By Michael Garson
At most major national tournaments, there is an international economics round that challenge the knowledge and economic understanding of extempers. These rounds often are placed in earlier outrounds as a means of sifting out those who rely solely on delivery. Equally dangerous is smaller tournaments that sprinkle in economics-related questions throughout all rounds. Fear of “complex” economic theory has caused otherwise easy questions to be immediately thrust back into the envelope. An understanding of economics helps not just economics questions, but also creates an opportunity for increased depth in nearly all questions. Money is one of the powerful forces in the world, and people of all faiths, races, and nationalities worship the almighty dollar/yuan/yen/euro etc.
This brief will:
– Review basic economic theories that govern all financial transactions and philosophies
– Examine the merits of the major economic philosophies
– Define key terms and expand on their significance
– Critique the modern international economic system on the:
o National level, with countries engaging in risky business
o Institutional level, with organizations that supposedly can stabilize the global system
Basic Economic Theory
Invisible Hand
Arguably the most famous economic phenomenon has been described by economist Adam Smith. Smith’s “Invisible Hand” argument shows that money will flow to where it is the most profitable. This point is exceedingly obvious. People want to make money. Businesses want to make money. Economies want to make money. Investments, policies, and other economic decisions will be based on profitability. Though this idea is simplistic, it is a necessary prerequisite for understanding of all other economic issues.
Ricardo
David Ricardo expanded on Smith’s “Invisible Hand” with his writings on comparative advantage. He posited that economic entities will choose policies based on their specialty. People, businesses, and countries will increase production in areas that they are the best at. When separate bodies work on separate specialties and then trade for the other good, there is increased production of both goods.
Example:
It would take me 2 hours to write an international extemp brief and 5 hours to write a domestic brief.
It would take Logan 1 hour to write an international brief and 1 hour to write a domestic brief.
If we both created one of each it would take a total of 9 hours (7 for me, 2 for him).
If I created 2 international briefs, Logan created 2 domestic briefs and we traded, production would take a total of 6 hours (4 for me, 2 for Logan).
Here is the catch that many extempers, and AP Economics students miss: even though Logan (or the United States for a real example) is better than me in both areas, it is still in his best interest to specialize and trade. If instead of looking at hours necessary to produce, we could look at amount of production in a given time span. Again, trade benefits both parties when they specialize. We would set up a trade agreement (1 domestic for 1.5 international briefs) that would save both of us time and/or generate more briefs than previously possible.
Synthesis:
So we have established that money is going to flow to where it generates the most wealth. Also, the maximum amount of wealth is generated when everybody freely trades what they are most efficient at for what they are inefficient at. So if the United States has an advantage in white-collar jobs and supervisory roles, then American workers should fill those roles and find another country’s labor force (Mexico, China, India) to actually engage in production.
In case it has not yet been evident, this analysis best works in the theoretical realm where production choices are made between rainbows and bunnies. Alas, the world does not always work as it should. Fear, competition, and pressure all prevent the economy from working as Smith and Ricardo believe it should.
Natural Advantage v. Artificial Advantage
One of the important factors that complicates hypothetical economics is the difference between a natural advantage and an artificial advantage. While statistics show that country X has an advantage in producing product Y, there are two possible reasons for why that advantage exists: a natural one or an artificial one.
A natural advantage is one that makes production in a certain area inherently wise. It is in Saudi Arabia’s best interest to export oil and import ice. It is in Argentina’s best interest to export beef and import oil. These are the types of trades that Smith and Ricardo would approve of. Natural advantages revolve almost exclusively on natural resources. Geography also can play a factor. Greece is a good place for a strong merchant class because it is a high-trade environment due to its location. New Orleans (pre-Katrina) and St. Louis also was a great place for trade because of their proximity to the Mississippi River.
The other type of advantage is artificial. Artificial advantages exist as a result of economic inequality throughout the world. A steel company in Pittsburgh is able to survive because there are many areas nearby that require steel. A banker on Wall Street takes advantage of the New York Stock Exchange’s location by becoming artificially profitable. A Chinese factory owner uses low wages to boost the profit margin of his company at the expense of the labor force. These advantages are no less real or significant than those that are naturally occurring. However, it is important to recognize the difference because artificial advantages can be fleeting. If the demand for Chinese labor increases to the point that it rivals demand for American labor, the Chinese factory owner’s advantage disappears. A financial downturn in America’s rustbelt would cripple the steel worker’s attractiveness as an economic asset. While examining what countries have advantages, pay careful attention to WHY those advantages exist.
