The Box and economics

Posted on July 22, 2013 by Tommy McGuire
Labels: books
And now, for something completely different....

I was just reading The Box, by Marc Levenson, and ran across this:

The third intellectual stream feeding into this book is the connection between transportation costs and economic geography, the question of who makes what where. This connection might seem self-evident, but it is not. When David Ricardo showed in 1817 that both Portugal and England could gain by specializing in making products in which they had a comparative advantage, he assumed that only production costs mattered; the costs of shipping Portuguese wine to England and English cloth to Portugal did not enter his analysis. Ricardo's assumption that transportation costs were zero has been incorporated into economists' models ever since, despite ample real-world evidence that transportation costs matter a great deal.14

The real-world evidence he cites is:

In 1861, before the container was in international use, ocean freight costs alone accounted for 12 percent of the value of U.S. exports and 10 percent of the value of U.S. imports. "These costs are more significant in many cases than governmental trade barriers," the staff of the Joint Economic Committee of Congress advised, noting that the average U.S. import tariff was 7 percent.7

One of the claims Levenson makes is that containerized shipping reduced the costs of transportation, to the point that the friction of distance is effectively zero.

This brings to mind another economic construct, the Gross Domestic Product. When it was introduced in 1934, it explicitly did not, and does not today, include non-monetary activity such as the unpaid services of a stay-at-home wife. Since it is effectively the number describing the size of a country's economy, this means that anyone engaged in such activity is at best an economic non-entity and more likely a liability. Since the GDP was created, and possibly because of it, free full-time domestic services have gone from a common occurrence to a rare situation. The growth of the proportion of women working outside the home is one of the most important factors in the growth of the American economy in the last 60 years.

Now, what does this have to do with anything?

Over the last 200 years, economics has gone from complete irrelevance to mere total inaccuracy. How much of that is due to self-fulfilling prophecies like that of the GDP and how much due to technological and social changes like transportation? I don't know! But I'm sure there is a good book, perhaps not yet written, describing the process.

Notes, from The Box

7. U.S. Congress, Joint Economic Committee, Discriminatory Ocean Freight Rates and the Balance of Payments, November 19, 1963 (Washington, DC, 1964), p. 333.

14. David Ricardo, The Principles of Political Economy and Taxation (London, 1821; reprint, New York, 1965), pp. 77-97. Richard E. Caves and Ronald W. Jones point out that the widely taught Heckscher-Ohlin model, which shows that a country has a comparative advantage in producing goods that make more intensive uses of its more abundant factor of production, assumes that transport costs will not affect trade; see their World Trade and Payments: An Introduction, 2nd ed. (New York, 1977). More typically, Miltiades Chacholiades, Principles of International Economics (New York, 1981), p. 333, describes international market equilibrium under the unstated assumption that trade is costless.

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