Here’s a letter that I sent yesterday to the Financial Times:
Clyde Prestowitz makes his case for higher tariffs by slaying a strawman (“Obama can help free trade with tariffs,” Sept. 10). According to Mr Prestowitz, the case for free trade relies on the validity of “the assumptions that the markets are perfectly competitive, that exchange rates are not manipulated, that there are no economies of scale, that there is no cross-border investment or cross-border transfers of technology, and that there are no government subsidies or export requirements.”
But with the possible exception of the assumption about economies of scale – an assumption that even its notable champion, Paul Krugman, regards as being academic rather than practical – the case for free trade in no way depends upon any of these assumptions. For example, although free-trader Adam Smith well understood competition, he never heard of “perfect competition” (as the model wasn’t developed until the 1930s). And even if he had heard of this model, Smith would have understood that free trade’s benefits are positive even when industries are not (as they never are) ‘perfectly competitive.’ (The supermarket down the street from me doesn’t compete in an industry that’s ‘perfectly competitive,’ yet I gain every time I choose to trade with it – as I frequently do.)
As for Mr Prestowitz’s claim that free trade requires that there be no cross-border investments or technology transfers, he here commits the sophomoric error of mistaking assumptions used to simplify the explanation of the principle of comparative advantage for being conditions necessary for that principle to operate in reality. While cross-border mobility of capital and technology might – indeed, often do – alter the pattern of comparative advantages, such mobility does nothing to weaken the case for free trade.
Not a thing in Mr Prestowitz’s poorly reasoned, factually inaccurate, and economically uninformed essay justifies Uncle Sam’s efforts to penalize American consumers who wish to purchase imports from China.
Sincerely,
Donald J. Boudreaux
As for foreign governments subsidizing or otherwise protecting certain of their industries from market forces, these state actions, too, might alter the pattern of comparative advantages – although not without imposing often-unseen costs on the people of the economies whose governments intervene in these ways – but these interventions by foreign governments do not detract from the ability of denizens of the domestic economy to gain from freely trading with persons in economies that are saddled with such interventions.
Share
{ 12 comments }
Please could you recommend an economics textbook or a econ. hyperlink that could help me to better understand your post. Thanks.
Moggio,
By the way, the best book to start with is the VERY accessible THE CHOICE, by Russell Roberts.
Moggio,
You can start with this short essay on comparative advantage (and with the links found at the end of it):
http://www.econlib.org/library/Enc/ComparativeAdvantage.html
Thank you!
With all due modesty, I understand “comparative advantage” and why you say in your post “he here commits the sophomoric error of mistaking assumptions used to simplify the explanation”. I was looking for a text that explains that the principle of comparative advantage still holds under “non standard” assumptions (except with economies of scale). Thanks again.
You might want to check out my favorite Paul Krugman article (ok 2nd favorite next to his paper about Interstellar Trade) which can be found here: “Ricardo’s Difficult Idea” http://web.mit.edu/krugman/www/ricardo.htm
BTW I second Don’s suggestion of reading THE CHOICE, I loved that book.
You can call him witless but what are the real world results? Where is the congruency between them and your explanation of how things work?
China has protectionist policies…. they are taking over the worlds economy and buying up America. We on the other hand have opened up our trade policy and now our debt to them as well as other trade debt seems casually related to 30 years of wage stagnation, job loss and the current economic collapse we see around us. Likewise I can point to a time when our country had many tariffs and protectionist policies and WE WERE the ones rising to world economic dominance.
The reality doesn’t fit the neat academic high minded theory. Trade policy as well as economics in general are clearly far too complex to follow the nice simply ideas of libertarian principles. We all want the world to be neat and simple and straight forward. It clearly is not and policies chasing such ideological dreams result in real world catastrophes.
“China has protectionist policies…. they are taking over the worlds economy and buying up America.”
“We on the other hand have opened up our trade policy and now our debt to them as well as other trade debt seems casually related to 30 years of wage stagnation, job loss and the current economic collapse we see around us. ”
“Likewise I can point to a time when our country had many tariffs and protectionist policies and WE WERE the ones rising to world economic dominance.”
http://en.wikipedia.org/wiki/Correlation_does_not_imply_causation
“It clearly is not and policies chasing such ideological dreams result in real world catastrophes.”
Yes, the world is frightfully complex. And remember, *all* economic policies must fundamentally operate at the micro level, regardless of macro intentions. Considering those two facts, at what level then do you think governments should aim for their desired outcomes?
Please refrain from responding to muir as every single point he makes here has been made AND responded to in past threads.
I remember hearing similar tirades against the Japanese twenty years ago.
Our dear Ducktor seems to long for the Good Old Days of Smoot-Hawley.
It seems to me that demand for U.S. Dollars is being supported by Chinese Government exchange rate controls. Since an increase in money demand relative to supply is deflationary, the Chinese must have been exerting a downward pressure on prices denominated in U.S. Dollars. An intervention of this kind would “bottle up” inflation until the day the Chinese decided to return the exchange rate of U.S. Dollars to the discretion of the market. Future price increases could have been offset by productivity gains (and still might to some extent), but the U.S. economy seems to have been heavily malinvested in housing.
I am convinced that most people must be convinced of two things in economics.
The first is that “Manna from Heaven” is always a GOOD thing economically.
The second is that destruction is always a BAD thing economically.
There are FAR, FAR too many people who simply can not grasp these two concepts. You don’t need to get esoteric in your descriptions.
You are talking about collective net GOOD and BAD. What is good/bad for the collective, is not necessarily good/bad for everyone. Thieves can do quite well at the expense of the greater economy. And the greater economy can do quite well at the expense of a minority slave class.