Peter Dorman at Econospeak provides an awesome little post, “Nonsense on Imported Stilts,” that eviscerates some conventional and widely used assumptions in trade economics:
Econ bloggers have really missed the point about Landsburg’s free trade screed. The estimable Dani notwithstanding, the issue isn’t ultimately ethics or even procedural fairness. The problem is that doctrinaire economists understand less about trade than the average person with no academic training in the subject.
Ordinary people in many parts of the world, and not just in the US, worry about trade because they are afraid that jobs lost to imports will not be counterbalanced by jobs gained through exports. They worry that there will be fewer economic opportunities for them and their children. They worry that their wages or working conditions will be pushed downward through competition with even more vulnerable, desperate workers in other countries. They are right to worry about these things. Such miseries are not destined to happen, but they cannot be ruled out either.
Except in standard economic models which begin with the assumption that increases in imports automatically call forth equally valued increases in exports. If trade balances on the margin we live in the happy world of comparative advantage, and it is indeed true, as Landsburg says, that “when American jobs are outsourced, Americans as a group are net winners.” But the assumption that trade balances at the margin is simply a modeling convenience, something that enables Landsburg to regale his students with blackboards full of elegant diagrams and equations. It is not grounded in real experience, and especially not the experience of the US economy since the 1970s.
You have to be very well trained in economics and have high-level skills to make such a brain-dead assumption and not even know you’ve made it. Then you don’t have to give serious consideration to counterarguments because, hey, why pay any attention to the fallacies of economic illiterates and mathphobes?
But let’s get specific. Here’s how Landsburg illustrates his claim that international trade makes us better off: “I doubt there’s a human being on earth who hasn’t benefited from the opportunity to trade freely with his neighbors. Imagine what your life would be like if you had to grow your own food, make your own clothes and rely on your grandmother’s home remedies for health care.”
Notice a problem here? Landsburg assumes that there is no difference between trade within an economy and international trade. (To be more precise, the only difference is that governments interfere more often with trade across national borders.) Worse, he accuses anyone who recognizes the difference of woolly thinking, based of course on his assumption that there is no difference.
This is why the French students complained about autistic economics.
For what it’s worth, my view is that we as a society ought to provide opportunities for as many of us as possible to have a satisfying livelihood. If a community is down and out we should step in and do what we can whether or not trade played a role in creating the problem. We should create rules for international trade that minimize downward pressure on wage, environmental and social standards and that limit dangerous imbalances. These ideas are fairly widespread among the general population, and if economists think really creatively they might just be able to rise to the same level.
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Hear hear.
The trade deficit with Japan has been negative and growing for over thirty years.
It would appear that that the trade benefits that smarmy economists tut-tut about as self evident truths only appear in the long run. The deficit with China has absolutely gone parabolic. We’ve certainly given a whole lot of free but nary a budge toward the “trade” part.
Of course the benefits of trade aren’t spread equally. CEOs and shareholders benefit a lot, but it’s unlikely that the ability to buy cheap stuff at WalMart makes up for the disadvantage of being stuck with crappy jobs at WalMart.
I was surprised to see this post on this blog. I don’t see how it is an awesome post when it fails to even argue its point. All it does is sneer at ‘Doctrinaire Econimists’.
1. It is hard to argue that jobs lost due to structural change aren’t eventually replace. Jobs in manufacturing have dropped significantly in the last 30 years across western countries. These have been replaced.
2. The author fails to explain why he believes Lansburg is wrong in his assumption “that there is no difference between trade within an economy and international trade”. Sure different laws, monetary policy and currency make a difference. But the author’s thinking sounds mercantilist.
3. Problems in economics often arise from rapid changes. Trade and capital flows shift much faster that people retraining and changing jobs. If we want to minimise this tempory harm of job losses and other economic problems we need to work to slow these changes.
Unfortunately there seems to be little we can do the prevent the rapid collapse of credit we are now facing. But it is our own fault.
Great post! Yeah, I found Steven Landsburg’s Op Ed this week to be particularly odious. I’ve written an extended critique of his article which you can read (here).
RFK,
Enjoyed your post. Unfortunately, it is beyond the scope of what I ordinarily write about to get into the ugliness of our corporate activities abroad (and a lot of my readers would want MSM verification, which is thin to non-existent). But keep up the good work.
1. It is hard to argue that jobs lost due to structural change aren’t eventually replace.
long-run expansion of global informal sector is not exactly ‘replacement’.
2. The author fails to explain why he believes Lansburg is wrong in his assumption “that there is no difference between trade within an economy and international trade”.
International terrain exhibits much greater uneveness which facilitates standard of living arbitrage by nominally national enterprises.
3. Problems in economics often arise from rapid changes. Trade and capital flows shift much faster that people retraining and changing jobs. If we want to minimise this tempory harm of job losses and other economic problems we need to work to slow these changes.
Which is part of the uneveness the process of combining accelerates and cannot be dealt with by either national or supranational institutions. The system ‘slows’ itself through crisis not policies.