Deconstructing economists' take on free trade

Once in a while you come across a paper that makes you nod in agreement and go "yes!" with every sentence you read. Robert Driskill's Deconstructing the Argument for Free Trade is such a paper. Driskill is a distinguished economist who knows the theory of comparative advantage as well as anyone else. And his argument is not against trade per se, but about the manner in which economists present their arguments in public and in their textbooks. His main argument is that the standard renditions

gloss over a key issue the resolution of which is anything but obvious: What does it mean for a change in economic circumstances to be "good for the nation as a whole", even when some members of that nation are hurt by the change?

In other words, instead of sticking to what they are good at--analyzing trade-offs--economists typically engage in amateur normative political theorizing about what is good for society.

Driskill also makes a more fundamental point:

Consider a scene in the movie Dead Poets Society, in which the all-boys-school poetry teacher portrayed by the actor Robin Williams asks his students: What is the purpose of language? They predictably answered: to communicate. Their teacher then corrected them: the purpose of language, he claimed, is to "woo women!"

Of course, in some contexts, wooing women is a worthy goal. But scientific writing about policy issues shouldn't be like writing poetry. Unfortunately, most economic writing on the welfare implications of trade are not a balanced weighing of the evidence or a critical evaluation of the pros and cons of arguments, but rather are more akin to a zealous prosecutor's advocacy of a point of view. As such, this writing is designed to persuade rather than to give the
reader the information needed to form an educated point of view.

...

My point is not that the economics profession is not on the side of angels in the policy debate over trade liberalization--although I will argue that a more careful argument should lead to a more nuanced view--but that the argument is poorly made. This reflects negatively on the credibility of the economics profession as a whole: critical thinkers might believe all economic arguments are as poorly supported as is the one in support of free trade; others might believe economists are mere propagandists and handmaidens in service of some philosophical or political goal. Furthermore, it obscures some key ideas that should be part of a persuasive argument in support of free trade. And finally, it has confused many people into false beliefs about what economic analysis really says about the effects of international trade.

A pervasive such false belief, for example, is that trade necessarily benefits more people than it hurts.

Driskill illustrates his arguments by drawing on the writings of a range of economists, from Deirdre McCloskey to Paul Krugman. You must read this paper if you are an economist (or keep their company). 

Comments

[David Lynch]

Driskill is not altogether fair to Irwin. While Irwin's (2002) "Free Trade Under Fire" may not emphasize the issues Driskill discusses so much, Irwin's (1996) "Against the Tide" highlights the difficulties of making welfare assessments based on changes in aggregate wealth (see Chapter 12, pp. 180-188). Referring to Senior's work, Irwin writes (p. 183): "...the question he was raising was unavoidable: can economic science make ethically neutral statements about the impact of government policy on economic welfare?" Irwin is also careful to note that "The most obvious qualification relates to a weakness in the analogy about how an individual and a country benefit from trade" (p. 219). The paragraph that follows again notes that wealth and welfare are not the same thing, and that distributional issues are likely to loom large.

[jerry]

This reflects negatively on the credibility of the economics profession as a whole: critical thinkers might believe all economic arguments are as poorly supported as is the one in support of free trade; others might believe economists are mere propagandists and handmaidens in service of some philosophical or political goal.

It truly doesn't help that so many free trade supporters have tenure.

Us slobs facing outsourcing can recognize clueless academic ivory tower bullshit when we see it, and being told by the tenured for 20 years now that free trade has benefited everyone because our job insecurity is balanced by the always low prices at Walmart, well, that's what starts mob action....

[Peter]

I’ve just read Driskill’s piece and am less positive about it. My qualms fall into two categories.

1. The “raw” argument about hypothetical compensation is longstanding (e.g. Little) and, in itself, not very interesting. I think Samuelson’s heuristic theorem is a reasonable first approximation, subject to two empirical questions: Are some groups systematically disadvantaged across the sequence of proposed changes? And, how large are the post-hypothetical-compensation gains? In the case of trade, Heckscher-Olin and a growing body of research tell us that the answer to the first question is largely yes; the second is an arena of dispute. I wish the paper had been more focused on the empirical dimension of its critique.

