Trade Sequence Part 1 – Introductions and Definitions

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James K

James is a government policy analyst, and lives in Wellington, New Zealand. His interests including wargaming, computer gaming (especially RPGs and strategy games), Dungeons & Dragons and scepticism. No part of any of his posts or comments should be construed as the position of any part of the New Zealand government, or indeed any agency he may be associated with.

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104 Responses

  1. Avatar MikeSchilling
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    says:

    I’ll be interested to see how the argument progresses.Report

  2. Avatar George Turner
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    Well, there’s parts of free trade that I don’t really understand.

    If an American company sells cars, say Ford Focuses (Foci?) to Italy, and an Italian company sells cars (Ferraris) to the US, the American cars are loaded onto a ship in New Jersey and the Italian cars are loaded onto a ship in some seaport over there. Aside from the obvious question of which ship arrives first, the Ferrari ship or the Ford ship, I don’t really see how anyone benefits.

    You’ve got Americans sitting around without the Fords they sent, and without the Ferraris they expect, and you’ve got Italians who likewise don’t have any cars. Meanwhile you’ve got two big crews of sailors sitting in the middle of the ocean, with cars they can’t possibly drive anywhere.

    I assume the magic of free trade somehow rectifies this situation, because that’s about as far as my thinking has gone so far.Report

    • Avatar Plinko in reply to George Turner
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      The situation you describe is temporary, shipping is a transaction cost that takes both money and time that’s definitely already a drag on trade in general (international is often worse because of distances but clearly not always).
      Once the ships are there, both Italian and American drivers can choose to buy either a Ford or a Ferrari if they want (or both if they can afford it, whatever floats their boat).
      I would think it’s pretty obvious that both Italians and Americans are better off if they get to pick one or the other than if Italians are stuck with Ferraris and Americans only with Fords. But, if not, then we need to get through the basic arguments for domestic trade and free markets before moving on to arguments about why the same things apply to international trade flows.Report

    • Avatar George Turner in reply to George Turner
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      says:

      Ah, so “the ships arrive” is the next logical step in my thinking! 🙂

      I point this out because when it comes to trade economics among much of the public, that parody is not too far off, and you see even worse ones, of course.Report

  3. Avatar James Hanley
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    Free trade is not about how tightly the market for a good is regulated, so long as that regulation applies equally to importers and domestic producers.

    In all seriousness, it wasn’t until I started reading the League that I realized anyone thought free trade was about not having any regulations at all on economic exchange. I think it was recently here that someone suggested free trade meant we’d have to accept imports of child porn. (Not that very many people here misunderstand that, of course–I’m not implying a general condemnation of the League readership here.)

    For part II, I suggest just posting this.Report

  4. Avatar Matty
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    says:

    gratuitous “health and safety” requirements that somehow domestic producers don’t have to comply with

    I’d be curious to see some examples of this. The version I hear (I’m not sure if I believe it or not) is that importing from places with different safety laws means giving foreign producers an unfair advantage since they can spend less on workers safety.Report

    • Avatar Plinko in reply to Matty
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      It’s not worker safety, but general product safety.

      For example, every shipment of goods my employer imports has to show documentation of some very rigorous testing from a certified lab to show conformity to a number of material and safety regulations.
      If someone manufactured the same goods in the US and sold them, their products are required to conform to the same standards, but the testing and documentation are not mandated and so they would be able make their own decision on how rigorous their standards and documentation needed to be, if they do any at all.

      That becomes, in effect, a tax on imports that is not applied to similar domestic goods.Report

      • Avatar James K in reply to Plinko
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        says:

        If someone manufactured the same goods in the US and sold them, their products are required to conform to the same standards, but the testing and documentation are not mandated and so they would be able make their own decision on how rigorous their standards and documentation needed to be, if they do any at all.

        Which means that in practice the standard is effectively optional – for domestic producers.Report

    • Avatar James K in reply to Matty
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      Up until very recently Australia banned imports of apples from New Zealand, allegedly due to fireblight. The only way they would accept our produce was by treating the apples with enough chlorine to turn them into brown sludge.

      The trouble is that fruit can’t transmit fireblight – it’s spread by open blossoms. Eventually the WTO rapped them hard enough over the knuckles that they were forced to accept our produce in a way that left it palatable.

      For this very reason, the WTO has some quite specific (but fair) rules on when you can impose a trade restriction for health or environmental reasons.

      As for the worker safety stuff, I’ll get to that in part 4.Report

  5. Avatar Murali
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    says:

    James, I don’t know that I will have much to add, but this is awesome.Report

  6. Avatar Ramblin' Rod
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    says:

    I look forward to the discussion, but given this:

    Given the severity of the differences between economists and non-economists on this issue, and the fact that it was one of my specialities at university, I thought that as the League’s resident Dismal Scientist it would be worth doing my best to explain how trade looks to an economist’s eyes and why it is that we see free trade as a fundamentally good policy to pursue, even if other countries don’t reciprocate.

    I’m skeptical of this being anything other than “My words are the Truth writ upon impressive blocks of granite. Any who would dare contradict or even question the Wisdom thereon are obviously ignorant fools.”

