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Yet More on ‘Trade has Losers’ (and Analogized to a Game of Dice)

Nothing in this post – save, perhaps, the dice analogy – will be new to regular readers of Cafe Hayek.  I’ve said it all before, but in many different places (although mostly here at Cafe Hayek).  Yet I write this post in order to summarize – mainly for myself – the reasons that I see for why it is a mistake – and a dangerous mistake, at that – to say, in one way or another, that “free trade has losers.”

(1) Jobs that today exist because these jobs were made possible by past patterns of international trade, or that today pay higher real wages because of trade, might indeed be destroyed tomorrow by international trade.  Yet if Williams, who holds such a job, would not have had that job were it not for trade, it is misleading to describe Williams tomorrow, when he loses his job, as a loser from trade.  One must compare Williams’s job situation, over a span of many years, in a world with international trade to Williams’s likely job situation, over the same span of many years, in a world without international trade. Only if Williams’s job situation over this span of many years is likely to be worse in a world with international trade than it would be in a world without international trade is it sensible even to begin to ask if Williams might be a loser from trade.

(2) In our world of uncertainty about the future, an entrepreneur or a worker might willingly opt to create a business subject to international competition, or to take a job at such a firm, because he or she expects the pay-off of doing so to be higher than the pay-off of creating a business in an industry immune to international competition or of taking a job in such an ‘immune’ industry.  If it turns out that this ‘gamble’ fails, there is no reason to describe this entrepreneur or this worker as a ‘victim’ of, or a ‘loser’ to, international trade.  That is, in this example the entrepreneur and worker might in fact both wind up poorer than they would have been had they chosen the option that immunized them from any consequences of international trade.  But to the extent that they made this trade-off voluntarily, it makes no sense to blame trade for their losses.

To better see why, suppose that I offer to you the following deal in what I call the “dice game”: I’ll give you one roll of two fair dice.  If you roll a number ten or lower, I’ll pay you $1,000; if you roll an eleven or a twelve, you pay me $60.  Would you take this offer?  You’d have to be astonishingly risk-averse to decline.  If you do decline, you’ll never lose $60.  But nor will you win $1,000.

Let’s say that you accept my offer and, alas, you roll a twelve.  You must pay me $60.  Has playing the “dice game” inflicted on you losses that are unjust?  Have I or the “dice game” treated you unfairly?  (You, as they say admiringly, “played by the rules,” but you nevertheless lost.)  The answer to both questions, surely, is ‘no.’  Still, in this one-shot game of dice you might reasonably be said to be a ‘loser’ at the “dice game.”

But now let’s give you the option of rolling the dice many times.  Each time you roll a number less than eleven, I pay you $1,000 and each time you roll an eleven or a twelve, you pay me $60.  You wisely agree to play many rounds of the “dice game” with me.  Suppose that after, say, 100 rolls of the dice, you’ve rolled ten or less 83 times and eleven or twelve 17 times.  (You note that such a distribution of outcomes is quite in line with what is reasonably expected.)  You’re now ahead by $81,980.  On your 101st roll, you roll a twelve, requiring you to pay to me $60.  If we look only at your 101st roll, we might mistakenly conclude that you are a loser at the “dice game.”  But clearly this conclusion would be wildly wrong.  You ‘lost’ on your 101st roll, yes you did.  But even after paying me that $60, you’ve still amassed $81,920 by playing the “dice game.”  Looked at over all plays of this game, you are unquestionably a winner at the “dice game.”

International trade is akin to the “dice game” in its payoff structure.  Yes, of course: each worker, entrepreneur, and investor might lose on any particular day.  But over time the gains from free trading, like the gains from the “dice game,” are so high and the probability of success so great that you’d be a fool to stop playing in order to avoid the possibility of experiencing what are called “losses” from trade.

(3) The phenomena that are regularly identified as the “loses” from international trade are not unique to trade; these “loses” arise in all settings and situations in which consumers do not continue to spend their money in the same ways day after day, year after year, and decade after decade.  Phenomena such as the losses of particular jobs and the bankruptcy of particular business firms job losses are indeed ’caused’ by international trade, but they are caused also by any change in the ways that consumers spend their money.  Saying that trade has losses gives the false impression that trade is unique in causing such losses.

(4) Saying “trade has losers” creates the impression that protectionism can prevent (or reduce) such losses, even if the costs of doing so exceed the value of the losses.  But such an impression is false.  While protectionism can prevent particular losses (for example, while protectionism can prevent Joe Jones from losing his job at the Acme Iron Works in Sometown, USA), protectionism, by preventing whatever particular losses it prevents, creates other losses (for example, Sally Smith loses her job as a motel manager because consumers, driven by protectionism to pay more for goods made with iron, have less money to spend taking family vacations).

Yet when assessed over time – over many ‘plays’ – one of these policies will be discovered to yield net benefits and one net losses.  When assessed as policies, therefore, the one that yields net benefits over time is not helpfully described as producing losses if its alternative is found over time to perform worse.

BOTTOM LINE: Trade certainly has costs.  Trade does not necessarily have losers.  To incur a cost or to pay a price is not thereby to suffer a loss.