A dialogue between an economist and an unemployed steel worker
Joe: An unemployed steel worker.
Thaddeus: An economist holding a chair at Free Market U.
Joe: Boy, free trade sure hasn't worked out as promised. Just look at the devastation it has created in the Rust Belt.
Thaddeus: I can't imagine what you are talking about: why, I have a very sophisticated model in which it is clear there are always net gains from free trade.
Thaddeus: An economist holding a chair at Free Market U.
Joe: Boy, free trade sure hasn't worked out as promised. Just look at the devastation it has created in the Rust Belt.
Thaddeus: I can't imagine what you are talking about: why, I have a very sophisticated model in which it is clear there are always net gains from free trade.
Joe: What you mean by "model"?
Thaddeus: It is a mathematical abstraction, that leaves out large parts of the real world in order to reach a determinate result.
Joe: So if your model leaves out large parts of the real world, how do we know its results apply to the real world?
Thaddeus: I did mention that it is a very sophisticated model, didn't I?
Joe: OK, let's say I grant that the results of your model do apply to the real world. You said it shows that there are always "net gains" from free trade. That implies that some people gain while others lose. How do you decide that the gains of the gainers are greater the losses of the losers?
Thaddeus: We use a compensation principle: if those who gained from some free trade agreement could, in principle, compensate those who lost, so that both sides would now prefer the free trade outcome, then we can conclude that free trade creates net gains.
Joe: Can you give me a concrete example of how this works in practice, for instance, in terms of the steel industry?
Thaddeus: I am glad you asked, because of course I can! Free trade allowed the steel company you used to work for to shut the plant at which you worked and move that production to China. Certainly, this move devastated the lives of workers in your town, and essentially left the town for dead. But other people benefited, for instance the consumers of goods that contain steel, but especially people like the upper management of the steel company that endows my chair at Free Market University. Let me tell you, those executives are doing really, really well as a result of that plant moving! I've been to a party at the CEO's house, and the upgrades he's been able to commission are just fantastic. I've never seen an infinite pool so sweet. Plus, they have been able to double my speaking fees at their summer seminar series.
Joe: I see. So, per your compensation principle, you will be recommending that those executives give up a portion of their gains to help out the town they left in ruins?
Thaddeus: I'm sorry, did you miss the part about "the company that endows my chair"? Jeez, do we really have to wonder why low-IQ workers like you are suffering in the great, global economy?
Yes, this hits the nail on the head in the respect that the argument for free trade is a highly abstract model "that leaves out large parts of the real world in order to reach a determinate result."
ReplyDeleteIn this case, the Ricardian a priori argument for free trade, requires two conditions to work properly, as follows:
(1) Domestic factors of production like capital goods and skilled labour are not internationally mobile, and instead will be re-employed in the sector/sectors in which the country’s comparative advantage lies;
(2) Workers are fungible, and will be re-trained easily and moved to the new sectors where comparative advantage lies.
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As is admitted even by Mises (Mises, Human Action: A Treatise on Economics 4th rev. edn, p. 164), by the late 19th century assumption (1) was questionable. Today it is also the case that both capital goods themselves and investment money for production are very mobile, so that (1) is also not true. Proposition (2) is also questionable in many cases.
Once capital becomes extremely mobile internationally, we no longer have comparative advantage, but absolute advantage. It is not at all clear that free trade under “absolute advantage” is beneficial to all nations. The neoclassical and Misesian argument for free trade is dependent on the capital of one country remaining in that country and being put to work in some other productive domestic industry, where comparative advantage lies. This is not what happens today, where capital from Western countries seeks absolute advantage in the developing countries.
Jason Alexander hits back.
ReplyDeleteIs this "compensation principle" a real thing?
ReplyDeleteWho promised Joe anything? What did they promise? A job for life? Unicorns?
ReplyDeleteIndividuals trade with each other. Sometimes that involves Joe. Most of the time, it doesn't.
If Joe's wife left him for another man, should the police bring her back?
Do someone promise you you wouldn't be an idiot in this life? They lied.
Delete