« New thinking on growth and development policy | Main | The power of advertising? »

April 27, 2008

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c891753ef00e55215873a8834

Listed below are links to weblogs that reference The "free trade reduces prices" fallacy, yet again:

» Adipex phentermine vs. from Adipex.
Adipex reviews. Adipex. How long does it take adipex to work. Adipex p phentermine vs. [Read More]

» Adipex for sale. from 180 ct adipex.
Adipex no prescription. Adipex. [Read More]

Comments

Bersant

Tyler's piece is wrong on so many levels. I think NYT needs to be better at satisfying its free trade tendencies.

Coming back to Dani's comment on prices, I think there is a common mistake a lot of people, and, surprisingly, many economists, do when discussing free trade. The lower price argument has a strong and unrealistic implicit assumption to it. The fact that freer trade will immediately expand production (capacities are in place, right?), increase competition and set in economies of scale, which will lower costs and subsequently prices. Over a certain period of time this could be true for some goods but generalizing this to all goods is misleading to say the least.

Raghav

It doesn't seem like he actually says that lifting trade restrictions will always and everywhere lower prices. (The lede comes closest, but read literally, it doesn't either.)

In fact, he writes, "Export restrictions send a message to farmers that their crops are least profitable precisely when they are most needed." And implicit in that sentence is that the relative price of rice will go up in rice-exporting countries under freer trade.

Anh Tran

Although I don't agree with Cowen when he says rice hoarding is a normal free market behavior, I think that that there is nothing wrong with his conclusion that freer trade reduces the global price for rice.

Dani is correct in saying that freer trade would increase the relative price for rice in rice exporting countries. However, what Cowen is saying, I assume for reading the piece, is that the average global price for rice, not just the price for rice in rice exporting countries, would reduce.

It would be problematic if one uses Dani's high-relative-price-argument as an excuse to restrict exports. Actually, the increase in relative price of exporting goods is a manifestation of the theory of comparative advangtage at work. It would be misguided to protest free trade based on the outcome of one section of the whole picture. Here, the whole picture include the buyers and sellers of all goods and services available in the market, regardless of its country of origin.

When we fully take market distortions in terms of environmental and social costs into account, free trade is good thing the world over. Think about those poor Vietnamese farmers selling their rice and fish throughout the world without the unreasonalbe restrictions from their own government and the governments of other countries. That would be is significant economic and political empowrement for them.

Ken Houghton

Give you a hint: if 93-95% of the suply isn't being traded internationally, that's probably because the indigenous demand is greater than the international demand. (If one could sell my rice on the open market and make enough to buy a preferred food, one would. Since one doesn't, they cannot.)

So when Cowen blithely proclaims that "the trade in rice doesn’t flow to the places of highest demand," he's ignoring his own data that the highest demand is internally--for exactly the reason stated above (that is, importing other foods is less utile than using the rice domestically; the highest demand is among the highest producers).

Diana

By the same logic, relative prices of food would also increase if the food exporting countries started importing more other goods (say pharmaceuticals), which would lower the prices of those other goods relative to food prices. Importing more stuff would generally be a sign that those countries are better off though, correct? So what's your point?
Overall freer trade will make food cheaper everywhere in absolute terms. Even if food is relatively more expensive people will be better off in absolute terms. Tyler is correct.

anon

I read the piece, Cowen never commits the fallacy.

Sebastian

Diana - simple example to show that freer trade will not decrease absolute prices for food:
Assume a World Market price for beef of 100$ per unit.
Assume that beef is abundant in, say, Argentina, so that, given no int. trade at all, it's domestic price would be lower. Now, with free int trade (assuming no transportation costs and Arg. being a ¨small" country with no effects on WM prices), the domestic price for beef in Argentina would equal the WM price of 100$.
Now have the Argentine gov´t impose export taxes of 100% on beef, so that they only get 50$ for a unit of beef selling on the WM at 100$. That means, of course, that equilibrium domestic prices would also be at 50$.

(Btw. - the quite good NYT article on Argentina
http://www.nytimes.com/2008/04/27/world/americas/27argentina.html has increased my concerns about their import taxes, which do indeed seem excessive and stifling technological modernization in Agriculture)

Free trade fundamentalist

Obviously you haven't even read the piece. But of course that is not necessary you know already that free traders are fundamentalists, so you can safely assume that fall for all possible fallacies.

Diana

Sebastian,

I think you are missing my point. Even if Argentina is a small country and its production does not affect WM prices, increased production and sale at higher WM prices means higher income for Argentinians, which means they can buy more stuff. So it is not clear that higher WM prices of beef will harm them! At the same time free trade will allow them to import goods that are scarce in Argentina at lower prices (as Dani pointed out), which I am assuming is a good thing for Argentinians.
So, higher beef prices in Argentina may mean less beef consumed in Argentina, but it also means higher incomes for Argentinians, which I think they would probably enjoy.

