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New Book By Felipe And McCombie

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The production function has been a powerful instrument of miseducation.

– Joan Robinson (1953–54), The Production Function and the Theory of Capital, Review of Economic Studies, vol. 21(2), pp. 81–106. (jstor)

… that is how Jesus Felipe and John McCombie begin their new book The Aggregate Production Function and the Measurement of Technical Change.

I have observed that although neoclassical economists use the aggregate production function heavily, even those who do not learn it somehow err and assume it implicitly somewhere in their analysis. This book I believe is a rewriting of both authors’ work in this area collecting various papers written in many places — critiquing the very “foundation” of neoclassical economics.

From the publisher’s site for the book:

‘This is an extremely important and long-awaited book. The authors provide a cogent guide to all that is wrong with the theory and empirical applications of the discredited notion of an aggregate production function. Their critique has devastating implications for orthodox macroeconomics.’ – Anwar Shaikh, New School for Social Research, US

h/t Matias Vernengo

Happy New Year 2014

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Here’s wishing the readers a happy new year. May you (and I) have a prosperous year ahead and learn more about the shell game of economists!

Good time to talk briefly about time.

Joan Robinson was perhaps the best critic of neoclassical economics and she did this by attacking the very basic concepts of mainstream theory. In her essay Time In Economic Theory (1980, Ch 7 in What Are The Questions?: And Other Essays), page 87 in Section 1: ‘Logical Time’ she says:

In a properly specified stationary state, there is no distinction between any one day and any other. On a properly specified growth path, such as a von Neumann ray, exhibiting a particular pace of expansion of employment and of a specified stock of means of production, there is no movement forward and upward or backward and downward, except the movement of the reader’s eye along the curve.

Unfortunately, the great majority of models in the textbooks are not properly specified. Take, for instance, the familiar Marshallian cross of supply and demand curves showing an equilibrium point in the middle. At a price above the equilibrium level, offer exceeds demand, and below, demand exceeds offer.

Now we are told, if price at any moment is not at the equilibrium level, it will tend toward it. This means that historical events are introduced into a timeless picture. As Professor Samuelson kindly explained to me, ‘When a mathematician says “y rises as  x falls”, he is implying nothing about temporal sequences or anything different from “When x is low, y is high”.’ 

To move implies a temporal sequence. To fill in the story of a movement towards equilibrium, a complicated dynamic process must be specified and to specify a process that will actually reach equilibrium is by no means a simple matter.

[emphasis added]

A footnote refers to page 138 of the book – another essay quoting Samuelson:

[Samuelson]: I do not think that the real stumbling block has been the failure of a literary writer to understand that when a mathematician says, ‘y rises as x falls’, he is implying nothing about temporal sequences or anything different from ‘when x is low, y is high’.

Robinson’s response is:

My dear sir! That is my point. I really cannot allow you to get away with that.

Unfortunately, economists keep getting away from this.

Joan Robinson - What Are The Questions And Other Essays Back CoverBack cover of What Are The Questions? …  And Other Essays

Happy Holidays

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Here’s wishing the readers of this blog a happy holiday break.

Happy Holidays

 via hallmark.com

I can never repeat this often enough – always remember:

The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists.

– Joan Robinson, 1955, “Marx, Marshall And Keynes”, Occasional Paper No. 9, Delhi School of Economics. Also in Collected Economic Papers, Volume Two, 1960.

Peace!

Manmohan Violet Singh

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In a short recent speech, the Indian Prime Minister – the great man who steered the direction of the Indian economy in the early 1990s – says:

The purpose of the study of economics is not to provide settled answers to unsettled and difficult questions, but sometimes to warn economists and the world-at-large, how not to be misled by clever governments.

which is similar to what Joan Robinson once:

The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists.

– in “Marx, Marshall And Keynes”, Occasional Paper No. 9, The Delhi School of Economics, University Of Delhi, Delhi, 1955.

I’d say Manmohan Singh doesn’t go as far as Robinson in putting the blame on economists themselves but I guess there is some amount of influence. But what Singh says is true – governments of advanced nations mislead the less advanced ones.

Also in the short speech:

I would like to say, that when we study economics, our impulse is not the philosopher’s impulse – knowledge for the sake of knowledge – but for healing that that knowledge may help to bring. These are the words of past thinkers: Wonder is the beginning of philosophy; but it is not wonder, but social enthusiasm, which revolts against the silence of fixed life, and the orderliness of the mainstream, which is the beginning of economic science.

