy/freedom right now are firmly suppressed. Don’t rebel, and you’re quite safe.
They’re a lot less tolerant of social dissent than we are in the West, and we in the West are still a lot less tolerant than many of us pridefully think we are, or ought to be. But we’re all at different stages on the same journey, and (mostly) moving in the right general direction.
Until you get in the way of power despite not wanting to.
It’s a lot safer than in Mao’s day, just as being a Russian under Andropov was a lot safer than being one under Stalin. Andropov died with fortunate promptness after he became leader. I feel no such confidence that Xi Jinping will quit the stage soon, or be succeeded by a Gorbachov when he does.
Yes to all three.
The thing to be careful with when thinking about China is that they don’t have the same philosophical basis as the west does. I myself often come unstuck by forgetting this, both in my studies and when I used to work over there.
The Chinese have an incredibly long-standing history of large bureaucracy, dating back to at least 200bc. Given that the Tao Te Ching (4th century BC, maybe earlier) contains the phrase “The more mandates and laws are enacted, the more there will be thieves and robbers” and Chuang Tzu (also 4th century BC) merrily mocked bureaucrats as being people unable to learn a proper job (a trade, at the time), I think it’s reasonable to believe that their bureaucratic nature dates from much earlier; if those two philosophers were railing against it, then I conclude that it was a large issue.
But most of Chinese thought since can be traced to Confucius, who considered “filial piety” to be an unquestionable duty, and also considered that filial piety extended to the state. He then also considered “Ren” (loosely translates to “humaneness” or “altruism”) to be an unquestionable duty – and this meant in practice ritual and correct actions. Important here for our purposes, “correct actions” are those deemed correct by society – which is why there is a lot of consideration to “face” (that I think is fairly well-known?) in China, as there is a deep-seated tradition of being seen to be “correct”, as this affects your social standing.
So Social Credit is actually a return to traditional Chinese ideals from their leadership – having outlawed the old “folk religions”, they realised that Confucianism in particular is the bedrock that Chinese history is built upon, and Social Credit was a way to bring an aspect of it back.
NIV: “To get to where we’re going, the economy has to go global. We have to dissolve national boundaries …”
Theory can be great! When theory helps us understand reality, it is truly valuable in helping us make better decisions. But all theories are only approximations to reality. When a theory omits critical elements (such as human nature), then it can mislead us into making huge mistakes. We always have to remember the limitations of theories, test them against reality, and revise them as appropriate. The US, UK, Japan have all suffered a hollowing-out of their industrial capacity under approximations to free trade, while China has made great progress using its Mercantilist model — Why would they change?
“… the West are currently at the front of the pack …”
30 years ago, that was undoubtedly true. Today, it is much harder to make that case. Where is all this recent innovation from the West? William Newman argued in a recent Samizdat thread that innovation was essentially trivial — as soon as something could be invented, it would be; by implication, inventors are fungible and do not deserve patent protection. Analogous to that hypothesis, there is an old saying that ‘Design follows manufacturing’. By taking advantage of the West’s adherence to dubious theories, China has established itself as the global manufacturing hub — Advantage China.
An interesting real world case in point was the 1960s ‘Brain Drain’ from the UK to the US. Smart people from the UK relocated to the US because in the much less regulated US of those days, innovative ideas could actually be put into practice. Today, while the UK has fiddled around with HS2 and California has wasted billions on the train to nowhere, China has actually built an efficient heavily-used High Speed Rail network. While we in the West talk about the potential for cashless transactions, China has largely implemented an efficient system. Innovation is meaningless without implementation — and China today is much more competent at implementation than the West.
I fear that we in the West are spending too much time looking back to our past successes and kidding ourselves with feel-good theories, and not focusing on the ways in which the world has fundamentally changed. We could pin our hopes for the future on the good graces of the Chinese government — but history suggests that is likely to be a road to disappointment.
Bah. It was Lieh Tzu, not Chuang Tzu.
“We always have to remember the limitations of theories, test them against reality, and revise them as appropriate.”
And when theory conflicts with our preconceptions, we have to carefully consider whether it is the theory that needs modifying, or our preconceptions. When we see a conflict, it might indeed be that the theory needs modifying. But sometimes instead the theory is trying to tell us that our preconceptions about the way the world works are wrong.
“The US, UK, Japan have all suffered a hollowing-out of their industrial capacity under approximations to free trade, while China has made great progress using its Mercantilist model — Why would they change?”
I always think of this as a bit like the complaint that agricultural machinery totally destroyed employment in the farming sector. It makes a false assumption about what ‘success’ looks like, based on what it looked like a century previously.
We gave up manufacturing capacity because we don’t want or need manufacturing capacity any more. It’s low-value compared to the stuff we’re doing now, it’s unpleasant, boring, and dangerous. It’s easily automated. It’s relatively easy to train the unskilled to do it. And so the comparative advantage is with the developing world, and it profits both sides to have that stuff done elsewhere.
It’s like the computer programmers who notoriously forget how to cook their own meals because they’re always ordering in pizza deliveries. (If you’ll pardon the outrageously stereotyped cliché.) For the coder, coding is a more valuable use of their time than ‘manufacturing capacity’ for food. For the pizza delivery boy, they can make and deliver pizza far more easily than they can learn how to code. So there is absolutely nothing wrong with the coders not even having a kitchen. They don’t want one. They don’t need one. It’s not worth their time.
And although quite happy with their business making and delivering pizzas, the pizza delivery boys would still really, really like to learn to code. Because they could earn 2-3 times as much by doing so.
China are the pizza delivery boys making pizza. Britain and the US are the coders getting their manufacturing delivered. Britain and America could do their own manufacturing if they wanted to, but it’s not as enjoyable, or as profitable as what they’re currently doing. Hence GDP/capita being 2-3 times higher in the UK/US than in China.
And while mom thinks it’s a shocking shame that her 30 year old son can’t even do his own cooking, and subsists on pizza all the time, this is an attitude that belongs to an age before internet-ordered takeaway deliveries, where if you didn’t cook you didn’t eat. The world used to think cookery was a real job that made something solid, while coding was not. The world moves on.
I think people have this romanticised idea of ‘manufacturing capacity’ being the measure of industrial and economic success. But I think it’s outdated, and not true any more.
NIV: “We gave up manufacturing capacity because we don’t want or need manufacturing capacity any more.”
Let’s hope there never is another shooting war. History suggests that that perpetual peace is unlikely, but we can always hope. We had better hope!!
In the meantime, we have to ask ourselves — what do we in the West trade in exchange for the necessary manufactured goods we now have to import? The UK and the US run unsustainable trade deficits because we don’t have enough of value to trade. Of course, in theory no country can ever run a balance of trade deficit because the terms of trade will automatically change to bring trade back to balance. When we find ourselves living in a real world that theory says is impossible, it is time to check our preconceptions that this particular theory is all-encompassing gospel.
The claim that Westerners today can make a better living writing code than making essential manufactured items runs up against another reality — it is cheaper for a US company to import a talented Indian coder on an H-1 visa than to hire an American. And the government definition of unemployment is changed to hide the consequences of this reality. The real world does not conform to over-simplified theories.
“Let’s hope there never is another shooting war.”
Let’s hope. But if there was one, we’d win. It would hurt at first while we caught up, but we can accelerate faster.
“When we find ourselves living in a real world that theory says is impossible, it is time to check our preconceptions that this particular theory is all-encompassing gospel.”
Theory doesn’t say it’s impossible. Theory says it’s because we spend more than we earn, and borrow to cover the gap.
In the analogy the pizza delivery boy earns $15k/year, the coder earns $45k/year, but the coder spends $70k/year and puts it on credit. The blame for this cannot be attributed to the pizza delivery boy.
NIV: “Theory says it’s because we spend more than we earn, and borrow to cover the gap.”
Then explain Japan — huge National Debt, which increases every year because Japan also runs a significant budget deficit; yet Japan has mostly run a trade surplus. And when you are finished with Japan, why not try Singapore, or China, or any of a long list of other countries which have managed to run budget deficits and trade surpluses.
We are in complete agreement that governments should not spend money they do not have and borrow or print to paper over the excess spending. But the theory there is a simple relationship between over-spending and trade deficits does not hold up. The real world is much more complicated.