K. Williams

Dani, come on. If you remove export restrictions and price ceilings at home, there's a greater incentive for farmers to grow crops. So there would be more supply available globally, which -- assuming constant global demand -- would eventually reduce prices.

Regardless, Cowen's point in this piece isn't about lower prices per se -- it's about ensuring that food gets to those places that want and need it, and that the global supply of food continues to increase. To deny that free trade in food would help in this regard seems obtuse at best.

happyjuggler0

I find it amusing that Dani cites Argentina as an example of where it makes sense to ban or tax exports of food (i.e. not use free trade). Perhaps he should read the Argentina article linked to by Tyler.

The feedback effects of an export ban are such that less food will likely be grown in Argentina. This is true in all countries with export bans or high export tariffs.

I wouldn't be at all surprised to see global flower prices fall due to supply substitution in countries that engage in protectionist export tariffs on food.

Gene O'Grady

At least in California discussion of price incentives and global demand doesn't have an awful lot to do with how much rice is grown for whom -- it has it a lot more to do with choices about the use of the scarce resource of water, and that really isn't best dealt with by individual homines economici.

Sebastian

should read "export taxes" after the btw. above.

Diana,
OK, but then you're making a point about the overall welfare effect of free trade - which Dani has shown in his empirical work to be much weaker than theory would suggest.

Regardless of that, though, the argument here is about food prices - partly because they have distinct distributive qualities - the people hurt most by high food prices are the poor, who will benefit least from more imports.
(To avoid misunderstandings: I think everyone here would agree that the poor in food importing countries are hurt by export taxes in food exporters).

As for Cowen's article - I agree with other people that his main argument is about increasing production rather than lowering prices (on the contrary - his demand argument seems to _rest_ on higher (export) prices.
I have no idea if he's right on that - he doesn't cite any empirical indication, let alone analysis that he is, though the argument is intuitive. Generally, though, Cowens is one of the true "free market fundamentalists" who makes a life of explaining why free markets are always great, so yes, I'm doubting some of what he write because of who he is.

Domino

Dani, you're at risk of becoming an ideological reactionary. You've ignored a good, progressive and legitimate point here to raise a side issue and score a cheap shot. This is the sort of debating approach I'd expect from Socialist Alliance or the GOP. You're better than this.

MW

"As for Cowen's article - I agree with other people that his main argument is about increasing production rather than lowering prices (on the contrary - his demand argument seems to _rest_ on higher (export) prices."

Don't misunderstand Cowen. His argument was not FOR higher export prices, but that higher export prices already exist. The world market price for grain and rice did not materialize out of thin air. They came from real shortages and real starvation experienced by other countries.

Dani's argument assumes that the only pertinent variable is the short-term consumption of goods within net exporting countries. Dani neglects to mention that exported goods go to satisfy a real need within other countries. On a world-wide scale, then, free trade produces a neutral effect.

Later on, free trade incentivizes more production and does reduce the world-wide price of goods while increasing world-wide production. For an empirical example, consider oil exports from Canada. Oil companies have invested billions of dollars in expensive shale oil exploration in the Canadian tundra and oil from these mines have supplied much of the oil to the American midwest. If Canadian oil exports stopped tomorrow, so would these investements. The American (and world-wide) price of oil would go up even more and the world as a whole would take a hit to its standard of living.

Fabio

I do not agree that Tyler Cowen is wrong; your claim that, despite rising supply, prices would not eventually fall seems curious in view of the relative inelasticity of food demand.

Free(r) trade ensures that goods are produced where it is most efficient to do so. Thus, it is highly likely that global supply will rise over time (which you acknowledge) and prices eventually fall (food demand is relatively inelastic, thus when you augment supply prices will necessarily fall).

Sure, resource endowments of different countries vary, and thus in countries with food abundance, the absolute price of food may rise. However, that’s the case for any good/service free trade scenario – relative scarcity is different in every country and so are the price effects of opening up to trade. However, it seems fair to say that *globally* (and not necessarily in every country in the world) food prices would be lower under the free trade scenario. Indeed, that’s what the author probably wanted to say.

