History or economic theory

(This will be my last post on free trade, I think. Sonic Charmertwice – and Aretae both have some final thoughts as well.)

A couple years ago, if someone had told me that they were a protectionist, I would have reacted as if they told me they were a creationist. From an economic theory perspective, you either believe in free trade, or you’re an idiot.

However, free trade is an area where history and economic theory disagree. The puzzle pieces don’t quite fit, so to speak. History and economic theory do not merely disagree, they seem to directly contradict each other. Economic theory suggests that free trade is necessary for growth. History suggests that restricting trade is a necessary condition for development. Either historical reality or economic theory is – at least partly – wrong. This apparent conflict is why I am interested in free trade. In general, in conflicts between reality and theory, I bet on reality.

The application of other economic ideas to free trade also yields results that are not clearly 100% pro-free trade. For example, the application of marginalism to free trade is instructive. Let’s take the marginal industry. Assume that there is an incredibly tiny benefit for the US if there is free trade in good X. In other words, each good X purchased in the US will be very very slightly cheaper if the production of good X occurs in Korea (for example). This shift in production to Korea is good depending on what happens to workers that are now unemployed in the US. People can legitimately disagree about which side has greater costs and benefits, but I don’t think that they can legitimately disagree about this being the fundamental issue. Unfortunately, most free traders won’t admit the possibility that free trade is not a free lunch (this fact alone makes me very suspicious about their claims).

We should discuss free trade and trade restrictions in a realistic context. Realistically in the US, free trade must be accompanied by some welfare-style benefits to displaced workers. Thus, on one hand, we have free trade and welfare benefits financed by income taxation. On the other hand, we would have restricted trade resulting in more workers being employed, higher costs for consumers, lower levels of welfare benefits and lower levels of income taxes. Honestly, I’m not sure which situation is better.

Ultimately, I think the uber-pro-free trade argument depends on the belief that all people are essentially equal – that anyone can do anything if they try really hard. I reject this view. Some people in any country are not going to be able to do more than provide menial labor. I therefore think it’s at least plausible that a country could be too advanced – i.e. it could have more low-skilled people than it has low-skilled jobs. From a stability standpoint, this is a recipe for disaster. Again, if you don’t have a rose-colored view of humanity, this is a problem.

Finally, I don’t buy the view that economic growth is all that matters. If it is, then ending Communism was bad for Russia. Less snarkily, even if you agree that economic growth is the "god-metric," it does not follow that you have to support free trade. The theory of comparative advantage does not say that free trade will improve economic growth in the long run, it only says that it will boost economic benefits in the immediate-term. In other words, free trade is not about improving economic growth, it’s about making the current level of economic activity as high as possible. This may seem like a slight distinction, but if the goal is creating economic growth, it’s a distinction that is hugely important. Even less snarkily, try this thought experiment. Marriage – traditional marriage – almost certainly decreases economic growth. In many cases, it allows women to stop working. It creates less demand for housing. If I suggested that this was a reason to ban marriage, you’d – correctly – call me a retard. Nobody actually believes that economic growth is all that matters.

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14 Responses to History or economic theory

  1. John says:

    I had never really had interest in why the gold standard was a bad (or good) thing. After listening to the Planet Money podcasts on the topic, the take home message I got was that the gold standard was good at discouraging trade imbalances and bad at allowing capital to flow in a recession (thus making recessions worse). So, it seems to be that going off the gold standard had the unintended consequence of changing the flavor of “free trade” in that trade deficits can now become very large. Is it possible that “free trade” under the gold standard might not be so bad compared to free trade when there is no gold standard?

  2. I wonder how much of this dispute is over local- vs global-maxima. For example in any given particular situation, I can easily buy the protectionist argument that ‘for this country, right now, given current circumstances, and feasibly-implementable policies, (etc etc), protectionism is best’. The free trader’s retort is just that free trade would be even better. Both could be right, they’re just considering different horizons/feasibility spaces.

    Also, two can play the feasibility game. For example, you envision higher tariffs marching hand in hand with lower income taxes and less welfare; I can say I doubt that would ever actually happen…

    I guess I would say my ‘hunch’ (this is not something I can hope to prove) is that it’s not that protectionist/similarly-distorting policies are necessarily disastrous or anything like that, it’s just that they’re not optimal and at best result in getting ‘stuck’ in a local maximum that one might wish us to escape.

  3. Isegoria says:

    The free-market argument is that tariffs help certain workers and politically connected industrialists at the expense of consumers and foreign producers — and tariffs don’t benefit those workers and industrialists as much as they hurt consumers and foreign producers, but the benefits are concentrated, and the costs are diffused across many (politically unconnected) people.

    If your concern is that some unskilled workers need protection, because they can’t compete globally, and we’re stuck living next to them, why is the answer tariffs? Tariffs are a shockingly blunt instrument for that purpose.

