Can the wrong answer in the classroom be the right answer in public debate?

I don’t think so, but it looks like we may be disagreeing with Greg Mankiw here.

In an interesting comment on my previous post dealing with the effect of trade on the price level, Greg notes that I am right “in theory,” but that he is “more sympathetic to the ‘lower prices’” view than I am for a couple of reasons. He writes:

1.  Defenders of free trade rarely are in a position of having to defend exports, because people think that exports create jobs. When people complain about trade, it usually about the alleged job-destroying effect of imports. This partial-equilibrium complaint naturally encourages a partial-equilibrium retort: imports lower prices for consumers. The losses to producers in these markets are more than offset by gains to consumers from lower prices. True, the full story can only be told in general equilibrium, where it is relative prices that matter for the allocation of resources. But the distinction between the absolute price level (determined by monetary forces) and relative prices (determined by numerous market supply and demand curves) looms larger in the minds of economists than laymen. The reason is related to my second point.

2. People sometimes instinctively treat the nominal wage as the numeraire. That may be because it is one of the stickier prices around. So maybe when we hear people say that trade lowers prices, we should interpret the statement as meaning that trade lowers the price of a basket of consumer goods for a given price of labor. That is, trade raises real wages. This is one simple way of translating the basic Ricardian model (in which trade expands both trading partners' consumption opportunities) into a language that is a bit more familiar to the general public.

Now, neither of Greg’s arguments is exactly right. On his first point, there is no theorem that guarantees that the partial-equilibrium losses to import-competing producers “are more than offset by gains to consumers from lower prices.” My wheat-and-beef example in Argentina is exactly an instance where this supposition fails. And on his second, trade theory does not guarantee that real wages of workers rise as a result of free trade, as Stolper and Samuelson showed long ago. (Greg knows this of course, which is why he qualifies his statement by referring to the basic Ricardian model, which is a highly special model where labor is the only factor of production and gains from trade have to show up as higher real wages.)

But the real reason for this post is different. I want to take issue with the general philosophy behind Greg’s argument, which is that a less than full (and possibly misleading) story in support of your argument is OK as long as it helps disarm your opponents in public debate.  His position seems to be this: Look, these anti-trade guys don’t understand comparative advantage anyhow, and it is pointless to waste our breath trying to explain it to them. So let’s instead argue our case in “their” language and within “their” framework. Never mind that Professor Greg Mankiw would flunk us if we ever gave the same answer in Ec. 10.

I am not sure I like this stance very much.  For one thing, it goes against the grain of what I think is the most important job of economists in public debate--to educate and not simply to be an advocate.  Second, it is bound to backfire, and ultimately undercut the credibility of economists.

Here is an apt example. Years ago, when NAFTA had just been negotiated and was being debated heatedly, the Institute for International Economics (now the Peterson Institute) put out a study that tried to counter widespread fears that the Agreement would destroy U.S. jobs. How did it do so?  By calculating the jobs that would be created by additional exports to Mexico.  And since Mexico had a whopping trade deficit with the U.S. at the time (in 1993, just before the peso crisis), it was relatively straightforward to show that more jobs would be created than lost!  Unfortunately for the IIE, soon after NAFTA was signed, the Mexican peso collapsed (no claim of causality here), and Mexico’s trade deficit turned into surplus. Anyone who used the same methodology could now calculate that NAFTA was in fact bad for U.S. employment.  Try now to explain to members of Congress that trade is all about efficiency in resource allocation and not about employment… 

There is a broader and potentially quite useful discussion to be had here on the manner in which economists should engage in the public debate.  Many of my colleagues are of the view that economists should just stick to their bottom line, and not "confuse" the public with the caveats and limitations of their arguments. Moreover, since anti-market views have enough supporters out there, economists often see their role as one of unqualified advocacy of the opposite position. I tend to disagree with this, which is why I am often accused of "giving ammunition to the barbarians."

To be continued ...

Comments

[Cho]

"For one thing, it goes against the grain of what I think is the most important job of economists in public debate--to educate and not simply to be an advocate. Second, it is bound to backfire, and ultimately undercut the credibility of economists."