Eric H

Anon nails it; the argument Dani is claiming that Tyler is making isn't made. At least by Tyler.

gulzar

Dani,
You are spot on. I have listed out a few reasons why greater trade in rice cannot achieve the objective of lower prices here
http://gulzar05.blogspot.com/2008/04/rice-trade-and-lower-prices.html

Arslan

For once, Dani’s argument confounds me. Strictly speaking, a move from less to greater free trade in a two region setting will raise the price of the good in the exporting country and lower it in the importing country. However, in our existing global situation, a move towards freer trade would presumably include lowering export subsidies. But this would, on impact, raise the international price for net importers and reduce the domestic price for net exporters! Indeed, that’s been one of the concerns that some of the net importers of food among developing countries have raised during recent trade negotiations.

pat toche

not so much a fallacy as ethnocentrism

ethocentrism:
The tendency to look at other cultures through the eyes of one's own culture

i.e. a U.S. perspective

Tord Steiro

Another question is whether increased demand for food will actually boost long time production very much. Most food producers are small agricultural households in developing countries, and while our industrialized agribusiness has a relatively low potential for any sustainable increase in production, it is these farm household that have the most promising potential.

The problem is, however, that they do not necessarily respond very well to increased demand or price incentives. Using the words of Edward Taylor and Irma Adelman: "As a consumer, the household now faces a higher staple price; however, it also experiences an increase in its income due to higher profits from farm production, leading to a positive income effect competing with the negative Slutsky effects outlined above." (http://www.agecon.ucdavis.edu/people/faculty/facultydocs/Taylor/REHO17-02.pdf)

While Elisabeth Sadoulet et al (http://www.jstor.org/stable/pdfplus/2234892.pdf)
tries to figure out why peasant households sometimes appears unresponsive to price signals and government programs.

Understanding these issues appears to be crucial in order to find a smooth way out of today's unrest over increasing food prices. And there is little evidence to support the idea that freer food trade is the silver bullet in the game, although it may prove to be part of a solution.

BlogReader

[ Bersant : Tyler's piece is wrong on so many levels. ]

Care to mention at least one in your post?

[ Bersant: Over a certain period of time this could be true for some goods but generalizing this to all goods is misleading to say the least. ]

Let's talk about the good in question: rice. What more is needed to get poorer countries into the position of exporting more rice? Mainly politics as there's already an infrastructure that's underutilized to deliver goods. So I suppose you're right in that there's not going to be a quick fix as the politicians want to keep their cushy jobs.

Barkley Rosser

Dani,

I have to say that this is one of the weakest postings I have ever seen you make. Sure, export restrictions by food exporting countries will keep their prices down. But you agree that freer trade in food will increase supplies, which should reduce the overall global price. Furthermore, it is the importing countries that are hurting in terms of food shortages and threats of starvation, not the food exporting countries. We should exacerbate famine so as to keep food prices down in Argentina?

This is not to say that everything Tyler Cowen argued is correct. Thus, he scuffles over the fact that agricultural land in many countries is very unequally distributed, with that distribution being based on a past that is not viewed as fully legitimate. So, merely enforcing existing property rights may not improve production, but may increase corruption. We have seen redistributive land reform work in many countries, Taiwan an example.

Also, many parts of the production system are provided by government, such as roads and the larger parts of irrigation systems. So, just enforcing property rights or having freer trade does not necessarily improve the provision of these.

Eco

Dani,

Instead of picking on Tyler, I think it is time to point the finger on the Argentineans for adopting policies whose outcome is to starve the people from poor food importing countries.

Or do the arguments about a global community only hold when the point is to criticize rich countries?

paine

dani
still a loyal reader
but nothing to add
so no comments

don't want
to become one of those nascar like commenters here

ever circling
the same simple slanted oval of a track

lap after lap

ever and always turning
in only one way and one direction

in my case

hard left

ps
i get my need to nascar
out of my system
over at economist's view

ivan janssens

If free market policies don't work, we can always increase export subsidies. These should be bad news for protectionist countries like Argentina and India, but good news for food importing countries. Let's try some dumping, like the Chinese did with textile products.

By the way I can see nothing wrong with this:


"Freer trade would reduce prices of food (relative to other prices) only in countries that are food importers. Food exporters would experience a rise in the relative price of food, and there is simply no way of escaping that reality."

If this is the result of free rade, then this makes the case for it even stronger than when it just lowered prices. Isn't this what we want? Lower prices for food importing nations and higher prices for food exporting ones?

dsquared

Barkley - surely the issue is that there are plenty of countries which are small net rice importers at present but which would become rice exporters if their export controls were lifted, with more or less disastrous consequences domestically?

I also think Dani's chosen misleading examples in Thailand and Argentina - Malawi's a net maize exporter, for example. On the other hand, Tyler's scattergun advocacy of undifferentiated deregulation is really irresponsible - developing countries with food import tariffs ought to get rid of them, but does anyone think that getting rid of EU subsidies to rice production would lower the price of rice?

