A simple model of disagreement among economists

by Henry on March 17, 2011

Ryan Avent and Matt Yglesias ponder whether the degree of disagreement among economists is exaggerated in public debate. The classic statement of this argument, of course, is Alan Blinder’s dictum in Hard Heads, Soft Hearts that:

Economists have the least influence on policy where they know the most and are most agreed; they have the most influence on policy where they know the least and disagree most.

But ever since reading this argument, I’ve wondered whether it was quite right. Blinder’s observation helps explain a readily observable empirical correlation between (a) disagreement among economists and (b) apparent prominence of economists’ arguments in public debate. But prominence is not the same thing as influence – and I can’t help wondering whether the causation goes the other way, so that economists are only middling influential at most when they disagree. Consider the following model (for extremely casual senses of the term ‘model’).

(I) Many important political actors have stable preferences over economic policy outcomes, regardless of whether they make economic sense or not. Perhaps e.g. a party or a well-placed interest group would like to see regulations that redistributed benefits to their members or to their backers, even if this led to lower growth. There will typically be other political actors with opposed distributional interests (who would oppose such a regulation, perhaps push for their own alternative regulation which favored them or their backers etc). These opposed interests lead to bitter political debates.

(II) Other political actors, or, to the extent it pays any attention at all, the public, have weaker preferences over policies, and can potentially be persuaded to support policies that are validated by experts (economists in this instance).

(III) Economists – the validating experts – adhere to a common set of methodologies or modeling techniques that suggest some general conclusions but that can also with a little jiggery-pokery (your common or garden partial equilibrium model, or folk theorem result) can be made to support (PDF) any policy prescription you might care to be having yourself. Furthermore, some economists (perhaps because of ideological commitments, perhaps external pecuniary motivations, perhaps some combination) can be swayed to find theoretical support for arguments that support external political actors in their own sets of debates.

(IV) Political actors with stable preferences have means (either intellectual – weekend seminars, perhaps in pleasant parts of the world, or directly pecuniary) that they can employ to sway those economists that are swayable, so as in turn to influence political actors with weaker or undefined preferences.

Now, I don’t at all fully buy into this drafter’s sketch of a toy model. There is surely a greater degree of coherence to economic thinking than it suggests, so that some positions will be more controversial than others. Nor are ideas mere ideological justifications for preconceived political agendas. Even so, the model’s plausible outcomes map onto real world outcomes in some interesting ways. One might reasonably predict the following.

(1) Where economic debates are not salient to political debates, economists will be left undisturbed. There will be many propositions in economics that are not particularly relevant to political actors. Some propositions may simply not have any very great distributional impact for politicians or their clients. Others may be politically irrelevant, because they are probably repugnant to all political actors. Here, there will be no external pressures causing economists to disagree, allowing them (to the extent that their natural vexatiousness permits) to reach a happy concordance.

(2) Where debates among economists are politically salient and economists have a genuine consensus among themselves, economists’ influence will be at its peak. They will not influence actors whose interests would lead them to oppose this consensus. But they may expect their arguments to be championed by political actors whose interests accord with the consensus among economists, and to be listened to by those who are open to influence. Note, however, that this happy (for economists) state of affairs will surely be unstable. Those political actors who are disadvantaged by the given consensus will have strong incentive to undermine it, by sponsoring or encouraging potentially dissident economists to make alternative claims, flying them on all expenses paid trips to week long boondoggles where they listen to counter-arguments etc. Precisely to the extent that economists are politically influential, disadvantaged political actors will have incentive to try to open up debate among them so that they can turn to their ‘own’ economists for validation in public argument. Hence, state (2) will sooner or later collapse into (3)

(3) Where debates among economists are salient, and where there is disagreement among economists, economists will only have moderate influence on political outcomes. Each side in political argument will have its own economists to validate its claims, provide helpful models, econometric papers etc. This state of affairs (we might dub it the ‘John Lott’ equilibrium) will, unlike (2), be quite stable, except under extraordinary circumstances.

So what does this predict? Like Blinder’s aphorism, it suggests that we will observe a broad empirical correlation between (a) the extent of disagreement among economists, and (b) the involvement of economists in political disputes. ‘Eat your greens’ propositions that are popular among economists, but more or less equally uncongenial to all political actors in a given system will, as in Blinder’s formulation, be systematically ignored. But economists’ influence will not be particularly high when they disagree with each other, since different economists arguing for different sides of the political debate will at least partially cancel each other out. It will be far higher on those rare and fleeting occasions when economists unite in favor of the one or the other side actively participating in a political debate.

I note as a postscript that this toy model contains a simple public choice explanation for the emergence of public choice. Drawing this out is left as an exercise for the reader.

{ 77 comments }

1

Antonio Conselheiro 03.17.11 at 6:04 pm

Economists are influential when they provide support for a well-funded party to a debate, and less so when they support a poorly-funded party. And likewise, economists supporting well-funded parties are invariably themselves well-funded, and economists supporting poorly-funded parties are usually but not always poorly-funded, and they’re also fewer.

There are no poorly-funded economists. If an economist is poorly-funded, he does not belong in the profession any more than a serial killer belongs in the helping professions. He is either incompetent, or else not a rational actor.

2

Antonio Conselheiro 03.17.11 at 6:05 pm

“There are really no…”

3

chris 03.17.11 at 6:16 pm

Economists are influential when they provide support for a well-funded party to a debate, and less so when they support a poorly-funded party.

But well-funded parties are themselves influential, so how do you distinguish this from “Economists are never influential; they are on the winning side only when that side would have won anyway”? That may not be very flattering to economists, but it seems to fit the evidence most of the time.

4

Francis 03.17.11 at 6:18 pm

For another, real-world example of this toy model, please refer to the amount of attention given by both the press and politicians to the tiny fraction of scientists who disagree with the consensus view on global climate change.

5

Antonio Conselheiro 03.17.11 at 6:25 pm

Economists provide niche support on the way to 51%.

6

JRoth 03.17.11 at 7:13 pm

Oh good, I was looking for a good place to discuss this. As it happens, I read MY’s endorsement of Avent’s statement (sounded wrong to me), and then read DeLong’s exasperation at Kling’s pathetic attempt to play gotcha on Krugman.

And what do we see there? When there’s a live, partisan debate, many economists will happily trash the consensus that existed right up until the debate opened (in this case, PK writes of Kling: “And may I say, I thought that this was part of what every economist knows — the story of the tight-money loose-fiscal mix of the Reagan era is, literally, a textbook case that’s in just about every undergrad macro book.”).