Now, maybe I am misunderstanding what you call theory. If so, please correct my misunderstanding. But please tie the explanation to real world examples.
“Then explain Japan”
This Japan?
https://www.marketwatch.com/story/japan-posts-largest-trade-deficit-in-5-years-2019-02-19
There are a couple of reasons. One is that the nation is not identical to the government. It’s possible for the government to borrow while the rest of the people manage to live within their means. A second reason is that it’s not just borrowing, it’s also about investment – which is a form of borrowing that is not counted as such in the statistics. If foreign investors buy stocks in Japanese firms, money flows in, and ownership of property flows out.
It’s an accounting identity. Let’s take our coders again. Exports from the coder household are $45k-worth of code per year. Imports are $70k worth of goods and services, including pizza. The ‘balance of trade’ is a $25k household deficit, the difference between the two. Now, they can fund the difference by borrowing on credit, or by renting out the spare room, or selling off the furniture, or by all sorts of other means that might or might not count as ‘household debt’, but fundamentally a trade deficit means you’re buying more stuff from abroad than you’re delivering, which means you’re spending more than you earn.
The answer is to spend less or earn more. Spending an extra hour in the kitchen every day instead of just ordering pizza and coding for another hour means you earn less, not more. You can’t blame your problems on a lack of home-made pizza.
NIV — Since we seem to be talking past one another at this point, I did a bit of research into the $15k/year pizza guy.
Turns out he used to be a $60/hour steelworker – but then his steel company outsourced its production to China and he was laid off. So were all his co-workers, which really hurt the town. The negative multiplier effect came into play, and the restaurant which his wife managed had to close for lack of customers.
But our steelworker was an American – he rolled with the punches and signed up for a taxpayer-subsidized class in coding. It turned out he had good natural talent, completed the course with flying colors, and got a job coding for a bank – as it happened, it was the same bank which was foreclosing on his house, since he & his wife could no longer afford the mortgage. And the journeyman-level coding job paid only $25/hour, but at least his family was now seeing light at the end of the free trade tunnel.
Then the bank found they could replace him with a coder brought from India on an H-1B visa — basically indentured labor. The poor Indian was paid $15/hour, which sounded like a fortune back in India but turned out to be way under the market rate in the US; however, the Indian could not look for a better paid job since he would be deported if he left that bank. The steelworker-turned-coder swallowed his pride and offered to work for the same reduced pay as the Indian H-1B coder, but the bank just laughed at him and showed him the door.
Soon the house was gone – as was the wife. She took refuge in drugs and began to hang out on Main Street outside an abandoned supermarket, turning tricks for $20. The former steelworker turned coder was still trying to hang on by his fingernails, and took the only job he could find – delivering pizzas for $7.50/hour when the shop called him. Business was not good; H-1B Indian coders could not afford pizza very often.
When he heard his Congresswoman (a post-menopausal liberal white woman) was making one of her rare visits to her constituency, he went to the town hall to hear how she planned to help this stricken area. She drove up to the meeting in her new Ferrari. Pizza guy could not understand how she could afford an imported supercar on her taxpayer-provided salary … but she had voted recently on a few laws which made it easier for certain businesses to outsource their production to China. The congresswoman was immediately surrounded by cheering Antifa groupies, who took her into the hall where she made a speech about the imminent danger from Climate Change and praised her shabbily-clad constituents for their world-leading success in cutting CO2 emissions. Then she left in a cloud of exhaust fumes and burning rubber.
The steelworker/coder/pizza delivery guy looked at his cheap cell phone, hoping that the pizza parlor would call him in. He could use that $7.50.
@Gavin Longmuir,
That was brutally honest and refreshing.
However, an argument can be made that the worker should go into business himself – but it’s tough and there’s a whole load of red tape in the way.
Successful businesses like regulation – they can deal with it better than start-up competitors.
“NIV — Since we seem to be talking past one another at this point, I did a bit of research into the $15k/year pizza guy.”
We are, indeed, talking past one another. Your story about the steelworker/pizza guy is only looking at the supply side of the labour market. As Bastiat explained, it’s only when you look at the demand side as well, and how it affects everyone’s welfare via the bits of the economy that most people don’t notice, that you can understand how it works.
It’s the same story as Ned Ludd’s. He used to be a weaver, and earned good money because weaving was slow, laborious, skilled work that few could do, and only the very rich could afford professionally woven cloth. Then the machines arrived. They could do the same work Ned did, but demanded no pay. A cheap and unskilled labourer could produce more and better cloth using the machinery than any ten of Ned’s skilled colleagues. Ned and his fellows were put out of work.
Ned Ludd was angry, but he didn’t swallow his pride as your steelworker did. He led a movement to smash the machines. The machines were destroying their jobs and their businesses, leaving the weavers abandoned on the scrap heap with a skill that nobody wanted any more, and no alternative skill that people would pay as much for. So they fought back. They fought to keep the new machines out, and to wreck any businesses that tried to use them. If all trades are automated, and all workers end up taking massive pay cuts as a result, who on earth is going to buy any of the products the machines produce?! Automation would impoverish the entire nation!
But the Luddites led by Ned Ludd lost the war. The machines came. And they did indeed destroy many of the skilled and well-paid jobs, permanently. (Wages for weavers dropped from 15 shillings a week to 5 shillings a week between 1803 and 1818, just 15 years. The shock was profound.) As history teaches, the result was that the price of cloth dropped sixfold and more, and instead of a scarce luxury for the rich, fine cloth became cheap enough for the poor masses to afford. Booming demand resulted in the building of huge factories. The poor and unskilled flocked from the countryside – where all the agricultural labour jobs had just been automated into oblivion – and into the cities. It ended up that more people were employed weaving cloth than before, more people had the skills to do so when it was automated, and many more people could afford the cloth produced. It was the start of the Industrial Revolution, that lifted the poor out of the abject poverty of subsistence farming, and into the lesser poverty of factory workers in the industrial age that you were so recently praising. Our ‘manufacturing capacity’ was itself only made possible by the destruction of the jobs of the Luddites.
The cheapness of steel means that even the poor can afford a cheap car. They’re not just an expensive luxury for the very wealthy Ferrari set. The cheapness of code means even the poor can afford a cheap mobile phone, and a website on which people can place orders for pizza. Computers aren’t just an expensive luxury for governments and multi-national businesses. Society doesn’t get richer through salaries going up, it gets richer through prices coming down. If you remember that ‘wages’ are really just ‘prices’ – the price of labour – this is easy to understand. But people are so used to equating wages with wealth, instead of looking at the goods and services they can afford, we find ourselves in the situation where millions of people even 240 years later are still making Ned Ludd’s mistake! Why is this such a hard concept to understand?
What if, say, our $15 pizza delivery boy gets jealous of the $70 lifestyle of the coder, and poisons the pizza? And what if, they’d been some evidence of this happening before?
Would it not be advisable to learn to cook at the very least pizza, and more advisable still, something a bit healthier, so that he can code more effectively in a shorter time, rather than spending the extra hour coding?
😉
NiV, your discussion of Nedd Ludd (who IIUC was rather the first of those who broke machines than the actual leader of any who did so later) addresses the first part of Gavin’s account of the former steelworker. It does not so obviously engage with Gavin’s second part: the steelworker learned to code, and accepted his reduced income, but was then replaced by an Indian whose H1B situation made him effectively indentured to the bank.
I think (but this merely repeats past comments of mine) that there are ways in which Trump could keep his base happy and serve the west’s strategic interests (e.g. immigration control, resisting China) that are not simpliciter denying the value of free trade. If the UK turns against Huawei, some who learn to code in the UK may see more work and some computer-related things may be more expensive – but it might be a trade worth making to remain free, and both effects will pass in time.
“What if, say, our $15 pizza delivery boy gets jealous of the $70 lifestyle of the coder, and poisons the pizza?”
Then the coder builds and programs a pizza-making robotic factory and a swarm of drones to deliver them. Robots don’t get jealous. It would take the coder time that could be better employed on something else, but coders can do things more efficiently and effectively than manual labour.
It’s all about the initial investment versus the marginal cost. A manual operation has very little set-up cost, but is relatively expensive per unit produced. An automated set-up costs a huge amount of investment initially, but the marginal cost per unit produced is much lower. We don’t eat enough pizza to make the investment worthwhile.
