Winners and losers from trade

by Russ Roberts on January 21, 2008

in Podcast, Trade

This week’s podcast is with Don Boudreaux, my co-host here at the Cafe and the author of Globalization, a superb primer on trade policy and the phenomenon of globalization.

Don argues in the book and in the podcast that to point to an American steel worker put out of work by imports of Brazilian steel and say that he is "harmed by trade" is to misunderstand the nature of trade and its winners and losers. He says it’s like saying that a man whose wife leaves him for another man is harmed by love. After all, the man married because of love. The man is the product of his parents who were touched by love. So it is with the steel worker. His steel job exists because of trade. His whole life is supported by trade of various kinds. So in what sense is he "harmed by trade?"

It’s a profound point. It forces you to see just how trade and specialization and the division of labor create the incredible lives we lead, lives of wealth and health unimagined by previous generations.

But having said that, I think there is something else to add, something about the way our self-worth and pride and satisfaction are tied up in our work. An out-of-work steel worker still has a very good life compared to generations past and the success of his life up until the loss of his job is indeed due to trade (and sometimes to the protectionism that worker would like to see made stronger). But there’s no denying that it’s very tough on a person who has invested most of his life in a particular skill to suddenly find that there’s no demand for that skill. Yes, it’s the price of progress and it’s a price worth paying. Yes, it’s not particular to foreign trade, as Don points out, but is the result of all kinds of economic change. But there is something deeply poignant about it, nevertheless.

It is a mistake to use protectionism to keep that worker from having to deal with change. But that doesn’t change the potential sadness of the situation. I’ve argued that the real consolation for that worker who loses his job and struggles to find another that is as satisfying is knowing (if he knows any economics) that his children and grandchildren will lead better lives because we tolerate economic change.

If computer-based learning caused George Mason and other universities to shut down, it would be a good thing. (Remember, I’m assuming in this story that students choose computer-based learning over brick and mortar education.) I would applaud it and I’m sure Don would too. But many great teachers would have trouble finding jobs that paid as well or that led to as satisfying a life on the job. Younger teachers would find an easier time adjusting and finding new opportunities. And some of those opportunities would come into existence because of the resources saved by shutting down universities. But that wouldn’t change the sadness of the out-of-work teachers who find themselves unable to use the skills that they have proudly honed.

As Don points out eloquently in the podcast, most of us willingly embrace and accept economic change even though we know that it sometimes has disparate effects on us. There is always a temptation to ask for an exemption from the costs while enjoying the benefits.

So I agree with Don that it’s wrong to say that trade creates winners and losers. We are all winners. But it’s also true that the benefits from winning are not evenly distributed and that the political demand for exemptions from certain kinds of economic change isn’t going away.

Ironically, the richer we become, the more specialization we have. The more specialized you are, the greater the risks (and rewards) from economic change.

The lesson, I think, is that education should give you a range of places to apply your specialized skills. It’s better to learn how to program than to learn how to program in HTML. It’s better to know how to write than to know how to write an article for a traditional newspaper. It’s better to know how to communicate generally than to know how to write.

It is better to learn how to learn than just to learn something specific.

Be Sociable, Share!

Comments

comments

44 comments    Share Share    Print    Email

{ 22 comments }

Paris Lovett January 21, 2008 at 3:33 pm

I think a key benefit to free markets is that they actually make change more GRADUAL. When you have tarrifs and other barriers, people continue to make educational and life choices based on taking jobs in the protected industry. So you have an industry which continues to grow despite the fact that without barriers it would be in a state of decline. People choose where to live, what to study, spend money, all to commit to an industry that is maintained on life support.

Eventually, as the bills pile up, the state pulls the plug, and loads of people are suddenly out of work. Ouch! that hurts.

When comparative advantage waxes and wanes without interference, much less pain occurs: older workers retire and are not replaced. Younger workers choose to go into other industries, live in other cities. With price information affecting corporate health more visibly, workers can see the writing on the wall much earlier (in terms of their job markets, pay and conditions) – and either leave while they have time and resources to re-train, or at least pick up extra skills.

