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A constitutional economic policy - Part 4
The opportunity costs of comparative advantage

Hector McNeill1

Adam Smith (1723–1790) wrote of "absolute advantage" of countries in trade and David Ricardo (1772-1823) of the "comparative advantage" of countries specializing in the production of those products supported by their natural endowments of natural and human resources. The combined work of Eli Heckscher (1879–1952) and Bertil Ohlin (1899–1979) gave rise to the Heckscher-Ohlin theory of comparative advantage which Wassily Leontief (1905–1999), on the basis of detailed evidence showed that in practice this did not apply to the USA which in spite of being a capital intensive economy was exporting more labour intensive goods than those imported. This created the "Leontief Paradox". Just to add to this mix, I need to record that Walt Rostow (1916-2003) published his "The stages of economic growth" in 1960.

The contrast between theory and practice has been immense, largely because the opportunity costs of adhering to the theory of comparative advantage has created distortions of over-dependency based on a fatalistic inevitability of theories of economic progress which have raised the opportunity costs involved.

This note explains aspects of this problem which are now more apparent and relevant to the wellbeing of constituents.

Behind the curve theories

Our economic theories have become intellectual institutions. Institutions as Thorstein Veblen (1857-1929) observed are fashioned according to past events and knowledge and therefore are never in tune with current realities. One of the intellectual gaps in Keynesianism and Monetarism (KM) theory and practice is the absence of adequate reference and inclusion of the fundamental source of 60%-70& of economic growth in the form of learning by doing, the accumulation of tacit and explicit knowledge and innovation leading to changes in technology and techniques and rising productivity.

Japan in 1980 attempted to seize the opportunity to become the world's leading 5th generation economy based on knowledge engineering or AI. Their initiative failed because they used very young motivated IT experts who did not have the tacit or practical knowledge of "how the economy works". This is why in a separate MITI programme on robotics involving industrial engineers who possessed the tacit and explicit knowledge based on experience, led to Japan leading the world in industrial robotics, even today. The USA and EU ran 5th generation programmes which also did not take us beyond the capacity of the IT industry following its normal evolution of innovations responding to industry and consumer needs.

The dead weight of theory

In the early 1960s, Kristen Nygaard (1926-2002) and Ole-Johan Dahl (1931-2002) created an object oriented logic to create practical, that is realistic, simulation programs capable of addressing the natural heterogeneity in human activities and nature and produced the first simulation program SIMULA 1, followed by other versions. Object Oriented Programming (OOP) was a spin-off. Bjarne Stroustrup, from Denmark, started his development of the C++ language in the in the 1970s and brought the key concepts of Simula into the C programming language based on his doctorate work at Cambridge University2. However under the suffocating tendency of the academic community to theorize the specific practical benefits of OOP were lost and OOP ended up as "another programming paradigm" as opposed to an effective basis for analysing and simulated reality in decision analysis models, so as to take effective practical decisions upon which to base commitments of resources3.
“… there is absolutely no inevitability as long as there is a willingness to contemplate what is happening.”

“The Medium is the Massage” Mashall McLuhan & Quentin Fiore Bantam, 1967
If one looks at programming manuals, OOP is an "option" and very seldom is any reference made to why this option is of specific practical significance. The OOP story was repeated later, as explained, in the Japanese ICOT programme into 5th Generation development.

The conclusion is that the tendency to theorize without adjusting theories to the evidence before us and without involving the main stakeholders in the process such as experienced practitioners in each sector it becomes difficult to understand where practice is taking us on the technological front. As a result an elaborate process becomes a direct source of misdirection of decisions in economic practice.

Walt Rostow (1916–2003) published his stages of economic growth in 1960 where he completed a historic analysis of the growth and he concluded that there were four stages as follows:
  • The traditional society
  • The preconditions for take-off
  • The take-off
  • The drive to maturity
In this process, economies moved from mainly agricultural, through industrial to services or a mixture of both. Again economic theorists took this on board largely failing to cast a critical eye on this theory and to take this "transition" as inevitable and even taught this inevitability as a basis for determining the level of development of countries; in theory of course.

Moving towards practical economic policies

In 1990 I was involved in digital device design at Advanced Silicon Compilers who were provided with a grant from the UK government to survey companies in Hampshire county on their interest in participating in an "Onshore Engineering Initiative". The objective was for companies to develop alternative technologies so as to reduce the export of UK industrial jobs to South East Asia. At that time, post slumpflation unemployment was still high and there was a need to initiate a process to bring back critical tasks to the UK on a competitive basis. Out of 100 companies contacted, one asked for a meeting. The individual who turned up did not know what the issue was and he had no decision making power and, in any case, had only come because the company concerned was curious as to what all this was about. This was when Japan was beginning to advance their robotics industry. With a different attitude and policy environment the UK could have done the same.

Even in 1990 the advances in automatic mounting were advancing. 3D printing did not yet exist but quite advanced proposals for the development of flat screens did not receive any government or EU funding support. There were, therefore, a series of bad decisions founded on the ignorance of decision makers, especially in the area of economic policy making linked to industrial innovation, because they were relying on theories perfected in a period long before the current capabilities of state-of-the-art-technologies could even be imagined.

I have commented how the information revolution has undermined criticisms of sound economic propositions based on the then difficulties in oversight and access to necessary information which today can be achieved with quite simple cloud-based programs. A case in point were the criticisms of Arthur Pigou's (1877–1959) tax to reduce externalities created by polluting industries, made by Ronald Coase (1910-2013) and Ludwig von Mises (1881-1973) on the basis the required information to administer it did not exist. Mises and Coarse were right at the time but now Pigou has been proven to be right and his critics wrong, not because they were wrong at the time but rather that the locational-state of affairs through space-time has transformed our reality and capabilities as a result of the IT and information revolution. This constant evolution in our state-of-the-art capabilities - by that I refer to currently proven feasible processes - are contributing to a major alteration in the theories on comparative advantage and inverting the theories derived from Walt Rostow's stages of economic growth. The reality is that the opportunity costs of relying on a theoretical comparative advantage that existed in a technological era of just 20 years ago, are beginning to distort decision making and represent a prejudice to our economy created by an unnecessary over-dependence on an international trade policy that is losing its practical relevance and economic justification.

Over the last 50 years the UK has exported a significant number of jobs offshore but has accepted the "inevitability" that we will become a service economy wholly dependent of cheap imports of manufactured products. In terms strategic security, this was always a doubtful proposition and even more so where our own foreign policy has contributed to global instability. This started with the government's commitment to the Iraq war leading to the instability in the Middle East and north Africa and the asylum seeker crisis leading to the cascade of illogic, giving rise to BREXIT. Somehow, the EU was blamed for the pockets of depression in our formerly industrial zones and that BREXIT would solve this problem; there never was any evidence for this. However, Covid-19 has had the effect of focusing minds on the reality of our currently precarious economic state of affairs.

We need practical economic policies that raise real incomes by inverting what were accepted to be inevitable trends of the UK as being a nation of service providers, shopkeepers, pub owners and restauranteurs, to accelerating our movement into industries were we have, in reality, a comparative but not an absolute advantage.

1 Hector McNeill is the Director of SEEL-Systems Engineering Economics Lab.

2 Internal note SEEL's "Seel-Telesis Decision Analysis Programme Agenda 2020-2025" August, 2020.

3 McNeill, H. W., "The State-of-the-Art & Future of Decision Analysiss", GBF, HPC, release Q4 2020.

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