    But hopefully I can offer up criticism that some will consider worthy of consideration.Report

    • Avatar Murali in reply to Ramblin' Rod
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      says:

      Question:

      Let us suppose for a given field of enquiry, there are two groups of people. One group has studied an issue for years on end and produced peer-reviewed literature in an environment where there are incentives to be unorthodox. The other group has not. There is a consensus on the topic among people in the first group members of whom come from across the ideological spectrum, while significant portions of the second group disagree with this consensus. It is established that the field in question is counter-intuitive and that our minds require proper training in order to make the correct inferences. Who is more likely to be true?

      What if the topic is the origin of species?
      What if the topic is about long term climate patterns, man’s effect on such patterns and their effect on us?
      What if the topic is on the effects of different kinds of trade policies on society?

      Also, do you notice how lay-persons always try to come up with some kind of explanation as to why for this topic, it is different?Report

      • Avatar Murali in reply to Murali
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        says:

        I pressed submit too soon:

        do you notice how lay-persons always try to come up with some kind of explanation as to why for this topic, it is different, especially when the conclusions of experts contradict their ideological commitments?Report

        • Avatar Stillwater in reply to Murali
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          I don’t think it’s people rejecting the consensus as being accurate, or correct. It’s people rejecting that a purely economic calculus provides the correct answers for what we want our policies to achieve. So the criticism is that focusing exclusively on economic interests blurs the distinctions people are actually interested in. Competing values and all that.

          The best arguments in support of free trade are ones that include and address those other values, other concerns. And for a very good reason: insofar as economic policy is public policy, people will support or reject it insofar as they think it furthers (or at least isn’t inconsistent with) their own ends.Report

          • Avatar Pierre Corneille in reply to Stillwater
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            Stillwater,

            Those are pretty much my thoughts as well. But more concisely worded than in my rambling comment below.Report

          • Avatar James Hanley in reply to Stillwater
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            I don’t think it’s people rejecting the consensus as being accurate, or correct.

            I think part of it is. Granted that efficiency does not take account or, nor necessarily trump, all other values, but it’s not always those other values people are talking about. The bumper sticker “Out of a job yet? Keep buying foreign.” is not really addressing those other values–it’s addressing the claim that free trade does not lead to a reduction in jobs. Other folks claim that free trade makes a country poorer. Still others argue that the trade deficit is a debt that has to be repaid. All those arguments are rejecting the accuracy of the consensus.

            But none of that is meant to dismiss or downplay the issue of values that aren’t addressed in the argument for free trade.Report

          • Avatar Murali in reply to Stillwater
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            The best arguments in support of free trade are ones that include and address those other values, other concerns

            Once James K has finished this sequence, I will see if I can do a post which basically tries to pick out those values which are in fact undermined by free trade. I think that when I do that, we will end up showing that those values aren’t worth promoting anyway (or are things liberal* polities should remain neutral about). (or at least not to the extent to which we forgo the gains from trade)

            *liberal in the broad sense that encompasses, high, claasical and neoliberalism and not just a synonym for the left.Report

          • Avatar Roger in reply to Stillwater
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            says:

            Stillwater,

            I think you and Creon are bringing up good points. Economics is a discipline which can answer certain questions of cause and effect.

            If you do X you will get Y with side effects of Z.

            Whether we want to do X though depends upon our values and our context. I will add that economists, unlike entertainers, don’t lean dramatically in one political direction or another. Thus, the consensus position of economists is a great place to start, or at least something which should not be dismissed lightly. there is a difference between being rational and rationalizing.

            I like to go to this web site below which provides the consensus view, weights and comments of a panel of established economists.

            http://www.igmchicago.org/igm-economic-experts-panel

            Note that there are usually a few outliers on topics, and they often provide comments on their reasoning.

            The IGM forum is a fascinating place to start on any economics question.Report

        • Avatar Creon Critic in reply to Murali
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          says:

          “Tariffs and import quotas usually reduce general economic welfare.” is how the linked Greg Mankiw post puts the consensus amongst economists. This point is a valuable piece of information, but as Stillwater suggests, this consensus is just one input into a process that need take into consideration a lot of other values. “General economic welfare” is just one of several competing ideas about social welfare that the public and policymakers rightly take into consideration: national security, labor conditions, environmental protections, and trade’s consequences for domestic culture. It isn’t self-evident that economists’ perspective ought to trump the alternative perspectives, no matter the number of peer review publications in tow.Report

          • Avatar James Hanley in reply to Creon Critic
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            You left out the value of not telling Peter that he has to buy his product from Paul, even though Peter could get it cheaper from Mary.

            That’s not solely an efficiency argument.Report

            • Avatar Stillwater in reply to James Hanley
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              Which is what he’s challenging James. Yes?Report

              • Avatar Stillwater in reply to Stillwater
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                Ooops. I didn’t see a “not” in there.Report

              • Avatar James Hanley in reply to Stillwater
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                Heh, I purposely wrote it so it’d be hard to see. 😉

                But really, I just wanted to get the idea out there that while there truly are other values besides efficiency, they don’t all necessarily point in a non-free trade direction.Report

              • Avatar Stillwater in reply to James Hanley
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                says:

                Probably worth more discussion than I can provide right now, but…

                I think what you wrote here is one of the interesting challenges to libertainism. Namely, if it’s not in a person’s immediate – and transparently obvious! – self interest to adopt free trade policies, why would they adopt them? It seems like a) this conclusion is inconsistent with a subjective determination of utility enhancement (on what grounds would I be justified in advocating for policies which this specific person thinks are harmful to their self-interest? Only on objective grounds, it seems to me.), and b) it is inconsistent with self-interest broadly construed (as classical liberals define it) since a person’s rational assessment of situation X doesn’t require them to (rationally) consistent in the application of that principle across the board.