For whatever reason, the US has entered an era in which every single issue is open to partisan debate (fresh examples from just this week: child labor laws are unconstitutional and whether your neighborhood school isn’t “public”, it’s “government-run”), and partisans will always find experts to agree with them. As noted by Francis @4, climate change is the paradigmatic example. The only counterexample I can think of, tragically, is torture – the only Obama action I can think of that has unquestioned GOP support is the torture of Bradley Manning.

7

stubydoo 03.17.11 at 11:51 pm

Trying to think through some examples to see how the theory pans out…

- I think it’s pretty much a consensus among economists that taxes on pollution are superior to environmental regulations, but public opinion here in the USA has it the other way around, and the policies being enacted reflect this.

- there’s a lot of kooky demagoguing about the gold standard of late, while the profession almost universally approves of the existence of monetary policy levers of at least some sort for central bankers to work with. On this one the economists are definitely getting their way, so that one accords well with Henry’s theory.

8

Myles SG 03.18.11 at 12:39 am

For whatever reason, the US has entered an era in which every single issue is open to partisan debate

Thankfully, this doesn’t really apply as much to free trade. (There are protectionist Democrats, but they are generally cranks.)

It’s an amazing achievement of sorts for the economics profession that the free trade consensus in the English-speaking world has generally held, even in a historically protectionist place like Australia.

9

Antonio Conselheiro 03.18.11 at 1:08 am

Yeah, the Democrats have lost every battle, but they’ve won free trade! Yay!

10

Myles SG 03.18.11 at 1:34 am

My point was that free trade was an example of economics having a powerful influence even when there’s pretty much a consensus within the profession (most economists, from Brad de Long to Greg Mankiw, are for free trade). It is, per Henry’s formulation, also something that was politically salient, in which the consensus of the economics profession managed to carry the day over the relevant sectional interests.

It’s hard to imagine free trade being an influential opinion had there not been a professional consensus for it over a long period of time.

11

Myles SG 03.18.11 at 1:37 am

– I think it’s pretty much a consensus among economists that taxes on pollution are superior to environmental regulations, but public opinion here in the USA has it the other way around, and the policies being enacted reflect this.

British Columbia, Canada, has a carbon tax instituted by a right-of-centre government.

12

Antonio Conselheiro 03.18.11 at 1:56 am

There are a ton of cranks opposed to free trade, but they’re just voters.

13

stras 03.18.11 at 2:58 am

Free trade is an obvious example where a powerful, well-funded party (multinational corporations) gets to dictate policy to a much larger, but much poorer, and therefore much less powerful party (everybody else). The role of economists here is not to influence the debate so much as it is to bless the atrocity that’s taken place. They are not stakeholders or purveyors of influence or even intellectuals; rather, economists are akin to medieval priests, spreading a thin veneer of sanctity on the ruling class in return for their own continued place of privilege in the status quo.

14

Nine 03.18.11 at 4:08 am

Why does Prediction 1 follow from the model ? Will the austrians or the marxists ever converge with, say, the neoliberals ? (Neoliberal is not used as a pejorative here, just a dimly remembered branch of the tree in Samuleson/Nordhaus).

Regarding the consensus on free trade – farm subsidies show no sign of going away & that’s just one example. Powerful actors seem able to defy the consensus and arguably even to destroy it. One billionaire can fund a 100 think tanks.

15

Myles SG 03.18.11 at 4:20 am

ather, economists are akin to medieval priests, spreading a thin veneer of sanctity on the ruling class in return for their own continued place of privilege in the status quo.

The deficiency of not understanding comparative advantage (or indeed other relevant intellectual concepts) is not, normally speaking, taken as a sign of virtue, except by Republicans.

farm subsidies show no sign of going away

Farm subsidies are inconsistent, but they don’t really matter that much for the broader economy. It would be a really small hill for the free trade cause to die on.

16

Nine 03.18.11 at 4:33 am

Again – farm subsidies show no sign of going away & that’s just one example.

17

Myles SG 03.18.11 at 4:35 am

Farm subsidies go under Henry’s scenario (1), where there is consensus among economists but the issue is not politically salient. Neither liberals nor conservatives want to get rid of farm subsidies, and any efforts in that direction are basically a waste of time.

18

ScentOfViolets 03.18.11 at 4:36 am

The deficiency of not understanding comparative advantage (or indeed other relevant intellectual concepts) is not, normally speaking, taken as a sign of virtue, except by Republicans.

The deficiency of not understanding the difference between comparative advantage and absolute advantage is not, normally speaking, taken as a sign of virtue either. Except – of course – when it’s Republicans who are incapable of distinguishing the two.

19

Myles SG 03.18.11 at 4:38 am

The deficiency of not understanding the difference between comparative advantage and absolute advantage is not, normally speaking, taken as a sign of virtue either.

Absolute advantage doesn’t actually matter. Comparative advantage does.

20

ScentOfViolets 03.18.11 at 4:46 am

Sigh. You haven’t actually taken any economics courses, have you?

Care to back up that – shall we say – rather interesting statement?

21

Myles SG 03.18.11 at 4:49 am

I don’t have my econ books beside me, but here’s Wikipedia:

“Even if one country is more efficient in the production of all goods (absolute advantage), it can still gain by trading with a less-efficient country, as long as they have different relative efficiencies.”

22

ScentOfViolets 03.18.11 at 4:54 am

Yes. You say that as if it means something. You don’t realize it’s orthogonal to your claim, ergo I conclude that this is just a talking point you’re parroting without understanding it.

23

Myles SG 03.18.11 at 4:59 am

No. I am not actually understanding your point. You noted that some people fail to recognize the difference between absolute and comparative advantage, and I was confused as to where absolute advantage comes into in a discussion about the merits of free trade, because it’s not relevant thereto.

24

ScentOfViolets 03.18.11 at 5:06 am

I was confused as to where absolute advantage comes into in a discussion about the merits of free trade, because it’s not relevant thereto.

By which you mean to say that you reflexively believe all “free trade” is based upon comparative advantage.[1] Whereas in reality you have no idea whether the advantage is comparative or absolute, but you believe what others have told you.

[1]In fact, it appears that you’ve abandoned your original assertion and traded it in for another without admitting your first one was wrong.

25

Myles SG 03.18.11 at 5:10 am

By which you mean to say that you reflexively believe all “free trade” is based upon comparative advantage.

