Trade and procedural fairness

Economists fail to appreciate sufficiently that globalization often runs into a procedural fairness roadblock.

Imagine some change in the economy leaves Tom $3 richer and Jerry $2 poorer, and I ask you whether you approve of this change.  Few economists, regardless of their political and philosophical orientation, would be able to give a straight answer without asking for more information. Is Tom richer or poorer than Jerry to begin with, and by how much? What are their respective needs and capabilities? And what exactly is the nature of the shock that created this redistribution of income? It would be one thing if Tom got richer (and made Jerry poorer) through actions that we would consider unethical or immoral; it would be another if this was the result of Tom’s hard work and Jerry’s laziness. In other words, most of us would care about the manner in which the distributional change occurred--i.e., about procedural fairness. The fact that the shock created a net gain of $1 is not enough to conclude that it is a change for the better. 

    

Yet when we teach comparative advantage and explain the gains from trade, we typically overlook this important conclusion. We expect our students to focus on the net gain triangles and disregard the rectangles of redistribution.  In particular, we do not ask whether the trade opportunity involves an exchange that most people would consider unacceptable if it took place at home. So it is immaterial to our story if the gains from trade are created, say, by a company shutting down its factory at home and setting up a new one abroad using child labor. (By the way, I chose $3 and $2 in my example as these values are commensurate with the relative magnitudes that come out of trade models under reasonable elasticities.)

The thought experiment clarifies, I think, why the archetypal man on the street reacts differently to trade-induced changes in distribution than to technology-induced changes (i.e., to technological progress). Both increase the size of the economic pie, while often causing large income transfers. But a redistribution that takes place because home firms are undercut by competitors who employ deplorable labor practices, use production methods that are harmful to the environment, or enjoy government support is procedurally different than one that takes place because an innovator has come up with a better product through hard work or ingenuity.  Trade and technological progress can have very different implications for procedural fairness.  This is a point that most people instinctively grasp, but economists often miss. (Notice that even in the case of technology, we have significant restrictions on what is allowable—c.f. human-subject review requirements—and wide-ranging debates about the acceptability of things like stem-cell research.)

Comments

[Sonia]

In the example above suppose that Chi has increased her income from $1.00 per day to $2.00 per day and her working conditions in the sweat shop beat the alternative. I am completely comfortable buying Chi's T shirt. Whether Tom or Jerry should be taxed or subsidized depends not on the change in their incomes resulting from Chi's improvement but on Tom and Jerry's incomes. On the other hand if Chi's factory pollutes my air then I want a tax (tariff) or other mechanism imposed to limit that externality.

[dave]

Sonia wrote:

"On the other hand if Chi's factory pollutes my air then I want a tax (tariff) or other mechanism imposed to limit that externality."

What if Chi's more labor-intensive workplace pollutes your air less than Jerry's nearby factory that's free of that tariff so far as your buying decision's concerned?

Should we then favor Chi's factory so as to drive Jerry out of business since he's been better-placed to afford a remedy but hasn't taken up the option?

And if so, should we do so even if everyone collectively winds up with $1 less?

[DM]

I don't know if the change is fair or not. But the change is the result of individual choice. So I do know that the people making the decision that lead to change are better off, or the change would not have occurred in the first place.

To stop the change, you have to argue that you know the change is unfair, and it is so unfair that it is worth sacrificing the decision makers utility and freedom to choose in order to prevent the change.

Economists (when practicing economics) take no stance on what is fair or unfair. Who are we to say? If Danni wants to stop the change, then he is assuming that he (unlike the rest of us) has the moral clarity to declare what is fair and unfair, and the authority to enforce his own personal idea of fairness on the rest of us.

[Butter]

Interesting... but I doubt the real reason why the typical "man on the street" is suspicious of free-trade and globalization is because of its potentially harmful effects on low-wage labor and the environment in foreign countires. The uncorfortable reality is that Joe Six Pack is way more xenophopic (and generally less liberal) than your typical Ph.D.-educated economist. See Bryan Caplan's work on systematically biased beliefs, especially his new book "Myth of the rational voter". Whenever you introduce something related to foreigners, irrationality shoots up (i.e. average opinion deverges from expert opinion) in surveys.

Median voters are more opposed to net positive redistributions resulting from trade vis a vi technology largely because they don't value foreign utility. Of course, your theory probably explains a significant amount as well, but I would argue less than 30% of variance.

[Eric]

DM said,
"But the change is the result of individual choice. So I do know that the people making the decision that lead to change are better off, or the change would not have occurred in the first place."