                It seems to me that the only reason this argument goes thru is by begging the question of what constitutes rationality (it isn’t subjectively determined) and what constitutes rationality in the application of principles (which, again, isn’t subjectively determined, but also isn’t consistent with normal human nature or even the logical limits of human nature).

                On the other hand, if the argument is consequentialist, then we’re talking about justificatory criteria which are right in the wheel-house of US political liberals.Report

              • Avatar James Hanley in reply to Stillwater
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                says:

                Still,

                You’re either going to have to rewrite that or grant me time to work out what you mean. I don’t mean that nastily–I’m just not sure I managed to follow it.Report

              • Avatar Plinko in reply to Stillwater
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                says:

                MattY had a good post that addressed this issue recently – particularly that the sort of incremental liberalization is problematic because it does, in fact, create specific winners and losers at every iteration.

                So, politically, it gets very problematic to make any given small change, largely because of preference intensity. But there’s a second-order effect that in the aggregate, people will necessarily believe that doing even more liberalization will just hurt more people. It’s extremely natural to believe that we just multiply the harms and that’s it because gains are easy to mark to zero (since they’re tiny to any one person) and multiplying by zero is, well, still nothing.
                Now, whether or not that’s rational is a different question, but I think it is rather obvious that it’s natural to be skeptical of general welfare gains from trade liberalization but making a proper rational analysis, as James says below, is hard.Report

              • Avatar Stillwater in reply to Stillwater
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                How bout this. I’ll re-write it to make it more clear, and you start thinking about the main argument (which is sorta clear, even if it’s too quick and generally bungled). I can do better, I think. It’s a subtle concept because the idea of subjectively determined utility enhancement is itself an objective property. And arguments for prioritizing that objective property above other objective properties is a hard thing to disentangle. Especially in terms of why we should – normatively and objectively speaking! – prioritize that objective value above others.

                So language is something I’m gonna have to fight thru to get the point across more clearly.Report

              • Avatar Stillwater in reply to Stillwater
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                Plinko, could you elaborate on that a bit? I think that’s getting pretty close to what what I was arguing, but I’m not entirely sure.Report

              • Avatar Plinko in reply to Stillwater
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                Matt’s post was actually about liberalizing H1-Bs and how it’s natural that by trying to expand one narrow area of immigration, you create a specific constituency to argue against it (in this case software engineers).

                When new immigrants arrive who are very similar to you personally the tendency is for your real wages to fall, but the real wages of everyone else (including the immigrant) to rise. And the important fact about this is that the gains are much larger than the losses. Because it’s a positive sum interaction, in principle you could compensate the losers with redistribution. But in the particular case of immigration, there’s no need to do that because very few people are very similar to you personally. The important thing is just to not restrict immigration to one particular kind of person. Only allowing computer programmers in is bad for computer programmers and only allowing plumbers in is bad for plumbers. But a broad-based expansion of legal immigration is good for everybody . . .

                http://www.slate.com/blogs/moneybox/2012/11/01/h1_b_visa_problems_immigration_restrictions_beget_new_immigration_restrictions.html

                The idea here applies equally to trade, opening up the auto market specifically is going to be very disruptive to people currently working in the auto industry.

                To take this back to your questions about rationality, I think it’s very natural for people to see “some lose a lot vs. many gain a tiny bit” and mark that as a loser. This is not necessarily rational because what the numbers matter overwhelmingly, there are a lot of values to plug in there for ‘some’, ‘many’, ‘a lot’ and ‘a little’ that make it good and a lot that would make it bad – but as long as it’s fuzzy, most human beings are going to do the math as ‘generally bad, so don’t do it!’

                I am not sure if this addresses the subjective/objective tension you’re getting at, because it’s really hinged on the one/two/many concept – though there might be subjectivity in terms of affiliation – that it’s just easier to affiliate with the specific loser than an aggregate gain.

                Now, assuming all the above, I’m still not sure what the policy upshot ought to be, how do you do the necessary work of gaining broad subjective acceptance? There’s no clearly obvious solution other than hoping people come around to the more objective analysis.Report

              • Avatar Stillwater in reply to Stillwater
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                But a broad-based expansion of legal immigration is good for everybody . . .

                Or bad for everybody. Depending on how the consequences turn out.

                Prima facie, if we permit totally open-ended legal immigration, then everyone’s wages decline. It’s not at all clear that the cost of living decreases resulting from that immigration policy, nor the loss/replacement costs of finding new work at comparable relatively commensurate wages following from the assumption that cost of living decreases do sum to the plus side of things, are worth permitting open immigration.Report

              • Avatar Stillwater in reply to Stillwater
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                And thanks for replying!Report

              • Avatar Plinko in reply to Stillwater
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                I’m not sure how you can claim that prima facie, everyone’s wages go down, I’m not sure that’s even possible.

                I mean, we could go in for some kind of general devaluation but, even then the change could only be nominal.

