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A Losing Perspective

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Here’s a letter to Reason editor Katherine Mangu-Ward:

Dear Katherine:

Daniel Drezner scores many solid points in his June cover essay, “The Economic Case for Free Trade Is Stronger Than Ever [2].” But he perpetuates one error that unnecessarily gives intellectual ammunition to protectionists. Specifically, Mr. Drezner is incorrect to suggest that free trade is unambiguously beneficial only if “the winners have to compensate the losers out of their windfalls.”

International trade is merely one of countless different channels in a market economy through which competition plays out. And because I’m confident that Mr. Drezner would never suggest that competition is unambiguously beneficial only if the ‘winners’ compensate the ‘losers,’ he’s mistaken to suggest that this one particular channel of competition – trade – is unambiguously beneficial only if the ‘winners’ compensate the ‘losers.’

Put differently, if it were true that trade is unambiguously beneficial only if the ‘winners’ compensate the ‘losers,’ then it would also be true that, say, women entering the workforce is unambiguously beneficial only if the ‘winners’ compensate the ‘losers,’ and that the opening of a new restaurant in town is unambiguously beneficial only if the ‘winners’ compensate the ‘losers.’ But of course we don’t expect the ‘winners’ from competition generally to compensate the ‘losers.’ Thus, the suggestion that such compensation is part of the case for free trade is unfounded.

Here’s an even deeper truth: an essential role of competition, including trade, is to impose loses on less-efficient producers in order to incite them either to become more efficient or to switch to other lines of production. And so if the ‘winners’ from tradewere actually to compensate the ‘losers,’ one of the market’s most vital signals (namely, losses) and one of its most vital incentives (namely, the desire to avoid losses) would become so muted and weak as to be utterly ineffective.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030

…..

Even more deeply: the terms “winners” and “losers” are simply inappropriate when discussing trade or any other source of economic competition. See, for example, here [3].

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