The coders can do anything the pizza boy can – it’s just more expensive, and takes time to set up.
“It does not so obviously engage with Gavin’s second part: the steelworker learned to code, and accepted his reduced income, but was then replaced by an Indian whose H1B situation made him effectively indentured to the bank.”
I thought of it as a continuation/repetition of the same story. The one bit of it I did think about querying was the following:
Why? Why would a bank put up with all the hassle of employing a foreigner if there’s a local resource just as good and at the same price? This makes no sense to me.
But I didn’t think it was worth diluting the economic lesson to pursue.
“I think (but this merely repeats past comments of mine) that there are ways in which Trump could keep his base happy and serve the west’s strategic interests (e.g. immigration control, resisting China) that are not simpliciter denying the value of free trade.”
I think that ultimately the only solution will be to educate Trump’s base, so they understand. (Hillary’s, too.) But nobody even seems to be trying. Just a few lone voices crying out in the wilderness.
“If the UK turns against Huawei, some who learn to code in the UK may see more work and some computer-related things may be more expensive – but it might be a trade worth making to remain free, and both effects will pass in time.”
If we have a genuine requirement for security that can only be met by keeping Huawei out, then I have no problem with that. But I’m not convinced by the technical case. There are plenty of security measures we could take against interception that we don’t, and indeed that our governments specifically discourage. Our own governments (along with plenty of commercial entitites) engage in pervasive monitoring and interception of us too – the main difference being that they’re considerably more tolerant about what they find. People don’t care, it seems. The business about sharing 5-eyes intelligence is a nonsense – that sort of stuff isn’t supposed to go out on the internet at all. (For this very reason! We know the public internet is insecure.) And if the government does want to use the public 5G network for military or government purposes to save money, rather than have their own dedicated lines, they’re perfectly capable of using technical measures to protect it.
I don’t think this spat has much if anything to do with security. It’s about Trump’s trade-war with China. And for some reason Britain have decided to break the embargo. Whether that’s because of the cost difference, or because we don’t agree with the trade strategy, or to make lucrative economic deals with China, I really couldn’t guess.
NIV: “Why? Why would a bank put up with all the hassle of employing a foreigner if there’s a local resource just as good and at the same price? This makes no sense to me.”
When things happen that apparently make no sense, one possible explanation is that our mental model of the world is incomplete.
Yes, it does indeed happen that progressive US businesswomen prefer to import H1-B visa workers instead of hiring Americans at the same price. The first is an indentured servant (a modern slave, if we want to be dramatic) who cannot quit and whom the strong arm of the government will deport if he grumbles. The second is a free citizen, who can leave if he is poorly treated and can demand a raise as his skills & value to the business improve; he could even try to draw attention to injustice by contacting his Congresswoman, although in his case it would not do much good since she is a liberal.
There are few things in this world where it is useful to be an absolutist. Free trade is not one of them.
“Yes, it does indeed happen that progressive US businesswomen prefer to import H1-B visa workers instead of hiring Americans at the same price.”
Ah! Right! Not the same price. A higher price. That explains it.
NIV: “… millions of people even 240 years later are still making Ned Ludd’s mistake! Why is this such a hard concept to understand?”
Bobby b mentioned recently that if we want to change people’s minds, we have to show them that we want the same goals (peace & prosperity for everyone), and only differ on the most efficacious means to get there. There was wisdom in bobby’s words.
Consider the possibility that you have completely misunderstood the Luddite movement. You approach the issue of weavers breaking the new machines from a Marxist perspective — man is merely an economic animal. The reality was that the weavers were vainly trying to defend a way of life. As weavers, they were independent men with no master. They worked out of their own homes, and had an intricate network of human interactions with the individuals who brought them yarn and the merchants who took the cloth.
When the mills came, the weavers were good candidates to run those temperamental early machines — but this made them wage slaves, responsible to a master. Instead of their daughters learning to weave in the safe environment of her home, now she had to work in the mill where she was exposed to possibly destabilizing influences. The fabric of human interactions within which the weaver had worked was ripped asunder. The Luddite movement was only marginally about money. A failure to understand where the resistance came from leaves the free trade absolutist unable to communicate effectively with people in threatened industries today.
Perhaps related to this is the issue that free trade absolutist seem to have too much of the Obaminoid “Citizen of the World” attitude to communicate effectively with their fellow citizens. In the days of the Luddites, at least the mills were creating new work for fellow citizens of the old weavers — not just in the mills themselves, but also in the manufacturers of the equipment and the miners of the ore and coal. The mills did indeed increase production which ultimately made life better for everybody, and the multiplier effect helped to spread the benefits of that increased production throughout the community. The old time weaving community was destroyed, but new opportunities were created in that country.
The multiplier effect works both ways. When a steel mill is shipped to China and jobs are lost, the negative multiplier effect destroys more jobs and reduces production in that locality. The ‘Citizen of the World’ is happy that now there are people in China with new jobs & new opportunities — but it is understandable why people in the original community do not share the free trade absolutist’s joy. Of course, the free trader will now assert there are opportunities to create new goods & services to sell to the now-richer Chinese — but the Chinese are not free traders. They have official policies like “Make It In China 2025”. Even if the laid-off US steelworkers can make something better & cheaper than the Chinese, the Chinese still won’t buy it; they will copy it.
Until free traders can understand the distributional aspects of sharing the benefits of production, they will continue to moan that no-one understands their brilliant theory.
There *is* wisdom in bobby’s words. Not *was*
😉
This is where the rubber hits the road, and we need to test drive our ideals.
It doesn’t work when the people we’re trading with are playing a game with different rules.
“Until free traders can understand the distributional aspects of sharing the benefits of production, they will continue to moan that no-one understands their brilliant theory.”
Sure. I understand why people believe in Protectionism. I understand why people believe in Socialism – which is just Protectionism applied to the labour market (largely what we’re looking at here). On an intuitive level, they seem to make sense. And they’re all about community and traditional values and ways of life. Change is disturbing. Stability is comforting. Protecting ‘us’ against ‘them’ seems eminently sensible.
But Protectionism/Socialism doesn’t work. If allowed free reign, it destroys the local economy and locks people into poverty. And because the followers are constitutionally unable to believe that their beloved system is the cause of all their rising woes, they go on to blame a range of enemies – foreigners, wreckers, capitalists, strike-breakers, Jews – history has many examples. They turn to force, to slavery and totalitarianism against the ‘wreckers’ to *make* it work, but only make things worse, and then the whole thing collapses in fire and flames.
But Protectionism still retains its appeal, despite its history. I can certainly understand why it is intuitively and emotionally appealing to people who know no economics: kind people who care about others, less fortunate than themselves. What I don’t fully understand is why people stick so doggedly to it even after the economic reasons for its inevitable failure are explained to them. We explain again and again why socialism and other forms of protectionism does not, can not, will not work, and they return to it like a dog to its favourite toy. Nothing will convince them. Explain the reasons, and that’s all just ‘theory’. Cite the history and that’s all just misunderstood.
I don’t know. Evidently, I can’t explain it. Does anyone else have any ideas?
Some. You and I, we’ve not found ourselves on opposed sides so far, right? So, gimme a chance?
Free trade is great, in theory. But it doesn’t quite work in practice when the other side is working with entirely different rules. It works “fine” in practice, once you understand your limitations. I’ve sat in China, drinking green tea, chain-smoking, and done the deal that is available. It needs to fit with their “face”, and with the government decree.
It’s not free trade as we see it; it is as they see it.
NIV — We have to keep looking at the real world and real history to try to get an understanding.
Think about an item that some of us still secretly keep in our bottom drawer, and pull out only when no-one is around — the slide rule. Companies like K+E and Faber-Castell made magnificent slide rules. Then Texas Instruments and HP and others brought out the electronic hand calculator, and the slide rule business died. It is not hard for people to understand that when a better technology comes along, the old one dies — no matter how efficient and innovative the old manufacturer may be. Life is a bitch, and the former slide rule workers have to move on. We can all understand that, and we all also can understand that “There but for the grace of God go I”. We should be compassionate to our fellow citizens, and many of us would be willing to have our governments provide transitional help to those displaced workers so they can find other productive work within our communities. That compassion is actually self-interest — by lowering the resistance to the adoption of new technology, we have the potential to make everyone better off.
