Pierce Cassidy

MGMT 561 Paper #3

Student: Pierce Cassidy Student Number: 322554 Class: MGMT 561 Due Date: Tuesday, October 25th

" ... if capital freely flowed towards those countries where it could be most profitably employed, there could be no difference in the rate of profit, and no other difference in the real or labour price of commodities, than the additional quantity of labour required to convey them to the various markets where they were to be sold. David Ricardo

Pierce Cassidy When David Ricardo originally coined the law of comparative advantage in 1817 in his book On the Principles of Political Economy and Taxation the global trading system and international economic framework were drastically different than they are today; in sum, his ideas had much more prevalence and applicability in the early 19 th century than they do in the 21st. As students pursuing our graduate business degrees, Ricardos theory of comparative advantage is a prime example of the old adage that learning is truly a lifelong process. This short paper will briefly examine the three pillars underlying Joshua Ramos Beijing Consensus and explain how Ricardos theory no longer holds applicable in our present day scenario. Chinas new Beijing Consensus is best captured by its author: Chinas new development approach is driven by a desire to have equitable, peaceful high-quality growth critically speaking, it turns traditional ideas like privatization and free trade on their heads it is defined by a ruthless willingness to innovate and experiment, by a lively defense of national borders and interests, and by the increasingly thoughtful accumulation of tools of asymmetric power projection.1 The Beijing Consensus is broken into three main parts: 1) developing nations should be using cutting-edge technology and constantly seeking innovation; 2) developing nations need to create new tools to deal with chaos (Chaos-Theory) with the primary developmental focus being sustainability and equality; 3) a theory of self-determination which stresses using collective and asymmetric leverage to remove hegemonic powers from exploiting the developing world.2 As world renowned economist Paul Anthony Samuelson pointed out particularly in regards to the concept of comparative advantage there is a great shortcoming in modern economics: What looks good in theory is often irrelevant in practice.3 Samuelson points out that the largest driver dispelling the theory of comparative advantage is the increasingly disruptive IT-enabled globalization; the modern day economic system which features an ever expanding exchange of goods produced by both blue collar (tradable goods) and white collar workers (knowledge-based activities).4 Samuelson highlights the fact that any individual, via the simple click of a mouse, has instant access to consultants, real estate agents, software programmers, librarians, medical technicians, financial analysts, and a myriad of professional service providers from major hubs scattered around the globe.5 The point to take away here is the diversity of options available in the list just provided notably, white-collar, knowledgebased jobs that were once deemed non-tradable services. In short, rich countries did not worry about losing their blue-collar manufacturing jobs to developing nations (India,
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Joshua Ramo, The Beijing Consensus (paper presented during a meeting at the Foreign Policy Center, London, UK, in May 2004.) 2 Ibid 3 Stephen S. Roach, The Perils of False Prosperity: China, America and a New Globalization (paper th presented for the Morgan Stanley clientele, April 18 , 2011). 4 Ibid 5 Ibid

Pierce Cassidy China, Mexico, etc.) because they could protect their white-collar industries. Unfortunately, the new reality is that the Internet has made this sheltering of certain industries impossible and is creating a wave of political backlash instead.6 In the final years of his life, Samuelson intertwined some of his mathematical formulas with Ricardos concept of comparative advantage and discovered that the United States could very easily experience a loss in real per capita income in international trade.7 The two main drivers fueling this possibility were the explosion of the Internet and the bounty of low-cost labour in nations like China and India.8 It appears that Samuelson was right on the money. Moreover, he was not alone in his predictions. The economist Paul Roberts points out a glaring flaw in the theory of comparative advantage, the system of global labor arbitrage, in which rich nations exploit the low-cost labour of developing nations (see: United States); this blatant system of exploitation is actually a form of absolute advantage.9 In short, the global economic system has changed drastically over the last two centuries, with two defining developments being the primary drivers: 1) the invention of the Internet which has made the trade of blue-collar and white-collar goods and services, in real time, available to virtually anyone with a computer and internet connection; 2) the awakening of developing nations with immense numbers of citizenry willing to work for much lower wages. In regards to the Beijing Consensus and Chinas vision of a peaceful and equitable rise, they may not exploit the global system to the extent of the United States, but there will be exploitation nonetheless (let us not forget that the Chinese government is arguably more secretive than the United States government). Moreover, the Internet is reaching the hands of more individuals around the globe each day and there is a new wave of developing nations whose citizenry is now awakening and willing to work for less than the Chinese. Ultimately, even with the best of Chinese intentions, Ricardos theory of comparative advantage does not hold nearly the same merit in our current global system as it did in 1817.

Ibid Ibid 8 Ibid 9 Global Labor Arbitrage: Dismantling America, last modified on July 28 th, 2004, http://www.vdare.com/articles/global-labor-arbitrage-dismantling-america
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