In an ever-changing global economy, artificial advantages will move from country to country and the significance of natural advantages will continue to be marginalized as transportation costs decrease.
Basic Economic Models
Liberalism
Influenced by Smith and Ricardo, liberal economic thought is predicated on free markets. Liberals view the world as a non-zero-sum game. This means that all parties can mutually benefit from trade. There is no malice or manipulation within the economic system. These are the economists who promote free trade. They believe that tariffs, quotas, and restrictions hurt all parties involved. The individual is of the utmost importance. Prices should be as low as possible and producers should be able to sell goods freely. The main sticking point of this ideology is that liberalism suggests that politics and economics are separate. It presupposes that all countries are willing to make any necessary sacrifices to achieve maximum growth potential.
Mercantilism
Mercantilism is a philosophy that suggests that the world is a zero-sum game. In other words, every gain is counterbalanced by an equivalent loss. When the United States’ economy improves, the Chinese, British, Japanese, and German economies lose, relative to the size of the American gain. Therefore, countries should not help each other, because it would be counterproductive to enhancing national power.
The only thing of value in the economy is precious metals. The Age of Exploration was largely spurred by a desire to increase holdings in gold and silver. As such, policies were put into place to preserve precious metals. The way to do so is to limit imports (stuff you buy from other countries) and increase exports (stuff people buy from you). The way to do so is using trade barriers such as tariffs (taxes placed on goods that enter a country), quotas (a maximum quantity allowed in of a certain good), and subsidies (the government giving money to businesses so prices can drop). These methods are antithetical to free trade, but do keep money inside state boundaries. The success of mercantilism is based on whether or not political power should take precedence over economic gains.
Trade Deficits & Budget Deficits
What they are
A trade deficit is the value of national imports minus national exports. The more a country exports, relative to its imports, the higher the deficit will be. Moreover, buying a lot of goods is only detrimental if an equal value of goods is sold. Conversely, a trade surplus occurs when the value of goods sold exceeds the value of goods imported. Note that the value, not quantity, of goods is significant. Selling ten apples for one car will result in a trade deficit.
A budget deficit is the value of government services minus the value of government revenues. Government services come in the form of programs like social security and projects such as roads. Government revenues are derived from taxes. When the government spends more money than it has to spend, a deficit results. If revenues exceed spending, there is a surplus.
What they represent
Deficits and surpluses represent the health and/or philosophy of an economy. Very strong economies, such as America’s can run high deficits. Likewise, weak economies, like many in Africa, can run high deficits. Running a deficit is not a sign of weakness. It is a sign that the country is using borrowed money to live above its expected standard. Surpluses also show neither strength nor weakness. They show an accumulation of value or currency that can be spent at a later time to grow the economy.
Why they are good
Deficits are good in that they improve the economic-well being of a country immediately. Also, deficits may be necessary for countries that fall on hard times. When the economy drops and tax revenue drops, the government needs to step in, increase spending, and drive up the deficit. Nearly all economists will agree that having a budget deficit to stop a recession is fine.
Why they are bad
Deficits are literal examples of spending money you don’t have and buying goods you can’t afford. The pressing danger is that countries with deficits will be unable to pay back their debts. Also, deficits tend to set a precedent and a pattern for more deficits. The trick with running in the red is that there are rarely small, short-term consequences. Instead, there are disastrous consequences that result from years of persistent deficits. The main trigger of deficit-related depressions is the realization of foreign investors that the government’s economy is no longer stable and the currency is artificially overvalued.
Currencies
What they are
Currencies are the vehicle which a government uses to represent value. At present, a dollar is little more than a green piece of paper with some numbers and a picture of a dead guy. During the 19th and 20th centuries, many countries moved to the Gold Standard. The Gold Standard means that each dollar (yen, yuan, pound etc.) would be backed by an equivalent amount of gold (1 ounce, .5 ounces etc.). America’s gold holdings were stored in Fort Knox and, theoretically, anyone in possession of a dollar could go to Fort Knox and get a fixed amount of gold. This system protected the value of currencies. However, it had two major drawbacks: quantity and variability.