When (as apparently happened in the UK) a steel mill is dismantled, shipped to China, and reassembled, the situation is quite different. There is no improved technology. The UK steel worker could not compete economically with the Chinese in part because of different costs of living reflected in higher UK wages, but mainly because the mill in China did not have to comply with UK regulations on environmental protection, health & safety, etc. And Western governments exacerbated the situation through tax rules which discouraged investment and by agreeing to one-sided trade deals which helped the Chinese. People can reasonably see that is simply not fair, nor beneficial to their nation.
Free trade proponents lose their audience when they take an absolutist line. Yes, there is a case for bilateral free trade between near-peer nations with similar regulatory environments, where the benefits of Comparative Advantage can make everyone in both countries better off and no trade imbalance is created. Outside of those fairly stringent restrictions, free trade is a foolish theory which has been very destructive to the fabric of society in the West. Free traders could gain credibility by first becoming the main proponents of insisting on the conditions required for free trade to be successful.
“The UK steel worker could not compete economically with the Chinese in part because of different costs of living reflected in higher UK wages, but mainly because the mill in China did not have to comply with UK regulations on environmental protection, health & safety, etc.”
Quite so. But why is it that when this happens, people *don’t* blame “environmental protection, health & safety, etc.”, they blame free trade? (Which this isn’t.) Why do they blame the Chinese, when it’s us that are unilaterally applying regulations?
And why can they not see that jobs are the price they pay for health and safety? To the extent that health and safety is something British workers value, it is still to their advantage that we trade on these terms. We get the goods for the cheaper price that ignoring health and safety allows, without risking our own health and safety. The Chinese are happy to take that risk. It is to our workers’ advantage to let them.
Why do people only look at the jobs side of things, ignoring the goods/services side?
(Incidentally, I’ve been told by people who used to work in the metals markets that the main reason for the demise of the steel mills isn’t China, but recycling. Most iron nowadays is sourced from recycling scrap metal; it doesn’t need to be refined from ore any more. What few steelworks are required are either for specialist alloys or are economically very marginal – which is why they’ve gone to China where overheads are lower. It doesn’t affect your general point, though.)
—
PS. Agree about the slide rule. 🙂 Somewhere I’ve still got the hand-drawn one I made myself when I was a teenager!
Could it be that y’all are arguing at cross-purposes?
I doubt that anyone argues that tariffs increase money flow. I doubt that anyone argues that increased money flow doesn’t increase overall prosperity.
But the argument that free flow always increases overall wealth has nothing to do with the distribution of that increased wealth – or the concomitant costs of that wealth – within a country.
Tariffs – especially as used by Trump – function more as a tool of class warfare than of economic policy. Certainly, allowing China to make all of the USA’s products with cheaper labor will eventually increase overall wealth in the USA (assuming we find more productive uses for our labor), but it’s “in the meantime” while we await that new wealth and its eventual trickling-down that we see horrid costs imposed in very defined portions of our population.
Those very defined portions of our population have been taking most of the hits from free trade policies, and this has resulted in an increasing wealth disparity across our country. Banksters and tech workers have benefited, while – yes, in the short term – the “labor” component of our country has been decimated.
Trump was elected partially as a result of unrest driven by this new disparity. The free-trade contingent has argued that, absent trade restrictions, wealth will increase and be spread widely – eventually – but that “eventually” seems to be coming just as quickly as “peace on earth.”
By imposing tariffs, Trump and his supporters are (sometimes knowingly) choosing slightly slower overall economic growth of the USA, in exchange for faster economic growth (or at least slower decay) for select portions of the USA population.
So, both arguments are correct – but have little to do with each other.
bobby, yes, both arguments are correct.
So the issue is to find the best balancing point between them. And to do that, we have to find the “best” measure by which to judge how close we are to finding that balancing point.
In principle, and in my heart, I really do want everybody to be better off — in every way — in 2100. Yet my immediate concern is to see that I and the Kid eat, and after that our associated n. & d. (cue Bertie), and our friends. Staying alive is, after all, a given concern of human beings.
Ideally, everybody would find his own balancing point and everybody else would do likewise and none of their decisions would affect the circumstances of anybody else. (While all of us would enjoy the full benefits of a pleasant social life and full cooperation with and benevolence toward everybody else. Hermits to exist only at their own preference.)
But then again, ideally there wouldn’t be any situations where one ideal rubs up against another. And if pigs had wings, beggars would ride.
This isn’t entirely cause for despair, however. We do lurch along, wobble back and forth between going for one ideal and then the other, and as circumstances change we sometimes do manage to come to a better balancing point — one in which more people are better off (economically anyway), both globally and here in town.
Because it’s so, so easy to personalise job losses, to make an “oh, the humanity” story out of them, and much more difficult to do so with goods and services.
Julie does well to raise the “in principle” point – and then to point out that her priority is herself and the Kid (n. & d.? I don’t know the term?) and then presumably extended family and community.
There’s a theory somewhere that people act from the heart for their family, and with their principles for the more “abstract community” that is “everyone else” – I’ve a vague feeling that JS Mills said something similar; NIV may be able to confirm or correct me.
I’m “directly responsible” for a factory closing down in the UK when I moved their main product line to a factory in Romania. At the time, I was the buyer for furniture for, uh, a large UK retailer with a mixed catalogue/online/shop premises model (NIV and other UK folk may recognise who I’m talking about, I’m deliberately not naming them). When said factory came in with a 20%-ish cost price increase as soon as I took on the new job, I started re-tendering; I realised shortly afterwards that if I re-sourced, I would put them out of business. Now, I’d not been in that position of power before in previous roles, and I was a little uncomfortable with what I was intending to do.
My immediate boss (very much a “British jobs for British people!” type) played on my discomfort, and made me delay for six months whilst exploring every option for keeping them in business, until I got annoyed, jumped over his head and spoke with his boss (also my mentor), who assured me that I had no moral responsibility to keep someone in business (I think his words were “Moral responsibility? It’s not like you’re out there killing fucking badgers”) just because.
Much relieved, I re-sourced the product. And I felt a bit bad about it. I’m sure if a UK-based “Julie” with a child to feed was employed at that factory, she might not be praising me for doing what was blatantly the commercially correct thing. She might not see that the responsibility more properly lay with her bosses for allowing 70% of their product line to sit with one retailer, and not having put the effort in to diversify and de-risk.
And that’s the thing with these kind of situations – I can tell an anecdote that almost weaponises the situation, by making it about “people”. It doesn’t make NIV wrong at all – but it makes it difficult to cut through with correct theory. And that’s what people do – they talk about the steel factories, the coal mines, the left-behind towns – and those things overtake the theory, because they’re “more real” – or at least more emotionally resonant.
Of course, I could have told the anecdote about the little Romanian factory in a poor little Romanian town, that I boosted employment in fairly dramatically…but who wants to know about them?
(it’s not a perfect analogy, but I think it serves)
neon —
“N.& d.” was what Bertie Wooster was wont to say when talking about his “nearest and dearest,” chiefly his Aunt Dahlia explicitly, but hinting that there might be a few others in the mix. :>)
Had I been faced with your situation, I’m not 100% sure what I’d have done, but I’d have tried to talk myself into not feeling too bad for the poor Rumanians. We are not, after all, our brothers’ keeper. And one thing that Miss R. did bring home to me is that it’s OK to look after the people you value most first. In fact my own mother always used to say, Charity begins at home — and she was not hard-hearted by a long shot.
It’s a little difficult actually, because since babyhood — and I imagine for a very long time before that — it seemed to be somehow bad form to look after yourself first (however ethically), and that fans out so that looking after your n. & d. ahead of others, including the children starving in Africa, was also not cricket. I mean, putting your own first –!!! Tsk!!!
(As to the Kid, she is now north of 40, so although I intend in a pinch not to see her drown financially, she is after all a grown adult with a career she likes and a husband ditto. Generally I refer to her online as the Young Miss, if anybody wants to know.)
Ah, but I gave the business to the Romanians, at the expense of a UK based company.
And in all honesty, I don’t and didn’t feel too bad; I’ve a hundred other examples of similar situations, it’s inherent in the job that I do – that’s just the one I remember because I was a much younger man and it was the first time I was in such a position.