Which is not not surprising since Manmohan Singh is influenced by Joan Robinson and Nicholas Kaldor. Here is a nice interview by the BBC’s Mark Tully from 2005 Architect Of The New India published in the October 2005 issue of the Cambridge University Alumnus Magazine. 

Here is an excerpt from the interview:

The thinking behind his solutions to India’s financial problems was first shaped at Cambridge by the theories of John Maynard Keynes. The great man had died almost 10 years before Manmohan Singh arrived but his legacy was still very much alive. ‘At university I first became conscious of the creative role of politics in shaping human affairs, and I owe that mostly to my teachers, Joan Robinson and Nicholas Kaldor. Joan Robinson was a brilliant teacher but she also sought to awaken the inner conscience of her students in a manner that very few others were able to achieve. She questioned me a great deal, and made me think the unthinkable. She propounded the leftwing interpretation of Keynes, maintaining that the state has to play more of a role if you really want to combine development and social equity.’

‘Kaldor influenced me even more; I found him pragmatic, scintillating, stimulating. Joan Robinson was a great admirer of what was going on in China, but Kaldor used the Keynesian analysis to demonstrate that capitalism could be made to work. So I was exposed to two alternative schools of thought. I was very close to both teachers, so the clash of thinking sometimes got me into difficulties. But that made me think independently.’

In Other News

The Reserve Bank of India announced some measures recently to curb the instability of the Indian Rupee:

The first announcement – effectively raising short term interest rates and which caught everyone by surprise – was on 15 July 2013:

The market perception of likely tapering of US Quantitative Easing has triggered outflows of portfolio investment, particularly from the debt segment. Consequently, the Rupee has depreciated markedly in the last six weeks. Countries with large current account deficits, such as India, have been particularly affected despite their relatively promising economic fundamentals. The exchange rate pressure also evidences that the demand for foreign currency has increased vis-a-vis that of the Rupee in part because of the improving domestic liquidity situation.

Against this backdrop, and the need to restore stability to the foreign exchange market, the following measures are announced:

…

On 23 July it further tightened monetary policy:

Over the last two months, the Reserve Bank of India (RBI) has undertaken several measures to contain the volatility in the foreign exchange market. Among them, some measures intended to check excessive speculation adding to undue volatility in market conditions were instituted vide the RBI’s Press Release No.2013-2014/100 dated July 15, 2013. These measures have had a restraining effect on volatility with a concomitant stabilising effect on the exchange rate. Based on a review of the measures, and an assessment of the liquidity and overall market conditions going forward, it has been decided to modify the liquidity tightening measures as follows:

…

There Is No Such Thing As A “Purely Economic” Problem That Can Be Settled By Purely Economic Logic

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… and politics and ideology will seep into it.

Tom Hickey writes a nice reply to Noah Smith’s blog post How Normal People See Macroeconomics.

Smith says:

I’ve been thinking about these differences for a while, and I’ve reached two major conclusions:

1. Normal people see macro as inherently political.

2. Normal people see macro as being mostly about redistribution rather than about efficiency….

The whole essay is like economists are doing something value free and that politics is not important. Joan Robinson nicely summarized the situation in her essay What Are The Questions (jstor URL):

The movement of the thirties was a attempt to bring analysis to bear on actual problems. Discussion of an actual problem cannot avoid the question of what should be done about it; questions of policy involve politics (laissez-faire is just as much a policy as any other). Politics involve ideology; there is no such thing as a “purely economic” problem that can be settled by purely economic logic; political interests and political prejudice are involved in every discussion of questions. The participants in controversy divide themselves in schools – conservative or radical and ideology is apt to seep into logic. In economics, arguments are largely devoted, as in theology, to supporting doctrines rather than testing hypotheses.

Smith writes as if what he is doing is good for the society as a whole – despite the fact that his own colleagues are pushing their own ideologies in policy which is bad for society as a whole.

Smith also writes:

Many people see the “-isms” of macro – “New Keyneisanism”, “New Classicalism”, etc. – as political advocacy rather than as dispassionate scientific attempts to explain the world around us….

But it is right – people like Greg Mankiw have pushed their agendas. What is wrong with “normal people’s view” on this? They are exactly right. Mankiw’s defending the 1% is a dispassionate scientific attempt?

And the above Robinson quote is actually a dispassionate description of the situation than Smith’s own!

Who is Smith trying to fool here?

