Saturday, 30 December 2017

Free trade is not a policy...

Excellent exposition on free trade from Jon Murphy:
...since free trade is no policy, it is not dependent upon the assumptions of the economic models to function... None of the arguments for free trade require perfect information, identical principles between buyers and sellers, known utility functions and universal preferences, etc. Free trade is robust to deviations from the ideal; the system still works because it is a process, not a policy. Deviations from the ideal, movements away from equilibrium, present opportunities for entrepreneurs to correct issues; the many plan for the many and do not require the guiding hand of government to correct for deviations.
And this, especially, on using models to guide policy:
To guide policy, you need a descriptive model, not an analytical model. In other words, you need a model that is descriptive of reality, not one that reflects reality. When attempting to guide policy, this is where the assumptions of the model become important. To impose an “optimal tariff,” you need to know the demand and supply curves (something which is unknowable), you need to know indifference curves and von Neumann-Morgenstern utility functions (which are unknowable), true relative prices and equilibrium, etc etc.
Go read and learn.


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