Thursday, January 12, 2012

Where John Emil in Daily Kos is Absolutely and Comparatively Wrong

John Emil (11 January) writes for the Daily Kos blog HERE

It is an essay on how to get everything about Adam Smith wrong while embarrassing its author.

“Where Adam Smith was Wrong”

“I grew up on Adam Smith’s The Wealth of Nations. I was a CPA, corporate executive, and top-5 business school MBA from Mitt Romney’s era, and Smith was God. But one strange, often repeated phrase nagged at me. What was this “carrying trade” that Smith harped on, over 35 times?

"The phrase is central to his über-capitalist argument about comparative advantage, and time has proven him dead wrong.”

… Smith divided the economic trade world into three parts – the “home trade,” with goods produced and consumed locally, the “foreign trade of consumption,” where you sell your production to a foreign country, and, finally, the “carrying trade,” the third party that cut the deal and delivered the goods, taking great risks over perilous waters to do it.

The carrying trade was central to his argument that basic home-produced goods would always have comparative advantage over competition from abroad, which would largely consist of luxury goods and agricultural products your local climate could not support. The costs of the carrying trade in getting low-priced goods to market protected the local basics from foreign competition, and even if there was a low-cost foreign competitor, your home market likely had a comparative advantage over the foreign market in another area.

…“Comparative advantage” goes down the toilet.

Damn! Here I am a CPA and “golden age” MBA and I’m channeling the one 19th-century writer whose name cannot be spoken in the public in the United States unless you precede it with “Groucho,” “Harpo” or “Chico.”

Adam Smith did not write about ‘comparative advantage’ – that was from the pen of David Ricardo, written in his Principles of Political Economy (1817), some twent-seven years after Adam Smith died in 1790. Smith described the theory of “absolute advantage”, which is quite different from “comparative advantage”, and, incidentally explained less than Ricardo’s refinement to trade theory in 'comparative advantage'.

Nor was Adam Smith a "19th-century writer”. Smith was born in 1723 and died in 1790 – in the 18th century!

John Emil advertises the fact that he was “a CPA and “golden age” MBA. Some “golden Age” CPA!

I would have thought numbers and dates were John's forte. Someone showing off that he was a graduate of a “top-5 business school MBA” should be more careful with his facts. The British carrying trade was protected by the Navigation Acts which policed all trade with Britain through the Royal Navy, paid by UK taxes. It certainly did not make anything cheaper for people in the British colonies of North America and denied them the right to trade freely with the rest of Europe.

Let alone, John’s misunderstands comparative advantage.

Though, as Adam Smith pointed out, Scotland could grow passable wine products at enormous cost in glass hothouses, instead of importing cheaper, high quality, fine wines from France, which was an important source of trade between Bordeaux and Edinburgh and major feature of social-life in central Scotland – local water was often dangerous to drink - until Britain's wars, and trade-wars, against France.

Scottish wine-producing glass-houses may produce more employment to produce local wine, but it would lower Scottish living standards (already pretty low in poverty-stricken late 18th-century Scotland) from the expenditure of scarce capital on something that could be imported at lower costs, and from diverting wage incomes unnecessarily, and raising wine prices.

Similarly, if Alaska now ignored Adam Smith on needless glass houses and diverted massive funds to setting up a subsidised domestic wine producing facility, it would become poorer.

What kind of business-models did John study as a “CPA” and a “golden age MBA”? He clearly knows little about Adam Smith.



Blogger airth10 said...


I am thinking that there must be an economic advantage in John Emil getting things wrong about Adam Smith. For instance, by getting things wrong about the invisible hand Emil and others like him furnish you with a task and employment.

Perhaps Smith intended to create a vagueness about his invisible hand so that it might be a source of employment for people analyzing, interpreting and putting their own stamp on it.

Smith gave the world one of the most enduring and rewarding metaphors ever produced. It is a wellspring, a Cornucopia, of entertainment and busyness. It certainly has added a new wrinkle to my life.

4:59 pm  

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