First, there is a finite amount of gold but an infinite potential of value in any given economy. Economic growth would require either more gold or an increased value of the currency. The former is difficult and the latter is exactly what the Gold Standard is supposed to prevent. The second issue is that the discovery of a gold mine does not necessary mean that more currency should be circulated. Linking gold to economics puts a lot of stress of the gold market and creates a mercantilist illusion that precious metals are the primary indicator of wealth. Forcing currencies into representing a fixed value is simply not feasible. Currencies can appreciate (gain in value, relative to other currencies) and depreciate (lose value, relative to other currencies). The Gold Standard constrains movement to a degree that rapid changes occur instead of gradual fluctuations.
How they can be manipulated
Perfect economics dictates that all currencies can be traded freely against each other. As stated earlier, countries are always looking for a way to get an advantage on the competition. Currency valuations are no exception to this tendency. The objective of sabotaging states is to make the currency as cheap as possible when financially healthy and as strong as possible when in trouble.
A weak currency means that it is cheaper to invest in that country. For example, if I need to pay an American worker $10 but I could convert $5 into 50 yuan and hire a Chinese worker, I will do that. To be clear, an appreciating currency exists when a currency gains value on another. This means that instead of $1 buying 1 euro, it buys 2 euros. Therefore, a weak currency means that citizens within a country value foreign currency very highly. China has engaged in the policy of keeping its currency weak so that foreign investors will continue to find it artificially profitable to do business from overseas (this is a great example of an artificial advantage!). It did so by pegging its currency to the dollar. This means that one dollar always bought roughly 8.24 yuan. As the dollar became stronger, the Chinese government would engage in policies to make the yuan stronger. This peg brought stability to the Chinese economy and made investors confident enough to invest in China and use the yuan. However, the booming Chinese economy and American sluggishness since the bursting of the tech bubble has meant the yuan is excessively low. Demand for the yuan has increased greatly, but the value has not changed. This has meant that more people are getting their yuan and China continues to prosper. Two years ago, China announced that its currency will be allowed to float (change values) slightly and will be pegged to a “basket of currencies”, which would be the weighted average value of the dollar, euro, and other significant currencies. Despite small efforts to change, China is a great example of currency manipulation and how keeping a currency weak spurs investment, assuming that investors are confident enough to get involved in the first place.
The perception of strength is always desirable in economics. Pegs were devised as a sign of artificial strength. After all, any consumer and producer would rest easy knowing that the currency in their wallet was directly linked to a more powerful, stable currency. A failed peg example comes from Argentina. During Carlos Menem’s free-market revolution of the 1990s, he pegged the Argentine currency to the dollar. The system projected strength and stability for Argentina. Unfortunately, the growing dollar and weakening Argentine economy showed the peg could not be stable. The government tried to maintain the peg, by altering the supply of currency and the value of the economy, only worsening the situation. Finally, the Argentine economy collapsed as the currency was dumped. This example shows that the peg can be beneficial in the short-term but may prove to be impossible to maintain.
International Institutions
World Trade Organization
The WTO may be the most accurately described international organization today. The group’s goal is to increase trade relations among countries of the world. It was created in 1995 as the successor to the GATT (General Agreement on Tariffs and Trade). It strives to limit trade barriers and keep trade fair by instituting global agreements. Creating a global consensus on economic policy has proven to be extremely difficult.
The most recent round of international talks has been dubbed the Doha Round, named after the city in Qatar where the talks take place. The main sticking points have been tariffs, property rights, and protection of agriculture. As piracy of everything from DVDs to the latest medicine increases in developing countries, companies in the first world are losing valuable sales. To what extent the deal will be able to protect the integrity and authenticity of intellectual property is keeping countries apart. Also, agriculture has caused a lot of conflict. Many countries see food as a vital industry that serves national social needs and security needs. The culture of farms and small artisan cheeses and wineries is a part of France. The French wish to keep their farmers from competing with America’s larger farms that are cheaper. Food also is a national security issue. If free-market economics allow only a small handful of countries to produce all of the world’s food, then those countries have a disproportionate amount of power. Holding food hostage would be far more effective than threatening to stop production of DVD players.
Also, charges of dumping have arisen. Dumping occurs when countries intentionally makes its goods so cheap that they can be freely exported and dominate another country’s market. Subsidies to American farmers have made crops so cheap that farmers, particularly in South America and Africa, have complained that domestic farmers cannot competitive sell their products to the general public. Indeed, the very survival of small, tribal economies in poor countries is on the line when this issue is debated.
Ultimately, it looks like the Doha round is dead. The countries are very far apart and show no signs of budging. President Bush had Fast Track Trade Promotion Authority, meaning that he could sign an agreement without the consult of congress, until June 30, 2007. The additional obstacle of going through a congress littered with supporters of agriculture and special interests makes passage even more difficult. Overall, these talks continue annually, but are making little to no progress.
