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Asd 3, Here Is How Rich Countries Got Rich

Here Is How Rich Countries Got Rich

To an outsider this may sound strange, but the science of economics behaves like fashion.

It changes in cycles. As a man who has had to wear ties professionally, I observed that if I

stored my unfashionable ties long enough, they would sooner or later become fashionable again.

The main variable in men's tie fashion is the width of the tie. The main variable of economics

fashion is the level of abstraction at which the analysis is carried out.

With the Cold War, a very abstract version of neo-classical economics became fashionable again.

English economist David Ricardo, writing in 1817, established a theory of international trade that

was built on the barter (exchange) of labor hours. All labor hours in the world were assumed to be

completely identical. Armed with this theory, England could ‘prove' that it was in everyone's

interest that England, the first country to industrialize, should remain the only one.

England had a ‘comparative advantage' in industry, and the rest of the world

should deliver raw materials to England. However, during the 19th century, all countries

that became wealthy industrialized behind protective duties; against the recommendations

of David Ricardo. Only the colonies were left without industry. And thus, they stayed poor.

There are political motivations behind different types of economic theory. Ricardo's theories only

became popular again with the Cold War. When communism promised ‘from everyone according

to ability and to everyone according to need', capitalism, armed with Ricardo's trade theory,

could promise that the prices of labor would tend to become the same globally.

This very abstract theory – assuming that the ‘market' facing a 12-year-old shoe-shine boy was

the same as the ‘market' faced by Microsoft and Bill Gates – mathematically ‘proved' that if free

trade ran the world it would benefit everyone. However, the lack of any classification

system between economic activities had benefits for some and costs to others.

In sports, like wrestling and boxing, athletes compete in different weight categories.

If suddenly these sports would become like economics – with no categories – it is fairly

obvious that the heavyweight wrestlers and boxers would take most of the medals and the

athletes that weight less would be the losers. In economics the result was similar. It was

discovered in 1613 that by establishing just two categories of economic activities

one could explain the difference between rich and poor countries.

Category 1 was when one factor of production is determined by nature – in agriculture,

in mining or fisheries. Here, sooner or later, less fertile land and less rich mines

would have to be used, and productivity would fall. Category 2 was manufacturing industry,

where production could normally expand with significantly lowered costs.

In economics, the most technologically advanced countries would be in the position

of the heavyweight boxers or wrestlers. Since World War II that has been the United States,

and not surprisingly US economists have produced very sophisticated theories ‘proving'

David Ricardo's 1817 theory. They were the heavyweights. Now when China is

becoming the heavyweight, the United States elected someone who was against free trade:

Donald Trump. This is normal. The same thing happened when the previously most advanced

countries, first Holland, then England, lost out. They also became protectionist.

It is time for us to understand this mechanism and to

rediscover the less abstract versions of economic theory.

This is difficult, however, because in most universities the abstract versions dominate.

Here Is How Rich Countries Got Rich Here Is How Rich Countries Got Rich Así se hicieron ricos los países ricos Ecco come i Paesi ricchi si sono arricchiti 豊かな国はいかにして豊かになったか Como é que os países ricos ficaram ricos İşte Zengin Ülkelerin Nasıl Zenginleştiği 这就是富裕国家如何致富的

To an outsider this may sound strange, but  the science of economics behaves like fashion.

It changes in cycles. As a man who has had to  wear ties professionally, I observed that if I

stored my unfashionable ties long enough, they  would sooner or later become fashionable again.

The main variable in men's tie fashion is the  width of the tie. The main variable of economics

fashion is the level of abstraction  at which the analysis is carried out.

With the Cold War, a very abstract version of  neo-classical economics became fashionable again.

English economist David Ricardo, writing in 1817,  established a theory of international trade that

was built on the barter (exchange) of labor hours.  All labor hours in the world were assumed to be

completely identical. Armed with this theory,  England could ‘prove' that it was in everyone's

interest that England, the first country to  industrialize, should remain the only one.

England had a ‘comparative advantage'  in industry, and the rest of the world

should deliver raw materials to England. However, during the 19th century, all countries

that became wealthy industrialized behind  protective duties; against the recommendations

of David Ricardo. Only the colonies were left  without industry. And thus, they stayed poor.

There are political motivations behind different  types of economic theory. Ricardo's theories only

became popular again with the Cold War. When  communism promised ‘from everyone according

to ability and to everyone according to need',  capitalism, armed with Ricardo's trade theory,

could promise that the prices of labor  would tend to become the same globally.

This very abstract theory – assuming that the  ‘market' facing a 12-year-old shoe-shine boy was

the same as the ‘market' faced by Microsoft and  Bill Gates – mathematically ‘proved' that if free

trade ran the world it would benefit everyone. However, the lack of any classification

system between economic activities had  benefits for some and costs to others.

In sports, like wrestling and boxing, athletes  compete in different weight categories.

If suddenly these sports would become like  economics – with no categories – it is fairly

obvious that the heavyweight wrestlers and  boxers would take most of the medals and the

athletes that weight less would be the losers. In economics the result was similar. It was

discovered in 1613 that by establishing  just two categories of economic activities

one could explain the difference  between rich and poor countries.

Category 1 was when one factor of production  is determined by nature – in agriculture,

in mining or fisheries. Here, sooner or  later, less fertile land and less rich mines

would have to be used, and productivity would  fall. Category 2 was manufacturing industry,

where production could normally expand  with significantly lowered costs.

In economics, the most technologically  advanced countries would be in the position

of the heavyweight boxers or wrestlers. Since  World War II that has been the United States,

and not surprisingly US economists have  produced very sophisticated theories ‘proving'

David Ricardo's 1817 theory. They were  the heavyweights. Now when China is

becoming the heavyweight, the United States  elected someone who was against free trade:

Donald Trump. This is normal. The same thing  happened when the previously most advanced

countries, first Holland, then England,  lost out. They also became protectionist.

It is time for us to understand  this mechanism and to

rediscover the less abstract  versions of economic theory.

This is difficult, however, because in most  universities the abstract versions dominate.