                If computer programming becomes less expensive, than everyone who purchases computer programming has just had the real value of their wages rise by the same amount, so even if there is zero gain (ie the influx of programming talent leaves us with zero additional productivity or production of computer programming), then we are at a net loss that is also zero. If there’s any additional gain, then generally, real wages must be higher. Where do you think the gains go?
                With trade, it’s easy to assume that the gains go to the place where to jobs are, but with immigration the new workers also live in the US, so the case that it’s a positive is far more obvious than when we start substituting Japanese cars for our American ones.Report

              • Avatar Stillwater in reply to Stillwater
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                Well, all other things being equal, if there’s more competition for jobs, then wages will go down. The theory is that those wage losses will be recouped by a decrease in spending on the part of workers (let’s restrict it to that). But there is no linear line to be drawn between decreased wages and gains made in price paid for goods and services such that (decreased wages) – (reduced prices) = more disposable income.

                That’s part of the theory, I take. A part that’s opaque to me.

                Plus, this is a bit tangential to the more specific question we were talking about earlier. Namely, persuading any particular individual who thinks free trade runs counter to their self-interest that they’re wrong to think so. So general arguments don’t apply in that case, it seems to me.Report

              • Avatar Stillwater in reply to Stillwater
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                says:

                Re: that last part, here’s another way to say it. All other things being equal, a person might support free trade. But given that all things aren’t equal, a special pleading is required to convince that person that his interests will be maximized by adopting free trade policies.Report

              • Avatar James Hanley in reply to Stillwater
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                if we permit totally open-ended legal immigration, then everyone’s wages decline.

                So “everybody” doesn’t include the immigrants? Sadly, I’m sure that won’t come as much of a shock to them.Report

              • Avatar Jaybird in reply to Stillwater
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                something something lump of labor somethingReport

              • Avatar Stillwater in reply to Stillwater
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                says:

                James, by hypothesis, we’re talking about domestic workers in this scenario, and what decisions they’re justified in making to maximize their self-interest. If you want to criticize them for having the wrong kind of self-interest, feel free.Report

              • Avatar Stillwater in reply to Stillwater
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                I guess I feel the need to finish that.

                … and if you do, you’re no longer talking about subject determinations of utility, nor are you talking about – it seems to me – economic rationality on the model of classical liberalism.Report

              • Avatar James Hanley in reply to Stillwater
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                Still,

                If you’re asking me if a rational person would always vote for free trade, the answer is obviously not. One individual’s benefit from trade barriers could outweigh his benefit from them.

                If you think libertarians expect individuals to always favor free trade if they knew their own true interest, then the answer is still no because of the above.

                If you think somehow there’s a substantive critique of understandings of rationality in either or both of those two questions, the answer is again no.

                If you’re asking something else, then I’m still lost.

                But to the extent words matter, I do tend to ave a visceral reaction to the use of the word “everybody” that excludes “them.” I get that you didn’t really mean that, but that’s often how immigration discussions go and I wanted to draw the line quickly.Report

              • Avatar Plinko in reply to Stillwater
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                That analysis kinda requires the quantity of ‘jobs’ to be fixed – if there are more people trying to get jobs than before, then the wages for those jobs will fall, but why would you assume the quantity of jobs is fixed? The new computer programmers will want to buy things – houses food, haircuts, cars and computer software – so they also create jobs when they come here because people need to be employed to sell them those things. It’s not just that we all get our software for a little bit cheaper (and therefore spend that extra money on something else, which just shifts the jobs around).

                If we discover a massive copper deposit that could potentially double the world’s supply of copper – should we leave it underground because additional copper will only depress the market price – hurting everyone that currently works in the copper industry or that owns a significant quantity of the metal? You’re suggesting we’d be worse off with more because prices must fall, but that kinda assumes that people can’t use any more copper so now we have all this unused copper lying around, plus the price of copper fell so all those other people took it on the chin all so that folks out there could have slightly cheaper electronics.
                I think it’s pretty obvious that we would, in fact, be glad to have a big increase in the supply of copper because we’d use it. The price might fall, but it won’t get cut in half because any decrease in price would surely make all sorts of additional uses of copper economical and so the equlibirium price would be lower than before, but higher than half, and thus we have more than we had before. That’s a real increase in prosperity.

                We should always, ceteris paribas, be better off with more resources – that includes people working.Report

              • Avatar Roger in reply to Stillwater
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                says:

                James K,

                If you read between the lines on the objections from the left, I tend to see a common theme on the topic of HARM.

                The point is that economics involves interactions between consenting adults and tends to be positive sum. Rational adults tend to voluntarily agree to interact only when each expects to benefit. However, every decision made sends out WAKES which affect others. Every decision I make on who to buy a soft drink from eliminates the opportunity for everyone else who wants to sell me that drink. Every decision to hire eliminates the opportunity for a job for anyone else interested.

                Long lead in to something which tends to arise on discussions of economics. It is possible to find some that are HARMED by lost opportunities. Those on the left often tend to focus on this and use it to oppose free markets.

                There is a zero sum dimension within the broader positive sum process of economic behavior. It would be great if your series could highlight and expand upon this issue.Report

              • Avatar James K in reply to Stillwater
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                says:

                I’ll be getting into that harms free trade can cause and how best to deal with them in parts 3 and 4.Report

              • Avatar Stillwater in reply to Stillwater
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                There’s a lot in your comment Plinko, lots I didn’t completely understand, and lots I disagree with but don’t have time right now to really dig into. But one of the things I’m consistently interested in talking to economists about is the disconnect between empirical evidence and the theory. We’ve talked about this before, wrt freetrade and outsourcing (at least, I think you were in on that discussion. Hmmm, it may have been James K and Simon K, not that I think about).

