A Quiz

by Don Boudreaux on January 28, 2011

in Trade

Here’s a quiz.  For each of the five following passages, guess the name of the economist who penned it.  (Answers below)

1. For the world economy as a whole – and especially for poorer nations – growing trade between high-wage and low-wage countries is a very good thing.  Above all, it offers backward economies their best hope of moving up the income ladder.  But for American workers the story is much less positive.  In fact, it’s hard to avoid the conclusion that growing U.S. trade with third world countries reduces the real wages of many and perhaps most workers in this country.

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2. The idea that Third World competition threatens living standards in advanced countries seems straightforward. Suppose that somebody has learned to do something that used to be my exclusive specialty. Maybe he or she isn’t quite as good at it as I am but is willing to work for a fraction of my wage.  Isn’t it obvious that I am either going to have to accept a lower standard of living or be out of a job?  That, in essence, is the view of those who fear that Western wage rates must fall as the Third World develops.

But this story is completely misleading.  When world productivity rises (as it does when Third World countries converge on First World productivity), average world living standards must rise: after all, the extra output must go somewhere.  This by itself presumes that higher Third World productivity will be reflected in higher Third World wages, not lower First World incomes.  Another way to look at it is to notice that in a national economy, producers and consumers are the same people; foreign competitors who cut prices may lower the wage I receive, but they also raise the purchasing power of whatever I earn.  There is no reason to expect the adverse effect to predominate.

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3. If you think in terms of models, however, you know that the case for free trade is profound, but also conditional: it depends, among other things, on having sufficient policy levers to achieve more or less full employment simultaneously with free trade.

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4. [T]he level of employment is a macroeconomic issue, depending in the short run on aggregate demand and depending in the long run on the natural rate of unemployment, with microeconomic policies like tariffs having little net effect.  Trade policy should be debated in terms of its impact on efficiency, not in terms of phony numbers about jobs created or lost.

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5. For the bulk of our economics students, our objective should be to equip them to respond intelligently to popular discussion of economic issues.  A lot of that discussion will be about international trade, so international trade should be an important part of the curriculum.What is crucial, however, is to understand that the level of public discussion is extremely primitive. Indeed, it has sunk so low that people who repeat silly clich6s often imagine themselves to be sophisticated.  That means that our courses need to drive home as clearly as possible the basics.  Offer curves and Rybczinski effects are lovely things.  What most students need to be prepared for, however, is a world in which TV “experts,” best-selling authors, and $30,000-a-day consultants do not understand budget constraints, let alone comparative advantage.

Answers: 1. 2. 3. 4. 5.

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