I might, possibly, have acted differently had it been “Neonsnake’s Furniture Shop” and I had some relationship to the supplier that mattered to me in the long term, but I was just a very small part of a very big corporation, which would eventually have taken a very dim view of my actions if I’d consciously cost them profit by keeping someone else’s business afloat just because they were British., no matter that my immediate boss was pressuring me to do so. I’m sure Miss R. would have agreed, for all that I think she didn’t have the first idea how negotiation works, bless her… 😉
As to the point about looking after yourself first…well, how on earth can you possibly look after other people if you yourself are not in the best of shape (physically, financially, whatever)?
In the above example, I guess a way of looking at it would be that I’d put myself first (my profit figures for my department), then my staff, and my company. I’m not required, either legally or morally, to put a supplier before my own company.
In part, because it is the interest and desire of a left-leaning media to have them blame something with the word ‘free’ in front of it (“free trade”) instead of something with the word ‘regulations’ following it (“health and safety regs”, “environmental regs”, etc.).
In part, because it is not a price they choose to pay – it’s a price others choose that they shall pay. Third party bureaucrats impose the regulations. Third party judges make costly rulings – lawfare is used when the PC lack legislative majorities. (Anyone remember when the Piper company was offered for $1 plus legal liabilities after many a lying lawyer brought many a crazy suit before many a lefty judge? Some light plane manufacture was thus outsourced.)
The bureaucrats and judges are still paid whatever the consequences. To the unconsulted, regulated, lawfared workers, the choice presents as free trade with foreigners exempt from the regulations or else protection from foreigners exempt from the regulations, with no practical ‘or be exempt yourselves’ third option. (You can add ‘deregulation’ to my list of things Trump can do to keep his base happy.)
Neonsnake: “Ah, but I gave the business to the Romanians, at the expense of a UK based company.”
That could also be stated — the business was won in a fair competition by a Romanian company, over a competing bid from a UK-based company.
For what little it is worth, I think you made the right decision. For relatively low-value relatively heavy items like furniture, the UK supplier had some significant advantages over its Romanian competitor — avoidance of possible language mis-communication; much shorter transportation distance, with potential cost savings and potential faster delivery times; avoidance of exchange rate fluctuations. Presumably you first had a serious discussion with the UK-based supplier, explaining they would lose the business if they did not make a more competitive offer. If the UK supplier could not or would not improve their bid, you had no choice but to award the contract to the Romanian firm.
If instead you had been responsible for buying bullets for the UK Army, and a Chinese supplier had under-bid a UK manufacturer which would have gone out of business, you might appropriately have reached a different conclusion. Or if you had been buying chemicals where you knew that the UK supplier was meeting stringent environmental guidelines while the cheaper Indian competitor was polluting its local water supply and causing birth defects in Indian babies. Price is not the only factor in a buying decision.
It could indeed 😉
But I chose not to frame it like that, I chose to frame it in a way that shows the protectionist argument – heartless ol’ me, costing proper British people their jobs, and giving them to Romanians, of all people!
But yes – I would be very surprised if anyone on this particular blog would disagree that I made the right decision – I got a product of comparable quality that I was confident in, for a cheaper price. It was that black and white for me – personally I’d have ripped the bandage off immediately and moved the product six months earlier if my protectionist boss hadn’t pressured me to do otherwise, and I (at the time) wasn’t confident enough to go against what was, after all, my new bosses wishes. And yes, I did it all “correctly” – giving the UK supplier ample notice, being honest, giving them a chance to re-quote, and everything else that anyone ethical should do – and as you rightly say, I had “no choice” – no moral choice, certainly, in my mind. As to feeling a bit bad afterwards – well, I’m not completely heartless. But if you can’t deal with the consequences of those sorts of decisions, you don’t do my job 🙂
So in that sense, I’m offering NIV a possible answer to why people don’t get the arguments against protectionism – because “you’re taking people’s jobs!” – and I’m supporting him in the sense that I think we all agree that my actions were morally correct. It’s not a perfect analogy, but analogies never are.
Further:
Very true.
(quick aside – you’re absolutely correct in all of the other things you said ref. lead times, currency fluctuations, delivery distance etc. All of those factor into the decision. I’ve moved product lines from China to Europe and paid a higher cost price, because I have to buy 3 months worth of product at a time from China, and if my forecasts were incorrect, I’m either stuck with that inventory, or I run out of stock. Better to have smaller commitments if I’m not totally sure of the forecast)
The Indian competitor example is relevant to me; I’ve moved products where I’ve had (not as extreme!) similar problems. I won’t buy wood products that aren’t FSC certified.
The bullet issue is similar – I should be free to…but I ought not to. And that’s the Libertarian dilemma, isn’t it? We believe that people should be free to…but we reserve the right to tell them that they ought not to. That, I believe, is where NIV is coming from.
My bad, I misread neon’s first comment on the Rumanian (old sp!) factory, and wrote my next comment on that basis. :>(
Comments subsequent to that all very good. :>)
(What is the “bullet issue”? Drat those missing marbles….)
Neonsnake: I’m offering NIV a possible answer to why people don’t get the arguments against protectionism – because “you’re taking people’s jobs!”
Just thinking about another (hypothetical) bullet purchasing decision — Would it have been a wise decision for a British Army purchasing agent in 1937 to have switched all purchases of bullets & bombs to the German supplier who offered lower prices, higher quality, & better delivery terms than the sole UK manufacturer — knowing that this purchasing decision would have resulted in the sole UK manufacturer closing down, with the equipment being scrapped and the staff dispersed? Sometimes it is worth paying a premium to maintain manufacturing skills and capacities — even if a fundamentalist would call that “protectionism”.
I don’t have a lot of sympathy for the protectionist argument that we should always preserve jobs & manufacturing capacity in our own countries, regardless of the premium. But I also have absolutely zero confidence in the arguments of free trade absolutists, who think only of the lower price the consumer can get today by buying imports and ignore everything else.
In the real world, we are faced with trade-offs between alternatives, none of which are perfect. Free traders would have more success getting support for their point of view if they emphasized the necessity of fair trade as a prerequisite for free trade, and demonstrated that they recognized the costs as well as the benefits of free trade — especially since the people getting the benefits are usually not the same people as those bearing the costs.
The next step, of course, is to ask what difference there is between the bullet scenario, and outsourcing a country’s food production, or steel production, or energy production, or tech production . . .
You cannot survive a war if you’ve lost your ammunition industry. Once shut down, it cannot be ramped back up quickly. Neither can your food production, or your steel production, or your chip manufacturing . . .
bobby,
I keep reading people who say that you don’t need to worry about all that stuff, because friends/allies….
I’ve had a great idea! What if a bunch of countries (just for the sake of example, Europe?) who historically are prone to invading each other and having wars, were to group together in such a way that war would be strongly discouraged due to intertwined trading?
Oh, oh, oh – you could, while you’re at it, make trade free across all those like-minded countries as well!
We could call it the Union Of Euro….ah, crap.
Meanwhile, from The Epoch Times yesterday:
“Chinese Regime Shocked by Tariff Increases; Chinese Netizens Celebrate”
https://m.theepochtimes.com/chinese-regime-shocked-by-tariff-increases-chinese-netizens-celebrate_2909515.html?ref=brief_News&utm_source=Epoch+Times+Newsletters&utm_campaign=43e822de27-EMAIL_CAMPAIGN_2019_05_06_03_37&utm_medium=email&utm_term=0_4fba358ecf-43e822de27-238269017
From the article:
Embedded in the story are links to pieces in the South China Morning Post that talk more about what the regime, and Washington, say. For instance,
“China tempers US hints that Beijing and Washington are preparing for the ‘last round’ of trade talks”:
https://www.scmp.com/economy/china-economy/article/3008771/china-tempers-us-hints-beijing-and-washington-are-preparing
Milton Friedman discussed the steel issue in “Free to Choose”. He fully admitted the defence argument could have value while also noting that an honestly defence-oriented argument would do a cost-benefit analysis of such alternatives as mothballing steel plants and stockpiling steel. (IIRC he did not much address the longer-term loss-of-skills argument.)
Britain’s agriculture (ramped up in various ways, e.g. “Dig for victory!”) proved to be enough for WWII. On the one hand, Churchill noted that the battle of the Atlantic was the only one he ever feared. On the other hand, it can easily be argued that agricultural protectionism before the war would have made UK agriculture less efficient while harming our industry, which we also very much needed to win the war.