                But to take just one thing to let you know sorta where I’m at on this, you began your post with this comment:

                I’m not sure how you can claim that prima facie, everyone’s wages go down, I’m not sure that’s even possible.

                Well, not necessarily everyone, but in aggregate. I mean, part of your argument is that economic systems are dynamic, there are no static parts. So a tweak of one variable necessarily causes tweaks in others. But it just seems trasparently obvious that hiring an immigrant because he’ll work for a lower wage than his domestic counterpart lowers the total wage rate of people being employed in that time slice.

                Here (I’ll write this out not to be insulting to you but so you can see where clearly identify what I’m trying to say): suppose there are ten employees in an economy at wage rates of 10 dollars an hour (or a hundred bucks a week, or whatever). If an immigrant is hired at 5 dollars an hour, then the aggregate wage rate of the employees has declined, and one guy is out of work. Net loss of wages.

                That just seems transparently obvious to me, so obvious that I don’t see anyone could refute it.

                Now, of course, the theory (and the practice) is that the unemployed guy finds work somewhere else and etc. But that story is told, and is only interesting, in relation to the original situation described. Wages decline, but so do prices, profit gets recycled into new startups creating jobs and more demand and etc etc. I’m not saying that story can’t be told, of course. It just seems to me like the evidence on the table is that free trade has hurt the american economy. It may be a “necessary” adjustment for longer-term stability down the road. It may be justified on moral grounds. It may be justified in any number of ways. But it seems to me the evidence is that free trade has hurt lots of sectors of our economy, and people who’ve been negatively effected are rational to oppose it.Report

              • Avatar Roger in reply to Stillwater
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                says:

                Stillwater,

                On your scenario, you treat higher wages like they are a good thing. Wages are a cost. The real economy improves when costs go down and efficiency of production goes up.Report

              • Avatar Stillwater in reply to Stillwater
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                says:

                Roger,

                On your scenario, you treat higher wages like they are a good thing.

                For the person receiving them they are.

                Wages are a cost. The real economy improves when costs go down and efficiency of production goes up.

                But why should a guy who’s wages have declined care about that? It seems to me you need to do lots of splainin for him to agree with, or even care about, “the efficiency of production”.Report

              • Avatar James Hanley in reply to Stillwater
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                suppose there are ten employees in an economy at wage rates of 10 dollars an hour …. If an immigrant is hired at 5 dollars an hour, then the aggregate wage rate of the employees has declined, and one guy is out of work. Net loss of wages.

                That just seems transparently obvious to me, so obvious that I don’t see anyone could refute it.

                How diligently have you studied the attemptsto refute it?Report

              • Avatar James Hanley in reply to Stillwater
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                The basic problem, Still, is that you’re assuming all the possible work in society is being done by those ten guys. But think about a society of just one person (and ignore the contradiction in terms). That guy’s working hard to supply his needs and wants. He’s tending gardens, maintaining his shelter, making clothes.

                Then another guy shows up and starts doing some of that work.

                Does the total amount of work required in society remain the same, so that the first guy’s labor is halved?Report

              • Avatar Roger in reply to Stillwater
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                says:

                Stillwater,

                Your point goes directly to the issue of HARM in free markets. The economy became more efficient as we are produing the same for less but someone was harmed via the loss of their job

                I am interested in how James K addresses this in future installments.

                My two cents is that free enterprise can be viewed as a creative system. People agree to compete with each other according to the rules because it creates prosperity. It is a constructive competition, probably the most constructive ever created. However, the creative process depends upon this competition, which has a zero sum win/lose dimension within a broader positive sum outcome.

                It behooves everyone to free ride off the system where everyone else except them competes to cooperate. The classic free rider issue. Everyone tries to reap the benefits without taking the risks. There is no free lunch. If you eliminate the zero sum dimension within the process, you destroy it, and everyone suffers.

                This also points out one reason why free markets have been so restricted or limited in history. Everyone who can prevent competition and creative destruction has done so. To save our jobs we killed off progress. We kept our jobs and continued to live off two dollars a day, for thousands of years.Report

              • Avatar Ramblin' Rod in reply to Stillwater
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                says:

                Roger, you wrote in response to Stillwater:

                On your scenario, you treat higher wages like they are a good thing. Wages are a cost. The real economy improves when costs go down and efficiency of production goes up.

                Do you feel the same way about executive compensation? Corporate profits? Dividends? Interest?

                Ultimately all costs to one party are revenues to another, whatever you call them, and they all ultimately accrue to individuals.

                At this point you need to explain why higher wages, which really are just the profits of Joe R. Worker, Inc., are inherently bad and should be minimized. I mean, other than the fact that they’re accruing to grubby, icky, workers.Report

              • Avatar Roger in reply to Stillwater
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                says:

                Ramblin’ Rod,

                You are projecting big time. Why are you assuming I believe workers are bad, grubby or icky?

                Interest, executive salaries, material costs and rents are all costs of production.

                As for profits, explaining* them is way over my pay grade. My non economist take on it is that profit is a fleeting thing that can be viewed like the applause of consumers as they reward utility gains in society. And truth be told, there is a degree of entrepreneurial risk in many activities or components of economics.

