Thursday, 29 May 2008

The case for free trade

In a recent posting on his blog, Greg Mankiw points us to an article by Robert Driskill, in which Driskill says
My fellow economists are manning the barricades to defend free trade from a growing public backlash. But with globalization increasingly seen as a threat, our arguments are falling on deaf ears. Maybe it’s time to stop claiming we know what is best for everyone?
Mankiw explains that the essence of the Driskill argument is
Do economists know something, though, that Joe Sixpack doesn’t, and does this knowledge inform their thinking about free trade? What they know that Joe Sixpack doesn’t is a basic but not obvious result from economic analysis: The gains to winners from free trade are sufficiently large that a hypothetical redistribution of these gains from winners to losers could make everyone better off. Note that economic analysis doesn’t say that these compensations actually take place. In fact, everyday experience shows us they don’t, and economists know that there are practical problems that make it virtually impossible to carry out such redistribution schemes. Why, then, do economists support free trade?...

What if free trade is making a small percentage of the country much better off, but is hurting a much greater percentage (the “Joe Sixpacks”), as some argue is the case? Even if the total gains to the few winners are sufficiently large that they could hypothetically compensate the losers, why would it be obvious that “Americans as a group are net winners”?
In his response Mankiw notes that the arguments of economists in support of free trade have both positive and normative dimensions. Mankiw writes
Some economists take the libertarian view that people should presumptively be allowed to engage in mutually advantageous trades, absent any externalities. Under this view, the restricted-trade equilibrium has no claim to moral superiority--indeed, just the opposite. The fact that some people lose when trade is opened up compared to a restricted-trade status quo is of little moral relevance.
Note that such a view doesn't mean that economists "know what is best for everyone", as Driskill claims, but rather that people know what best for themselves and free trade helps them get it.

Mankiw goes on
Other economists take the utilitarian view that we should use society's resources to maximize total utility of everyone. Because of diminishing marginal utility, income redistribution from the rich to the poor is a key part of the utilitarian's plan. But a progressive tax and transfer system, rather than restricting international trade, is the most effective way of achieving that goal. Once again, the economic gain or loss compared to the restricted-trade equilibrium is no special relevance. Maybe it would be relevant if for some reason a progressive tax/transfer system were infeasible, but that is not at all the case.

As theoretical exercise, we often examine the effects of trade by imagining the economy with and without trade. But the situation without trade is not a philosophically noteworthy benchmark under either libertarian or utilitarian perspectives. The libertarian wants maximum freedom; the utilitarian wants maximum social utility. Neither goal is best served by trade restrictions. The fact that some people lose when trade is opened up has no philosophical significance. (Whether it has political significance is another matter.)
As noted above, Driskill argues that
The gains to winners from free trade are sufficiently large that a hypothetical redistribution of these gains from winners to losers could make everyone better off. Note that economic analysis doesn’t say that these compensations actually take place.
He then says that compensation can't be made. But does this matter for support of free trade? I assume even Driskill would support free trade if everybody was actually made better off, that is, if the compennsation was actually made. What if the compensation could take place, then should it? Does support for free trade require support for compensation of the losers from trade? In a New York Times article, entitled What to Expect When You’re Free Trading, on the issue of compensation for losers from trade Steven E. Landsburg argued we should not give such compensation. Landburg's basic question is
All economists know that when American jobs are outsourced, Americans as a group are net winners. What we lose through lower wages is more than offset by what we gain through lower prices. In other words, the winners can more than afford to compensate the losers. Does that mean they ought to?
His answer, no. Landsburg argues
Even if you’ve just lost your job, there’s something fundamentally churlish about blaming the very phenomenon that’s elevated you above the subsistence level since the day you were born. If the world owes you compensation for enduring the downside of trade, what do you owe the world for enjoying the upside?

I doubt there’s a human being on earth who hasn’t benefited from the opportunity to trade freely with his neighbors. Imagine what your life would be like if you had to grow your own food, make your own clothes and rely on your grandmother’s home remedies for health care. Access to a trained physician might reduce the demand for grandma’s home remedies, but — especially at her age — she’s still got plenty of reason to be thankful for having a doctor.

Some people suggest, however, that it makes sense to isolate the moral effects of a single new trading opportunity or free trade agreement. Surely we have fellow citizens who are hurt by those agreements, at least in the limited sense that they’d be better off in a world where trade flourishes, except in this one instance. What do we owe those fellow citizens?

One way to think about that is to ask what your moral instincts tell you in analogous situations. Suppose, after years of buying shampoo at your local pharmacy, you discover you can order the same shampoo for less money on the Web. Do you have an obligation to compensate your pharmacist? If you move to a cheaper apartment, should you compensate your landlord? When you eat at McDonald’s, should you compensate the owners of the diner next door? Public policy should not be designed to advance moral instincts that we all reject every day of our lives.
Tim Worstall also argues against compensation. He writes
For the removal of said tariff or other restriction is what is going to cause the loss to those producers. Which means that the imposition of it has been of benefit to those very same producers all the years it has been extant. And what we haven't been seeing all of those years are lump sum transfers from those producers to the consumers to compensate, from the benefits being gained, to cover the losses from not trading.


I have absolutely no doubt that such things as retraining grants and the rest are a useful political response to peoples' worries over the structural changes brought about by changes in trade restrictions. It's just that I don't see the moral case: they're not been paying us out of the profits they make from the restrictions upon us, so when those restrictions are lifted, why should we pay them?
Another related question is, As a a political matter should we compensate people? If compensation doesn't take place why would those who fear losing out from free trade, at least in the short term, not fight a move towards freer trade? If you want to defuse the very vocal and dangerous anti-free trade movement isn't an attempt at compensation a sensible and justifiable policy? As Jagdish Bhagwati has pointed out trade liberalization can backfire politically
... as workers in import-competing industries are likely to mobilize against the adjustment being imposed on them. Politicians in democratic countries are also unlikely to be impervious to their complaints, especially as those who lose are more likely to vote to punish you than those who win are likely to reward you, an symmetry that seems to be fairly common.
Mankiw goes on to point out that
... the arguments that Professor Driskill uses would also suggest that we economists should not be so hard on the Luddites. After all, there are sometimes losers from technological progress. And the original Luddites were precisely such losers. Yet I doubt that one would find many thoughtful libertarians or utilitarians (or economists of any other stripe) siding with the Luddite cause.
The outcomes of technological change and trade are basically the same, so why should we treat them differently? If we are to be anti-free trade then surely we must also be anti-technology.

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