I would expect that total unhappiness to workers in a given shrinking industry in a given country would be much less in the absence of protectionism.

John Dewey January 21, 2008 at 3:50 pm

Paris Lovett, your comment makes a lot of sense to me. Thanks for the insights.

shawn January 21, 2008 at 4:07 pm

Paris…while I'm sympathetic with the anti-protectionist viewpoint, I'm not sure that a non-protected industry is necessarily a gradually changing industry. From a (admittedly cursory) glance, it seems just as likely that a particular industry will change overnight (especially now, due to our increased communication capabilities and expanded knowledge) as take 10 years to transition.

Granted…there's always going to be residual hold-overs to old technology (because it's cheaper than the brand new tech, and some people are going to opt for the cheaper older tech), but by and large, wouldn't it just change? Obviously, tech is the extreme example; software programming is another….machinery/manufacturing is going to be slower, because the costs of adopting new technology will slow the infiltration of that new tech…

Chris Meisenzahl January 21, 2008 at 6:50 pm

That was a fantastic podcast this week!

Justin Rietz January 21, 2008 at 9:41 pm

While I am a strong advocate of free trade, we shouldn't punish workers for the government's poor policies.

Trade restrictions distort the market, so it is expected that workers would be attracted to protected industries. This is a central tenant of Austrian economics – Government interference in the free market creates false signals (interest rates being the most prominent example) and it is difficult for businesses and individuals to deduce what the true free market equilibrium would be, whether it is loanable funds or the labor pool.

The fair policy for both workers and consumers would be to phase out such protectionist policies in a manner that gives workers time to find new jobs or educate themselves for a new occupation. From a practical perspective, this is also more palatable to politicians and their constituents versus a "slash and burn" approach.

Gabby January 22, 2008 at 2:21 am

i have a question about the analogy in the second paragraph. If a wife leaves her husband for another, WE DO say he was harmed by love. Its true that love helped him, for all the reasons you mentioned. But its also possible to be harmed by love. Hence the term heart broken. I think the analogy is incomplete. You should instead argue, even during times when love hurts us, does that mean we should NOT fall in love? to anyone with a broken heart, do we say: you are right, love sucks. kill yourself. ? Of course not. Similarly, for trade, sometimes people get hurt by it, but this doesn't mean we should retreat from potentially profitable/enjoyable relationships.

Bruce G Charlton January 22, 2008 at 2:22 am

RR says: "Ironically, the richer we become, the more specialization we have. The more specialized you are, the greater the risks (and rewards) from economic change.

The lesson, I think, is that education should give you a range of places to apply your specialized skills. "

I have suggested that the way this happens is by multi-disciplinary study.

http://www.hedweb.com/bgcharlton/multi-d.html

Students learn to learn new subjects repeatedly; and to study several different subject simultaneously.

They key 'skill' for the modern world is abstract, systematic reasoning – to the ideal way for this to happen would be multi-disciplinary study of sciences (a science being any systematic subject – including economics, music theory, jurisprudence etc):

http://www.hedweb.com/bgcharlton/scigened.html

John Dewey January 22, 2008 at 5:23 am

Justin Reitz: "From a practical perspective, this is also more palatable to politicians and their constituents versus a "slash and burn" approach."

What do you mean by a "slash and burn" approach? Are you saying that while collecting unemployment pay for 26 weeks a laid off worker does not have time to find other emplyment?

Why should it be an employer's responsibility or a nation's responsibility to ensure that a worker remain employable? Why is that not the employee's responsibility?

Would you favor a similarly gradual phase out of job losses that arise from domestic competition or from technological obselescence? If Wal-Mart's entry into supermarket retailing causes layoffs at Albertson's, would you somehow protect the unfortunate Albertson's employees from their job losses? Would you mandate a gradual adoption of cell phones in order to ease the pain of wire and cable phone installers? What makes job losers from suddenly unprotected industries any more entitled than job losers from competition or technological change or management incompetence?