Well yes. Theoretically one believes that all free trade is based upon comparative advantage. I meant to say (originally and now) that absolute comparative doesn’t matter for free trade.

26

Myles SG 03.18.11 at 5:11 am

absolute advantage*, sorry.

27

Anarcho 03.18.11 at 8:46 am

Talking of simple models for economists, I wonder what the conclusions would be if we applied a “supply and demand” model to economic theories.

It would, I think, conclude that the rich would “demand” an economic theory which justified their economic position, which denied their obvious economic power, which focused on atomised individuals rather than individuals embedded in class structures and social relationships, it would desire a theory which showed income from capital was not the result of exploitation, it would show that redistribution of income/wealth could not be theoretically justified nor actually help, a move away from production (and its hierarchies) to exchange, and so forth.

It would also conclude, surely, that in the face of this “demand” there would be a “supply” of an appropriate economic theory. So, for example, we would expect that theories which showed that income to capital was exploitation of labour would be replaced by those which did not, that values of theory which justified redistribution of income would be replaced by those which did not, that a focus on social class would be replaced by one looking at isolated individuals, a focus of production happening in time would be replaced by one based on snapshots of exchange between individuals outside time, and so forth.

In short, the history of economic theory and the move from classical to neo-classical economics…. But, still, I’m sure that this is just a massive co-incidence….

28

Alex 03.18.11 at 9:45 am

can be made to support (PDF) any policy prescription you might care to be having yourself

This is a special case of Kolakowski’s Infinite Cornucopia*, isn’t it?

*”For whatever course you have decided on, there exists an Infinite Cornucopia of reasons to justify it after the fact”

29

Nemi 03.18.11 at 10:02 am

It might be true that “the model’s plausible outcomes map onto real world outcomes in some interesting ways”, but since the domain is far outside the real world, why does it matter?

30

Henry 03.18.11 at 11:16 am

ScentOfViolets – please note that I’m getting quite impatient with your repeated rhetorical ‘sighs’ and the like. You may continue to participate in comments on my posts – but only if you stop behaving like Comic Book Guy’s less well-socialized younger brother towards other commenters. A little politeness, and assumption of good faith and reasonable intelligence on the part of your interlocutors will go a long way.

31

Niamh 03.18.11 at 11:43 am

Here are two interesting studies by political scientists that try to sort out how the storyline runs. The Lindvall paper is about policy choices in Sweden vs Austria and Denmark; Manderkern and Shalev compare two episodes of policy choice in Israel:

Lindvall, Johannes. 2009. The Real but Limited Influence of Expert Ideas. World Politics 61 (04):703-30.
‘This article claims that while experts exert strong influence over the selection of policy instruments, their influence over the formulation of policy objectives is much weaker.’

Mandelkern, Ronen, and Michael Shalev. 2010. Power and the Ascendance of New Economic Policy Ideas: Lessons from the 1980s Crisis in Israel. World Politics 62 (03):459-95.
‘Recent explanations of transformations of macroeconomic policy under crisis conditions spotlight the intrinsic properties of ideas and the persuasiveness with which they are marketed. Bridging the divide between power and discourse approaches, this article reveals the causal role of the power of agents over ideational change, conditioned by the political conjuncture in which they operate.’

32

Antonio Conselheiro 03.18.11 at 12:35 pm

NAFTA won because freetraders, interest groups supporting free trade, controlled the Republican Party and key Democrats, notably the President. I don’t see why it shouldn’t be regarded as interest group versus interest group, rather than the victory of sweet reason. 199 Representatives voted no, 43 of them Republicans.

When the elder Bush left office he named free trade as his greatest accomplishment. When Clinton left office he named free trade as his greatest accomplishment.

DeLong and Krugman were big players in the NAFTA fight. They also supported some kind of cockamamie scheme whereby the losers from free trade would be compensated, but nothing came of it. The Republicans free-traders made sure of that. They say that Krugman and DeLong, seeing the political devastation, are now having some second thoughts and maybe even asking themselves whether the economic model of society they were working with might not have been imperfect.

33

ScentOfViolets 03.18.11 at 1:52 pm

ScentOfViolets – please note that I’m getting quite impatient with your repeated rhetorical ‘sighs’ and the like. You may continue to participate in comments on my posts – but only if you stop behaving like Comic Book Guy’s less well-socialized younger brother towards other commenters.

Gee, ya think that maybe this is in reaction to Miles’ posting? Given our history, I’ll believe this is what you think when come down on him for similar behavior. You really didn’t get that from the fact that my initial post was worded almost identically to Miles?

Uh-huh. So how about a little of this umbrage directed towards him? I get really tired of comments like his about how people don’t “get” stuff, and yes, as you note, it is annoying and contributes little to the discussion. The ball’s in your court on this one.

34

Myles 03.18.11 at 2:05 pm

199 Representatives voted no, 43 of them Republicans.

You should count how many cranks were among that 199, and especially among the 43.

By the way, since you haven’t mentioned it: protectionism in industrial-age America has had an extremely nasty political history, having been allied with such causes as racial xenophobia and ethno-nationalism. If you are going to talk judgmentally about it in terms of interest groups there’s no getting away from those. The tendency of protectionists to think they are God’s own special snowflakes is tiresome.

35

ScentOfViolets 03.18.11 at 2:20 pm

Btw Henry, in case you haven’t figured it out yet, I’m a tit for tat sorta guy; look on the other thread about nuclear power which is free of Miles sort of sneering and in which all parties are markedly more civil despite the very obvious and deep disagreements.

Which, btw, he exhibits again in his most recent post, and I’ll thank you kindly to give him the same lecture you gave me.

This isn’t about personalities or past history, right Henry ;-)

36

Charles St. Pierre 03.18.11 at 2:42 pm

Free trade is a nice ideal. Unfortunately, a: countries which practice it are easily exploited by those with mercantilist tendencies. b: The equalization of factor prices resulting from free trade is disastrous to the labor and distribution of wealth in a developed country, when it practices large scale trading with a developing one. c: Where there are chronic trade imbalances, the deficit country suffers decreased revenue for its industries, thus dis-investment, deflation, and unemployment. d: With free trade the economy of a country with a higher discount rate, that is a country that tends to consume more in the present and values future consumption less, ends up in debt to the economy of a country with a lower discount rate, one which values present consumption less and future consumption more. In the limit the country with the higher discount rate ends up ‘owned’ by the country with tahe lower discount rate.