In fact,

One of the main effects … of orthodox traditional economics was … a plan for explaining to the privileged class that their position was morally right and was right for the welfare of society.

– Joan Robinson, 1937, “An Economist’s Sermon”, Essays In The Theory Of Employment, The Macmillan Company

Smith also writes:

If monetarists or New Keynesians (is there a difference?) suggest monetary expansion, for example, a lot of readers see it instead as a liberal attempt to use inflation to redistribute money from rich creditors to poor debtors, while a few see it as a conservative attempt to boost the profits of big banks. Only a small minority seem to consider the question of whether monetary expansion is a Pareto efficient response to the business cycle. Because of this, monetarists like Scott Sumner often spend a lot of time “punching hippies” on every issue other than monetary policy, trying to avoid being tarred as hippies themselves for their lack of fear of inflation.

Whatever Pareto efficiency is.  But it is mainstream economists themselves who have promoted deflationary policies by selling them to the public that such policies are good for them. Monetarism was a scourge in the 1980s and has permanently distorted economists and the common man. Now he completely avoids history and presents the case as if (mainstream) economists want a rise in demand, not the normal people!

Games Economists Play

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The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists.

– Joan Robinson, 1955, “Marx, Marshall And Keynes”, Occasional Paper No. 9, The Delhi School of Economics, University Of Delhi, Delhi.

It is fun to watch what economists have to say after the recent Reinhart-Rogoff episode and look at their behaviour.

To be brutally straightforward, I think economists are playing games here to mislead and deceive everyone. Mainstream economists in the past few days have been trying their best to persuade everyone into believing that they are modest people and economics is a hard science* and it’s two outliers who have misled politicians into worldwide austerity etc.

So we hear Mark Thoma saying something like lack of sufficient data prevents economists from choosing the best model. It gives the impression that mainstream economists broadly know how the world works and that they are just unable to give the best solution from a pack of 10 good models. But it hides the fact that at the most elementary level, macroeconomists struggle to even understand basic macroeconomics and that there exists a supreme Post-Keynesian alternative.

In a recent NYT blog post Destructive Creativity Paul Krugman tries his best to mislead everyone about the status of macroeconomics.

According to him:

If you stayed with Econ 101, you got it right, if you went with the trendy stuff you made a fool of yourself.

It is the most inaccurate statement about the state of macroeconomics and reflects poorly on someone who has written articles such as A Dark Age Of Macroeconomics. Econ 101 – as taught in most universities – is deeply misleading and erroneous.

I won’t go into how chimerical macroeconomics is because there are already a few good blogs there. This post is not about attempting to prove how economics taught at universities is chimerical but to point out games economists play.

Krugman tries to play a supergame on top of what other economists are doing. He says:

You can already see quite a few people reacting to this affair by declaring that macro is humbug, we don’t know anything, and we should just ignore economists’ pronouncements. Some of the people saying this are economists themselves!

No, this is misleading. Mainstream economists are not saying this really but are playing games. Those who have been saying that mainstream economics is a chimera have been saying this for a long time. There is hardly any new entrant in this from within the orthodox community. And Krugman tries to defend the subject itself:

What we have experienced since 2007 is a series of huge policy shocks — and basic macroeconomics made some very counterintuitive predictions about the effects of those shocks. Unprecedented budget deficits, the model said, would not drive up interest rates. A tripling of the monetary base would not cause runaway inflation. Sharp government spending cuts wouldn’t free up resources for the private sector, they would depress the economy more than one-for-one, so that private spending as well as public would fall.

There are three things wrong about this. First, basic macroeconomics did not make these predictions. Second, Krugman – as he has done in the past – is saying that in liquidity trap situations exceptions appear and more importantly he knew it beforehand! Third, Krugman says Econ 101 notes the exception.

(Some great tactics to avoid saying that Econ 101 is garbage).

Of course some points should be given to Krugman because he has been saying things which are different from most of his colleagues but it is incorrect and thoroughly misleading and to say that Econ 101 survives the crisis.

*of course true that Macroeconomics is hard but read Luigi Pasinetti’s Keynes And The Cambridge Keynesians: A Revolution In Economics To Be Accomplished.

Trade Elasticities, Floating Exchanges And Debt Sustainability

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[Although the following is a response aimed at one comment, it can be read in general]

In my post on the connection between balance of payments and debt sustainability, I got a “you are wrong” comment saying the analysis is based on the notion of trade elasticities which doesn’t exist (or is a chimerical notion) and that I ignore floating exchange rates. So a reply.

