Quotation of the Day…

by Don Boudreaux on November 17, 2011

in Complexity & Emergence, Growth, Myths and Fallacies

… is from page 32 of Daniel Cohen’s odd but useful 2006 book, Globalization and Its Enemies (which is the translation, by Jessica Baker, of his 2004 book, La Mondialisation et ses ennemis):

There is no convincing proof that returns to capital in the form of profits are greater in poor countries than in wealthy countries.  Far from then observing a tendency for international capital to flow toward the South, it is shown that capital has a much greater tendency to leave the South and go to the North.

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Invisible Backhand November 17, 2011 at 12:47 pm

Can you post the rules for when you limit posts so us law abiding Invisible Backhands can plan accordingly?

Invisible Backhand November 17, 2011 at 1:11 pm

Don, please excuse the silly, false accusation implied by my other personality, Irritable Bowel. Dr. Muirgeo gave him another laxative instead of the needed sedative. I am not sure why mother keeps calling Dr. Muirgeo. Well, back to our basement.

With Warmest Personal Regards,

Invisible Backhand

Gil November 18, 2011 at 12:47 am

Sockpuppetry is wrong when the other guy does it.

Invisible Backhand November 18, 2011 at 5:29 pm

Help! I’ve fallen and I can’t get up! Help! I need daddy to set rules — not for me (since I am, in my own opinion, “law abiding”), but for everyone else — so that others don’t attack me the way I attack Don, Russ, Hayek, Friedman, Mises, Caplan, Horwitz, Hazlitt, and all other freedom-loving neoliberals!

vikingvista November 17, 2011 at 12:55 pm

Capital investment increases productivity increases return on investment increases capital investment? A positive feedback loop? But wouldn’t such a self-reinforcing loop potentially cause an explosion of economic progress–a revolution of sorts? Like, say, an industrial revolution (to coin a phrase)?

SmoledMan November 17, 2011 at 1:59 pm

or a 2nd Industrial Revolution, or a Digital Revolution? Damn so many peaceful revolutions that improve people’s lives instead of mass murdering them!

vikingvista November 17, 2011 at 2:04 pm

Yeah, but revolutions devoid of human slaughter are not fair or well-intentioned, so…

Invisible Backhand November 17, 2011 at 2:01 pm

Far from then observing a tendency for international capital to flow toward the South, it is shown that capital has a much greater tendency to leave the South and go to the North.

While some may find that a problem (I don’t), the capital flows themselves are the problem:

The unstable flows indicated that capital movements were in themselves destabilizing. Containing and limiting capital flows could thus limit the scope for the international transmission of crises. A check on capital movements had also opened the way for the management of monetary and fiscal policy in a distinctly national context. These ideas about limiting capital mobility were at the heart of the settlement reached at the 1944 United Nations monetary conference at Bretton Woods, and remained the guiding principles of international economic management during the first two and a half postwar decades.

The Creation and Destruction of Value: The Globalization Cycle, Harold James

Invisible Backhand November 17, 2011 at 4:58 pm

Can anyone think of a recent crisis transmitted internationally? Anyone? Bueller?

Ferris Bueller November 17, 2011 at 5:20 pm

Yo! Hey, what do you want?

Cameron November 17, 2011 at 5:24 pm

I’ve decided not to let you drive my dad’s car.

Ferris Bueller November 17, 2011 at 5:33 pm

It’s not his car anymore. It belongs to the people. And, as one of the people, I will drive it whenever I want.

GiT November 17, 2011 at 2:20 pm

Would this suggest against the convergence hypothesis, or am I misunderstanding what the quote means? If so it’s somewhat discouraging.

Jon Murphy November 17, 2011 at 2:43 pm

I think you are misunderstanding.

The fallacy is that you can make more profit in a poor country than you can in a rich one because inputs (labor, land, etc) are cheaper than rich countries. However, this tends not to be the case. In fact, because of the catch-up effect, as capital flows into a poorer area, the price of inputs (wages, rent, etc) increases, thus driving down profits. Look at China, for example. For the US before that.

Jim November 17, 2011 at 2:59 pm

This explanation doesn’t entirely refute profits being higher in poor countries. It is only after the prices for inputs are actually driven up that profits are not higher. Until then, by this argument, they are higher.

Is there more to the argument than was given here?

Jon Murphy November 17, 2011 at 3:07 pm

Yes, but I am at work right now, so I can’t really give the detailed answer I would like suffice to say look up wage equalization theory. I’ll post a better answer tonight

kyle8 November 17, 2011 at 9:29 pm

The thing is that the profits can be fairly high, and the growth rates enormously high in poorer countries. Depending upon which stage of industrialization they are at.

Josh S November 18, 2011 at 10:05 am

I wonder if a related problem is that poor countries are poor because they have tyrannical, corrupt governments that loot productivity wherever they find it. For example, if I had any capital whatsoever and lived in Russia, I would be desperate to find a place to invest it where success wouldn’t get it expropriated by Putin’s gangster government.

jpm November 17, 2011 at 7:46 pm

oh for Pete’s sake. Profits are inherently lower in poorer countries across the board by definition. “poor” is “lack of capital”. rofits higher when you dig ditches with bulldozers, not spoons?

Raghav Aras November 18, 2011 at 3:32 am

Daniel Cohen was invited by France Television (the national television broadcaster) last year to make a documentary film explaining to the general public the causes of recent problems in the housing and financial markets. As a representative of the common man, France Television chose Pierre Arditi, a successful actor from Paris.

Cohen’s film was a most inaccurate, incorrect and unlettered exposition on the subject. A great lie in fact. His villains were the free markets (for the first time I saw Milton Friedman on French TV, and it was in a terrible caricature), his heroes Government control. He reported to the French people that their problems began in the 1980s, from the actions of Ronald Reagan.

A great country like France, with a love for truth and logic in everything, and today its Government invites well paid, well educated men like Cohen and Arditi to offer the French people poor, archaic and false ideas about the world.

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