For a discussion of ‘c:’ see http://anamecon.blogspot.com/2010/04/effects-of-unbalanced-trade.html

‘b:’ has been well known but seldom discussed since a Samuelson paper in 1948.

37

stras 03.18.11 at 3:01 pm

Science is meant to be predictive and descriptive; when a physicist fails to accurately predict or describe the universe, she concludes that something is wrong with her model of the universe. When an economist fails to accurately predict human behavior, he starts getting huffy about all these people who are behaving improperly because they don’t understand economics. That’s not science; at best, it’s a species of ethics, at worst, a religion.

38

Antonio Conselheiro 03.18.11 at 3:02 pm

The term “crank” is generally applied to isolated individuals ranting on streetcorners, Myles — people like me. It generally isn’t applied to large demographics. It doesn’t just mean “People I disagree with”. Those are technically called “poopyfaces”.

Trotectionism in industrial-age America has had an extremely nasty political history…. Yeah, it’s amazing that “decent” human beings ever could have supported things like slavery, genocide, or tariffs. How far we’ve progressed!

If you are going to talk judgmentally about it in terms of interest groups there’s no getting away from those.

I did mention interest groups, which are what makes American politics function, but there was nothing judgmental about it, unless you think that interest groups are poopyfaces too.

How many of the successful developing nations of Asia practiced free trade? How well did the “developing” nations do who followed the free trade rules laid down by the WTO?

39

Myles 03.18.11 at 3:03 pm

a: countries which practice it are easily exploited by those with mercantilist tendencies.

Japan’s economic doldrums over the last twenty years, I think, have demonstrated the evolution of a kind of defensive mechanism against mercantilism. The cellphone market, for example, was a huge own-goal for Japan. See:

http://en.wikipedia.org/wiki/Gal%C3%A1pagos_syndrome

c: Where there are chronic trade imbalances, the deficit country suffers decreased revenue for its industries, thus dis-investment, deflation, and unemployment.

This is theoretically obviated by a floating exchange rate regime.

In the limit the country with the higher discount rate ends up ‘owned’ by the country with tahe lower discount rate.

Various Arab countries outright “own” Knightsbridge. Ferrovial outright “owns” Heathrow. This isn’t to mention English football. I mean, I am just not seeing where’s the problem of having foreigners own your stuff.

40

Henry 03.18.11 at 3:05 pm

ScentOfViolets – this is _certainly_ because of personalities – to be more exact: your online personality; perhaps you are nicer in person – and your past history. And, as it happens I have come down on Myles too in the not-too-distant past. I’m not particularly interested in having my comments sections become an arena for you to show off your purely self-authenticated intellectual superiority at the expense of good conversation. You’ve already been quite badly behaved in the comment section to my previous post on AI in SF, and I let it go. I certainly do not want you to believe that you can make a habit of it. Take this as a warning. As of the moment, your moderate intellectual contribution to debate is very definitely outweighed by the damage to conversation caused by your bad behavior. If the balance does not shift, I will have to take steps, starting with limits on number of comments to my posts and/or a temporary ban. You are perfectly free to continue commenting – if and only if you maintain a minimum of politeness, and assumption of good faith and reasonable intelligence on the part of your interlocutors.

41

ScentOfViolets 03.18.11 at 4:50 pm

And I see that you’re still not delivering a similar rebuke Myles (not Miles, my apologies) despite his very bad behaviour here, and despite the fact that another poster (and not someone who is – shall we say – not disinterested) has also explicitly taken Myles to task for his abusive style. You know, the reason why I decided to mimic his posting style? The old tit for tat game?

Frankly, until you do chastise Myles and give him the same ultimatum[1], I just don’t believe you. And if I were you, I’d find that fact troubling (assuming you grant my sincerity.)

[1]Consider this – if you had performed your function and stepped in to curb Myles before I felt compelled to take action, we wouldn’t be having this conversation. And this thread would have been much pleasanter and more productive all around.

42

Henry 03.18.11 at 5:09 pm

ScentOfViolets – given the frequency and exuberance with which you have exhibited your conversational charms in the past, I find your ‘but I only did it because he did it first!’ quite unconvincing. But in any event it is entirely irrelevant. Your feeling that you are “compelled to take action” – i.e. to behave badly because someone else is, in your opinion, behaving badly – suggests that you have some serious misconceptions regarding your role as a commenter. Please consider this your final warning.

43

ScentOfViolets 03.18.11 at 5:20 pm

The term “crank” is generally applied to isolated individuals ranting on streetcorners, Myles—people like me. It generally isn’t applied to large demographics. It doesn’t just mean “People I disagree with”. Those are technically called “poopyfaces”.

The problem, of course, is that “free trade” and it’s desirability under the “comparative advantage” argument is that what economists mean by those terms is rather more technical and hedged with qualifications[1] than are generally argued in the media (yes, even the blogosphere :-)

So claiming that people who disagree with you about “free trade” because they’re not hip to the comparative advantage argument tends to generate a lot more heat than light. To name but one hypothetical, if company A labors under “burdensome regulations” concerning pollution controls and employee safety while company B enjoys no such restrictions and this results in B undercutting A’s pricing schedules and ultimately driving it out of business, this is not an example of comparative advantage. And arguments to the effect that this is showing free trade at it’s best, by giving the old customers of company A cheaper goods completely miss the mark . . . as Inigo Montoya says: “You keep saying that word. I do not think it means what you think it means.”

[1]I’ll go to the wiki, not because it’s the most informative or the best, but because it does a fairly recent job of laying out some of those explicit assumptions:

Assumptions in Example 2:

* Two countries, two goods – the theory is no different for larger numbers of countries and goods, but the principles are clearer and the argument easier to follow in this simpler case.

* Equal size economies – again, this is a simplification to produce a clearer example.

* Full employment – if one or other of the economies has less than full employment of factors of production, then this excess capacity must usually be used up before the comparative advantage reasoning can be applied.

* Constant opportunity costs – a more realistic treatment of opportunity costs the reasoning is broadly the same, but specialization of production can only be taken to the point at which the opportunity costs in the two countries become equal. This does not invalidate the principles of comparative advantage, but it does limit the magnitude of the benefit.

* Perfect mobility of factors of production within countries – this is necessary to allow production to be switched without cost. In real economies this cost will be incurred: capital will be tied up in plant (sewing machines are not sowing machines) and labour will need to be retrained and relocated. This is why it is sometimes argued that ‘nascent industries’ should be protected from fully liberalised international trade during the period in which a high cost of entry into the market (capital equipment, training) is being paid for.

