What’s the Relevance of Rodrik’s Point?

by Don Boudreaux on April 30, 2007

in Trade

In the debate sparked by Dani Rodrik’s recent post, Marginal Revolution’s Alex Tabarrok comes closest to saying what’s on my mind.  Here’s Rodrik’s key passage:

Advocates of globalization love to argue that free trade lowers prices, and the argument seems sensible enough.  Think of all the cheap goods from China that we can buy at Wal-Mart.  But anyone who understands comparative advantage knows that free trade affects relative prices, not the price level (the latter being the province of macro and monetary factors).  When a country opens up to trade (or liberalizes its trade), it is the relative price of imports that comes down; by necessity, the relative prices of its exports must go up!  Consumers are better off to the extent that their consumption basket is weighted towards importables, but we cannot always rely on this to be the case.

Following Alex, I emphasize that at the core of the case for free trade is the irrelevance of political boundaries.  Almost any sort of economic change makes, in the immediate wake of that change, some persons better off and other persons worse off.

But what’s so special about change that involves exchange across political borders?  Nothing.

Suppose that Americans currently have no trade with non-Americans.  Further suppose that, for years, Americans have bought lots of automobiles made in Detroit as well as lots of oranges grown in Florida.  What happens if Americans’ tastes change and the bulk of them shift their spending from oranges to steel houses and steel furniture?  Orange growers clearly are worse off as a result of this change.  So, too, are those Americans who are especially heavy demanders of automobiles, for the change in consumers’ spending patterns drives up the price of steel and, hence, the price of automobiles.

If we were omniscient we could do a welfare assessment, measuring the gains to the American economy from allowing consumers to change their spending patterns compared to the costs of allowing this change in spending patterns.  If the size of the losers’ losses is found to be larger than that of the gainers’ gains, we conclude that this change in consumer spending patterns is regrettable.

Do we further conclude that the case is dubious for allowing consumers to spend their money as they wish?  What about the case for allowing entrepreneurs to introduce new products and production processes?  Are economists and others who argue in favor of generally allowing consumers to change their spending dogmatic?  Doctrinaire?  Biased?  Blinded by ideology?  Does the possibility that consumer-spending patterns can change in ways that generate net harm mean that government should control such spending changes, preventing those changes that are determined ahead of time to be likely harmful?

The logic of Rodrik’s argument, it seems to me, condemns far more than changes in the pattern of trade that crosses political boundaries.  It counsels skepticism of nearly all economic changes.

(It’s useful here, by the way, to check out Russ’s outstanding article on comparative advantage.)

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{ 19 comments }

Slocum April 30, 2007 at 7:57 pm

The logic of Rodrik’s argument, it seems to me, condemns far more than changes in the pattern of trade that crosses political boundaries.

I agree. And I think that's a much stronger counter-argument to Rodrik than Alex Tabarrok's argument that there's no possible ethical justification for worrying more about one's countrymen than about others.

Sam Grove April 30, 2007 at 8:55 pm

Dammit, no one owns the market and no one should act like they own it or any portion of it.

Ray G April 30, 2007 at 9:16 pm

Excuse me if this is too simplistic or wrong, but it seems to me that the negative effects of economic change would tend to force those on the negative side, eventually, into a positon where they might participate in the market in a positive aspect.

A fool who enters the wrong business will eventually be done a favor by being put out of business by his bad decisions. He would be forced, by necessity, into a more feasible line of work where he can provide a living for himself, while of course also helping the immediate economy merely by his participation.

The Dirty Mac April 30, 2007 at 9:47 pm

My Uncle Fred started working on a horse drawn ice wagon in 1938. I don't need to recount all the jobs lost among the ice and wagon manufacturers, blacksmiths, stablehands, etc. Essentially, they were all wiped out. The trade off was the availability of electric refrigeration. I would assume that virtually all of the displaced workers were able to ultimately buy one of those electric refrigerators.

David P. Graf April 30, 2007 at 10:05 pm

Just because people engage in a particular behavior be it economic or political does not mean that it's a good thing in itself. I can recall the old saying by Churchill that the behavior democracies like to engage in may not be the same kind which preserves a democracy.

And so, we have to look at the long-term consequences of economic policies. As a start, it would probably help to outline statistically how well people do after losing their jobs due to overseas competition or outsourcing. No one spares many tears for the ice wagon drivers who lost their positions because many more and better jobs were opened up by the advance of electricity. Can we say the same today about free trade or globalization?

Ray G April 30, 2007 at 10:39 pm

My usual analogy in such discussions is the blacksmith.

Seems obvious to me, but of course not everyone sees things the same.

M. Hodak April 30, 2007 at 11:43 pm

"Can we say the same today about free trade or globalization?"

Given that the US has been highly exposed to the forces of globalization for decades, has seen tens of millions of jobs lost to said globalization, and yet somehow has among the lowest unemployment rates and highest per capita income in the world, I'd answer "yes" to your questions.

David P. Graf May 1, 2007 at 12:00 am

However, you have to look beyond the employment rate and ask what kinds of jobs are we talking about. What are the salaries and benefits? That's why I'd be interested in seeing the stats on the kinds of jobs people wind up with after losing their positions.