As a professional Government Economist, I couldn't agree with you more. Economists have a responsibility to present the full evidence. Very often there's a danger of treating policy makers as daft. What I have found is that very often policy makers want to hear these caveats!!

[itdepends]

Greg Mankiw is losing the debate here, unless he begins to marshall some better arguments. He'd really be much better off arguing scale effects and greater product diversity (which one can argue are increasingly important and help account for most trade -- which is intra-industry trade).
He should know that trying to argue, as he did in his second point, that standard models predict rising real wages to all factors is like spitting in the wind (in all but the most unrealistic one factor Ricardian model).

[Michael Greinecker]

I think there is a analogy that holds almost exactly and allows the public to understand trade. It´s the trade-as-technological-change view. David Friedman in his textbook writes:

"There are two ways we can produce automobiles. We can build them in Detroit or we can grow them in Iowa. Everyone knows how we build automobiles. To grow automobiles, we begin by growing the raw material from which they are made--wheat. We put the wheat on ships and send the ships out into the Pacific. They come back with Hondas on them.

From our standpoint, "growing Hondas" is just as much a form of production--using American farm workers instead of American auto workers--as building them. What happens on the other side of the Pacific is irrelevant; the effect would be just the same for us if there really were a gigantic machine sitting somewhere between Hawaii and Japan turning wheat into automobiles. Tariffs are indeed a way of protecting American workers--from other American workers."

This metaphor allows to understand pretty much all the main topics: comparative advantage, increasing returns to scale and path dependence...

[jdrietz]

Cho:

Not to be too cynical, but it makes sense that(politicians) want as many caveats as possible - it makes it easier to justify their position when election time comes around :-)

[jdrietz]

Sorry, my comment was munged.

(politicians) = policy makers (i.e. politicians)

[Cursed]

Thanks for sharing your thoughts

[Bruce Webb]

"Can the wrong answer in the classroom be the right answer in public debate?"

Certainly. In the absense of a fully formed theoretical model or in the presense of a counterfactual assumption it can happen as often as not.

Copernicus would have failed a course in Ptolemeic Astronomy.

I was on the Berkeley campus when the Alvarez's published their comet extinction theory. It was immediately and almost universally denounced as not only wrong but dangerous pseudoscience by every paleontologist on campus, and Berkeley was a known leader in the field. Despite the fact that one author was a Nobel prized Berkeley physicist. Now they teach versions of it to school children. A theory can be fully scientific and still produce bad results.

In the 30's they legendarily proved that the curve ball was impossible. Came as big news to all the guys that had gone down swinging at wicked curves. Turns out their theoretical model was missing a piece. Apparently the math of the curve ball is a lot harder than anyone would of thought.

As a historian or former one I look at Economics and see a theory that is not fully formed. In particular some portions of it only seem to work once you fix a dynamic variable in place.

As an example in the present debate there seems to be a working assumption on both sides about non-elasticity of beef production in Argentina, as well as an assumption that beef demand in Argentina is not sensitive to price.

I don't know either is true. And certainly there seems to be little attention to the issue of substitution.

The stated question is whether economists should simplify perhaps even to the level of distortion when explaining it to non-economists. Simplify yes, distort no. But equally the question of whether your assumptions actually meet real world conditions is not a settled one. Not when looked at from the outside. Certain assumptions are simply too convenient to promote particular policy outcomes for my comfort.

[Idaho_Spud]

Hehe, it seems the 'barbarians' needn't be troubled with having enough information to make an informed choice in the matter?

This reminds me strikingly of the WMD in Iraq 'debate'.

I guess the second-most frightening sentence you will ever hear is "I'm a free trade advocate, and I'm here to help." ;)

Thanks for offering, finally, a balanced and erudite description of the issue.

