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Outstanding Interview of Paul Craig Roberts by World Affairs Monthly

World Affairs Monthly recently had some communication Paul Craig Roberts. Roberts worked for President Ronald Reagan and was Assistant Secretary of the US Treasury. I proposed an interview and he asked me to send him some questions, which I did. Paul Craig Roberts is clearly an honest man and a very impressive intellect. He can be found on the net at www.paulcraigroberts.org.

What would you describe as our real knowledge of “economic science” these days?

My latest book (2012), currently available only in the German language, is The Failure of Laissez Faire Capitalism and Economic Dissolution of the West: Towards a New Economics for a Full World. This book explains that despite the necessary modifications and additions made by supply-side economics to capital theory and to macroeconomic theory and policy, economics as it is known today is incapable of producing understanding or correct analysis on important issues. I will give two examples.

Economists mistakenly understand jobs offshoring as free trade and, thereby, assume that jobs offshoring benefits the economy. However, as I demonstrated also in my book, How The Economy Was Lost (2010), jobs offshoring is the antithesis of free trade. Free trade is based on the principle of comparative advantage, whereas jobs offshoring is the pursuit of absolute advantage.

When corporations move their production for their domestic markets offshore, it destroys domestic jobs and creates jobs for foreigners. Domestic consumers are separated from the incomes associated with the production of the goods and services that they consume. By moving jobs offshore, corporations bequeath to a foreign country the incomes associated with the production of the goods and services, the GDP and tax base associated with those incomes, and the careers associated with the jobs, and, thus, dismantle the ladders of upward mobility in their home country.

Economists who serve as shills for the offshoring corporations claim that offshoring results in more and better jobs in the US. However, as I have empirically demonstrated, there is no sign of such jobs in the BLS jobs statistics. For a decade or longer, the US economy has only been able to create jobs in lowly paid non-tradable domestic services, such as waitresses, bartenders, and hospital orderlies. These new lowly paid jobs have not kept up with population growth. Consequently, the US unemployment rate, if measured by the official methodology of 1980, is 22 percent.

When the goods and services produced offshore are brought back to the home country to sell, the trade deficit rises, which puts downward pressure on the exchange value of the domestic currency. The US has been able to tolerate this pressure, because the dollar is the world reserve currency. Nevertheless, year after year of large trade deficits in the end means a surfeit of dollars and a loss in value of the dollar.

I have also demonstrated, as have other economists such as Herman Daly, that the conditions that David Ricardo specified as the necessary conditions for free trade do not exist in the modern world. In addition, the most important work in trade theory since Ricardo, Global Trade and Conflicting National Interests by Ralph E. Gomory and William J. Baumol (MIT Press, 2000), shows that free trade theory was incorrect from the beginning. Gomory and Baumol conclude that “free trade is not always and automatically benign. . . . Roughly speaking, one country can improve its position only if the other country’s position is worsened.” Despite Paul Samuelson’s endorsement of the new theory’s main principle, economists have not yet absorbed this new work twelve years after its publication. We will return to jobs offshoring when answering a subsequent question.

The fact that America’s jobs have been moved offshore and are no longer extant in the US is the reason that the most expansionary monetary policy (zero interest rates and debt monetization) and the most expansionary fiscal policy (year after year of trillion dollar plus budget deficits) have had no effect. As statistician John Williams (www.shadowstats.com) has demonstrated, since the economy turned down 5 years ago, it has been bottom bouncing. There are no signs of economic recovery except in the GDP series which shows recovery in real GDP by understating inflation.

A more fundamental problem than economists’ ingrained misconceptions about jobs offshoring and free trade is the Solow-Stiglitz production function that is the basis of modern economics. The Solow-Stiglitz production function assumes that man-made capital is a perfect substitute for nature’s capital. This assumption means that there are no ecological limits to economic growth. When we run out of natural capital, man-made capital simply takes its place.

As Nicholas Georgescu-Roegen demonstrates conclusively, this assumption, which is the basis of modern economics, is “a conjuring trick.” Man-made capital and natural capital are complements, not substitutes. Production transforms resources into useful products and into waste products. Natural resources are what are transformed, and labor and man-made capital are agents of transformation.

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reedr3v's picture

He seems an honest and well-meaning

authoritarian. He believes in BigGov managing the economy "intelligently" and for the "benefit" of all. He truly believes in his vision and is quite put off by Obama and those who betray its purity.

It would be instructive for him -- and us -- to debate one of the Austrian heavyweights. He makes many basic mistakes in his assumptions about the existence and "failure" of laissez faire "free" trade.