I think most people would admit that they have made choices before that have made them worse off. This seems to me to be because (1) we don't possess complete information about what consequences may result from our choices and (2) we don't have fully formed preferences. It is not hard to think of cases where people may not know what they want, but choose instead what they are told or think they should want.
It's necessary to look at the rational actor model and understand that it is a simplifying assumption that can be useful for modeling, but does not do a very good job of telling us how people actually behave. Furthermore, the discussion above concerning externalities should show that when people trade they are not necessarily made better off. The issue of abstracting from individuals to countries also complicates the preference satisfaction view of trade, but I will not go into that here.

"Economists (when practicing economics) take no stance on what is fair or unfair."

What about the CPI? Aren't there implicit moral decisions involved in choosing a typical basket of goods? Economists make these kind of decisions all the time but it seems to me are seldom aware of it.

[happyjuggler0]

Do economists overlook that there is destruction during creative destruction? I don't think so, they merely understand that in the long run over a series of such transactions that it tends to even out. Those small individual gains from being able to buy cheaper t-shirts add up.

It is impossible to construct a scenario where everyone is better off all the time, the best we can do is what helps the most people out the most over time.

International trade is a positive sum game, and restrictions on that trade hurt the neediest most, both in rich countries and poor countries a like.

If over the span of a decade 99 Tom's and 99 Jerry's are better off with freer trade and 1 of each are worse off, and thanks to the consumer benefits from free trade those 1% aren't all that much worse off, while the 99% are considerably better off than they are today, then would you make that tradeoff?

But even that is not enough information. How about if you knew that in a Lou Dobbs presidency that 70 Tom's and 50 Jerry's are better off in 10 years than they are today, while 30 Tom's and 50 Jerry's are worse off, and by similar percentages than from the freer trade example?

But wait, there's more. What if the citizens from the poorest countries benefit the most with few citizens with negative returns, while from the richer countries there was a 50-50 split between gainers and losers with gainers gaining $3 and losers losing $2, in both the rich countries and poor countries?

Under that scenario, while the nominal gains are the same denomination, the percentage gains from gaining $3 are radically higher than the percentage losses from a $3 loss (let alone a $2 loss) is for someone in a rich country.

There is always going to be churn under creative destruction, and also churn under just plain old destruction as well. Stasis economics, i.e. a 0% change in GDP, is likely to wind up with the rich getting richer and the poor getting poorer. We may as well pick the method that has the most creation going on since it is far from clear that in its absence there will be fewer losers from allegedly fair trade than from freer trade.

Finally, over the span of generations everyone wins with higher GDP than under lower GDP, regardless over whether or not under a caveman society the gains from fire were unequal.

[happyjuggler0]

For example, with 20-20 hindsight it is eminently clear that given a 50-50 shot at being born in the US or being born in Russia everyone would root for being born in the USA. But about 80 years ago intellectuals would've guessed that in 80 years time that they would prefer to be born in the more "fair" Russia than in the US.

Overall GDP growth matters. If one takes a sample size of all the people who live under a "fair trade" regime in the US from 2007 to 2107, and all the people from a freer trade regime in the US from 2007 to 2107, it ought to be obviosu that if one correctly assumes that freer trade leads to higher overall GDP, that there are far more losers under that total 100 year population from "fair" trade than from freer trade.

Is it fair to those future generations that their more liberal (US definition) ancestors deliberately lowered GDP growth to *try* to help a small number of people way back in 2007, but wound up hurting 99% of the people in 2107?

Before you answer that last question, do you think we "ought" to "do something" to prevent a possible environmental problem (manmade global warming) that really won't be a problem for anyone currently alive today but will be a problem for future generations? Can you square your answers from my last two questions with each other?

[Scott Wood]

Surely that's at least partly because the rest of the world looks at nothing but.

[Idaho_Spud]

The responses in the comments section are almost as interesting as the initial blog post.

Unless I'm mistaken, Prof. Rodrik is not taking a stand on unequal distribution of wealth, merely stating the obvious dichotomy between joe sixpack's view and the typical economist's view.

Obviously there is a little cognitive dissonance going on in the commenter's minds... I see Russia used as an example, I see "What should be done" in quotes, where I can't find that in the original blog post, and I find Lou Dobbs name being thrown around as a future president! So the comments are... enlightening.

The *perception* among non-economists (generally people who don't know what a Gini coefficient is), is that free trade has not enhanced their lives all that much.

The fact is that perceptions between economists and non-economist differ.