(I'd also note that you're underestimating the distributional issues in making the claim that " it is the importing countries that are hurting in terms of food shortages and threats of starvation, not the food exporting countries". Notoriously, Ireland was a net food exporter throughout its 19th century famine).

Barkley Rosser

dsquared,

I think you had better pony up with your claim about all the might-be net rice exporters who are net importers due to export controls. Who? How many?

As for Ireland, please, that is an extreme example that is mostly good for people getting drunk on green beer and screaming at each other about events of well over a century ago. I do not see Argentina, Ukraine, Kazakhstan, or even India, as an 1840s Ireland, although the state of Bihar in India might be. Are any of these in as much danger as Haiti, Mauritania, or Ethiopia?

Butter

"Consider a simple analogy: if the quality of Interstate 95 declined, the price of barbecue in North Carolina might fall, namely because people like me wouldn't drive to go eat there. Yet few people would argue that a nation can do better feeding itself by lowering the quality of its roads or for that matter littering its harbor with dangerous rocks." Ouch! Sorry Dani.

corvad

no outside the box thinking, as far as I can see. so many problems with the following suggestion, but for kicks, if poor people can't buy the food produced in their own country because of the commodity boom, how about direct cash transfers/food stamps financed by a Tobin-type tax? if the global market prices food out of the bellies of starving people, food security has to become a human right.

(ducks and runs out of the room)

Marcel

If you look at price as pressure it becomes obvious that as you combine the higher and lower pressure then the equilibrium pressure is somewhere in between.

While it may make some type of sense to have this as a desired outcome. If everything is at the same pressure then there need to be no structures in place to preserve imablances. The societal ramifications of pursuing this goal are severe and cannot be discounted.

Also, the idea of trying to pursue price equilibrium, without wage equilibrium, and equilibrium in mobility is a bit of a farce.

rolex watches

This is clearly replica watches the job for our legal fraternity to engage the establishment to necessary breitling watches steps by filing petitions in various courts. IF one fails another should be cartier watches filed taking every one to task. It is rolex watches useless to suggest ways and means to solve tag heuer watches the day to day problem to well paid employees tissot watches of government controlled establishments. Only active omega watches judiciary will resolve this problem.
http://www.watchvisa.com
http://www.watchvisa.com/breitling-watches.html
http://www.watchvisa.com/cartier-watches.html

rado watches

Why is everyone just montblanc watches willing to accept power cuts? Don't you think that patek philippe watches having continious power is your right? If people aren't going to demand rado watches 24X7 power, don't expect anything zenith watches to change. The government needs to look at other sources parmigiani watches of power generation. The only solution is more power panerai watches production. Nothing less.
http://www.watchvisa.com/montblanc-watches.html
http://www.watchvisa.com/patek_philippe-watches.html
http://www.watchvisa.com/rado-watches.html
http://www.watchvisa.com/tudor-watches.html

bvlgari watches

They should take up building BVLGARI Watches dams for power generation. We should FRANCK MULLER watches learn from china. They have the world's largest dam for power CHANEL Watches production, it alone produces 22,000 MW of LONGINES Watch power. So, unless the government opens up the economy more for iwc watches foreign investors, this power cut problem is a life long disease every hublot-watches india will need to face.
http://www.watchvisa.com/bvlgari-watches.html
http://www.watchvisa.com/chanel-watches.html
http://www.watchvisa.com/franck_muller-watches.html

aion kinah

So, merely enforcing existing property rights may not improve production, but may increase corruption

Supra Skytop Red Black

In fact, he writes, "Export restrictions send a message to farmers that their crops are least profitable precisely when they are most needed." And implicit in that sentence is that the relative price of rice will go up in rice-exporting countries under freer trade.

rolex watches

People usually say :"Seeing is believing." http://www.tt88times.com
Each attempt has a corresponding gain, in part or obvious, or vague. At least we have the kind of satisfaction After I bought this watch ,in a sense,it means a great deal to me. http://www.fashionhairfu.com

buy viagra

i like this part of the post:"I imagine little electric vans available for “Café To Go”, where place an order and the van comes with all the supplies you need, and helps you set up the Café. There would be also a Café “On the Road”, where couples get into alternative energy vehicles and travel around the country, hosting cafes on different topics, and sharing with people what they heard form the last community they visited, creating a network of learning with people feeding good ideas into a central area. This would be all networked via the Internet so that you won’t feel that it was just one, individual conversation, but that the larger network was in communication with itself. " is very good

ghd straighteners

GHD straighteners was kmown as ghd flat iron, which was authorized online seller provides all kinds of hair straighteners,pink ghd,purple ghd,babyliss. By visiting ghd australia , you will find what you want and made yourself more beautiful.If you miss it ,you miss beauty.Buy a piece of ghd for yourself.Come and join us http://www.ghdoutlet-au.com/ to win the ghd iv styler.