IMO, individual responsibility is what makes individuals and economies strong. Socialistic protections is what makes individuals and economies weak. "From a practical pespective", gradual phase out of government protection just prolongs the damage to all of us.

save_the_rustbelt January 22, 2008 at 8:00 am

Over the past 40 years governments, especially at the state level, rationed educational opportunity after high school in order to guarantee a steady stream of fresh employees for the mills and factories, at the behest of the Chamber of Commerce of course.

Now those workers who did what the government wanted are getting screwed.

The rich guys always win, sooner and later.

(Just to add insult to injury, the feds helped the companies dump the workers pension plans; who cares about contracts and stuff.)

And of course in this blog it is the workers fault, they should have anticipated this and become economics professors and lobbyists.

Randy January 22, 2008 at 8:44 am

I think you're actually pretty close to the mark here, Rustbelt. A case can certainly be made that the state does ration educational opportunities – in fact, the ability to manipulate futures is a primary reason why they monopolize the educational system. And yes, of course the government treats workers as a resource – that's how it makes its profits. And as for it being the worker's fault, I would say it is the individual's fault, because the bottom line is that it is always the individual's responsibility. Trusting in government, society, or any other higher power, is just a rationalization for putting off acceptance of personal responsibility.

John Dewey January 22, 2008 at 9:13 am

rustbelt: "Over the past 40 years governments, especially at the state level, rationed educational opportunity after high school in order to guarantee a steady stream of fresh employees for the mills and factories"

Where did this happen, rustbelt? I don't know about other states, but college-capable kids were not denied educational opportunities in Texas and Louisiana in the 60's and 70's.

rustbelt:"The rich guys always win, sooner and later."

Oh, come on! Few of today's millionaires were rich guys when they entered adulthood. They just made the right choices along the way – such as the choice to not depend solely on union wages for their livelihoods.

rustbelt: "And of course in this blog it is the workers fault"

It is always the individual's responsibility to ensure his own welfare. Socialism doesn't work, rustbelt.

John Dewey January 22, 2008 at 9:24 am

rustbelt: "Over the past 40 years governments, especially at the state level, rationed educational opportunity after high school"

What is the alternative to government rationing of education, rustbelt? I think it would be market-based price rationing. Do you agree? Which one would more likely ensure that "the rich guys always win"?

Of course, if all higher education were market-based, at least someone who really desired a college degree would have a chance to save the money and get one, wouldn't they?

Randy January 22, 2008 at 9:48 am

John Dewey,

I also think that getting an education would be a whole lot cheaper with a competitive system. Start with parents/students not having to pay for classes that have little practical value, classes that are solely for the purpose of indoctrination or socialization, and subjects that could be learned by just buying or borrowing the book.

vidyohs January 22, 2008 at 9:56 am

My favorite picture and anecdote fits this thread to a T. Yes, I know I have recounted it before but it bears repeating.

In approximately 1990/1 Daddy Bush went to Boston to give a speech and attend some meetings.

As his motorcade went through downtown Boston it passed many protesters and supporters who were on the streets holding signs and cheering or booing as may have been their view.

Time magazine photographed a young man standing on a corner holding a sign that said, "Why should engineers be pumping gas?" Time used his image to promote what it saw as the failed policies of Daddy Bush and of course the American economy.

My first, and permanant, thought was, "What a thumb-sucking whining loser."

My next thoughts were:

Who raised him to think he was owed anything?

Did he choose his field of engineer or was it forced on him?

Did he graduate having gained sufficient knowledge and skills to actually perform competetently as an engineer?

Did the firm that accepted him contract with him for life-long employment as a guarantee?

Finding that they could run their business without him, was there some moral or legal reason why they couldn't show him the door?

Having found himself with no job, why does he hold a sign implying that someone else should be forced to employ him as an engineer?

If he disdains pumping gas, just exactly what, other than engineering, does he think is within his dignity range to accept as employment?

And finally, why shouldn't engineers be pumping gas if that is the only honest work they can find. The other two alternatives seem to be off the chart as immoral acts; those choices being stealing or begging.