* Immobility of factors of production between countries – why are there different rates of productivity? The modern version of comparative advantage (developed in the early twentieth century by the Swedish economists Eli Heckscher and Bertil Ohlin) attributes these differences to differences in nations’ factor endowments. A nation will have comparative advantage in producing the good that uses intensively the factor it produces abundantly. For example: suppose the US has a relative abundance of capital and India has a relative abundance of labor. Suppose further that cars are capital intensive to produce, while cloth is labor intensive. Then the US will have a comparative advantage in making cars, and India will have a comparative advantage in making cloth. If there is international factor mobility this can change nations’ relative factor abundance. The principle of comparative advantage still applies, but who has the advantage in what can change.

* Negligible transport cost – Cost is not a cause of concern when countries decided to trade. It is ignored and not factored in.

* Before specialization, half of each country’s available resources are used to produce each good.

* Perfect competition – this is a standard assumption that allows perfectly efficient allocation of productive resources in an idealized free market.

44

ScentOfViolets 03.18.11 at 5:33 pm

Okay, Henry. We’ll do it your way, and I’ll say this formally and without rancor:

Myles, when you say that people ‘don’t understand comparative advantage’, or that they’re “cranks” for not understanding the same, or if you characterize them as “protectionists”, or say that “The tendency of protectionists to think they are God’s own special snowflakes is tiresome.“, well that’s insulting and hurtful. I would appreciate it if you would refrain from that sort unnecessary and counterproductive commentary. I need hardly add that these are opinions, and not ones backed up with any cited facts or close, meticulous reasoning.

There. I hope that’s good enough for Henry :-/

45

Charrua 03.18.11 at 5:34 pm

Myles, regarding your original point (that “the consensus of the economics profession managed to carry the day over the relevant sectional interests”) ¿are you suggesting that there weren’t powerful sectional interests on the “free trade” side?
My impression is that the consensus of the economics profession only managed to carry the day (or in fact, to form a consensus) when the side they backed became much more powerful than the other.
I’m not a protectionist, but you can’t ignore the relative strength of the sides on that debate (and many other subsequent ones). It seems to me that declining unionization rates had much more to do with the final result that academic consensus.

46

chris 03.18.11 at 5:35 pm

To name but one hypothetical, if company A labors under “burdensome regulations” concerning pollution controls and employee safety while company B enjoys no such restrictions and this results in B undercutting A’s pricing schedules and ultimately driving it out of business, this is not an example of comparative advantage.

Sure it is — the regulations lower the cost-effectiveness of producing things in country A. What I think you mean to say is that moving all the industry to B isn’t better for everyone and it’s not even clear that it’s better for anyone (given that the B workers are now being killed in industrial accidents, which is even worse than being unemployed).

The economy exists to serve the population and not vice versa, and sometimes that means efficient outcomes like putting all the retirees on ice floes so they won’t consume any resources have to be ruled out by non-market considerations.

The fact that “free trade” is sometimes used as a mask for regulatory arbitrage to get around just this sort of people-before-markets regulation (and, for that matter, Pigouvian taxation too, when anyone is wise enough to pass any) is something that definitely has to be borne in mind and considered before concluding “rah rah free trade, it’s the most efficient way”. Because cutting up the least productive members of your society to make Soylent Green is efficient too (even before considering the incentive effects).

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ScentOfViolets 03.18.11 at 6:20 pm

Sure it is—the regulations lower the cost-effectiveness of producing things in country A. What I think you mean to say is that moving all the industry to B isn’t better for everyone and it’s not even clear that it’s better for anyone (given that the B workers are now being killed in industrial accidents, which is even worse than being unemployed).

Well, no, being able to offer something at a lower price does not necessarily mean that the cost to produce it is lower. It could also, for example, indicate the ability of company B to externalize it’s costs. Which was precisely why I chose the example that I did, the problem of pollution as an unpriced cost (good) being a famous and old one that most people know about. The same holds true for employee safety and health; in fact, companies like Walmart are notorious for shucking their costs in this regard onto the public.

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Robert 03.18.11 at 7:02 pm

Nothing orthodox economists say, whether or not it is a consensus of that subset of economists, should be believed. My name is a link to some remarks on the theory of international trade. One might also want to look up the “Leontief paradox”.

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Myles 03.18.11 at 7:03 pm

Well, no, being able to offer something at a lower price does not necessarily mean that the cost to produce it is lower. It could also, for example, indicate the ability of company B to externalize it’s costs.

Guys, that is a completely different discussion altogether, i.e. negative externalities. This is why labour and environmental clauses exist in free trade agreements. Wal*mart’s employment policies constitute negative externalities; paying Vietnamese workers lower wages (in absolute terms) most emphatically do not.

are you suggesting that there weren’t powerful sectional interests on the “free trade” side

I don’t actually know. It’s very hard to say definitively, because while labour groups almost universally oppose free trade, businesses tend to vary a lot more. Japanese businesses are unbelievably protectionist, for example.

“The tendency of protectionists to think they are God’s own special snowflakes is tiresome.“, well that’s insulting and hurtful.

Well, the (bit more) serious point I am trying to make is that protectionists are very averse, in general, to admitting that protectionism has any serious downsides as well. Free-traders readily admit that there will be downsides from trade, but the benefits will be greater. Oftentimes protectionists argue as if they think that protectionism produces no losers at all.

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Antonio Conselheiro 03.18.11 at 7:09 pm

” Free-traders readily admit that there will be downsides from trade….”

Maybe in the privacy of their homes. During the political argument, “Everyone will be better off” was the dominant them and “Few will be harmed” was the backup and “We’ll help the new unemployed readjust” was next and “Sorry about that” comes last.

The arguments against free trade are more political and social than economic, and they mostly are directed against Democratic or liberal free-traders (since conservative free-traders think that harming labor is neutral at worst, and a good thing because it harms Democrats and liberals.)

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ScentOfViolets 03.18.11 at 7:30 pm

Nothing orthodox economists say, whether or not it is a consensus of that subset of economists, should be believed. My name is a link to some remarks on the theory of international trade. One might also want to look up the “Leontief paradox”.

Looking over all the previous stuff, it seems that the implicit assumption is that we’re discussing macroeconomics. I don’t think this is necessarily the case if you extend the conversation to explicitly include microeconomics, stuff like marginal rates of production and such.

At least, that was the case thirty-odd years back. Maybe that’s changed too.