Unfortunately it seems that the perception of economists cannot be called into question? I propose there is some reality in Joe Six's perception that free trade has not improved his lot much. Not that I'm passing any value judgements on that, just recognizing the reality.

"Reality is that which, when you stop believing in it, doesn't go away." Philip K. Dick.

[DM]

Butter said:

"I think most people would admit that they have made choices before that have made them worse off"

So know someone like you should take their ability make choices away from them?

So I made dumb choice with poor information, now I am no longer allowed to make choices? Or better yet, an equally dumb person who also has bad information makes my choices for me?

[ben]

Welcome Dr Rodrik, I'll be bookmarking this blog and visiting frequently.

[Stormy]

Sonia:

In the name of free markets, would you insist on Chi’s right to join a union and collectively bargain with her employer? Right now, comparative advantage has nothing to say on, say, slave labor. I am always surprise how quick economists are that capital have conditions that promote competition, i.e., a level playing field, but are reluctant to talk about labor competing in the market place. When collectively bargain is not allowed, then there is no true comparative advantage.

Ah…but you are concerned about pollution from Chi’s factory…an externality…because it affects you. In short, all that concerns you is you. This is not a value judgment, just an observation. Treat it as such.

To everyone else:

As for the net positives of globalization, as it is being practiced, I wish someone would enlightened me. Some say that it clearly benefits the Chinese worker. The Chinese iPod worker now makes .60/hour. (Apple’s profits have been exceedingly good. Nothing like sweatshop labor in China.)

According to China’s Modernization Report of 2006, the average Chinese wage is expected to be approximately $1200/month (in 2002 dollars) by 2050. (And that figure does not include inflation between now and 2050.) What happens to wages elsewhere during this period? And you really think a middle class is rising in China? By 2050, Average wage to be $14,400 in 2002 U.S. dollars? The U.S. average wage is higher than that!

And, of course, we have not touched the environment. 2050? Between 1960 and 2000, the Himalayas lost 7% of their mass. According to one estimate, they Himalayan glaciers may be gone by 2035. Those glaciers are essential water sources, feeding major river systems. Really hard to comprehend, isn’t it? Must be a fairy tale.

Yet, China hopes to become a first class competitor by 2100. Do any of you know how many coal burning plants China intends to add between now and 2012? (The answer: 562, according to the Energy Bulletin.) Right now, according to China’s own admission, it ranks 110 out of 118 nations in terms of the environment. In short, China has chosen a path or rapid and profligate industrialization, thanks to FDI and the WTO. After all, the WTO wants only a level business playing field within a country. As long as environmental regulations—or lack thereof—apply equally to all business within that country, all WTO requirements are met.

At some point, those silly exogenous variables will control the market place. All economists should be looking at the economic consequences of pollution, global warming, and resource depletion. Perhaps a thread on the Stern report would be seemly.

I remember one economist saying that he had yet to see any real plan of how to deal with global warming, for the world would fall apart if there was not continued growth. Continued growth? A key concept, apparently. “Fortunately,” he said, “the probability of global warming was slight, and, if real, sufficiently distant.”

[Brent]

To address the original post itself:

I agree that it is important to realize that people give ethical weight to procedural fairness, but this doesn't mean they *should* give ethical weight to it, nor that economists should.

So should they? Well, according to this post, changes in inequality are OK if they result from technological change, but not if they result from competition from countries with low labor standards. Why might this be? Well, perhaps there is something moral problem with allowing imports from countries poor labor standards, and this problem is not present in technological innovation. But what might this problem be?

In your book _Has Globalization Gone Too Far_, Professor Rodrik, you argue that when there are no consequences for domestic inequality, we should not restrict imports from countries with unfair labor practices, because it might actually make the plight of the global poor worse. For example, child laborers might be forced into prostitution.

If trading with countries employing poor labor practices actually makes the global poor better off, what actually is morally wrong with this kind of trade? And how, exactly, is domestic inequality resulting from technological change OK while inequality resulting from trade with the global poor unacceptable?

[Dirk Nachbar]

Dani

Maybe I am missing your point here, but I think most people ask about the position of Tom and Jerry in the income distribution, because they have diminishing utility functions. IE they care more about the poor!?

[wjd123]

When economist support free trade as practiced today they do so for reasons of efficiency. Economic morality goes begging. The political economy of nations ends up being shaped by market forces that are driven by rational necessity without normative controls. The ensuing results are supposedly brought about by creative destruction.