In short I saw a typical American whiney. "I am wonderful because my mommy said so", Dr. Spock baby, Boomer child, and ego and self esteem laden loser who was full to the gills with the socialist indoctrination and enculturation American society began shoving down children's throats shortly after WWII.

The hard core truth is that running into that kind of person is a constant daily routine and began to be so back in the 1960s as the boomers entered the workforce.

The markets do not create losers, the economy doesn't create losers, so what or who does?

I suggest that the answer is in the song/dance routine in West Side Story which I paraphrase, "Losers have to be carefully taught."

Kids learn what they are taught, garbage in – garbage out, good in- good out, confusion in – confusion out, fear in – fear out, work ethic in – work ethic out, self reliance in – self reliance out, etc. etc. This is true with only very very rare exception.

It is amazing but true that the whiney thumb-sucking losers we have dumped in our laps are the very whiney thumb-sucking losers we allowed to be created.

Purge Dr. Spock from every book shelf, teach and enforce discipline with children in home and in public. Make 'em feel your pain when they act up.

Purge socialism from every school and from every vestige of public life and in two short generations America would be the most dynamic and productive force in the world to the point of pure amazement.

Then we could huddle the left over losers in a corner of some state and feed them and pet them as relics of a horrible past until they passed away.

John Dewey January 22, 2008 at 10:40 am

Randy: "I also think that getting an education would be a whole lot cheaper with a competitive system."

Don't we have a competitive market in higher education right now? Certainly we have public universities and public trade schools, but even they compete for students. The U.S. has hundreds, if not thousands, of private colleges and technical schools. I'm not sure how many exist, but online educational companies seem to be prospering. In addition, scores of technical skills can be learned through self-study, using materials not connected with a school.

The higher education industry seems competitive to me, though I would rather see more of it run by the WalMart's and Microsoft's rather than by state officials.

Randy January 22, 2008 at 10:55 am

True, the situation is getting better… but I think it could be a whole lot better if the government would take its hands entirely off the controls.

save_the_rustbelt January 22, 2008 at 5:31 pm

"What is the alternative to government rationing of education, rustbelt?"

Good question John.

There probably is no alternate to some rationing, by resources and/or quality.

The problem here is that the rationing was done for less than honorable reasons, i.e., someone needed a stream of labor and "bought" enough government influence to guarantee a supply.

Hardly a free market.

Had the State of Michigan for example, provided higher education at the same level as California over the past 40 years, it would be a much different place. This would not have fit the Chamber of Commerce labor plans though.

All of the "rugged individualism" sounds good in retrospect, but largely defies reality.

(Did anyone notice something odd about Tr. Sec. Paulson's statement this morning? He did not deliver the statement at Treasury, he delivered it at the headquarters of the US Chamber of Commerce. Who the hell is he working for?)

Nathan Bowers January 22, 2008 at 7:57 pm

I really liked the part of the podcast at 1:05:15 where the comparisons between Bill Gates' and an average American's living standards illustrate how wealth inequality doesn't matter and how the rising tide of wealth has lifted all boats over time.

$55 for Don's book?! Ouch. In this podcast the value add of book publishers is mentioned, but I would argue that book publishers and other gatekeepers are obsolete.

vidyohs January 22, 2008 at 9:06 pm

STRB,
"(Did anyone notice something odd about Tr. Sec. Paulson's statement this morning? He did not deliver the statement at Treasury, he delivered it at the headquarters of the US Chamber of Commerce. Who the hell is he working for?)
Posted by: save_the_rustbelt | Jan 22, 2008 5:31:25 PM"

The Sec Treasury works for the International Monetary Fund, not you.

I told my favorite anecdote above about the whiner in Boston.

"All of the "rugged individualism" sounds good in retrospect, but largely defies reality."

Well, STRB, your comment above spurs me to recount my favorite anecdote on the "rugged individualism" side, or the self motivated and self reliant capitalist side.

At virtually the same time frame as the whiner was standing on the street corner in Boston with his pathetic sign, Reason magazine reported this story in its small articles section that begins each issue.

A man in Michigan worked as a supervisor for a large construction company and made decent money. At that job he was making close to $90,000 a year.