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chris 03.18.11 at 7:34 pm

Well, no, being able to offer something at a lower price does not necessarily mean that the cost to produce it is lower.

No, but in this example, the cost *to the producer* of producing it is lower. And that’s how cost-effectiveness is customarily measured (particularly by people deciding where to build their next factory).

If you want to argue that that is misleading from a standpoint of looking at the overall benefit to society, I completely agree and that was the point of the whole rest of my post. But according to the econometrics that will drive the industry to country B, the cost *is* lower there, and that’s its comparative advantage: regulatory arbitrage.

Guys, that is a completely different discussion altogether, i.e. negative externalities.

No, it isn’t. Free trade in the last half century or so has existed to a very substantial extent not as a pure and abstract principle, but as a mask for regulatory arbitrage. Both between countries, and to some extent, between U.S. states. This is also where free trade got its powerful financial backers and think-tank hacks.

Heck, the whole basis of labor backing for protectionism is that “free trade” would drive down the labor costs *that result from U.S. minimum wage, overtime, worker safety, etc. laws* by allowing the industry to flee into a jurisdiction that lacks those laws, creating pressure to weaken the laws in the name of “competitiveness”, and the overall effect would not be an improvement for the U.S. worker. The unions have been proved dead right on both international and interstate levels.

Models that demonstrate the benefits of free trade usually don’t even attempt to model different regulatory regimes in the example countries — even though having separate political systems capable of reaching different results is practically the definition of “different countries”.

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Myles 03.18.11 at 7:41 pm

that result from U.S. minimum wage

Actually, comparative advantage does cover wages, including minimum wages. There is nothing illegitimate about this, and there’s no regulatory arbitrage involved at all, unless you propose that Vietnam should have the exact same minimum wage as the U.S.

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Robert 03.18.11 at 11:07 pm

“I don’t think this is necessarily the case if you extend the conversation to explicitly include microeconomics…”

No. You should not necessarily believe anything in orthodox microeconomics either. Where to start? Maybe with:

Daniel Kahneman and Amos Tversky (March 1979). “Prospect Theory: An Analysis of Decision under Risk”, Econometrica, V. 42, N. 2: 263-291.

Alan Kirman (1989). “The Intrinsic Limits of Modern Economic Theory: The Emperor has No Clothes”, Economic Journal, V. 99: 126-139.

I don’t know what a search on “Full Cost Pricing” or “Mark-up Pricing” will get you.

And I made my name link to another subset of posts on my blog.

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ScentOfViolets 03.19.11 at 1:29 am

Well, no, being able to offer something at a lower price does not necessarily mean that the cost to produce it is lower.

No, but in this example, the cost to the producer of producing it is lower. And that’s how cost-effectiveness is customarily measured (particularly by people deciding where to build their next factory).

That may be how it is customarily measured, but that’s not what economists usually mean by costs, prices, resource allocations, what have you in these sorts of discussions about comparative advantage. And which some people will take rather unscrupulous advantage of, incidentally.[1] And in any event, if you are talking about trade between countries instead of the differential competitive advantages the companies have pricing again assumes it’s regular meaning.

If you want to argue that that is misleading from a standpoint of looking at the overall benefit to society, I completely agree and that was the point of the whole rest of my post. But according to the econometrics that will drive the industry to country B, the cost is lower there, and that’s its comparative advantage: regulatory arbitrage.

Actually, your last sentence is dead on and that’s what I am alluding to in my example about the relative assumed burdens of pollution. See, the company not paying for pollution controls doesn’t magically make the associated costs go away. Someone will pay have to pay them, in this case, the public of said country. And they’ll pay for it, literally, with their lives: people will die months or years earlier than otherwise through increased and systemic pulmonary stress, by higher incidences in the population of cancers, cumulative poisoning, etc. And of course, don’t forget little details like teragenic birth defects . . .

So yes, this is literally a “comparative advantage” in regulatory arbitrage. Which again, is not what economists generally mean by that term when making this argument :-)

[1]I remember one of my first encounters with a net.libertarian. In a discussion about mechanical efficiency he insisted in framing the conversation in terms of economic efficiency. Even though in the economic context efficiency meant what it usually meant, when the arguments were heavily against him he pulled a jujitsu move and claimed that he was talking about economic efficiency and we were all just poopyheads for not getting it.

Other people have over the years suggested that having my first online encounters with that tribe of political philosophers be David Friedman and getting my first impressions from that individual was . . . unfortunate. Perhaps mentioning that name will give other people pause to cut me some slack :-)

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Charles St. Pierre 03.19.11 at 3:31 am

in response to Myles:
“a: countries which practice it are easily exploited by those with mercantilist tendencies.”
Myles: Japan’s economic doldrums over the last twenty years, I think, have demonstrated the evolution of a kind of defensive mechanism against mercantilism. The cellphone market, for example, was a huge own-goal for Japan. See:
http://en.wikipedia.org/wiki/Gal%C3%A1pagos_syndrome

Sorry, Myles, I don’t see the relevance of your ‘refutation.’ What does the social isolationism have to do with Toyotas? As far as I can tell, a country practicing mercantilist policies seeks to accumulate the money of its trading partners. This is irrelevant to whether it develops a product idiosyncratic to its own market. Indeed, it is interested in dominating foreign markets with its own products, and thus will tend to avoid that sort of thing. But: http://www.thetruthaboutcars.com/2010/07/ford-japan-not-just-there-for-fun/ it is good to hear Ford is “bullish” about cracking the Japanese market.

“c: Where there are chronic trade imbalances, the deficit country suffers decreased revenue for its industries, thus dis-investment, deflation, and unemployment.”
Myles: This is theoretically obviated by a floating exchange rate regime.

Did you read the article I referred you to? Here it is again:


http://anamecon.blogspot.com/2010/04/effects-of-unbalanced-trade.html

A theoretically obviating floating exchange rate doesn’t exist where one country pegs its currency to the other.

“In the limit the country with the higher discount rate ends up ‘owned’ by the country with the lower discount rate.”

Myles:Various Arab countries outright “own” Knightsbridge. Ferrovial outright “owns” Heathrow. This isn’t to mention English football. I mean, I am just not seeing where’s the problem of having foreigners own your stuff.

Well, if you don’t have a problem with foreigners owning your stuff, I’m happy for you, because they’re going to own more and more of it, and take their profit off of it, to your loss.