2. The paper skirts the far more important question about trade, whether price equilibration is an appropriate assumption for an empirically useful model. All trade theories I am aware of make this assumption, in the form of taking it as given that a change in the value of imports will be exactly offset by a change in the value of exports, perhaps (in more sophisticated approaches) after a period of transition. Like price equilibration in macro theory, however, this begs the central question. Most popular concerns over trade liberalization are predicated on doubts over whether permitting an expansion of imports will actually result in a corresponding expansion of exports. Mainstream economics errs by regarding this as a theoretical question, subject to axiomatic proof, when it is really empirical. Does the proposed equilibration mechanism, from an initial trade imbalance to exchange rate (or wage or price level) adjustment to trade rebalancing, actually occur in practice? My reading is that the literature on real exchange rate determination does not support this view in any general way. If so, the theorems of trade theorists predicated on price equilibration are irrelevant to the practical concerns of trade policy.

[Bruce Wilder]

I am inclined to second Peter's comment.

The critical issue, here, is not the abstract "quality" of the analytic, a priori argument -- rather it is the factual evidence and the relationship of theory to carefully-considered and interpreted historical experience.

The non-economists, since time immemoriam have said, "well, that may be true in theory, but in the real world . . ." and, frankly, they are right to do so. "In the real world" people are concerned about the effect of "free trade" on economic rents, on the accumulation of capital, on incentives to technological innovation with increasing returns and external economies, imperfect competition etc. "In the real world" of economic relations, with which most people are familiar, the distribution of income is clearly related to institutional details, many of which have no correspondence in a theoretical Heckscher-Ohlin model. "In the real world", for example, gatekeepers, with access control, say, to shelf-space at Wal-Mart or CostCo or Safeway, may make a lot of money, and the highly productive people who make the dental floss or canned pickles sold there, may make very little money.

Economists, generally, are happy to study a Heckscher-Ohlin model, and to feel confident in a dictum, like "exports pay for imports", without ever considering how badly Heckscher-Ohlin models typically fit actual patterns of trade.

A practical policymaker would prefer generalizations grounded in carefully considered factual evidence and historical experience and strategic guidance, to "insights" and bland pieties. But, maybe, that's just me.

[tt]

"Are some groups systematically disadvantaged across the sequence of proposed changes? [...] In the case of trade, Heckscher-Olin and a growing body of research tell us that the answer to the first question is largely yes;"

Peter, which literature are you referring to? Can you mention some papers? Thanks.

[jsalvati]

I second tt's request. is there a review of that literature?
Also, from the paper:

"But the implications of the model for
"gains from trade" should not be used as an argument in favor of a policy of free
trade: it is just not the right model for helping us think about this question."

This seems like a strange statement. You can say that it is not an argument ender, but surely the fact that there is more material wealth with free trade is an argument in its favor.

[Peter]

What is the literature on the distributional effects of trade? It's huge, of course. My summary of the US lit would be that there is consensus on the direction but not the degree of the effect. (Our humble host, DR, has contributed to this body of work.) There are also many studies in Europe and the developing world.

Examples: "Distributional Effects of Globalization in Developing Countries" by Goldberg and Pavcnik (2006) and an older but very interesting NBER paper by Marianne Bertrand, "From the Invisible Handshake to the Invisible Hand? How Import Competition Changes the Employment Relationship" (1999). But one could cite many others.

Is this what you had in mind?

[wjd123]

That "free trade is for the good of the nation" and "more people are helped than hurt" are dubious propositions indeed. Economists are in a position to do the adding and subtraction when it comes to measuring the creation of wealth and its distribution, but they aren't in a position to extract from these numbers value judgments about goodness that are any more valid than the non-economist with his street philosophy or not wanting to compete with workers making twenty-five cents an hour.

For instance, one might agree that free trade creates wealth but does harm to democratic values. That the checks and balances put on power in our political economy are destroyed by increasing corporate power. And one may further believe that that in turn will destroy ones sense of procedural fairness and lead to a sense of take-as-take-can; and finally that mindset will ultimately erode any sense of shared responsibility and social solidarity. How do you subtract ones dread of living in a nation of malcontents with anarchistic values from the economist measures of greater wealth. You can't.

In fact as corporations get more powerful it will be increasing unlikely that such dread will even be measured or heard except as it might apply to marketing and public relations.