    To target the specific problem you mention, I would expect you to recommend limiting immigration of unskilled laborers, providing “family planning” for the poor, subsidizing hiring unskilled laborers, etc.

    • Foseti says:

      I recommend all those things.

      However, I’m not sure that a tariff – especially if fixed and flat – is a blunter instrument than some other form of redistribution via an alternative form of taxation.

      • Isegoria says:

        Suggesting tariffs in place of a progressive income tax is an entirely different argument from the one you seem to be making though.

        And if you look to history, the lesson there is that a small, flat income tax raises a lot more money than any tariff.

      • Foseti says:

        Isn’t that another pro in the tariff column then?

  4. JManon says:

    “Marriage – traditional marriage – almost certainly decreases economic growth.”

    This is not clearly the case when you factor in (1) single moms generally raise less productive kids with more social problems, and (2) traditional marriage fosters population growth. So it is a trade off between short-term growth from more women in the work force and long-term growth from having more and more productive children in the future.

    • Foseti says:

      I agree completely.

      However, I think the analogy still works with respect to free trade. As I said, comparative advantage says nothing about long-term growth – it only speaks to immediate effects on the level of economic activity. As you point out, the same is true for marriage.

  5. Handle says:

    1. Assume your have some room for maneuver and you must make some decision as to how one will progress over the next cycle.
    2. In order to select a particular course of action from among your various options, you must have some kind of strategic goal or desired end-state, and you must have a model that is competent at determining which of your potential choices is most likely to achieve that end-state.

    Ok, at this point we’re not discussing anything different from Chess.

    Now, say you’ve got some room for maneuver in terms of international-trade and economic policy. It’s time to make our move, what shall it be.

    Our first problem is to set our strategy. Oh snap. We can’t agree on a strategy. In reality, we’ve got competing interests that, to a certain extent, are irreconcilable. Clearly then, determining our strategy and our desired end-state is a major political problem.

    Our next problem with choosing our next tactical move is that even were we all agreed as to what our strategy ought to be, we don’t possess accurate “scoring” models that help us prepare for an unknowable future full of major short-term uncertainties and risks.

    Now, what if we were playing some kind of Economic Chess, even a potentially cooperative, “win-win” kind of a perpetual Chess of endless moves, and I were to tell you “The next move is Queen’s pawn to D4”. You pause and ask me, “But… hold on a second. What exactly am I trying to achieve with all these pieces? And how do I know that this move will help me do that?”

    And my answer is “I Said, Queen’s Pawn To D4! Do It!”

    You might suspect

    That’s Free Trade Theory in a nutshell. Without agreeing on what we are trying to achieve, and without any guarantee that we even know how to achieve it, we are nevertheless given what is claimed to be the one and only right move that we are never permitted to question.

    That’s senseless.

  6. Gian says:

    Things in economics do not seem computable. That is, given a policy, it is not possible to say if that policy maximizes long-term growth.

    Thus it is more sensible to have simple and fair rules. I submit that free trade is the simplest rule that is fair to both producers and consumers, natives and foreigners etc.

    Tariff is highly subject to politics. How would you ever determine optimum tariff?

    • Foseti says:

      Again, a flat and fixed tariff of 20%, for example, on all goods is not subject to manipulation.

      Some industries would still leave, while others that otherwise would leave would stay.

      “Free trade” in the US has been just as subject to political manipulation, see e.g. any “free trade” agreement.

    • RS says:

      I (and all paleos) have no strong wish to be economically fair to foreigners, when a trade-off at the expense of countryman is involved.

      Moreover, what if foreigners, say China and Japan, decline your free trade policy? A not-so-hypothetical scenario. If you persist in your policy anyway (again not-so-hypothetical), you may be behaving masochistically.

      Even if we cannot obtain precise insights into which policy is optimal, we may still be able to reach a fuzzy sort of density distribution of p(optimality) over policy space. Presumably that’s what China and Japan have done, or think they have done. Every state is forced to do the exact same fuzzy thing in foreign policy (inter alia). Rational and empirical methods are both as deeply compromised in foreign policy as they are in econ. We don’t /have/ to undergo this fuzzy aspiring-approximating to the truth; we could just globally adopt a certain convention — but that doesn’t mean we necessarily will.

  7. Tschafer says:

    The question seems to be; do you believe that all questions of policy can be boiled down to a question of social wealth-maximization,(the “economism” position) or do you not? I personally do not, so while I favor free trade under most circumstances, I can easily envision circumstances where I would favor protectionism, EVEN IF free trade policies would maximize wealth, so long as free trade adversly impacted some other important social goal, such as National Defense, crime rate, or social cohesion. Perhaps such goals could be reduced to economics, but I doubt it. I mean, how much marginal utility does the existence of the United States as an independent country have for a given person? How much value does my wife or daughter not being raped have for you? Can ultimate valuse really be boiled down into numbers? Until this happens, I cannot count myself a free trade absolutist.

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