Trade Elasticities

A standard observation is that imports and exports depend on income – domestic and in the rest of the world. Exports depend on how competitive the producers are in the rest of the world and also the demand in the rest of the world. Similarly imports depend on foreign producers’ competitiveness compared to domestic producers as well as domestic demand. So in a simple Keynesian model one writes:

IM = μY

where μ is the propensity to import. It measures imports as a proportion of domestic output. Relative propensities (between nations) measure relative competitiveness of producers. This is a very quick way to build a model for how stocks and flows change over time.

There is one simplification in this. Although it rightly captures the amount of imports during a period – such as a few years, it supposes imports rise one-to-one with output – i.e.,

ΔIM/IM = ΔY/Y

But in reality it could be worse – as the response of imports to a rise in domestic demand can be worse.

Also, it doesn’t capture the effect of prices. Producers across the world compete with each other on both the quality of their products and on price. So we have “non-price competitiveness” and “price competitiveness” . Now it is a Post-Keynesian observation that non-price competitiveness is much more important. So one has income elasticity of imports as well as price elasticity and the analysis can get a bit complicated. Some kinds of products have higher elasticities than others. For example manufactured products may have different elasticities as compared to raw materials, commodities etc. Also one can include nuances such as which is more important – income, expenditure, output etc.

Even more generally, the rest of the world consists of many nations and one has to be careful. So the rest of the world may be growing but it may happen that exports aren’t because exports are concentrated on one country or a group of nations which are not growing.

A good original reference is Joan Robinson’s article The Foreign Exchanges from her 1937 book Essays In The Theory Of Employment. 

Rather than going through the analysis, let me just show the plot of the United States’ imports to show that the concept of elasticity is far from chimerical as one observer claims.

The following is a scatter-plot of the logarithms of GDP and Imports for the United States since 1951 (quarterly). The data is from Federal Reserve’s Z.1 Flow of Funds Accounts.

US Imports Versus GDP

The thin grey line is the fit and in addition, there is a 45-degree line to show that the slope is different than 1.

The “elasticity” is supposed to capture the response of imports to a rise in expenditure/income/output. The above simple scatter-plot shows the relation is far from being random.

So much for the notion that trade elasticities don’t exist!

Of course, the elasticities can be improved and not god-given. A nation’s government can take some protection and/or invest in research and development because the elasticity is a supply-side concept. It can also be improved if producers learn how to improve their products and the quality of its sales force in marketing them in international markets. Still, the improvement depends on how well all these are carried out etc.

Now to floating exchanges.

Floating Exchange Rates

Now, it can be argued that a debt sustainability analysis is invalid because of floating exchange rates. If a nation’s currency floats, a depreciation of the exchange rate in the foreign exchange markets can improve the trade balance. While it is true that a depreciation can turn the balance in a nation’s favour because of price effects, it is doesn’t necessarily happen that way. Even if one assumes away J-curve effects, a nation can find itself in a balance worsening in spite of a depreciation. This is because non-price competitiveness is far more important than price-competitiveness. In fact there exists no reason how “market forces” miraculously resolve the imbalances by depreciating. In reality trade imbalances are kept from blowing up by adjustments to income.

It is one thing to say that depreciation can improve the trade balance (which has truth to it) and another to say it can do a miracle.

Now, coming to debt sustainability, one can still claim that this process can continue forever (i.e., net indebtedness to foreigners rising forever relative to gdp) without any trouble in the foreign exchange markets. That is something for another post but it is too much of a claim.

The Joan Robinson paper I quoted has the mechanism of how this ends up creating troubles in the fx markets.

The Beggar-My-Neighbour Game

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How did Keynes and the Cambridge Keynesians (such as Joan Robinson, Richard Kahn, Nicholas Kaldor and Wynne Godley) think the world economy works?

A few important principles relevant here and of course not exhaustive:

First, real demand, output and employment is determined by the fiscal and monetary policies of the government with the former having a more solid impact on demand. Second, fiscal policy has constraints due to the capacity to produce, and inflation. High inflation – although also influenced by demand – needs to to tackled by direct political means as it is also (highly) dependent on costs. Third, economies have a balance-of-payments constraint and a nation’s success depends crucially on how its producers perform in international markets.

