Here’s a letter to a new correspondent:
Mr. W__:
Thanks for your e-mail.
You write that “free trade really works only if wages and prices are flexible; if they are not flexible, workers displaced because of imports stay unemployed for extremely long stretches; their fall in spending will reverberate through the economy, costing others their jobs.” You close with this line: “Free trade is valid in theory but in the real world it is terribly problematic.”
You’re correct that the economy performs poorly the more “sticky” are wages and prices. You’re correct also that the case for free trade is usually made under the assumption that wages and prices are sufficiently flexible to allow for resource reallocation across economic sectors. But you’re incorrect to identify trade as a unique force that triggers the process of economic rot that you describe.
If prices and wages are so inflexible that an increase in imports would cause the severe problems that you describe, then the same sort of severe problems would be caused by any change in economic activity. Even in a closed economy (that is, one with no contact with foreigners), if prices and wages are too inflexible to serve as guides for resource allocation, then, say, a change in consumer tastes away from dining out to eating more home-cooked meals would throw many restaurant-industry workers out of their jobs. Unable to find new jobs, these workers would reduce their spending, causing unemployment of workers (and of other resources) to spread. You name the economic change, that change will cause some workers to lose their particular jobs. And if, as you assume, wages and prices are so inflexible as to not enable appropriate adjustments to the new economic reality, then as my old professor Leland Yeager said, “the rot snowballs.”
The key point is that the theoretical problem that you identify is wages and prices being so inflexible as not to work. The problem is not trade. While trade is one of countless different economic activities that might spark snowballing unemployment in an economy with inflexible wages and prices, it is by no means the only one. In the economy that you assume, your closing line would be more accurate if it instead read: “Economic change is valid in theory but in the real world it is terribly problematic.”
Because you believe that wages and prices are so sticky as to justify government preventing people from buying more imports, you should also understand that wages and prices are so sticky as to justify government preventing people from making any change in the ways they conduct their economic affairs.
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
