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Responding to Dani Rodrik

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Tyler Cowen – for his upcoming conversation at the Mercatus Center [2] with the consistently interesting Dani Rodrik – asked on his blog for suggestions of questions [3] that he might put to Prof. Rodrik.  Remembering my July 2007 post [4] on Prof. Rodrik’s position on economists and trade policy, I suggested, in the comments section of Tyler’s post at Marginal Revolution, that Tyler ask Prof. Rodrik the following:

Rodrik was quoted in a 2007 New York Times report as saying that, while he follows the methods of modern economics, he rejects the “faith” [his word] – that says, among other things, that free trade is always good. And, of course, Rodrik is known for his ‘heterodox’ refusal to join in mainstream economists’ embrace of free trade.

So, ask Rodrik if economists who embrace free trade within a country are guilty of faith-based policy recommendations in the same way that he thinks economists who embrace free trade between countries are guilty of faith-based policy recommendations? If he answers no, ask him to summarize the relevant differences that separate intranational from international trade, and press him explain why these differences are real or strong enough to shift the burden of persuasion away from those who oppose a general policy of free trade and onto supporters of free trade.

Tyler shared my question with Prof. Rodrik immediately; here’s Prof. Rodrik’s response [5].

I will here begin to respond, although to prevent this post from being excessively long, I’ll break my responses into two, three, or more different posts.

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If the concern is economic (as opposed to non-economic, such as national defense), then I don’t see that the particular reasons why consumers change their spending patterns matter.  When Smith reduces the amount of apples he buys from fellow citizen Jones, Jones is no less distressed if Smith’s action were the result of Smith coming to prefer more oranges to apples or of Smith buying more imported apples.  Either way, Jones loses his job or suffers a reduction in pay while some other of Smith’s and Jones’s fellow citizens gain jobs or higher pay that they would otherwise not get.

I will perhaps be accused of naively assuming – rather than demonstrating – that Jones is no worse off in the second than in the first case, and that some of Jones’s and Smith’s fellow citizens will get jobs or higher pay as a result of each of these economic changes.  To this accusation I respond by saying that the burden of proof is upon those who insist that international trade differs significantly enough from domestic trade to justify the claim that economists who consistently advocate free international trade do so as a matter of faith rather than as a matter of science.

It is, of course, easy to describe theoretical scenarios in which allowing consumers the freedom to buy more imports will lead to long-term damage to the domestic economy.  Yet it’s equally easy to describe theoretical scenarios in which allowing consumers the freedom to shift their spending around purely within the domestic economy will lead to long-term damage to the domestic economy.  What must be demonstrated is not merely that monetary arrangements, working conditions, geographical conditions, culture, tax rates, regulatory burdens, and other factors differ across political jurisdictions.  Of course they differ.  Rather, what must be demonstrated is that these differences pose such a large risk of making international trade damaging to the home country that the rule of respecting consumer sovereignty – a rule that we follow for purely domestic trade – ought to be cast aside for international trade and replaced by a grant of discretionary power to political authorities to suppress consumer sovereignty whenever that sovereignty would be expressed by greater voluntary trade with foreigners.

This demonstration must show that (1) international trade is noticeably more likely than is purely domestic trade to cause net economic damage at home, and (2) entrusting political authorities with the discretion to overrule consumer sovereignty internationally is sufficiently likely to yield net benefits overtime that creating such discretionary power is prudent.  I doubt that any convincing demonstration of either is possible.

Take (2) first.  I know of no reason to suppose that real-world politicians and other government officials have sufficient information and wisdom, and will act with sufficient regard to the long-term general welfare of the country, to justify entrusting them with discretionary power to overrule citizens’ decisions to trade voluntarily with foreigners.  And if I am mistaken and there is such a reason, then why ought these same politicians and government officials not be entrusted also with discretionary power to overrule citizens’ decisions to trade voluntarily with each other domestically?  What is it about foreign trade that raises the absolute, or relative, trustworthiness of government officials to override consumer sovereignty such that those officials can be trusted to get it right internationally but not domestically?

Before moving on to point (1), I pause to point out that the case in favor of free trade is not exclusively an economic one, narrowly conceived.  Economists for the past at least 2.4 centuries – including Adam Smith – have understood that arguments for or against free trade must also include assessments of the likely performance of political authorities.  Just as part of the case for a rule in favor of a policy of free trade includes the assessment that political authorities neither know enough nor are immune enough from political pressures to be trusted with the power to restrict foreign trade, any case against a rule of free trade must include an assessment that political authorities can, in fact, be trusted both to have sufficient information and such immunity from political pressures that they will exercise their power to restrict trade in ways that yield economically beneficial outcomes over the long run.  I wonder if Prof. Rodrik has made any such careful assessment of political authorities and, from it, concluded that as a rule these authorities can be trusted with the power to obstruct international trade despite their being insufficiently trustworthy to be given the power to obstruct domestic trade.

Now to point (1) – the more narrowly economic point.  Sellers in foreign countries sell things to buyers in the home country only because they – the foreign sellers – wish to increase their wealth.  The motives are identical to those of sellers in the domestic economy.  What do foreign sellers do with the revenues they earn from the sale of their exports?  They spend them.  They save them.  They invest them.  Perhaps on occasion they hoard them.  These options are no different from the options confronting domestic sellers.  If the funds spent on imports return to the domestic economy as demand for exports, jobs and economic activity shift from import-competing domestic industries into exporting industries.  No problem.  If these funds instead return as investments in the domestic economy, again there’s no problem: when, for example, Ikea opens a store in New Jersey it employs workers in that store no less than would an American who opened a similar store.

Are foreign sellers more likely than are domestic sellers to hoard their earnings?  I don’t see why they would be.  But even if funds spent on imports are indeed less likely to return to the domestic economy as demand for exports or as investments in the domestic economy, why would this presumed fact be a problem unique to international trade?  It would be a problem if, and to the extent that, prices and wages in the domestic economy are sticky downward (yet it would be a blessing to the extent that prices and wages are flexible downward).  But unless it can be shown convincingly both that downward wage and price stickiness is a real problem and that funds spent on imports are less likely than are funds spent on domestically produced goods and services to return to the domestic economy as demand for exports or as investments in the domestic economy, then there is no reason to presume that international trade is more likely than is domestic trade to cause long-term and economy-wide unemployment or wage stagnation.

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Other points and arguments bear attention, which I will give to them in the coming days in follow-up blog posts.

I conclude this post by expressing my heartfelt thanks both to Tyler and to Prof. Rodrik for the opportunity.

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