"The Greatest Gift that Economic Wisdom Ever Bestowed on Humankind"

Clive Crook in the October issue of the Atlantic (only an excerpt available free online) looks with distress on a recent trend of major public economists turning their backs on the wisdom of international free trade. His conclusion:

[Paul] Samuelson once regarded the principle of comparative advantage--the modern theory of the gains from trade--as nontrivial. I would go a little further and say it was the greatest gift that economic wisdom ever bestowed on humankind. In a way that Samuelson did not envisage, the doubts that he and others have expressed threaten to make that idea trivial after all--dismissed as nothing more than an arresting curiosity, apt to be oversimplified by blinkered pro-trade types, with no real policy content and no claim on politicians' attention. What a tragedy that would be.

In our July 2004 issue, contributing editor Brink Lindsey offered "10 Truths About Trade."

Comments

[GinSlinger]

I agree with Timothy.

[carrick]

Damn, and I just found out we don't care about first posts ;-0

[John]

Hold it, you mean economists disagree about this sort of thing? I thought Brian Caplan told us that there is only one economic orthadoxy and that anyone who disagrees with it or votes contrary to it is "irrational".

[GinSlinger]

Counter Intuitive Trade

[The Artist Formerly Known as T]

Carrick said:
"Damn, and I just found out we don't care about first posts ;-0"

Me too, but I found out the hard way. However I did find out that Hiro Moonbat & I are "kindred souls", so that was kinda sweet.

[joe]

Saying the Theory of Competitive Advange refutes these economists' criticisms is like saying that the Laws of Thermodynamics make it impossibe to start a fire, or that the Theory of Gravity makes it impossible for a craft heavier than air to fly.

Here's a head's up: when an aeronautical engineer says he can design an airplane, he's not wrong, even if the first chapter of your physics book makes you think he is.

[fyodor]

joe,

Doest the Theory of Gravity also say you can't jump?

Belief that flight was impossible actually predates Einstein's insights into gravitational forces by a longshot.

That said, I'll take your point that maybe economists who condemn free trade are not really dismissing the reality of comparative advantage. I'd have to read their arguments to know for sure. But, as my use of italics indicates, I'm skeptical that these folks are not just putting aside what they should know for political expediency.

[Aresen]

In a way that Samuelson did not envisage, the doubts that he and others have expressed threaten to make that idea trivial after all--dismissed as nothing more than an arresting curiosity, apt to be oversimplified by blinkered pro-trade types, with no real policy content and no claim on politicians' attention.

This sentence is so badly constructed that it is possible to read it as the exact opposite of what the author intended.

The politicians want to dismiss it as trivial.

"Pro-trade types" most certainly do not.

[NP]

What's to be so "distressed" about this trend? Just calm down and let the economy prove the doomsayers wrong. There's no need for us to take upon ourselves what history will do for us.

[fyodor]

NP,

One shouldn't care if people who should know better are spreading fallacious ideas because "history" will prove them wrong?

Alfred E. ("What me worry?") Nuemann would be proud of you!!

There's consequences to what these folks are saying and history can take a long time to "prove" something, especially if those with the education to interpret it properly are not doing so!

That said, no one has any obligation per se to worry about anything at all that's not his direct personal responsibility, but your reasoning for forsaking distress on this particular issue is hardly consistent with any sort of interest in public policy. Yeah, sometimes I'd just as soon skip to the sports page, but meanwhile....

[Ken Shultz]

"...apt to be oversimplified by blinkered pro-trade types..."

When we get to the point where the idiot masses are doing real damage to our economy with their blind, pro-free trade bias, somebody please point it out to me.

[MikeP]

The challenges to the theory of comparative advantage that are posed by economists are not refutations. Even 'doubts' is too strong a word. They are theoretical cases where it can happen that extremely well managed protectionism can lead to greater wealth for the protecting economy.

But these are thin margins to be gained by precise protectionist measures delineated by unclear metrics. And that isn't even worrying about whether the political process can get anywhere close.

Grasping these ephemeral theoretical exceptions to free trade is sad, but to be expected from politicians. From economists, it's harder to accept. It takes us back to the days when planned economies were all the rage...

[mitch]

How many times has joe unleashed his "the laws of physics don't prevent an airplane from being built" chestnut on us now? It's becoming a major part of his repertoire.