And you didn’t respond to (b:) the equalization of factor prices, which argues that with free trade the US will eventually have exactly the same minimum wage as Vietnam. Granted, Vietnam’s minimum wage will be somewhat higher than it is now. If it is a comfort to you, all other wages will in time become proportional.

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Robert Waldmann 03.19.11 at 4:53 am

I have no idea where Blinder got his views. I can’t imagine what he thinks that economists know. I can’t think of any topic on which economists agree.

There has been quite a bit of discussion of economics and the economics profession recently (mostly related to the question of whether economics is a science). I am aware of essentially no evidence presented in the course of this discussion.

In particular many people seem to be convinced that economists know some things and agree on some things. But no one gives examples. I’m an economist and I can’t think of any.

I will check here upthread.

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Robert Waldmann 03.19.11 at 5:11 am

OK I’ve now checked. Economists due generally support free trade policies in developed countries. No competent economist will claim that a country is unambiguously better off with free trade than without, because of the logic of comparative advantage. Trade affects income distribution within a country.

Some economists are add up the utils utilitarians and will say that free trade can increase or decrease the national sum total of happiness. Others claim that we only have preference orderings that utility functions merely summarize those orderings and that any monotonic transformation of a utility function changes nothing. They then forget that they assume something quite different when they consider choice under uncertainty. I note that their statements are not at all consistent. But then they will say we can only discuss whether some outcome is Pareto better than another. Typically outcomes under free trade and under protection are not Pareto ranked.

Of course there are economists who identify money metric welfare with welfare. I consider them incompetent. There is no rationale for this approach. So on the

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Robert Waldmann 03.19.11 at 5:29 am

here again. One can find economists on both sides of the Myles vs Scent of Violets debate. Some assert that economic theory proves that free trade is best. Others disagree.

I think the key explanation for the near consensus in favor of free trade policies in rich countries is that economists who are not free market fanatics tend to be egalitarian and to care more about the really very poor workers in developing countries than about workers in rich countries. For some reason, manyoutspoken opponents of free trade seem absolutely sure that no one could possibly care about foreigners. Others assume that international trade is bad for third world workers (no global activists before they renamed themselves new global). When eg Krugman and DeLong claim they think the US shouldn’t protect because they are egalitarian, many people just assert that they are lying.

Here the key question is do economists protection of firms in poor countries. Well specifically poor countries with well functioning states which don’t sell out to the highest briber restrained only by simple rules (such as free trade or no IMF loans for you). I’d say that there is a debate on this and that the near consensus in favor of free trade for them too is based on political economy (any discretionary policy will be guided by corruption) than on economics.

Sorry for running on. I’d say on free trade there is agreement on the policy but disagreement on the economics. It’s mostly a coincidence.

OK pollution taxes. It’s close to unanimous. Mary Weitzman will note advantages of cap and trade. Of course economists don’t agree that their should be pollution taxes. Some believe in freedom to pollute. I can argue against pollution taxes (but I don’t believe the argument). The key issue is that one has to have the correct index of pollution. Otherwise, the incentives can be all wrong. An example would be a simple CO2 tax might make it profitable to let byproducts rot rather than burning them. That would be terrible as they then release methane which is much worse than CO2. A real life example is particulate pollution. Power companies requested a limit on tons of particulate pollution and not command and control dictation of how to reduce particulate pollution from the EPA. Their plan was to not install electrostatic dust precipitators and instead reduce particulate pollution by putting tarpaulins on coal piles. The problem with this is that the dust from a coal pile consists of large particles compared to the smoke from a smoke stack. The tiny particles stay in the air much longer and get inside our lungs and are much worse per ton of particles. The proposal which sounds sensible would have eliminated most of the benefit of the regulation.

An advantage of command and control is that it doesn’t leave loopholes (like tarpaulins not precipitators). In the end I support a pollution tax (I have since I first heard of the proposal soon after passage of the clean air act). But I can make a case against it.

OK another example. I don’t know an economist who supports rent control.

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Myles 03.19.11 at 7:03 am

I don’t know an economist who supports rent control.

Surprisingly, there has actually been movement in this area in recent decades. NYC, of course, is still stuck in the Stone Age about this, but it can’t be helped. Rent control is basically a classic case of perverse incentives.

Well, if you don’t have a problem with foreigners owning your stuff, I’m happy for you, because they’re going to own more and more of it, and take their profit off of it, to your loss.

This logic is just insane. Generally speaking, especially in the case of real estate investments in England, foreign money pouring in is a massive win for the host country. Arabs buying up Knightsbridge doesn’t mean they are actually making money off it; it means they are paying massive amounts of taxes, gardening fees, various charges, fees for decorators, fees for real estate agents, fees for plumbers and roofers and carpenters and the rest of it. It’s just a massive cash stream going into England and right into British pockets. This is like basically awesome if you happen to be British and in any way tangentially in line to benefit from Arab cash.

This raises the question: do you imagine that outsiders going in and buying up Aspen reduces the welfare of original Aspen residents? Or the other way?

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Myles 03.19.11 at 10:07 am

Consequences of protectionism:

“Apart from an expected $35 billion in insurance claims from last week’s earthquake, the financial losses in Japan will probably fall most heavily on the Japanese government once it tallies the damage from the tsunami and the nuclear disaster.

Business insurers that operate globally, like ACE, Chartis, Allianz and Zurich, have a relatively small toehold in Japan, and therefore small exposure.

About 90 percent of the property and casualty business in Japan is written by three big domestic insurance groups, the MS&AD Insurance Group, the Tokio Marine Group and the NKSJ Group.

The Japanese insurers jointly own a reinsurer, the Japan Earthquake Reinsurance Company, which in turn is backstopped by the Japanese government.”

The large global reinsurers will take up a significant portion of the burden, but the rest will be largely borne domestically. For Japan, this is deeply unfortunate, and entirely avoidable. The exclusion of the global insurers was deliberate industrial policy.

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Myles 03.19.11 at 10:07 am

(Sorry, that was from the New York Times, “Disasters’ Costs to Fall on Japan’s Government”)

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ScentOfViolets 03.19.11 at 6:52 pm

“I don’t think this is necessarily the case if you extend the conversation to explicitly include microeconomics…”

No. You should not necessarily believe anything in orthodox microeconomics either. Where to start? Maybe with:

Daniel Kahneman and Amos Tversky (March 1979). “Prospect Theory: An Analysis of Decision under Risk”, Econometrica, V. 42, N. 2: 263-291.