Or one might see a global trade without rules leading to economies of scale which in turn will destroy competition and block the creation of wealth; that the wealth created today by free trade will be taken away by tomorrows monopolistic practices; that economist who preach the gospel of free trade are too blinded by today's buying and selling to see the way that leads to salvation; that they will help lead us to partition buy keeping questions of procedural fairness and values from being heard.

So unless one believes that an ever expanding economic pie is always good for nations no matter how that expansion is achieved, can one make the value judgments that free trade is good for the nation and that it helps more people than it hurts.

[Denis Drew]

The Industrial Revolution was good for the nation as a whole -- but reduced the much more productive -- but much more interchangeable workers who now depended on the boss' capital to destitution because of their loss of bargaining power (answer: heavy unionization not common ownership Karl).

[tt]

Thanks, Peter, I was not aware of Bertrand's paper.

My remark on that literature is that it does not pick up any growth effect of trade liberalization (if any, as Dani would remind us).

Also, it focuses, understandably, on specific cases of liberalization but not on sequences of them. I might be hurt today from open markets but benefit tomorrow. It is that "systematically disadvantaged across the sequence of proposed changes" that caught my eye.

I am not claiming that a balance of benefits actually occurs over time, just that I am not aware of any serious study about this issue.

[Robert]

It has been known since 1974 that comparative advantange does not justify the claim that a country with free trade will have more goods to consume than it would have with tariffs. This objection is not about how the non-existent gain from trade is distributed. See http://robertvienneau.blogspot.com/2006/05/unregulated-international-_114890667128392540.html

Of course, mainstream economists just ignore the demonstrations of mistakes in their mathematics.

[Stephen]

Is industrial policy a potential Pareto improvement and if so how would we know?

[dale]

As a layperson looking at this post, I'm struck by the shifting between the terms "free trade", "trade per se", "trade", "trade liberalization", "international trade". Nowhere are the actual, negotiated trade regimes of the past few decades specifically mentioned.

[wjd123]

dale,

As the paper points out the correct description of what has been happening with trade is "trade liberalization," and not "free trade."

I like to call it "free trade as practiced today" to call attention to what we have gotten wrong: that it's not as free as its supporters make it out to be.

There would be nothing wrong in saying "trade liberalization" except for the fact that it just too innocuous a term when it supporters keep calling the process "free trade" with brings with it all the loaded connotations that come with the word "free."

[Septeus7theParaniod]

Oh goody my favorite subject; the fraud that is free trade.

I came to doubt the claims of the free traders not because of any technical problems with the theoretical justifications for the (non)policy but by simply observing that the results that free trade were supposed to produce weren't actually happening.

So rather than debating the technical merits let's get historical and empirical.

The first example is the greatest period of 19th century trade liberalization in Europe.

From 1866 to 1877 free trade practices reached its height highest. However rather creating a period of great economic growth from 1868 to 1870 GNP declined from 1.6% to .6% starting a period know as the great European depression. The turn around, on the overhand, started with the return of protectionism.

Now China practiced liberal trade for 500 years starting in the Sung Dynasty in order to exploit the benefits of sea trade. However this resulted in a Muslim dominated shipped policy with the greater risk being put on the Chinese domestic exporting merchants.

The Muslim traders came to dominate Chinese trade policy much like our transnationals do today.

But when Mongke Khan sent his brother Hulagu to conquer the Middle East. That cut off Muslim support to the Song which then caused the Sung rulers to cannibalize their own economy trying to defend against the Mogul onslaught.

Free Trade always creates interdependency which always leads to foreign domination.

I could go on and on about the hundred of years of Eastern experiments with liberal trade policies which took place 100s of years before Adam Smith wrote a word about economics and trade but what is the point?

We have all decided to go for globalony so don't be surprised when its the only we make in this country.

[David Fine]

"What is the purpose of money?" Also to woo women?

But seriously I have a question about trade liberalization today. How liberal is trade today in 2007? Are there tarrifs on goods? What goods? What are the problem tarrifs? I'm not a big company engaged in international trade, so I don't know the details. How liberal is trade today compared to the 1990s, or 80s, or 70s?

Also, is there inefficient trade going on, where nations export products like apples and expend the energy to transport them to places that grow apples themselves? For an example...

Nice blog, I was referred by Prof. Gabriel Aguilera after a lecture he gave on Mexican politics since the 1995 Financial Crisis.

Best,

Dave Fine

I think life may be repeating itself...