There is nothing creative about this process. Once norms are removed, it's rational necessity that shapes society--competition demands it. The underlying values of society will be reshaped in the process, however, the process is set in global amorality.

The rationality of interventionism based on a knowledge of our underlying social values is undermined. Global economic choices of what we produce, how we produce it, and how we distribute it are settled in a global market by market forces that are norm destroying.

Every society has its underlying values, its social roles. Economist try to show what system will produce the greatest efficiency. Social values are qualitative, efficiency of production is quantitative. When economist endorse a world trade system primarily based on the quantitative they are making an implicit value judgment on what forces will shape all societies.

Those that support free trade as practiced today have chosen rational necessity and normative anarchy as those forces. Deliberately setting society on a course where amoral necessity will shape society and its values, choosing thus without due consideration and knowledge of the underlying values of diverse societies is irrational. Think, Bush's mindless intervention into Iraq and the chaos that ensued.

Economists can't wash their hands of the destruction that follows by calling it creative. The never tried to understand the underlying values of the societies on which they released rational necessity nor have they thought out the logical consequences of that normless rational necessity..

National economies that value competition make rational judgments on how best to get it-- anti trust laws for example. Laws are normative. Institutions are required to judge them and enforce them. We have an institution to carry out those laws that are in accordance with our social values.

Where can we intervene in free trade agreements to ensure competition. There is no international court in which to plead our case. Yet, free trade without norms tends toward economies of scale. Economies of scale destroy competition. The logical consequences of trade without norms is monopolies. Monopolies don't have to be competitive or efficient.

If we are to make trade agreements we can't ignore their effects on our economic morality and social values. We should look to how free trade is practiced in the EU. There free trade is combined with care to social values. The ability to practice normative intervention on an international scale is preserved. To this extent the destructive forces of free trade can be creatively controlled.

[İç Çamaşır]

National economies that value competition make rational judgments on how best to get it-- anti trust laws for example. Laws are normative. Institutions are required to judge them and enforce them. We have an institution to carry out those laws that are in accordance with our social values.

[seks shop]

National economies that value competition make rational judgments on how best to get it-- anti trust laws for example. Laws are normative. Institutions are required to judge them and enforce them. We have an institution to carry out those laws that are in accordance with our social values.

[wjd123]

From reading comments on different blogs it seems that the main argument between Dani Rodrik and Tyler Cowen has been lost.

This is Dani Rodrik's argument:

"Domestic trade takes place within thoroughly embedded markets; there are clear rules and they apply to all transactions equally. International trade, on the other hand, is conducted in only weakly embedded markets: the rules either do not exist or apply unevenly. I believe this is the fundamental reason why their consequences are often perceived so differently."

This is Tyler Cowen's argument:

"What’s really happening [the backlash on trade] is that many people, whether in the United States or abroad, are unduly suspicious about economic relations with foreigners. These complaints stem from basic human nature — namely, our tendency to divide people into “in groups” and “out groups” and to elevate one and to demonize the other. Americans fear that foreigners will rise at their expense or “control” some aspects of the economy.

"ONE approach is to appease these sentiments by backing away from trade just a bit, or by managing it, so as to limit the backlash. Giving up momentum, however, isn’t necessarily the right way forward. If we are too apologetic about globalization, we can feed core irrationalities, instead of taming them. The risk is that we will frame trade as a fundamental source of suffering and losses, which would make voters more nervous, not less."

Dani believes that in matters of international trade workers can understand the concept procedural fairness. Tyler Cowan believes that the concept of procedural fairness escapes most workers when it comes to their feelings about trade and that they are basically xenophobic.

If Dani is right then the way ahead to appease fears about free trade would be address matters of procedural fairness. If Tyler is right then, according to him, the way ahead is not to inflame "irrational fears."

Tyler doesn't want to slow down the momentum of trade so his rational solution is to dumb down the bad stuff such as questions about procedural fairness and play up the good stuff such as savings at Wal-Mart and expanding markets.

We have been on this route before--NAFTA--where economist decided to hide the bad stuff when arguing for free trade so as not to give ammunition to those who opposed it. Tyler has gone a step further he would deny the rational feeling of those Americans who believe that they are being hurt by free trade and tar them with feelings that he sees as irrational.

I think Dani is right on workers feelings about procedural fairness, but even if he isn't, I can't understand Tyler's approach. To assuage American fears about the benefits of free trade by de-emphasizing their rational feelings while playing up their irrational ones is only rational in it's Machiavellian logic. In other words, when it comes to facing problems, it's dishonest. It's not a good faith approach, and it should be rejected.