Sunday 11 September 2016

Free exchange (that's trade folks) makes everyone richer...

Alright. I know. We don't like Paul Krugman. He's that snarky left-wing economist with a beard and a New York Times column. And he's levered his Nobel Prize in economics to become the poster boy of progressive economic commentary.

But we really should take note of what he says when what he says is the stuff he got a Nobel Prize for. This is like paying attention to Paul Nurse when he's talking about genetics and cancer research but treating him with contumely when he sounds off about climate change.

Paul Krugman's Nobel Prize is for trade economics. So when he writes an essay about comparative advantage we should listen. Certainly we should listen more to Krugman than to folk like the late Sir James Goldsmith. Here's Krugman:

What is different, according to Goldsmith, is that there are all these countries out there that pay wages that are much lower than those in the West -- and that, he claims, makes Ricardo's idea invalid. That's all there is to his argument; there is no hint of any more subtle content. In short, he offers us no more than the classic "pauper labor" fallacy, the fallacy that Ricardo dealt with when he first stated the idea, and which is a staple of even first-year courses in economics. In fact, one never teaches the Ricardian model without emphasizing precisely the way that model refutes the claim that competition from low-wage countries is necessarily a bad thing, that it shows how trade can be mutually beneficial regardless of differences in wage rates. The point is not that low-wage competition never poses a problem. Rather, what is significant is that despite ostentatiously citing Ricardo, Goldsmith completely misses one of the essential lessons of his argument.

Now you'll be familiar with Goldsmith's argument (it was - in the manner of Oolon Colluphid - the central premise of Sir James' book 'The Trap') as it now forms the core of the argument from Donald Trump, Nigel Farage, Marie le Pen and many others - either foreigners over there are doing us out of jobs and cash or else foreigners coming here are doing us out of jobs and cash. Sometimes this argument is fluffed up with fancy words, sometimes it has a dash of scientific racism (you know - black people are genetically thick but good at sports) but in the end it's the same - trade is bad.

I'd add here that this nativist argument makes common cause with the protectionist argument beloved of the anti-market, socialist left. Some of this anti-trade stuff is presented as wanting 'fair trade' or as protecting workers rights. A little bit of saving the planet is added in for good measure to created a sort of 'I'm all right Jack' autarky.

The thing that Krugman explained is that, while trade does have losers, these are vastly outweighed by the winners. Trade - free exchange between individuals - is mutally beneficial. It's not a competition between nations, it's not a 'global race', and it's not a winner-take-all game of international treaty poker. The whole bloody point is that both participants gain.

We sort of understand this in our daily lives. Most businesses aren't trying to take advantage of you - they've got stuff to sell you and you buy it because you think it will enhance your life (or fix a problem which amounts to the same hill of beans). And when it is boiled down this is all trade tells us - if we focus on doing the stuff we're good at and other folks do likewise then the whole world benefits from that specialisation. But only when we allow free trade.

The problem is that, as Kipling observed, we have small hearts so get stuck in the idea that somehow buying stuff made on the other side of the world is doing people here out of a living. What comparative advantage tells us is that, however much empathy tells us otherwise, this ain't so.

In the end, free trade like free speech and free enterprise is what makes for our great world. We should not let up in making sure this isn't destroyed by powerful people pretending that somehow we'll be richer is we restrict trade. Trust me on this one, Corbyn, Trump, Farage, Le Pen and all the other opponents of free trade - they lie when they say their autarky will make us richer.



Radical Rodent said...

Okay. So, let us have open borders. Let them come, without let or hindrance, ‘cos you know it’s going to make us all rich. Of course, at the present rate of ~300,000 per year that means building a town the size of Bradford each and every year; with schools, hospitals, public buildings, electricity power stations (and, please, do not mention “renewables”…) and supplying it, gas supplies, water supplies, sewage treatment. That means we have to integrate many people from many cultures, not only with the English but also with each other. Like, that’ll go well, won’t it? Much as it is going, right now – i.e. seriously down the pan!

Sorry, but if this is your idea of free trade, then I am afraid it ain’t gonna work. The system is creaking now; how long before it collapses altogether? To reduce it down to a simple analogy (yes, I know – analogies always contain flaws): homes engage in free trade by going to work, buying in goods, etc.; they do not usually just open their doors to all and sundry, letting them move in and live as they want to in the house, whether contributing or living off the household budget, and claiming this is “free trade”. Let each household live as they want to, independent of others, and trade amongst themselves.

Sackerson said...

Can of worms. Richer in what senses? How does one calculate the far-reaching costs of unemployment? Of increasing inequality and the flight of the talented young from our country? Of the depredation of the countryside by greedy landowners and developers?

I am disappointed that you do not engage with comments, so I shall not be surprised if you do not elaborate your argument.

Simon Cooke said...

Richer means just what it says - exchange creates mutual benefit in that both the buyer and seller have greater value. I sort of get the point about infrastructure but not the stuff about inequality or young people deciding to take their talents to a place where they get most value from them.

The economic benefits of free trade - a bit like the utter stupidity of rent controls - are one of the few things where nearly all economists agree. Now I get that economics isn't everything but if we are to have policies - protectionism being a good example - we should start by recognising that there is an economic cost to having those policies.

Finally those greedy developers are creations of our planning system - we made it possible to have development land at x1000 of agricultural values by creating an artificial scarcity of land. This might be worth it to protect openness around our cities and to prevent sprawl but the development business is absolutely a consequence of that policy. The price we pay for having a green belt.