Niall K: “On the other hand, it can easily be argued that agricultural protectionism before the war would have made UK agriculture less efficient while harming our industry, which we also very much needed to win the war.”
Indeed! That seems to be the key point about discussion on trade — it is complicated! There are definite benefits to free trade, along with very real & significant costs, and all kinds of unintended consequences. Decisions on trade in the real world need to be thought through carefully.
To return to NIV’s question about why so many people are not receptive to the free trade argument, a big issue lies with the way too many free trade absolutists simply brush the inevitable trade-offs under the carpet, and refuse even to admit the obvious downsides. Free trade enthusiasts might be more effective if they adopted a more balanced approach which acknowledged the limitations of free trade as well as the benefits.
Very true – a proper cost-benefit piece would sort out the bad-faith arguments from the good-faith arguments. I will back up Gavin’s points earlier that pure cost is not the only factor that we take into account during negotiation and business decisions, though. “what is best?” is not always “what is cheaper?”.
I’m inclined to forgive Mr. Friedman for not addressing the loss-of-skills argument. To my understanding, he was writing in 1980 – I’m unclear on whether he would have had enough knowledge back then of the increasing nature of the hyper-specialised world we live in now, or whether he’d have been able to predict it.
Always the case! And with pretty much everything. After all, we’re trying to present cases which we need a majority of people to agree with, and to vote in line with…
…I ever tell you the story of the time I pulled a Romanian village out of poverty through the virtues of free trade?
😉
More seriously, trade always involves downsides. It’s the nature of it. I hate this idea that there is in trade a “win-win” situation. It’s utter nonsense. At best, there’s “You win, I win more” – that’s the absolutely best case. That means that I’ve got more from the trade than you wanted to give me, but you’ve still got enough that you haven’t walked away. Anything less than that, and I haven’t done my job properly.
At worst, there’s “I win, you lose.”; that means that I closed the deal, and pushed you passed the point that you should have walked away. You’re screwed (because eg. I’ve forced you to give me the product below your cost price), but I’m laughing all the way to the bank.
There is no such thing as win-win, no matter what anyone tells you to make themselves feel better.
It’s brutal and nasty, to those people who think the whole world is unicorns and fairy cakes, but that’s the truth of the matter.
Damn, that’s depressing. Also, I’d argue, untrue.
Maybe it can be true if you’re selling completely fungible widgets to completely fungible clients. If the item you are offering for sale is exactly like all of the other widgets out there for sale, and your entire role is to hand off a widget and walk away with a dollar, then I could buy into your description, but only because all you’re doing is exchanging currencies, for a presumably published price. You’re like a change-maker – no win for either, just an exchange.
But, say you sell a product that is NOT fungible – not just like every other product out there. (As an example, I sell ME.) And, of the list of possible clients seeking such products, some will profit more than others if they can get the particular individual qualities that differentiate your product from the others. Plus, establishing a relationship with some unique seller(s) might enable you to profit in unique ways, beyond merely the unit price.
In the example of ME, that means that I find a client that truly will profit more by using MY services than the services of others because of my unique set of experiences, personal qualities, interests, and working habits that I bring to the table – and I convince them that that combination is worth a good day’s pay to them. Further, I find a client who interests me, whose work challenges and entertains me, and with whom I wish to be associated, and I count those things when examining the sufficiency of their financial offering.
If you can ferret out that particular combination of unique client and your own unique offerings that works to the advantage of both, you can truly have a win/win situation. If you are selling Ticonderoga #2 pencils to chains for scheduled prices, not so much (although a very good salesman can probably find ways to differentiate even the most fungible of products.)
“Maybe it can be true if you’re selling completely fungible widgets to completely fungible clients.”
Mmm. There was an economist who argued as follows. There are three separate definitions of the ‘value’ of a commodity: the labour-value, the use-value, and the exchange-value. The labour-value is based on the total amount and quality of human labour required to produce it. The use-value is the value to the consumer who eventually gets to use it. And the exchange-value is the amount of other goods or services the commodity can be exchanged for. Whichever value is used, if people trade always paying the true value for the goods, services, or labour provided, then there can be no profit – no surplus value. The labour value is fixed at the start of the chain by the labourer, and is the same forever after unless additional labour is added. The use-value is fixed by the consumer at the end of the chain, and is the same at every step leading up to it. And the exchange-value is fixed by the market place – $10 worth of X is exchanged for $10 worth of Y, or simply $10, and there is no change of value.
Thus, for capital to yield a return without expending labour, for a merchant to buy and then sell the same goods at a profit, purely as a middleman, somebody must be getting ripped off! Somebody has to be paying less than the goods are worth. Arguments to the contrary generally only work by sneakily switching from one definition of value to another half-way through the presentation!
It was an influential idea in its time, and is still favoured by many serious academic thinkers even today. What do you think? Is the argument convincing?
NIV: “Is the argument convincing?”
Not in the least. For example, those definitions ignore “Locational Value”. What is a glass of water worth to a thirsty man in the desert, versus to a customer at your local diner?
Gavin – how much was Dagny willing to pay for Rearden steel? She was dying of thirst in a desert at the time, right?
“I will pay as much as it takes”
The market (her) had set the value far higher than it’s worth. Rearden ripped her off, in the sense of NIV’s example.
She won. He won more.
Win/win? Not in my mind 😉
Nullius:
I think there are very few people who value anything purely for the labor that went into making it. I’ve never run across such a person, and I’ve never heard of one either.
So much for the labor-theory.
There’s also sentimental value (I just spent ~ $90 to replace some favorite books of my childhood). Sentimental value certainly varies from person to person … along with any other value an item might have to a person due to his own wants or needs. Gavin’s extra-thirsty gent in the desert is another example. One guy wants a cat, another can’t stand cats.
So “use-value” has to reside in the value that the thing has to the purchaser, which isn’t necessarily its utility as an implement of some sort or as a thing you need in order to sustain your life; it could be just something that gives you pleasure or a sense of contentment. And its “use-value” certainly isn’t fixed.
Similarly, “market value” isn’t fixed either — it depends on circumstances and it fluctuates with the time and the locale and the number of people who desperately desire the last Prius on the lot (not me).
IIUC, all that is what von Mises meant when he said that you never know what the value of a thing is until you know what the particular person paid for it.
I would amend even that to say that people do indeed buy things despite the fact that in any meaningful sense of the word “want,” they want the money they paid for it even more. People go through the register line, pay for the item that they grabbed off the shelf during the one instant they felt (felt) they wanted it — just had to have it!, and as soon as they’ve paid their bill they take the thing and the register receipt to the Customer Service desk to return the thing and get their money back.
. . .
neon,
In the economic sense, “win-win” means specifically and precisely that both the seller and the purchaser of the good or service are, by their own lights, they are better off than before. (There are exceptions to this, as I wrote above, and if they’re lucky they can get their money back, or whatever they offered as payment.)
The idea that in a trade, “win-win” is only possible if both the transactors are equally better off, is probably the result of mixing up in the mind (ie., of conflating) the concept of “win” in trade with concept of “win” in a competition. But a trade is not a competition, except perhaps in the mind of a particular transactor who rejoices that he got the better end of the deal; or, interestingly enough, both the transactors may feel (feel) that they got the better end of the deal. Or the reverse of course, where each feels that he came out worse than the other guy. “That goniff! I can’t believe I paid all that money for a really bad Reuben sandwich!” “That patzer! I can’t believe I let him talk me down on the price for the sandwich just because there wasn’t anyone else I could sell it to!”
Also the childish sense of “fairness” enters into the feeling of being ripped off.
But more often, it ends up with both the traders feeling that they came out ahead in the way that mattered most to them, even if not quite so far ahead as they’d have preferred. Except insofar as they’re the type who always find something to be unhappy with in practically every circumstance of their lives, or are the type who are consumed with the awfulness of the fact that TANSTAAFL.
This happens a lot, because often neither party knows the other’s walkaway point. In an ongoing relationship, my goal is certainly to make the other person feel that they’ve got the better end of the deal (even if I believe that I did), in order to nurture the business relationship.
Let us posit a 4 bedroom shared household, referred to by its inhabitants as “Galt’s Gulch”, naturally.