[NP]

fyodor,

I guess I should've added a few more words to my last post. I didn't mean to imply that we shouldn't remain vigilant against needless governmental policy. I'm just saying we worry about it more than we should, at least in this case.

I say this because there's a lot more consensus in economic issues than in, say, those involving civil liberties. Take the PATRIOT Act, for example. As long as we are waging this "war on terror," many reasonable people will disagree on how much freedom should be sacrificed for security, so it is vital for us to speak out in favor of civil liberties when a great number of the populace would say otherwise.

But economics is a different matter. No matter how enamoured progressives may be with "fair trade," they're not likely to push for full-out protectionism. Most of 'em understand the benefits of the market; they just would like a few small-scale governmental interventions in trade, which, by the way, will have limited effects anyway. So I say, let them voice their opinions, and if history is any guide the economy will prove them wrong. This is all I wanted to say.

[prolefeed]

No matter how enamoured progressives may be with "fair trade," they're not likely to push for full-out protectionism. Most of 'em understand the benefits of the market; they just would like a few small-scale governmental interventions in trade, which, by the way, will have limited effects anyway.

Screw things up one piece of Fabianist legislation at a time, pretty soon you're talking about real damage.

It's fine for economists to talk about in theoretical terms how it is possible to eke out tiny theoretical advantages from carefully limited protectionism if we have all-wise, all-knowing, angelic politicians -- so long as they include the disclaimer that in every case it has been tried, protectionism ran up against real-world politicians who made things worse, sometimes catastrophically so.

[NP]

prolefeed,

Yes, but I think you're ignoring also how much progress there has been over the years. (For a quick view check out the Brink Lindsey article Brian links to.) And again, we aren't likely to see the kind of "Fabianist" protectionism anytime in the future. I mean, just look at the self-proclaimed democratic socialist governments in Europe. How many of them are actually "socialist" in ecomonic matters? I rest my case.

[joe]

Economists are not increasingly coming out with more nuances takes on globalization because of esoteric, theoretical exercises, but because the actual effects of Free Trade, Inc., haven't matched previous predictions.

The data on job and wage growth aren't matching the old theories, so they're working on new theories. The "proving" that's going on here is that those theories were too simplistic.

[NP]

joe,

I'm actually open to suggestions that free trade may not be the alpha and omega of the market system. I'm just not sure that government interventions can have cure whatever shortcomings of free trade.

One amusing anecdote by Paul Krugman: When he was asked what impact the NAFTA will have on employment, he answered triumphantly, "None." In a similar vein free marketers would probably argue that whatever the feds try to accomplish will be just as effective.

[Brandybuck]

...but because the actual effects of Free Trade, Inc., haven't matched previous predictions.

But we don't have "Free Trade, Inc." What we have is a managed trade. Fortunately, it's less managed that what we had before, and actually approach "free" if you squint hard enough.

Regarding predictions, there's a whole school of economic thought out there (the Austrians) that rejects empirical methodology, because absolute predictions are impossible due to the inordinately large number of variables, human behavior, etc. I don't entirely agree with them on this, but they do have a point. There are a myriad of forces at work in the economy that affect jobs and wages, and the policies affecting them have been changing during the prediction period.

You cannot claim free trade has failed because 1) we don't have free trade; 2) you don't have anything to make an "all things being equal" comparison with. I don't know who made the specific prediction you were referring to, but he was foolish to make it. As foolish as an ecologist making and exact prediction of caribou population levels in the arctic ten years in advance.

[Aresen]

there's a whole school of economic thought out there (the Austrians) that rejects empirical methodology, because absolute predictions are impossible due to the inordinately large number of variables

This is precisely why managed economies don't work. There are of the order of 10^6 variables involved. (And, due to innovation, the number is constantly increasing.)

No mathematician or computer can solve a minimax equation with that number of variables.

[JasonL]

Reading Timothy's case that small careful trade restrictions can improve the welfare of the protected at everyone else's expense makes me scratch my head when I consider what it looks like when every other country does the same.

At the end of the day, when everyone's protectionism in response to yours is accounted for, how does the local benefit remain in tact? Don't you just wind up eating the loss on some widget someone else tariffs at some advantage to themselves and at your expense?

[Russ R]

joe:

"The data on job and wage growth aren't matching the old theories..."

This may initially sound preposterous, but economically speaking, more jobs and higher wages aren't always a good thing.