A San Antonio, Texas construction company had reason to offer him a position as a supervisor with them at a substantial increase in income, somewhere near (I believe) $110,000 a year. In short, he took the offer and they made a verbal contract. The man put his home on the market, settled his affairs in Michigan and drove south to San Antonio. The process took him about two weeks.

Upon arrival in San Antonio he was told by his new "employer" that a sudden downturn made him expendable and he had no job. Of course he was pissed. He had his family in a motel, his house on the market in Michigan, 2 kids needing to be put in school, no job, and only a small amount of ready cash to use.

Instead of standing on a street corner sucking his thumb whining, he did what a "rugged individual" would do. He took care of himself, in the best way he could.

He spent some money in a local building supply store and bought, buckets, squeegees, rags, cleaners, ladders, and sponges. He loaded that in his station wagon and hit the streets selling his window washing service.

A year from the date he began washing windows he had multiple crews working for him and he personally netted over $150,000. And, he did it without doing tall buildings that required investment in heavy equipment.

The contrast between the two people could not be more stark and educational.

The socialist is a loser thumb sucker who has to be "given" a job.

The "rugged individual" (capitalist generally) simply goes and does it.

I have many more of these anecdotes that illustrate the differences.

The "rugged individual" parapalegic in the wheel chair I saw in the office building lobby at 1300 Post Oak Blvd, Houston, Texas early one rainy cold day, dressed neatly in a business suit, able to use only one arm freely and the other somewhat. He had an appointment book spread on a tray before him at high shest level, and was talking on the phone arranging sales appointments. I am the kind of guy that will eavesdrop to learn things when I am presented with the opportunity. How many in his position would be home whining and complaining about his raw deal?

Or an acquaintence in Utah, in his late sixties, who had palsy and had to walk with two crutches and for whom sipping coffee was a daily combat experience. He had no Handicapped sticker for his car and always parked in available places in the lot at the McDonalds where an informal group of us gathered in the morning for coffee before beginning our work day. He wobbled into the place and managed to get his coffee in a paper cup with a lid, then wobbled to a table, shook sugar all over the table and into his cup, and refused any help…..Another of the men who frequented our coffee group was a very robust large man who had a gimpy knee and walked sometimes using a cane, sometimes not. He "by God" had that handicapped placard hanging from the rearview mirror of his by pickumup truck, always parked in the handicapped spot next to the door, and always had one of the McDonalds girls carry his coffee to the table for him. And, he always complained bitterly if the handicapped spots already were full.

When one gets down on the street and looks around the lessons in reality are all around and it all puts a lie to rantings of Karl Marx, the foolishness of Dr. Spock, the desires of muirduck, and STRB's denigration of those of us on the other side of that great divide from him.

vidyohs January 22, 2008 at 9:10 pm

book spread on a tray before him at high shest level, (this of course should read chest level)

from the rearview mirror of his by pickumup truck, (this of course should not have the "by" before pickumup truck.)

Minna January 22, 2008 at 10:11 pm

Russel,

When you say "His steel job exists because of trade. His whole life is supported by trade of various kinds. So in what sense is he "harmed by trade?"

Yes, trading has helped him throughout his life, but it's also possible that he can be harmed by trade. It is false that if one thing helps you, it can never harm you. Trade can be harmful AND helpful. But just because we get hurt from it does not mean we should refuse to use it. We need it in today's society to help benefit the country and the people.

Sidney January 22, 2008 at 11:06 pm

I was intrigued to comment on the analysis of comparative advantage, as also expressed in the podcast highlights time-mark 404 in the middle of the paragraph:

“If Joe can do something at a lower cost than Sam, then Joe should specialize in doing that and Sam the other thing; and they should trade. They should do this even if Joe can do both things better than Sam”

To reject the point on the 'even if' condition, I turn to Russ Roberts wonderful story of the “Treasure Island” which I suggest needs be read first. But the general picture and a link to the story are in the next paragraph in Russ’s own words.