Things are not going too well at the moment, bobby b has been struggling to find work (but today, he is finalising a pitch to a company he’s really excited about, and they appear to feel the same, and it could lead to a long-term relationship).
NIV is tired, he’s been busy coding a new app late into the night and his diet has been very poor, and he’s feeling rough. bobby b, because he has free time, has been advising him on the legal side of what happens when he releases it. neonsnake has offered to cook healthier meals, because his office hours are flexible, he can get home early enough to cook, and he enjoys cooking and doesn’t like pizza.
Gavin is putting most of the money into the shared coffers, which he’s ok with, but he’s feeling the strain. Julie (living on the other side of town) is worried about us and hopes that NIV’s app is finished soon and will make money, and that bobby b nails the pitch.
So, neonsnake is busily cooking dinner for everyone on Friday evening.
Gavin comes in, looking a bit pleased with himself. Turns out, he had a blow-out on the way home. He went to a garage, the owner of which is known to rip off his customers, and is mean to small children and animals. Gavin negotiated so hard over the price of a new tyre that the mechanic, flustered, sold it to him below cost price. Gavin and I chuckle over this, because the mechanic is a nasty man, and Gavin has other options in the future if he has a blow-out again.
This is win/lose.
Gavin then grabs the oranges from the counter – I stop him, informing him that they’re mine, I need them for dinner. Gavin tells me that no, he needs them for drinks. We begin to negotiate – 1 each? I get 1/2, he gets 1 and 1/2? And so on. NIV, annoyed by the rising volume of our argument, comes in and points out that I need the rind, and Gavin needs the juice (NIV wrote a programme that creates our shopping list ensuring that we never order more nor less than we need for dinners). Abashed, I grate the rind from the two oranges into a bowl, and hand them both to Gavin.
This a pure win/win – neither of us are worse off. But it happens so infrequently that I pay it no mind.
Finally, bobby b returns home, triumphant. He nailed the pitch.
He was hoping for $600 per day. When it came to that part of the meeting, he told the company to make him an offer. They offered $650 immediately. bobby b looked disappointed, and said “That’s a real shame, I was really looking forward to working with you”. The company upped their offer to $700. bobby b, knowing that this was a potential long-term relationship, wisely didn’t push any further, and also, he likes the guys in the company – they’re not like the mechanic. They shake hands, and bobby b comes home.
This is what I mean by “he wins, you win more” – both bobby b and the company are very very happy. Both have won, absolutely, and neither should feel cheated. Maybe the company were prepared to offer $800 – we’ll never know. But bobby b won more than the company, if the company wanted to pay $650.
Very pleased with the day, I top the tagine I’ve been making with the grated orange rind, we raise the vodka screwdrivers that Gavin has been making and toast bobby b’s success. We then phone Julie on the secure line that NIV somehow created, and tell her the good news.
Julie wryly points out that we’ve spontaneously developed a household where we give according to our ability and get according to our needs, and we chuckle heartily.
“I think there are very few people who value anything purely for the labor that went into making it.”
The people who made it value the time they spent doing so, and when they trade, that’s often what they’re asking to be compensated for. They frequently make stuff they don’t want and can’t use personally, and when they’re making it for trade they’re not going to use it anyway. Its use-value is irrelevant to them. They trade when the exchange-value they can get for the product is greater than the labour-value of the time and effort they put into it.
Sentimental value is just use-value (‘utility’, if you like). That different people hold different use-values doesn’t change the fact that only one person can eat any given slice of pizza, and so the only one that matters is that of the eventual consumer of that particular item. Items of the same type may well have different values, but each one is fixed by its destiny. Locational value is usually just a difference in labour-value: the cost of employing someone to transport it from A to B.
I’m playing Devil’s Advocate here, of course. It’s not a theory I subscribe to. But Neonsnake’s line about there being no win-win trades, and bobby b’s point about fungible items reminded me of it. I wondered if I could come at the problem from the other end – since people are inclined to argue with me, to propose a proposition I wanted to defeat and let the other debaters do so. It was just an idle thought.
“This happens a lot, because often neither party knows the other’s walkaway point.”
Do they need to? If I win but could have won more, does that mean I lost?
It happens a lot anyway, because of the shape of the supply and demand curves. As the price rises, the number of suppliers willing to supply at that price steadily increases, and the number of consumers willing to buy at that price steadily decreases. At £10 there’s only one seller able to do it at a profit, but a hundred buyers willing to pay. At £19 there are 49 sellers and 51 buyers. At £20 there’s 50 sellers, and 50 willing buyers. At £21 there are 51 sellers and 49 buyers. At £40 there are a hundred sellers but only 5 buyers. Everyone buys and sells at £20. But there is at least one seller who would have sold for half that, and five buyers who would have bought for double. All the sellers to the left of the market equillibrium and all the buyers to the right are getting a much better deal out of trading at the equillibrium price. It’s probably true of almost everyone in the market – few people are going to be balanced exactly on the cusp of willingness at any one price.
Competition drives the market towards a common price (rather than a common split), and with a common price there are always going to be both small winners and big winners. But seeking to be a bigger winner too is part of the motivation to do things better, cheaper, faster, easier that drives progress.
Not at all – you’ve won. And so have they – I don’t think my “you win, I win more” should be depressing, it’s just to show that it’s not perfectly balanced. Apologies if not being clear, both sides have absolutely won! It’s something that I was taught and have to now teach – just because you got the price you wanted in a negotiation, it doesn’t mean that you couldn’t have got more. I have to think like that in my job – if I was to happily say “I’ll pay you £30 per unit” to a supplier and he smiles and shakes on it immediately, then yes, we’ve both won – but I’ll know deep-down that I could have offered less (otherwise he wouldn’t have agreed immediately). In that sense, I get quite purist about win-win.
As to our obscure, lost in the annals of history, mysterious and heavily bearded economist: my personal belief is that he understand labour-value and exchange value; but misunderstood use-value drastically. Use-value (in my personal belief system) is the Quality a product holds, what Julie calls Value up above in a fantastic example. It is indefinable and non-quantifiable.
And that will vary from person to person, of course – it’s the tiny little sliver between the Objective (“books”) and Subjective (“favorite…from my childhood”). It is what makes you “you” and me “me” and Gavin “Gavin” and so on – people as Individuals with their own Subjective desires.
So, to misunderstand use-value so drastically would be to deny that humanity is made up of Individuals.
It’s a good job this forgotten economist didn’t go any further down that road with his thoughts, isn’t it? Crikey, think of the damage he could have done…
“if I was to happily say “I’ll pay you £30 per unit” to a supplier and he smiles and shakes on it immediately, then yes, we’ve both won – but I’ll know deep-down that I could have offered less (otherwise he wouldn’t have agreed immediately)”
Maybe, maybe not. He might have just known what the market price was, and that you knew too, and that you knew that he knew, etc.
“As to our obscure, lost in the annals of history, mysterious and heavily bearded economist”
🙂
My view would be that he was correct from the point of view of any one system of value, but that the advantage of trade comes precisely from sneakily switching value definitions half-way through the argument! It’s a legitimate move, because everyone uses their own personal values to judge their own interests. And everyone reckons they’re the winner and the other person the loser in every trade. They just got something more value in exchange for something less valuable to them – thus by my values the other person lost. That they say the same about me is because they’re using a different value system. (They didn’t like Einstein’s theories, either…)
Our bearded economist was trying to be objective and scientific. If value is a real thing, then it must be the same for everyone. ‘A is A’. Things are what they are. The value is the value. It can’t be a different number depending on who you ask. So in following this scientific principle, seeking the objective reality of what ‘value’ really is, he inevitably only saw one piece of it, because he was looking for exactly one piece.
It’s as bad as dealing with the same problem in moral philosophy. Different people have different moral values, but the scientific mind doesn’t like such subjectivity. It seems like illusion and falsehood, a hall of mirrors. So moral philosophers were always trying to find and justify the single, real, objective morality. ‘Natural Law’. And the shifting perspectives in the hall of mirrors is condemned as ‘moral relativism’, which was then used to justify any evil, any depravity, any corruption of society. You could say that the idea of individual values all being equally valid was ‘economic relativism’ in the same sort of way. Somehow, it’s being used to rip people off!