                * it would probably be more truthful to put the word “understanding” in place of explaining. Maybe James can go into the role of profit, entrepreneurial activity and such in his essays.Report

              • Avatar Mike Schilling in reply to James Hanley
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                says:

                “Free” is, in general, a good thing.

                Though without :local content laws, we wouldn’t have the Mackenzie brothers, eh?Report

          • Avatar James K in reply to Creon Critic
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            says:

            I’ll get to some of that stuff in later parts. Things are less clear on those topics than most people believe.Report

            • Avatar Creon Critic in reply to James K
              Ignored
              says:

              Look forward to reading how you address some of these thorny issues. This may or may not figure in your analysis, but one of the trade and culture issues that comes to mind is screen quotas and other mechanisms to protect domestic film industries from what other nations might call an American film juggernaut. As in the other areas, there are a number of values at play even when the widgets in question do not involve dual-use technology, environmental degradation, or exposing workers to exploitative conditions.Report

        • Avatar Ramblin' Rod in reply to Murali
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          says:

          Well I’m not going to speak for all lay-persons but I can think of several reasons why economics is different that the other fields you mention.

          First, the study of economics has always been strongly influenced–some might say tainted–by political considerations. Economic theories and the recommendations of economists have real-world, pocket-book, consequences that lead to winners and losers.

          Economists don’t speak in a unitary voice. There’s a number of schools of thought that differ in fundamental ways that you don’t see in the sciences. The only controversy surrounding subjects like evolution and climatology is between experts and politically/religiously/ideologically/economically driven non-experts. NOT between competing schools of experts.

          The bottom line is that the social sciences are just a lot squishier and the conclusions less conclusive. The ability to perform experiments is practically and ethically constrained and the fundamental forces at work in the systems being studied are complex critters that stubbornly refuse to follow simple physical laws. As complex as climatology may be–and it’s mind-boggingly complex–the drivers of the climate system ultimately reduce to fundamental physics, chemistry, and biology that can be studies and verified using laboratory methods. Molecules don’t lie. They don’t cheat and steal and exhibit altruistic behavior. They don’t decide what to do based on false and/or irrational beliefs. They don’t have emotions, drives, ambitions, biases, and fears. In short, they’re not people, and that makes these subjects fundamentally different. Frankly, this is where I agree with the Austrians.

          Finally, I have to add that I’ve heard supposed expert economists say some stupefyingly stupid shit. My favorite is from some years ago when an economic expert was opining on an increased unemployment rate (like 5 or 6%; good old days, huh?). His explanation was that this wasn’t a failure of economic policy but rather just workers expressing a preference for more leisure. Now put aside for a moment whether that fundamentally makes any sense (it doesn’t), but just contemplate that his statement was false by definition. The unemployment rate is calculated based on people actively looking for work. Actively looking for work and expressing a preference for leisure are clearly contradictory concepts. But there he was on national TV with his face hanging out in front of God and millions of viewers making this absurd claim.Report

          • Avatar James Hanley in reply to Ramblin' Rod
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            says:

            Rod,

            It’s not so contradictory as you might think. Leisure’s great, but it doesn’t pay. To get unemployment compensation you have to be “actively” looking for work. Functionally that just means you jphave to give the unemployment office a list of places you applied for work, it doesn’t mean you sincerely looked for a job. And insincerely looking for work leaves a lot of leisure time.

            This isn’t rare. My mother was an employee at General Electric. Their orders weren’t always steady, so she would occasionally get laid off temporarily and go on unemployment. She would fill out the obligatory applications, but she was pretty determined not to actually be offered anything. And when my wife lost her job a few years ago she said screw it, I’ve been working 25 years and never took a penny of unemployment, so I’m going to just take it as long as I can. A good job sort of fell into her lap then, so she didn’t, but that was mere fortune, not effort. And I have a good friend–used to be an OTR guy like you–who drives a cement truck. There’s no business in the winter, so he gets laid off and does as little paid work as possible as possible while being mostly listed as unemployed.Report

            • Avatar Ramblin' Rod in reply to James Hanley
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              says:

              James, I understand where you’re coming from, but wouldn’t those cases be a part of the normal 4 to 5% of unemployment “churn” that’s typical even in the best of times? There’s always going to be a certain number of people who are getting laid off for one reason or another and spend a few weeks looking for work, etc. It’s just a normal part of the labor market.

              I also recognize that there’s going to be a certain number of people and companies that are going to game the system like your wife and friend. I could tsk-tsk about it but the one and only time I was on unemployment I wasn’t really supposed to be getting it because I got paid a severance (actually got the severance twice; they were also laying off folks in HR and accounting–bad idea).

              But that’s not the situation I was referring to. This was, IIRC, the 91-92 recession under Bush the Elder. Not a big deal compared to 2008, but unemployment was up a couple points. You see, on average, for every person like your wife who decides to take some time off there’s going to be someone else deciding to saddle back up. Just part of that normal churn. But it defies credibility to suppose that hundreds of thousands (millions? whatever it was) of people are simultaneously, and for no common reason, just decide to fuck it all for a while. Especially when said fucking it all also entails saying fuck it all to the mortgage and car payment and bills and savings and credit rating and self-respect and often the marriage and other relationships. Being truly non-voluntarily unemployed is really hard work. It’s exceedingly stressful and fucks up your life in many ways. I know because I’ve been there; not often and not for long, but I’ve been there.

              The argument makes as much sense as the idea that people choose to be gay just for the hell of it, despite all the crap that rains down on your life as a consequence.Report

          • Avatar James K in reply to Ramblin' Rod
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            says:

            You make some good points Rob, social sciences are inherently less certain than the physical ones be virtue of the sheer complexity of what we study. Of course, this should also apply to anyone’s beliefs about economics, and not just ours which is why it always confuses me when (and I’m not accusing you of this) some people feel the uncertainty inherent to economics gives them licence to substitute their beliefs for the experts whenever it contradicts their own preconceptions.

            This uncertainty does lead to more legitimate controversies within the discipline, and can’t blame people for sort of going their own way on questions like fiscal stimulus, for example.

            But one reason I wanted to write about trade is that its the most solid result in economics. 250 years of different techniques and the basic result is the same. It also has a very strong consensus among economists, so there really isn’t an alternative school here.

            I expect I’ll put part 2 up some time after the election. At that point we’ll have something more tangible to discuss.Report

            • Avatar Ramblin' Rod in reply to James K
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              says:

              I want to make it clear that my critiques aren’t against the foundational theory but rather in facts of implementation. Also that much of the theory that supports it makes certain assumptions that aren’t always (actually, rarely) met in the real world and those variances matter.

              At its basic core, free trade theory is just specialization of labor analogized up to the level of national economies and, as such, is obviously, one might even say trivially true. So obviously true that it’s hardly even interesting if that’s all the farther you take it. The real issues, IMO, are distributional effects and the role of international finance.Report

              • Avatar James K in reply to Ramblin' Rod
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                says:

                Just to give you a heads up, I’m planning to start with the simplest objections to free trade and get more sophisticated as I go. This means the early parts will be more didactic and less nuanced than the later ones.

                Based on your comments I’d suggest parts 3 and either 4 or 5 (depending on how much I have to say about currency markets) will be of most interest to you.Report

              • Avatar Ramblin' Rod in reply to James K
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                says:

                Good. I hope you can get into Bretton-Woods and the consequences of the “Nixon Shock” when it (B-W) collapsed. It’s kind of a pet project of mine. (And no, I’m not a gold-bug.)Report

      • Avatar Ramblin' Rod in reply to Murali
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        says:

        Here’s the thing, Murali. You don’t even know what my criticisms or objections are going to consist of. Hell, I don’t even know that yet, since I haven’t read James’ stuff since, you know, he hasn’t posted it yet.

        But what I find curious is how libertarians a) are so certain that they’re the only species of human that knows a damn thing about economics, b) constantly decry mainstream economic theory in favor of “Austrian” genii, at least until, c) the mainstream agrees with their position, in which case they immediately shift into “argument from authority” mode.Report

        • Avatar Murali in reply to Ramblin' Rod
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          says:

          constantly decry mainstream economic theory in favor of “Austrian” genii, at least until,

          Libertarianism is not one homogeneous movement. People arrive at libertarianism from different routes. And there are libertarians of differing purity. There are libertarians who are big on Austrian economics. There are other libertarians whose libertarianism has nothing to do with economic efficiency and more to do with the idea that private ownership and control of the means of production is a basic liberty that requires a high threshold in order to be interfered with if at all. Then there are many libertarians who are fairly mainstream New keynesians or New Classical economists. New Keynesians and New Classicals, are both fairly within the mainstream (and in fact make up the bulk of the mainstream). The neoclassical micro which forms the foundation for mainstream econs, also provides the basis for public choice critique of governments. This provides an additional basis for libertarianism. So, there is also a massive school of libertarians who subscribe to mainstream economics + public choice. It is this latter group which tends to make criticisms of the lay public’s ignorance of economics (though not exclusively). But the libertarians who decry the public’s ignorance of mainstream economic thought are rarely the same economists who poo poo mainstream economic thought except in the limited case where Austrians talk about points of agreement between themselves and mainstream economics but which also happen to be points of disagreement between economists in general and the lay public.Report

    • Avatar Mike Schilling in reply to Ramblin' Rod
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      says:

      What if the topic is using statistical methods to predict the outcome of future events (or even what it means for an event to have a certain likelihood of occurring)?Report

    • Avatar James K in reply to Ramblin' Rod
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      says:

      If all I wanted to do was badly assert the superiority of free trade, I could have done that in one post 😉

      My intent is to explain the logic that leads economists to believe what they do. I will be authoritative at times, but as Murali points out, I do actually have a justification for it.

      And I certainly don’t think people who disagree with me on trade are fools. Wrong? Certainty. Ignorant? Only in the mundane sense that everyone (including me) is ignorant about most stuff, after all there is far more to learn than there is time to learn it. But fools? No, this stuff is hard – it works against instincts that served as well for the vast majority of humanity’s existence. I don’t blame people for getting it wrong, I just wish we educated people better about it.

      In any event I welcome your comments on the future parts.Report

      • Avatar Ramblin' Rod in reply to James K
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        says:

        I look forward to it, too. I only hope I’ll have the time to participate as fully as I’d like.