“To begin to answer that question in the first part of this essay, I told the story of the Fishers and the Palmers, two newly-wed families shipwrecked on a tropical island, desperately seeking food and water. The Palmers can barely gather enough fish and fresh water to survive. The Fishers are better at both. But even though the Palmers are inferior in both tasks to the Fishers, they still have something to offer in trade—their time. By collecting water for the Fishers, the Fishers have more time to fish. And by fishing for the Palmers, the Fishers create more time for the Palmers to collect water”.

The Palmers are best able to utilize their time by collecting 2 broken coconut shells to carry fresh water (W) and catch 2 fish (F) per day. Hence their survival income is: 2W + 2F per day. Or in the alternative, their own time tradeoff is to do 4W + 0F per day, if they should choose to go a little hungry – not highly recommended.

The Fishers are a more productive couple by nature, being able to produce a daily income for survival, on the island of: 3W + 6F. Similarly, the Fishers can tradeoff their time to do: 0W + 12F instead, under a similar argument.

The Palmers see an opportunity to trade so that “all will be winners” even though the Fishers are better than the Palmers at both collecting water and fishing. The proposed division of labor for the trade is as follows: The Palmers do 4W + 0F, and the fishers will do 0W + 12F. The trade is that the Palmers will give 2W to the Fishers, and in return receive 4F from the Fishers.

After the trade, the Palmers end up with 2W + 4F per day which is clearly a win for their diet compared to their pre-trade income of only 2W + 2F. The Fishers end up with: 2W + 8F compared to 3W + 6F before, but is it a win for them? I don’t think so. As the story goes, the Fishers give up 1W per day, which is not too critical to their livelihood to gain the extra 2F which they seem to like. On the surface it may look like a “win-win” because the common pie between them has changed from 5W + 8F to 4W + 12F. But in reality it is not a win because the Fishers had to give up some preference which is not fully accounted for in the trade.

Since the Fishers are more efficient on all counts they do not need the Palmers at all if they still wish to produce their new income of 2W + 8F, by better time and labor management and without even working any harder. Here is how. Remember that the Fishers can still be satisfied with 2W per day because they so agreed to in the trade. They can live on 6F per day since they had been doing so before. But even this “difficulty” will be very short lived anyway. Here is the Fishers’ work schedule:

Day-1: produce 3W + 6F, but consume only 2W + 6F (save 1W)
Day-2: produce 3W + 6F, but consume only 2W + 6F (save a second 1W)

Now that they saved 2W, they can labor and consume differently on day-3 as follows.

Day-3: produce 0W + 12F, and consume 2W + 8F (save 4F)

Now they can repeat the cycle with the advantage of starting to consume 2F extra in days 4 and 5 because of their 4F savings. This time-labor management will work indefinitely for the Fishers because their own tradeoff is 3W = 6F. Hence they cut their water consumption by 1/3, which was acceptable to them in the trade; and use it to augment their fish consumption by 1/3 from 6 to 8 which is what they desired. But they don’t need the Palmers for that.

So why did the Fishers take the deal? It certainly gave them no profitable trade. Perhaps, it sounds on the surface as a good example why trade should always be a win-win even if one party is better than the other on all counts. But this is false. The Fishers should quickly realize that for them to make a profit they need to trade with a party who has a comparative advantage over them, because their own comparative advantage alone is not enough. I’m sure that someone could work out the math in a general case (a nice research project) to prove the point based on the above idea of clever management of production, consumption and saving. But even common business sense tells you that if the Fishers are all around better than the Palmers, then why bother with the Palmers, i.e., look for an opportunity where you expect to make a profit before you trade. Instead, the Fishers should look for a profitable exchange with the next newly-wed couple to be shipwrecked on the island.

The critical mistake the Fishers made was forgetting that the overriding economic goal is the profit for each trading party, while the trade is the tool, and given the necessary condition of comparative advantage. The goal is certainly not to increase the total pie between the Palmers and the Fishers, even if it happens. The increased pie is incidental (albeit desirable) and better be left to the diligent care of the invisible hand. After having read my analysis, I’m sure the Fishers will stop trading with the Palmers and then, where will the pie increase go?

Previous post:

Next post: