Twofish's Blog

December 2, 2008

Trade riddle

Filed under: china, finance — Tags: , — twofish @ 6:42 am

One other characteristic of the post-BW I system was that, there was a lot of ad hoc evolution. I don’t think that anyone in 1970 could have really predicted what the world system looked like in 1985, and right now we are also sailing into the unknown. There is a limit to which you can design system, and most complex systems are more the result of ad-hoc evolution than intelligent design.

One important criterion for any workable system is “political viability.” You have to have some reason that the major actors go along with the system, and that reason could be either persuasion or coercion. The major actors are so interlinked that coercion for the most part is not an option. Coercion in the global economy is like threatening to push someone you are chained to off a cliff, and there are limits that you can threaten someone before you hurt yourself.

So you have to use persuasion, but then you run into the problem that people have different interests.

One should point out that one reason that Bretton Woods I cam into being was that after World War II, the United States was the only major power left standing and could dictate global economy rules. Bretton Woods I ended when this was no longer the case, and you had Europe and Japan with different interests.

Something similar happened with Bretton Woods II. For a brief moment in history, the United States could reshape the world in its image, but that moment is fast fading.


This is one big reason I don’t think that the current situation in which everyone is doing what seems to be in their interests is necessarily a bad one. You can come up with a system in which a Lenin or Mao comes to power and forces people to do the “right” things, but there is no assurance that those things are right after all.

Ying: Unfortunately politicians and businessman are too obsessed with zero-sum gain sort of thinking that they can’t get out of it.

Business and politics is all about making agreements that are positive for the people making it. You give me X, I give you Y, we both benefit. Figuring out what X and Y is quite tricky sometimes.

The trouble is that sometimes (and in fact quite often) you do end up with zero-sum or negative-sum situations. If it is positive sum, then it’s easy, you get people in a room and shake hands and make deals. But sometimes it isn’t. Or sometimes you have a deal that’s positive sum for the people in the room, but negative for people outside. Or sometimes you have a deal that is short term positive but long term negative, or you can have something that is short term negative but long term positive.


The other thing that I don’t understand is why people assume that the “optimal situation” between US and China is one in which you have zero trade deficits when no insists that this is the optimal situation between New York and New Jersey or even between France and Germany. My guess is that if you use some simple comparative advantage arguments, you’ll end up finding that impose an international trade constraint actually reduces total wealth generation. (This also nicely explains why there was such huge trade friction with Japan in the 1980’s. Since Japan and the US have similar economies, there is no extra wealth generated by comparative advantage so things do become zero-sum.)

I propose this as the solution to the riddle that if global balance is such as great thing, why are there so few people interested in having it.


1 Comment »

  1. Excellent, thought-provoking work.

    Comment by TH — December 2, 2008 @ 9:45 pm

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