“It’s a good job this forgotten economist didn’t go any further down that road with his thoughts, isn’t it? Crikey, think of the damage he could have done…”
I keep on thinking the same thing about Protectionists… 🙁
Indeed – but my job is to pay less than the market price. My job is to say “Yes, I know other people are paying £30, but I will give you £25. In return, I will buy far more units from you than the other guys, because I can sell more than they can. Also, if you don’t sell them to me for £25, I’ll start looking at your competitors and seeing whether they’d be willing to sell it to me for less than you…” and so on.
And then, some of my competitors will notice that I’m selling widgets for less than they can, they’ll argue the supplier down to £25, and that becomes the new market price (it works in the other direction as well, of course)
In terms of the win/win thing – as long as both people walk away happy, I still consider both people to have won. Win/lose is rarely a clever thing to do – it destroys trust.
Pricing based on labour is still unfortunately a fairly common model (I’m going to equate labour with cost, for ease) in retail. Give a category manager a target profit percentage of 30%, and watch them price everything to make 30% profit. It can take a while for people to realise that they need to price based on what people are willing to pay (and make the profit by reducing costs if necessary, or by selling more of the higher-profit products etc).
The objective and the scientific are, obviously, great; but going too far in the direction and trying to pretend that everything is countable, measurable and objective is still denying the individual nature of human beings.
I can’t really speak to moral relativism (or relativism in general), I tried reading about constructivism and got hopelessly tied up in knots going from “yes, obviously, that’s just a truism” to “this is clearly utter nonsense! what are you talking about?”. I’ll stick to my own simple little philosophy where things exist, we can observe them, and we can decide what they mean to us.
Re. protectionism vs free trade, what’s your take on things like “dumping” – and indeed on anti-dumping rules?
(I’m more pro free-trade than against it, as might be expected)
And yes, I meant to say – absolutely. And that you’re right to point out that it’s not “sneaky”, but completely “legitimate” to allow people to decide for themselves how much value to attach to something (either consciously or subconsciously).
“Indeed – but my job is to pay less than the market price. My job is to say “Yes, I know other people are paying £30, but I will give you £25. In return, I will buy far more units from you than the other guys, because I can sell more than they can.”
As I’m sure you’re aware, this sort of competetive negotiation is just how the market operates to create the market price. Things are always a little fuzzy in reality.
But I’d note thay buying in bulk is something else – the market price is genuinely different in these circumstances. It may be that your manufacturer is having to pay £150/day rent on his premises, which has to be divided among the items he makes and sells. They cost him £10 each to make, and if he makes 10 a day he has to add £15 on each to pay the rent. Total cost is £25 per item so £30 is a nice profit. But then you come along and offer to buy 100 for £25 each! Now he only has to add £1.50 to each to pay the rent! He’d have been willing to sell them to you at £16.50 each, to get the same profit per item, so £25 is bloody brilliant! He will no doubt work hard at looking sad, hesitant and defeated, as he makes the deal. His lip will tremble. Sad violins will play in the background. You never can tell.
I’m sure that in your job you already know all that. But I still meet people who figure that if shops can still make a profit selling the stuff at half price during the January sales, they must be *really* ripping us off for the rest of the year! Not necessarily so.
“Re. protectionism vs free trade, what’s your take on things like “dumping” – and indeed on anti-dumping rules?”
It depends. There are circumstances where there are legitimate free market reasons for charging different rates in different countries, and charging different rates temporarily, as in a sale. Demand differs, circumstances differ, so the equillibrium price may differ to make it cheaper in a foreign market than at home. And if that drives competitors in that foreign market out of business, so be it.
On the other hand, when people complain about ‘dumping’ in a Protectionist context, they’re often talking about some form of short-term trickery for getting a temporary advantage in a market, that can be leveraged into a permanent one. I think all such tricks are vulnerable to exploitation. It’s like bluffing in poker. You bet high on a bad hand, and keep pouring in the money. If you can outbid your opponent, you can drive him out of the game without ever showing your hand. If you can’t and get your bluff called, you lose, big-time. And if your opponent knows you’re bluffing, he can find ways to exploit it to your disadvantage.
‘Dumping’ usually means losing your own money to subsidise foreign consumers. That, on the face of it, is obviously stupid. If your idea is that you drive your foreign competitors out of business and then raise prices on them, and they fall for it, then you win. But if they take your money and grin, and use their knowledge that you can’t keep it up for long to keep their own industries running in readiness for your collapse, it’s economic suicide. There’s always a way to exploit it.
In this context, I do very much like the story of Dow and the Bromine war! https://fee.org/articles/herbert-dow-and-predatory-pricing/
But it’s not just a tactic used at the international level. One supermarket can engage in a price war to try to drive another supermarket out of business, and then afterwards raise prices, having less competition. If you’re going to ban it as an ‘unfair’ tactic, you would have to ban it at the level of individual shopping streets. It doesn’t just apply between nations, but also between companies. I don’t accept that it’s any different if you draw the lines at a national or a local level. You can’t say it’s fair between neighbouring shops and not between countries, or vice versa. Either the method is fair, or it’s not.
NIV: “… because of the shape of the supply and demand curves.”
We have wandered so far off the original topic, we are probably trying the patience of our host. But let me make one last comment, because the issue of models is important. Mental models of how the world is (or should be) constitute such an important underpinning to differing views on many matters.
Supply/demand curves are a useful tool for understanding certain transactions — if we recognize there are a significant number of implicit assumptions. But the model has severe limits. For example, it completely ignores the very significant impact of time delays in real markets.
The classic example is the old one of pricing Pork Bellies. The price of pork bellies in Chicago would go up because demand temporarily exceeded supply. Farmers would respond to the higher price by raising more pigs — but it takes time to produce piglets and raise them to marketable weight. (As the old saying goes: ‘Nine women cannot get together and have a baby in one month’). In due course, when the flood of new pigs hit the market, supply would temporarily exceed demand, the price of pork bellies would fall, and farmers would be left with a loss.
We have to use models to understand our world — but we should always remember that models are a simplification (often a gross simplification) of the real world. The factors we ignore when setting up our models can result in model predictions being wildly wrong. The models supporting the Anthropogenic Global Warming scam are only one example.
I hope so! Them’s the rules of the game.
So, I’ve “won”, because I got him down to £25. I get back to the office, tell my boss that I got £25 (I’d managed his expectations at £27), high-fives all round.
But I left £8.50 on the table. This, specifically, is what I mean when I say “I won. He won more.”
Which would be close to the equivalent of creating cartels, if what this means is that I’m not free to set my own prices. Makes sense, that’s a helpful way of putting it.
I occasionally run promos on my current set of products at below cost price, specifically with the aim of taking business away from my competitors at key times of the year. I would be outraged if I wasn’t allowed to do this; I agree that the same applies when scaled up.
Ah, sorry. I thought that, when you said “There is no such thing as win-win, no matter what anyone tells you to make themselves feel better . . . “, you meant that the word “lose” always had to appear on one side or the other. Which would be depressing. I see commerce as involving exceedingly few truly fungible products – everyone can always bring something new and valuable into a trade as an added value, whether it be location, timing, good experiences, or just a nice smile, and so almost every trade can be made into a win/win outcome.
I suppose that, from a conservation of energy viewpoint, everything that can be an added value in a trade can also be reduced to its monetized form, which would truly make all trade into a net neutral with the exchange simply being the newly-defined “value” of each participant’s offering. It just depends on where in the chain you decide to make that valuation – do I count the effort of creating my “nice smile” into the cost of goods sold? If the answer is “yes”, then trade can truly only ever be a zero-sum game.
But that creation of added value – the act of smiling – is how the middleman monetizes his own efforts, adds value to the exchange, and thus supports himself. So it may well still always be a neutral exchange, but more people are deriving more monetization of effort from it, which is really a net gain.
In my experience, that’s certainly true. I have to negotiate as part of my job, so I take a certain purist view 🙂 see my example above of the “orange” negotiation and the “pitch” negotiation for context.
I don’t think we’ve ventured too far from the topic, we’ve stayed within the bounds of trade and how it works in practice.
(As a very swift aside – thank you to Julie and Gavin for going out of their way to reassure me on my decision re. moving business, neither of you had to do that, and yet you did.
Bobby, same for calling me “realistic”. And Mullis in Verba for ongoing support and education 🙂 )