        But, really, the foundational stuff isn’t that hard. What makes it hard is the real world of floating currencies and central banks. IMO, the slipperiest subject in all of economics is money and it’s amazing how little attention is paid to it by the foundational theorists (except for the ones that actually specialize in it).Report

  7. Avatar Roger
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    says:

    Great start to what I am sure will be a great series, James.Report

  8. Avatar clawback
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    says:

    Can’t wait for the part where we learn that everyone should support free trade because although some people lose their jobs, surely they will be compensated by generous social welfare programs financed from the bounty of free trade. So everybody wins!

    I love that part of the story.Report

  9. Avatar Pierre Corneille
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    says:

    James (K., or Hanley, too, or any other James or non-James out there),

    If you had a conversation with me about economics, it would probably take you all of two minutes, if that much, to find out I’m not particularly literate in economics. But I do offer the following questions in good faith, even though they may strike you as hypercritical and even though in many ways they are probably reducible to the same question:

    1. Concerning the consensus among economists, I believe you. But are there *any* respected economists who question at least parts of this consensus. I’m not talking about the lone wolf with suspect credentials whom a protectionist might trot out, but someone who is an established and competent member of the field who has advanced *any* arguments *whatsoever* that question any aspect of the consensus.

    I realize I frame this question perhaps too broadly (*any*, and *whatsoever*). I don’t do this as a gotcha, but more as a question about what is and is not in the consensus.

    1b. I also wonder about the claim that “mercantilists” are not considered as among the economists these days. To me that seems a bit of a circular way to state there is a consensus, in part by defining out of the universe of economists those who disagree with the consensus. (I realize, of course, that one of the founding treatises of economics was Adam Smith’s, and that his was a robust response to mercantilist arguments of his day. So I’m not alleging foul play so much as noting an apparent circularity in what you wrote.)

    2. I understand that economists place a great deal of value on “efficiency,” and probably a few other concepts that helps to determine what is a “good” state of affairs over what is a “bad” or “less than optimal” state of affairs. I also understand that “efficiency,” and probably the other concepts, has/have meanings that are precise to economists but that are understood by laypersons differently.

    My point is, I imagine the consensus in favor of free trade is based on certain notions of “the good.” My corollary to this point is that people who oppose free trade–to the extent that they are not simply mistaken or being disingenuous about things–probably oppose free trade based on different notions of “the good.” My question is of the type I often criticize philosophers for asking to derail conversations, but I mean it sincerely: what are the value assumptions behind the preference economists have for free trade?

    I ask this question both for the aforementioned reasons, but also in part because I suspect (correct me if I’m wrong) that the preference for free trade is not always generalizable into what policy is realistically pursuable by any given state, and in part because I suspect that in some (perhaps limited) situations, other values might trump the values that inform economists’ assessment of the good.

    3. I’m curious what you mean by “gratuitous” in “gratuitous ‘health and safety requirements that somehow domestic producers don’t have to comply.”

    I realize you answer this question partly in the exchange with Matty, and your example of the apples is probably a good point. But I’m trying to push you to try to delineate what makes a requirement “gratuitous.”

    I’m also trying to suggest that perhaps some policies might effectively restrict trade from abroad even if the domestic producers have to abide by them, and I’m suggesting that those ought to count as impediments to free trade, even though your definition, if I read it correctly, seems to define those impediments out of the definition.

    For example, let’s say that the going rate for labor in a certain industry in a certain state is $5 per hour. Would a law forbidding the sale of any product produced at less that amount be counted an impediment to free trade? It wouldn’t be a meaningful restriction in that state unless the going wage rate goes under $5 per hour, and it would operate, if enforced, against articles in the same industry produced with lower wages.

    I’m sure I’m missing something here, but that is something that’s been bothering me since I’ve read your post last night and a comment, about a week or two ago, that Mr. Hanley made in a comment thread.Report

    • Avatar James K in reply to Pierre Corneille
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      says:

      1) The biggest respectable dissenter is Joseph Stiglitz. He has a Nobel, so he’s definitely not a lone wolf, but his dissent is of a pretty lukewarm variety. Most of his criticisms are about the political side of trade – the way wealthy countries and NGOs, the US and the World Bank structure trade agreements the the ways they exert political pressure on poor countries. Other than that, no one springs to mind.

      1b) Fair point, but as you say there are reasons why the mercantilists don’t count. Not only did Smith and his contemporaries take them to the woodshed as economics was still separating itself from Social and Moral Philosophy, but their prescriptions were for running a colonial empire, and there aren’t too many of those around these days.

      2) The normal definition of efficiency in economics is Kaldor-Hicks efficiency (of course you also have to consider the distributional impacts of a policy when using that definition). But for this sequence my primary focus will be that the negative effects of trade that people fear either don’t happen, or that there are better ways of dealing with them.

      3) From a trade perspective, the criteria I’m going to use for legitimate environmental or safety regulations are the same as the ones the WTO uses: A) That there be scientific evidence of a health or environmental harm and B) the regulation applies equally to foreign and domestic production.

      The example about minimum wages you give is an interesting one. I don’t think a rule like that would be a good idea (in general, minimum wages are a bad way to help people) because it fails to account for differences in productivity. It’s almost an anti-dumping rule, which are typically considered non-tariff barriers (they’re selling stuff cheaper than us, they must be cheating!). I this is kind of a grey area. In any case, I’ll get into labour conditions more in part 4.Report

  10. Avatar North
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    says:

    Looking forward to it James.Report

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