Jobs aren't economic goods which ought to be maximized. Creating unproductive jobs (those which consume resources of greater value then the outputs they produce) destroys value. Eliminating such jobs creates value and frees up scarce labor resources to be employed more productively.

Nor are higher wages necessarily a positive thing. It could be argued that in many sectors, US wages already exceed market-clearing equilibrium levels, making domestic jobs less productive and driving labor demand overseas. Forcing wages even higher only drives the economy further away from equilibrium.

The way to maximize economic value is to allow people to choose, without restriction, what goods and services they wish to produce and consume, import and export, and buy and sell at whatever quantity and price they can agree upon.

Whether or not economic value ought to be maximized is an entirely different debate.

[Edward]

The Greatest Gift that Economic Wisdom Ever Bestowed on Humankind:

Sounds like some sort of pious religious dictum.

[joe]

Russ R,

You mean, it's not a bug, it's a feature?

That certainly isn't the outcome the NAFTA people predicted.

Brandybuck,

I know, True Communism has never been tried. Those failures came about because they weren't True Communism. Still, the Free Traders thought they knew what would happen, and they were wrong. That's why some of them are now more modulated in their support for Free Trade.

[Timothy]

At the end of the day, when everyone's protectionism in response to yours is accounted for, how does the local benefit remain in tact? Don't you just wind up eating the loss on some widget someone else tariffs at some advantage to themselves and at your expense?

Jason: That can happen, but the mathematical outcome is that in the large-country case there will be a non-zero restriction that maximizes home country welfare. The real key to whether or not a country can raise its own welfare through trade restriction is whether or not it can affect world price. The tit-for-tat thing is accounted for in the game theory models for trade, and there is (for a "large" country) a non-zero tariff that maximizes welfare after all the best responses have been accounted for.

The case is different for "small" countries, those that cannot influence the world price of whatever good we're talking about, they can't benefit from trade restrictions at all.

[joe]

Let's do a thought experiment:

Let's say that the passage of NAFTA and other, similar Free Trade agreements had reversed the decades-long stagnation of wages for the bottom 2/3 of American workers. Let's say that it had clearly and plainly opened up many more doors than it had closed. Let's say that it had brought about a period of economic prosperity whose stature and cause could not be doubted.

Would libertarians still be writing that it was not "real free trade," and that we should not be judging the value of lowering and reducing trade barriers by the consequences of NAFTA?

I doubt it. They certainly didn't have any problem declaring that the fall of the Soviet Union proved that superiority of a non-redistributive, entirely laissez-faire system, even though no such thing ever existed in competition with the Soviet model.

[joe]

BTW, can anyone thing of a country that was lifted from pre-industrial levels of wealth to modern levels of prosperity without a system of protectionism and subsidy for industry?

And please note, the question is not about whether countries have ever had assembly plants located there by foreign owernship, but about the middle-class producing, poverty-chasing, material-quality-of-life raising consequences of having an industrial economy.

[joe]

Let me amend that: can anyone thing of a country that was lifted from pre-industrial levels of wealth to modern levels of prosperity THROUGH INDUSTRIALIZATION without a system of protectionism and subsidy for industry?

Obviously, there are trading centers like Singapore, who have very little industry.

[MikeP]

Hong Kong.

It may have little industry any more, but it first gained its prosperity as an industrial manufacturer.

Nonetheless, joe, your impressions are pretty accurate. There are precious few places in the world where the political class did not exploit the fears of both labor and capital to empower themselves with government management of industrial policy.

[r4d20]

Pardon me if I sound snippy but...

1) Comparative Advantage is non-trivial? News to me. It seems pretty obvious.

2) PLEASE don't pretend that there are not plenty of cases where it can be detrimental or fatal - particularly vital supplies that are necessary for life or basic defense. Trade can be interrupted and relying exclusively on trade to supply necessary materials always carries with it a measure of risk. Complete self-sufficiency is a pipe-dream, but only a foolish nation relies exclusively on trade for necessities.

[Russ R]

joe:

I've got my own experiment.

Let's take a country, divide it in two, and run each half in different ways. One side can be a managed economy with large restrictions on imports and exports, the other can be a market economy with freer trade. All other factors could held nearly constant.

Let the two countries run in their own ways for a few decades and see which has a higher standard of living.

Just to be sure that there's no contamination of the experiment, you could probably build a big wall in between the two sides, kind of like in Germany or Korea.

If we could somehow run an experiment like that it would probably settle the debate.