For neoclassical economists and their cousins, world demand and output is determined by the supply-side. It is fantasized that with economic scarcity (as if!) utility and profit maximising behaviour of economic agents will lead to the most efficient allocation of resources and attempts to regulate trade will only make everyone worse-off. The amount of resources is “given” and interference with markets only leads to a lower output for that “given” amount of resources. Fiscal policy is neutral – although it is conceded by them that it can have positive short-term effect. Over the long run, fiscal policy is strictly neutral in this view. The prescription is for the government to balance the budget – sooner the better, and for monetary policy to either “control” the stock of monetary aggregates and/or for interest rate to return to some vaguely defined normal. Further, at an international level, the free trade ideology is imposed on nations because it is thought that it will lead to a convergence of incomes and living standards and full employment.

For example the WTO page on tariffs says:

Customs duties on merchandise imports are called tariffs. Tariffs give a price advantage to locally-produced goods over similar goods which are imported, and they raise revenues for governments. One result of the Uruguay Round was countries’ commitments to cut tariffs and to “bind” their customs duty rates to levels which are difficult to raise. The current negotiations under the Doha Agenda continue efforts in that direction in agriculture and non-agricultural market access.

Unfortunately, free trade, has the opposite effect. Rather than leading to any convergence, it leads to some nations gaining more success and others failing. As Nicholas Kaldor said, “success breeds further success and failure begets more failure.”

How does this operate? A government which wishes its nation to grow faster can put up fiscal policy but sooner or later will be faced with a balance of payments because of the adverse effect on trade and rising indebtedness to foreigners. This constraint shows up as troubles in the foreign exchange markets. This constraint is strongest for a nation whose currency is fixed irrevocably (such as the Euro Area nations) but also is also strong for nations whose currencies are pegged and freely floating.

Now, a nation which has good exports sees good economic expansion via the “export multiplier”. Imports on the other hand are “leakages”. Let us think of a Nation X with a higher propensity to import. Faced with higher imports, X may try to use fiscal contraction to further contract demand and hence imports. This has negative ripples throughout the world as a whole. Exporters to X will see a lower demand for their products – even if they maintain market shares. Via lower multiplier than otherwise, this leads to a lower demand than otherwise in the rest of the world. This again has a contractionary effect on X because of lower exports again leading to a lower demand in the rest of the world than otherwise and so on. So fiscal expansion and investment are good for the world as a whole but free trade is damaging. This is not to deny the benefits of globalization but a world with free trade will be worse-off than with a system of regulated trade which will have higher output, income and world trade since allows more space for fiscal policy and via an accelerator process, allows investment to expand faster.

Now, till recently the United States was acting as the “demander of the last resort” because of its huge imports. Faced with a high balance of payments deficit (in the current account), the United States neither wants to be in this position nor is going to expand domestic demand. It is as if the engine of growth has been cut off.

Faced with so many constraints, nations try to play the beggar-my-neighbour game. Unfortunately this game is also played by the creditor nations. The phrase was first introduced by Joan Robinson in a 1937 article titled Beggar-My-Neighbour Remedies For Unemployment. This excerpt is from beginning of the article:

For any one country an increase in the balance of trade is equivalent to an increase in investment and normally leads (given the level of home investment) to an increase in employment.1 An expansion of export industries, or of home industries rival to imports, causes a primary increase in employment, while the expenditure of additional incomes earned in these industries leads, in so far as it falls upon home-produced goods, to a secondary increase in employment. But an increase in employment brought about in this way is of a totally different nature from an increase due to home investment. For an increase in home investment brings about a net increase in employment for the world as a whole, while an increase in the balance of trade of one country at best leaves the level of employment for the world as a whole unaffected.2 A decline in the imports of one country is a decline in the exports or other countries, and the balance of trade for the world as a whole is always equal to zero.3

In times of general unemployment a game of beggar-my-neighbour is played between the nations, each one endeavouring to throw a larger share of the burden upon the others. As soon as one succeeds in increasing its trade balance at the expense of the rest, others retaliate, and the total volume of international trade sinks continuously, relatively to the total volume of world activity. Political, strategic and sentimental considerations add fuel to the fire, and the flames of economic nationalism blaze ever higher and higher.

In the process not only is the efficiency of world production impaired by the sacrifice of international division of labour, but the total of world activity is also likely to be reduced. For while an increase in the balance of trade of one country creates a situation in which its home rate of interest tends to fall, the corresponding reduction in the balances of the rest tends to raise their rates of interest, and owing to the apprehensive and cautious tradition which dominates the policy or monetary authorities, they are chronically more inclined to foster a rise in the rate of interest when the balance of trade is reduced than to permit a fall when it is increased. The beggar-my-neighbour game is therefore likely to be accompanied by a rise in the rate of interest for the world as a whole and consequently by a decline in world activity.

