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Saturday, November 17, 2007

The economic fallacy of "free trade"

The economist's definition of the benefits of trade is based on the concept of comparative advantage:
There will be a net gain to both countries with trade because it allows each country to produce from its comparative advantage, which is that good or goods where it is least inefficient.
A classic example of comparative advantage: Scotland can produce five bales of wool per acre and only a gallon of bad wine per acre. France can produce ten bales of wool per acre or twenty gallons of good wine. France has the absolute advantage in both products, but it still makes sense for both countries for Scotland to trade wool for French wine. Both will end up with a better total product.

From this concept, economists take a great deal of pleasure. It is simple, obvious, and illustrates that economists are enlightened and the public are Luddites. (See Alan Blinder's treatment.)

In fact, there will be a net gain, but there is a big hole in the "net" when the gain is not shared. The hole in this net is big enough to drive one-third of American manufacturing through, and tens of millions of Latinos back the other way.

The experience of trade is different than this economist's dream of stylized facts and frictionless perfection. To say trade is a net benefit, is similar to saying there is enough food on the planet to feed everyone and enough money to provide clean water and health care and then walking away as if everything is fine. The market does not distribute according to need, but according to the power of its participants. And those who bear a great deal of the costs of free trade are often not among the powerful.

We've put up the whole story at the web site.

1 comment:

  1. It is hard to believe that the simplistic comparative advantage argument has carried free traders over the many years. It would be somewhat misleading, too, since in particular in the early post-war years the damage from trade that exists today was completely absent.

    But that was an era of American industrial dominance. The idea of following the EU model is a good one.

    One can envision reversing the flow of people from north to south across the Rio Grande if significant investment in human capital and infrastructure came to Mexico.