International Monetary Fund
The IMF is an organization that bails out failing economies. Its goal is to offer funding and planning for countries that enter a depression. While its goal is pure, the implementation has been questionable. The IMF usually provides very strict guidelines for measures that the government must undertake to be eligible for IMF funding. These measures often worsen the situation and breed resentment within the struggling state.
The IMF has been criticized heavily for how and why it acts. The organization’s power is distributed based on economic size, so America and its allies have a firm grasp on control. Many non-western countries that applied for aid claimed that they were being manipulated and westernized by the IMF. Additionally, the existence of the IMF creates a moral hazard, where negative consequences are not fully felt, allowing for risky behavior. International investors are always scooping around the world to find the next emerging market. However, when the IMF bails out investors who lose money when an economy collapses, there is no risk to investing in an unstable country. Yet another artificial advantage is created, allowing countries to undeservingly swell with foreign currency. While the IMF is far from perfect and in desperate need of reform, it certainly serves an important purpose of attempting to bail out troubled economies.
Global Economic Overview, Review, and Preview
Surely the past few decades have thrust us firmly into the information age. Money, information, and people can travel faster than ever thought possible. This rapid communication has allowed trade to increase, become cheaper, and create dependencies. Without Saudi oil, Japanese electronics, and South American fruits, this economy would not be the same. Every country relies on others to buy exported goods and supply imported goods. Economies have changed so that trade has been built-in part of economic planning. Economics is increasingly important and can be used for all sorts of political goals.
The United States uses its power as the world’s largest consumer to pressure countries in small, lopsided bilateral deals. The threat of tariffs and embargos have been used as a tool to coerce action out of rival states. China’s accumulation of foreign currency currently scares the United States and, along with the threat of war, keeps Sino-American relations awkwardly positive. Also, China has used economic power to demand countries formally state that Taiwan is not an independent country.
There also appears to be a failure of the global community to organize and compromise. The western agricultural lobbies are very strong and will not allow subsidies to be slashed. Likewise, the poor countries of the world have finally banned together to stand up to wealthy states. They have come too far to back down by allowing the status quo. They recognize the importance of global trade talks and will not sign a lopsided deal. Therefore, extempers would do well to research potential alternatives to global talks. Regional trade talks between countries that share similar interests but represent diverse sectors could help each other out. If each country was a part of one or two regional agreements, the world would be tied together by a few sets of fixed rules.
Cards:
Altman, Daniel. “Managing Globalization: Isolation is Not the Answer.” 30 Oct. 2007. International Herald Tribune. <http://www.iht.com/articles/2007/10/30/business/glob31.php>.
The International Herald Tribune is one of the rare newspapers that provides analysis in its articles. This one does not disappoint as it provides a concise, reasoned argument why free-market trade policies are beneficial. Altman cites other scholars in the field, which enhances his argument and deepens your own.
Blinder, Alan S. “Offshoring: the Next Industrial Revolution?” Mar.-Apr. 2006. <http://www.foreignaffairs.org/20060301faessay85209/alan-s-blinder/offshoring-the-next-industrial-revolution.html>.
Blinder suggests that offshoring is a bigger deal than most industrialized countries are willing to admit. It does get into how the concept of competitive advantages have modernized, which can provide great analysis to almost any trade-related speech.
Caplan, Bryan. The Myth of the Rational Voter: Why Democracies Choose Bad Policies. Princeton UP, 2007.
This book was released with quite a bit of publicity. The main contention is that Americans disproportionately vote against free trade policies due to irrational and overblown fears of unemployment, along with other, more domestic issues. It is an interesting read and books are always looked upon with favor in extemp.
Polaski, Sandra. “U.S. Living Standards in an Era of Globalization.” July 2007. Carnege Endowment. <http://www.carnegieendowment.org/publications/index.cfm?fa=view&id=19442&prog=zgp&proj=zted>.
This article offers solutions to America’s widening income inequality, which is really more of a domestic issue. Yet, it proves that international happenings have a domestic effect, adding another layer to an extemper’s analysis.
“US Urges China to Speed Up Currency Revaluation.” 12 Oct. 2007. Agence France Presse. <http://afp.google.com/article/ALeqM5hod65BP4j2DdMl4MYrAohXSlTzJg>.
This article is one of many that you can find that will shed light on how China’s currency tricks are being negatively received by the international community.