The principal devices by which the balance of trade can be increased are (1) exchange depreciation, (2) reductions in wages (which may take the form of increasing hours ot work at the same weekly wage), (3) subsidies to exports and (4) restriction of imports by means of tariffs and quotas. To borrow a trope from Mr. D. H. Robertson, there are four suits in the pack, and a trick can be taken by playing a higher card out of any suit.

1 See below, p. 159, note, for an exceptional case. [Note on p. 159: When the foreign demand is inelastic a tax on exports (as in Germany in 1922) or restriction of output (as in many raw-material-producing countries in recent years) will increase the balance of trade, while at the same time reducing the amount of employment in the export industries, and increasing the ratio of profits to wages in them. In these circumstances, therefore, an induced increase in the balance of trade may be accomoanied bv no increase, or even a decrease, in the level of employment.]

2 Unless it happens that the Multiplier is higher than the average for the world in the country whose balance increases.

3 The visible balances of all countries normally add up to a negative figure, since exports are reckoned f.o.b. and imports c.i.f. But this is compensated by a corresponding item in the invisible account, representing shipping and handling costs.

“Free Trade Doctrine, In Practice, Is A More Subtle Form Of Mercantilism”

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Dani Rodrik has written a very interesting article The New Mercantilist Challenge for Project Syndicate. 

Perhaps it is the main aim of this blog to argue how the sacred tenet of free trade is devastating to the world as a whole and why a sustainable resolution of a crisis can only be achieved by new international agreements on how to trade with one another combined with coordinated demand management policies with an expansionary bias.

Joan Robinson was one of the fiercest critics of free trade. A good appreciation of her work is by Robert Blecker in the book Joan Robinson’s Economics (2005)

Joan Robinson's Economics

Blecker says:

Robinson’s critique of free trade had several dimensions, including her opposition to the comparative static methodology usually employed to “prove” the existence of gains from trade, as well as her scathing criticism of the actual practice of trade policy by nations proclaiming their fealty to free trade while seeking mercantilist advantages over their neighbors. Robinson also thought that international trade relations were far more conflictive than they were usually portrayed by free traders

[emphasis: mine]

In her 1977 essay What Are The Questions? (which is full of quotable quotes) Robinson says:

A surplus of exports is advantageous, first of all, in connection with the short-period problem of effective demand. A surplus of value of exports over value of imports represents “foreign investment.” An increase in it has an employment and multiplier effect. Any increase in activity at home is liable to increase imports so that a boost to income and employment from an increase in the flow of home investment is partly offset by a reduction in foreign investment. A boost due to increasing exports or production of home substitutes for imports (when there is sufficient slack in the economy) does not reduce home investment, but creates conditions favorable to raising it. Thus, an export surplus is a more powerful stimulus to income than home investment.

In the beggar-my-neighbor scramble for trade during the great slump, every country was desparately trying to export its own unemployment. Every country had to join in, for any one that attempted to maintain employment without protecting its balance of trade (through tariffs, subsidies, depreciation, etc.) would have been beggared by the others.

From a long-run point of view, export-led growth is the basis of success. A country that has a competitive advantage in industrial production can maintain a high level of home investment, without fear of being checked by a balance-of-payments crisis. Capital accumulation and technical improvements then progressively enhance its competitive advantage. Employment is high and real-wage rates rising so that “labor trouble” is kept at bay. Its financial position is strong. If it prefers an extra rise of home consumption to acquiring foreign assets, it can allow its exchange rate to appreciate and turn the terms of trade in its own favor. In all these respects, a country in a weak competitive position suffers the corresponding disadvantages.

When Ricardo set out the case against protection, he was supporting British economic interests. Free trade ruined Portuguese industry. Free trade for others is in the interests of the strongest competitor in world markets, and a sufficiently strong competitor has no need for protection at home. Free trade doctrine, in practice, is a more subtle form of Mercantilism. When Britain was the workshop of the world, universal free trade suited her interests. When (with the aid of protection) rival industries developed in Germany and the United States, she was still able to preserve free trade for her own exports in the Empire. The historical tradition of attachment to free trade doctrine is so strong in England that even now, in her weakness, the idea of protectionism is considered shocking.

[emphasis: mine]

Joan Robinson - What Are The Questions

Joan Robinson (1981)
What Are The Questions? And Other Essays