[comp_adv]

"Stanislaw Ulam once challenged Samuelson to name one theory in all of the social sciences which is both true and nontrivial. Several years later, Samuelson responded with David Ricardo's theory of comparative advantage."

source:

http://en.wikipedia.org/wiki/Paul_Samuelson

[knzn]

It seems to me that, if a polemical economist makes an oversimplified argument, it’s someone else’s responsibility to point that out. Greg has Dani Rodrik (and Brad DeLong and Mark Thoma and countless others, including me) to counterargue if he makes a specious argument, and that’s as it should be. Part of the beauty of the blogosphere is that it facilitates such exchange of arguments. But I don’t think it is the responsibility of a blogger – or a columnist, or a lobbyist – to point out the flaws in his own argument. We certainly don’t expect lawyers in court to do that. It’s different when the other side doesn’t have a chance to respond – for example, if one is writing a staff report for the benefit of a policymaker. But in that context, I think the tendency is to provide plenty of qualification.

[Nicholas Gruen]

Couldn't agree with you more Dani. Paul Krugman did us a service on this starting a decade and a half ago. Nice to see you taking up the cudgels.

[TheJew]

Ok, let me make this really simple:

The only people made worse off from “rising prices” (which can always be restated as falling relative prices) are the people who are especially impaired from producing goods other then the new imports. This new formulation adds nothing.

Suppose we have a two sector economy which produces Beef and Other Stuff. Agents in the economy can produce both but the production function causes agents to specialize in only one type of good per period (i.e. people don’t make Beef one day, Paper Clips the next, Televisions on a third, and back to Beef on the fourth, they work at a job for intervals of at least three months, but they could do any of those three jobs). Because of individual variation, agents will pick one sector and continue in that sector because of natural talents.

Previous to international trade 1 Other Stuff was worth 2 Beef in Argentina. After international trade with the US, 1 Other Stuff is worth 1 Beef. If you are a reasonably able person with near equal talents in both Other Stuff and Beef and you are currently producing Other Stuff in Argentina, you will switch to Beef production. Because there was a small difference between your talents to begin with, and because your Beef production is worth so much more now, you are much better off.

However, if you are some retarded gimp who can only produce in the Other Stuff sector and are completely untalented in the Beef sector, then you will be made worse off. But this is only if you are some retard gimp only gifted in one sector. If the same retarded gimp lived in the US and could only produce Other Stuff there, then it would be worse off without trade. With trade the two would be equal, the retarded gimps making Other Stuff in the US are in an equally bad position as the retarded gimps in Argentina making Other Stuff.

In addition, all the retarded gimps in Argentina who could not make any Other Stuff, but could make some Beef are made strictly better off by international trade as well. In all cases of Argentine Beef producers the additional income from Beef will compensate for the rise in Beef prices.

For a good review of actual arguments against international trade, and their weaknesses, look here. What?! No tags! Ok, look here:

http://ideas.repec.org/a/aea/jecper/v1y1987i2p131-44.html

[pgl]

Dani - thanks for elevating this debate. We all knew your entry as an economist blogger would be beneficial, but this thread is terrific. Greg has tried an attempt to say his Ricardian simplification is justified given capital mobility. I'm not buying it for reasons noted over at Angrybear.

[caveat bettor]

The Mexico example is the one with which I am most familiar. I am thinking that there are some distortive effects, beyond the peso factor cited, such as remittances and agricultural subsidies. So I can't just accept the NAFTA point on face value.

[Tony Healy]

Another example of how economists can get it wrong is contained in a paper on offshoring by Catherine Mann of IIE. To promote one of the orthodoxies of offshoring, that displaced workers migrate upstream to better jobs, Mann cited the relative growth of software engineering jobs versus programming jobs.

What she didn't understand is that those titles describe the same jobs. Software engineering is simply a more modern, and up-market, title for jobs once described as programming, as pointed out by Norm Matloff of UC Davis.

http://heather.cs.ucdavis.edu/Archive/Mann.txt

Mann was an inadvertent victim of the huge spin campaign mounted by Indian offshorers, which sought to dispell concerns about offshoring by describing offshored work as low-end. This fitted with an agenda promoted by various ideologues and universities spruiking new software engineering departments, who use the terms to denote hierarchies. Unfortunately their ideology is not backed up by formal job categorisations. The trend Mann reported was no trend at all.

[piglet]

"Second, it is bound to backfire, and ultimately undercut the credibility of economists."

Too late, Dani. Not much left to undercut any more ;-)