Niels Jensen’s Absolute Return monthly newsletter raises one of the major structural impediments to growth in Europe:
As [economist Woody Brock] pointed out when in London, ageing has only had a modest impact on GDP growth and inflation so far. Governments have ruined economic growth in Europe; demographics haven’t. If employment laws are such that employment is virtually for life, companies stop hiring. If you can’t fire, you don’t hire, as Woody pointed out….
Similar impediments are evident in Australia. If developed economies want to compete in global markets, they need to get their house in order. Raising barriers to free trade is not a sustainable alternative but will instead destroy any remaining semblance of competitiveness. Trade barriers result in a limited choice of products, forcing customers to pay higher prices and accept inferior quality. Lack of competition leads to the death of innovation. Quality deteriorates and we soon face another zombie industry dependent on government support. A prime example would be the motor industry — in Europe, North America, even Australia — over the last half-century.
Many foreign-policy experts see the present international order as the inevitable result of human progress, a combination of advancing science and technology, an increasingly global economy, strengthening international institutions, evolving “norms” of international behavior and the gradual but inevitable triumph of liberal democracy over other forms of government—forces of change that transcend the actions of men and nations.
……But international order is not an evolution; it is an imposition. It is the domination of one vision over others—in America’s case, the domination of free-market and democratic principles, together with an international system that supports them. The present order will last only as long as those who favor it and benefit from it retain the will and capacity to defend it.
via Robert Kagan on Why the World Needs America – WSJ.com.
The idea of free trade is of course based primarily on David Ricardo’s 1817 theory of ‘comparative advantage’. Comparative advantage is a lovely little mathematical proof that even if one party is better at producing everything, the greatest efficiency in production can be attained, and all parties can benefit, if each trading party focuses on producing what they are relatively best at, and they trade freely with one another for the rest of what they need.
….comparative advantage does not take into account the costs associated with shifting a regions productive infrastructure from where it is now to producing what it is relatively best at producing.
Neither does comparative advantage take into account the costs of trade; the ports, the ships, the rail lines, the petrol. As well as the economic costs, we can also look at social and environmental costs in relation to both this and the above point.
….Considering these problems, I think it is fair to say that all that the mathematical proof of comparative advantage tells us is that it is possible for all parties to benefit from free trade, not that they necessarily will.
via Free trade's not free, bring back the tariff – On Line Opinion – 1/12/2011.