Ray G May 1, 2007 at 1:36 am

David;

The first primer I ever read on logic made the short but sweet statement of not projecting one's uncertainty on to the world at large, and claiming objective status for it.

Last I checked, the median income in America was somewhere around the low 40Ks. And that's with a much smaller % of the population working in the kind of physically demanding jobs that our forefathers had to work at.

David P. Graf May 1, 2007 at 9:17 am

You are right about the median income, but that in itself does not constitute proof of the value of free trade. For example, the latest information from the Census Bureau states that the median income has remained stagnant over the last several years. When you consider that the cost of living has increased while income has remained flat, then it's hard to use this to argue in favor of free trade.

As for myself, I think that free trade makes the best sense. However, I am concerned that we too often sweep under statistics the human cost of economic changes.

M. Hodak May 1, 2007 at 11:19 am

Wait a second, David. Are we asking a question that can be answered by facts or by feelings, here? If by facts, then what facts are you looking for? I thought the premise being contested was that globalization exposes a people to loss of jobs or income. When you're presented evidence that such losses are not visible over a significant periods of time, then you point to data for the last several years, messy data that ignores all sorts of value transfers and mix of jobs, to refute the long term, large scale data. How about comparative data, showing how the incomes of relatively more open versus protectionist countries are doing? What data would you find dispositive?

Methinks May 1, 2007 at 11:43 am

David,

The real median income does not reflect the rising value of non-money payments like health and dental benefits. Certainly healthcare benefits are part of compensation and when they are included as such, the real median income is no longer stagnant. You also have to remember that people don’t tend to have the same income throughout their lifetime. So, those people who were earning the median income several years ago are likely not the same people as those who earn it today. I believe that point has been made ad nauseam on this very blog.

Humans always pay the price for change – and they always ultimately reap the ultimate benefits. Change is stressful and painful but without change, and its associated ills, we also have no progress. Necessity is the mother of invention.

Bruce G Charlton May 1, 2007 at 11:57 am

"…what’s so special about change that involves exchange across political borders? Nothing."

Well, the short answer is that political borders encompass national governments. So, it isn't _so_ surprising if national governments try to advantage their population at the expense of others by protection (of course they usually succeed only in protecting interest groups).

Having said that I strongly support free trade. Probably it comes from the free exchange between individuals – free trade is favoured by individual freedom. Modernizing societies (for reasons I am not entirely sure about) seem to depend upon individual freedom, so the long term prospects for free trade seem good.

Abe May 1, 2007 at 2:30 pm

Cafe Hayek has the most erudite of posters. All interesting and informative to read.

Some posters are fact driven and eschew feelings based opinions. Some find their philosophical base then use facts to prove their points.

Realizing there are many ways to word the questons involved, where can polling data be found on the following subjects:

How many American's think that what is described as free trade, sizable imbalances of trade with (among others) China, "Naftas" types of agreements and a huge debt (as China and others buy our bonds) is in their personal interests, american broader economic interest and american national security interests?

This likely would be a poll of 'feelings' as the underlying economic issues are perhaps too complex to quantify even with algorithms and tons of variables factored in. But maybe some "objective" data is also out there as someone has made a fact based effort to factor the variables into answers?

How many americans think that there is such a thing as free markets in the U.S.?

How many Americans believe that the american economy now and will operate in the interests of average americans? If so why; if not why not.

not.

Sam Grove May 2, 2007 at 12:41 am

Here and elsewhere (more so elsewhere), the questions are always long the lines of "How will this economic behavior/policy/etc. help or harm Americans (when asked n America, of course), but rarely is the question asked: will this political intervention help more than it hurts or will it hurt more than it helps. It is almost always assumed that most things the government engages in will help more than it hurts.

Why?

It seems to be the premise of many that taxes are transparent in impact on the economy while government spending only does good.

Methinks May 2, 2007 at 8:23 am

Good point, Sam. Too much Keynes and not enough Friedman?

It is also a puzzle to me why we believe that private citizens will inevitably take advantage of and abuse the less powerful but government (run by largely the same people) will not – despite overwhelming empirical evidence to the contrary.

Tom May 2, 2007 at 10:24 am

Methinks,

I'll save you some typing. Whenever someone quotes median income and not compensation, he is not sincere. The information in your response has been out there for quite some time now, long enough that you are trying to educate someone who has no intention of being educated.

p.s. I do love your posts. Always right on.

Sam Grove May 2, 2007 at 2:31 pm

People also sem to conceive of government as some amorphous thing detached from the people who operate it. They are unable to perceive the systemic problems, or, IOW, if only we had the right people in office.

Many want the government to stand in for the underdog but fail to comprehend that politicians have human responses, that is, the necessities of getting elected/re-elected make them susceptable to resourceful influences.

I challenge anyone who can figure a way to make a political system approach the ideal, given the reality of human nature.

ben May 2, 2007 at 6:53 pm

David Graf

It seems to me that the empirical observation that the more open a country is to trade the wealthier it is on virtually every measure combined with centuries-old theory on how trade deepens markets and improves specialization should convince you that the costs of trade, in the form of friction from the changing mix of jobs in an economy, is overwhelmed by the benefits. If that were not true, trading countries would be poorer.

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