birkenstock

Birkenstock was Made in Germany since 1774 . Check out our Birkenstock sandals and Birkenstock shoes including the Birkenstock gizeh,at the lowest regular outlet prices, free shipping and when you put on Birkenstocks. you will feel very comfortable.

irrigation systems

Great Idea ! Yeah Dani, I think Eco is right..You must think about his idea. Here I am completely with Dani opinion.

lachou

I like these articles , democratic countries formulate policies are both team and the interests of the people of power, but the undemocratic countries rarely for the interests of the people, http://www.jerseysky.com it is the sorrow of many democracy, I like the western and northern state policy.
http://www.cheapsaleing.com
http://www.nikeairmaxshoe.ocm

louis vuitton on sale

When we fully take market distortions in terms of environmental and social costs into account, free trade is good thing the world over. Think about those poor Vietnamese farmers selling their rice and fish throughout the world without the unreasonalbe restrictions from their own government and the governments of other countries. That would be is significant economic and political empowrement for them.

jordan shoes

I am happy to find this post very useful for me, as it contains lot of information. I always prefer to read the quality content and this thing I found in you post. Thanks for sharing.

jordan shoes for sale

I think this is a great post. One thing that I find the most helpful is number five. Sometimes when I write, I just let the flow of the words and information come out so much that I loose the purpose. It’s only after editing when I realize what I’ve done. There’s defiantly a lot of great tips here I’m going to try to be more aware of.

jordan shoes

I’ve seen progression in every post. Your newer posts are simply wonderful compared to your posts in the past. Keep up the good work!

jordan shoes

I’ve seen progression in every post. Your newer posts are simply wonderful compared to your posts in the past. Keep up the good work!

oil additive

have a look at this psot man its great

xiaoye

Thanks for sharing your article. I really enjoyed it. I put a link to my site to here so other people can read it. My readers have about the same interets

Account Deleted

At your very good pumps market, Christian Louboutin sale this French man absolutely fail to grow to be ignored. In addition the true is all of your not necessarily ignore it at pandora sale, because the type of brand Christian Louboutin wedges couldnt grow to be a little more well known, assist some people extent.

Account Deleted

Dubai is the centre of the international trade. People from all over the world come to Dubai to shop various products and articles on regular basis.

Fresh Music Library

Account Deleted

raf

Thanks for article.

Ron Looker

columbus injury lawyer
I always enjoy reading your posts and I look forward to your next one.

Account Deleted

In addition the true is all of your not necessarily ignore it at pandora sale , because the type of brand assist some people extent.

Account Deleted

Raf
raf

Thanks .. I like it ...

Account Deleted

Many places and centers offer business and trade promotions to both buyers and supplier.What about the differences in skill intensities across industries? The job losses in the relatively unskilled-labor intensive battery industry should have little effect on the relatively skilled-labor intensive machinery
sexshop
sexyshop
sexshop online

Account Deleted


I'm still learning from you, but I'm trying to achieve my goals. I certainly enjoy reading all that is posted on your blog.Keep the information coming. I loved it!


organic seo service

Account Deleted

Very interesting thanks. I believe there's even more that could be on there! keep it up
drug forum

Account Deleted

This is such a great post, and was thinking much the same myself. Another great update.
medicine forum

Account Deleted

powerpoint file corrupted

Thanks for the interesting article!

Account Deleted


Awesome, Very interesting issue that after a very successful. Nicely written article good work ! Thanks for the great piece of sharing. Enjoy to read your write . Thanks a lot
Creating History Together With ArenaBetting Piala Eropa 2012 http://seotoolinfo.com/2012/06/creating-history-creating-history-together-with-arenabetting-piala-eropa-2012/
Agenliga Sebagai Agen Bola Online Untuk Euro 2012 http://seotoolinfo.com/2012/06/agenliga-agenliga-com-sebagai-agen-bola-online-untuk-euro-2012/

Verify your Comment

Previewing your Comment

This is only a preview. Your comment has not yet been posted.

Working...
Your comment could not be posted. Error type:
Your comment has been posted. Post another comment

The letters and numbers you entered did not match the image. Please try again.

As a final step before posting your comment, enter the letters and numbers you see in the image below. This prevents automated programs from posting comments.

Having trouble reading this image? View an alternate.

Working...

Post a comment