In his Stockholm lecture, Nobelist Douglass C. North offered an explanation for the failure of economics to explain the processes of development. "There is no mystery why the field of development has failed to develop during the five decades since the end of World War II. Neoclassical theory is simply an inappropriate tool to analyze and prescribe policies that will induce development ... [The analysis contains] two erroneous assumptions: (i) that institutions do not matter and (ii) that time does not matter." (North, 1994)

The following rough calculation provides the background for considering the contradictions and deficiencies in economic theory as applied especially to economic development: The U.S. with five percent of the world's population consumes 25 percent of the world's energy. Therefore, if China, with 25 percent of the world's population is to reach the level of U.S. production, China will have to consume 125 percent of the world's energy. It will take only 35 years for this self-contradictory result to come about, assuming that China is at one-tenth our level of production and is growing at 10 percent annually while our growth rate is three percent.

Critics of this deduction will argue that technological progress and discovery of new resources will enable the world to escape the devastation implied by any substantial movement towards this apocalypse. But we should then point out that while technological change and discovery have, indeed, been ignored in the numerical illustration, so also have the increasing economic requirements of the remaining 70 percent of the world's rapidly growing population.

These observations are meant to underscore the fact that our political leaders, abetted by near-sighted economists, are pissing on the campfire and all the while the woods are on fire. Problems of economic development, especially as related to WTO, GATT and NAFTA, are impeded by faulty analysis. What we are offered as panaceas are slogans, which may be satirized as "Democracy and Free Markets will cure everything from bad breath to the hole in the ozone layer." Supplemental slogans are "We need only more GDP" or, most simply, "Jobs, jobs, jobs!"

Among the issues raised by GATT and NAFTA are those dealing with the free international movement of labor and capital. Economists have long known that in free markets, resources will flow to geographic areas where their returns are highest. Hence, labor will flee from lower wage areas to higher wage areas and capital, from lower rates of profit to areas with higher rates. And, indeed, we see this all the time, e.g., capital from the U.S. to Mexico and to other less developed countries (LDC) and labor flowing from Mexico and other LDC's to the U.S. And this new allocation of resources is optimal, that is, most efficient. But for whom is it optimal?

The trouble with this fairy tale of optimality is that an influx of foreign labor depresses wages in the U.S. and takes job opportunities from American workers.* It is remarkable that while economists are nearly unanimous in their consensus that an increased supply of something will lower its price, they are reluctant to apply this to the price of labor, that is, to the wage rate. We may note that their bias is symmetrical in the case of a rise in the wage rate. Thus many will argue that an exogenous rise in the minimum wage will not result in a decline in the quantity of labor demanded. But if a commodity price goes up many of the same economists will contend that the quantity demanded will fall.

*Footnotes and references are listed at the end of the article, on the next page.

Conclusion—»