@Capital_Room comments on "Culture War Roundup for the week of March 3, 2025

Culture War Roundup for the week of March 3, 2025

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Capital_Room rather dementor-like 25d ago

It seems to be a clash of different type of worldviews, one being the so called industrial policy, which is a policy where a nation creates favorable environment to grow domestic behemoths and grow their domestic economy. There are multiple examples of countries employing this type of policy such as South Korea, China or even Japan back in the day.

On the other side of the spectrum you have standard economic theory in favor of free trade. It has formidable range of theories for why this is ultimately the best policy, the most important one being the concept of comparative advantage.

On this debate, I recently read this lengthy 2017 American Affairs article, which I found pretty good for firming up and supporting a number of my views on this issue, particularly "free trade" as perhaps the archetypal example of economists succumbing to "the Ricardian Vice."

The bit that was particularly new for me, and thus stood out, was the bit about The Atlas of Economic Complexity and diversity beating specialization due to development spreading via "proximity":

Thus, although they claim to be experts on the effects of trade policy and argue almost unerringly for liberalization over protection, economists have not yet even asked the questions that are crucial to the real-world impact of trade liberalization: what does it do to the level and distribution of output, income, and employment?

Given that economists have not even considered these issues, it is not surprising that other researchers who have done so have reached conclusions that are diametrically opposed to the biases of economists. By analyzing the enormous Standard International Trade Classification database of international trade flows, data scientists at Harvard University, working on what they have christened The Atlas of Economic Complexity,19 have found that diversity, rather than specialization, leads to national success in international trade.

Their methodology was to classify products on the basis of their “ubiquity,” which they defined as how many countries exported the product, and countries on the basis of “diversity,” which they defined as how many products a given country exported.

…

The message that comes through loud and clear in this empirically grounded analysis is that, for countries to succeed at both growth and trade, specialization is essential at the individual level, and diversity matters at the level of the nation-state:

The researchers used the measures of ubiquity and diversity to develop a composite index they called “complexity,” which quantified “the amount of productive knowledge” products and economies contain.23 This complexity metric correlated well with living standards—with countries like Japan and Switzerland at the head of the 2015 index (at 2.47 and 2.18 respectively) and Papua New Guinea and Nigeria at its tail (–1.81 and –2.18 respectively). But movements up the complexity scale also correlated strongly with improved growth performance:

An increase of one standard deviation in complexity, which is something that Thailand achieved between 1970 and 1985, is associated with a subsequent acceleration of a country’s long-term growth rate of 1.6 percent per year. This is over and above the growth that would have been expected from mineral wealth and global trends.24

The success of this index in predicting which countries are likely to outperform growth expectations in the future was related to the role of product diversity within a country, which enable new products to be invented. The authors of The Atlas found that a country was more likely to develop a new product if the country had other industries which were close to that product in a third metric they called “proximity.” Technically this was measured as the likelihood that a country exported one product given that it exported another; practically, it indicated that invention of new products required knowledge of existing, closely related products. A country with a diversified export profile (and by implication a diversified industrial base),25 rather than one with a specialized portfolio, is more likely to have the product proximity that allows new products to be invented and the economy to grow.

These empirical findings also cast a very different light on the populist revolts that are currently disturbing the pro-globalization consensus, which has dominated economic policy for the last thirty years. These revolts are not unthinking reactions against rationality, as mainstream economists like to believe, but reactions to the failure of the real world to conform to the irrational thinking of economists, and the damaging policies that have been imposed by politicians following their advice.

Thirty years of trade policies pursuing the false promise of specialization have meant that residents of the Rust Belt states of the United States, and the economically depressed regions of the United Kingdom, can now compare the promise of globalization with the reality. They voted against globalisation, not because they were too intellectually limited to perceive its benefits, but because experience gave them the lens through which to reject the Ricardian Myth of the advantages of national specialization.

Policymakers should too. The empirical research that underpins The Atlas of Economic Complexity—as opposed to the armchair speculation that has characterized the development of economic theory—provides strong guidance on how to achieve economic development. It starts from an understanding of where the increased prosperity of the last two centuries has come from. It has not come from specialization in the allocation of existing resources, but from acquiring and developing new knowledge over time:

During the past two centuries, the amount of productive knowledge we hold expanded dramatically. This was not, however, an individual phenomenon. It was a collective phenomenon. As individuals we are not much more capable than our ancestors, but as societies we have developed the ability to make all that we have mentioned—and much, much more.26

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