<snip>

And I made my name link to another subset of posts on my blog.

I didn’t mean to imply that everything in micro was unquestioned, or even most of the theory. But surely there must be some bits of it on which there is a broad bipartisan (;-) consensus?

Thanks for the link in your name, btw. It’s good stuff; by which I mean you give numbers that I can run and check for myself (that is to say, I mostly just copied and pasted into Mathematica so that after some editing the machine did the work for me. I’m guessing that you either did the same or had it checked by machine as a matter of course. It’s a wonderful age we live in.)

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Michael 03.19.11 at 7:23 pm

I’m not really sure that history validates the claims of free traders. Every country that has ever gotten rich has followed a protectionist regime, and countries that follow free trade regimes generally see massive capital outflow, which leads to slow growth.

That said, history definitely also doesn’t validate the claims of protectionists. So maybe it’s complicated.

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Michael 03.19.11 at 7:26 pm

@Myles: it helps the original property owners and hurts the renters. See also: Hawaii, cost of living in.

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ScentOfViolets 03.19.11 at 9:15 pm

Heck, the whole basis of labor backing for protectionism is that “free trade” would drive down the labor costs that result from U.S. minimum wage, overtime, worker safety, etc. laws by allowing the industry to flee into a jurisdiction that lacks those laws, creating pressure to weaken the laws in the name of “competitiveness”, and the overall effect would not be an improvement for the U.S. worker. The unions have been proved dead right on both international and interstate levels.

I’d like to expand a bit on what I’ve previously said before. You’d think that from the expostulations of the rah-rah “free trade” types that American workers opposed on principle any such agreements.

Well, this is yet another fact-free assertion that Just Ain’t So. Yes, there is vociferous opposition to “free trade” with Mexico, or China, or South Korea, in fact opposition to “free trade” with any country where the labor is (kept) cheap and those so-called “burdensome regulations” concerning worker safety and treatment, pollution, etc. are lax to nonexistent.

But what about free trade with Canada? Or Australia? I haven’t heard a lot of objections concerning those countries from the so-called simple-minded union/labour types. And what about proposals for free trade with Great Britain or Germany? I haven’t heard much objection from the usual parties there either. I think it’s pretty obvious to everyone that the reason you hear so few objections about free trade with these countries is that they don’t have an advantage when it comes to pollution controls or worker safety or decent wages. When was the last time you heard anyone complain about unfair competition from that hell-hole of a country, Germany, where sulfur-rich fumes from coal-fired power plants are allowed to freely spew into the atmosphere, mercury runs undiluted into the water supply, and workers are paid the equivalent of five U.S. dollars a day?

So I think we can take it as a given that these malcontents the “free trade” types like to go on about really do understand the argument of comparative advantage and and have no problems – indeed welcome – free trade with Great Britain, France, etc. It seems that those who like to sneer at the lack of economic sophistication in others have whopping great holes in their diverse theories about the opposition coming only from the reactionary and ill-educated and selfish.

And in fact – irony of ironies – this is precisely where those who like to trot out those accusations show their ignorance: if they really understood or cared about the comparative advantage argument they’d know that provisions in free trade agreements that addressed the wage and pollution and safety concerns of their opponents wouldn’t have the slightest effect on the comparative advantage argument. None. Nada. Zippo. That’s just by the very nature of the argument (in fact, I teach something very like this in my finite methods classes – you know, those optimization problems where you find the points of the polygon of the feasible solution set or set up a matrix with pivot rows and slack variables or something similar to get the best mix of outputs.)

Let me say that again: Provisions in free trade agreements that take into account conditions like differing pollution standards among the signatories do not affect the comparative advantage argument for free trade between them in the slightest.

If you don’t know this, then you’ve got no business sneering at the lack of economic acumen in others, in fact, you open yourself up to ridicule.

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ScentOfViolets 03.19.11 at 9:26 pm

here again. One can find economists on both sides of the Myles vs Scent of Violets debate. Some assert that economic theory proves that free trade is best. Others disagree.

I’m not sure of what you’re referring to here – probably because so many of those terms thrown so casually around should come equipped with scare quotes – and in fact I think the economic theory for free trade is sound.

I’m simply pointing out that you can’t call every trade agreement a “free trade” agreement because you think the term carries some academic heft and you can’t disparage the objections of others as arguments from ignorance concerning theories of comparative advantage.

Really, ISTM that calling some of these treaties “free trade agreements” is like calling legislation that weakens pollution controls the “Clear Skies Initiative”.

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Charles St. Pierre 03.20.11 at 2:35 am

Myles @60

If they buy Knightsbridge to live in, and spend their oil gotten pounds in England, then England comes out ahead. The English are getting their money back. If they buy Knightsbridge to rent out to the English, then no. The foreigners collect their rent. The money leaves England, and the English must work to get that money back.

As for foreign insurance in Japan, it is the foolish insurance company that pays out in claims more than it collects in premiums. Japan might have gotten away with one this last time if they had had foreign insurers, but you can bet that even now the actuaries in insurance companies across the globe are recalculating the risk of insurance for earthquakes and tsunamis, and that, should they ever in the future cover Japan for these, these foreign insurance companies would be determined that they will come out ahead, just as, were Japanese companies to insure against disaster in foreign countries, the Japanese coumpanies would be determined to come out ahead.

Once an entity’s statistics become large enough, it is not unusual for them to self-insure, and retain what otherwise would be the profits paid out to the outside insurance company.

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Myles 03.20.11 at 5:15 am

If they buy Knightsbridge to rent out to the English, then no. The foreigners collect their rent.

What makes you think it’s being rented out to the English, as opposed to other expats and Arabs?

Japan might have gotten away with one this last time if they had had foreign insurers

This isn’t the point. The problem here is that the Japanese had an illusion of having insurance, when they didn’t; consequently this is going to mostly fall on the government. Whatever profit they might or might not make, the global insurers would diversify risk away from the Japanese domestic economy; reconstruction would be paid out of the European, American, whatever economies, from premia gathered from Japan incrementally when times were good, rather than now lumped onto a stricken Japanese economy struggling to recover from a bad stroke of luck. This is a matter of timing more than anything; the whole point of insurance is to avoid this kind of horrible situation where on top of natural disasters, you now to have take a giant bite out of your domestic economy at the worst possible time (rather than gradually and incrementally when the times were good, and you were most capable of paying for it) so as to pay for the costs and damages.

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chris bartle 03.20.11 at 4:05 pm

works for climate and evolutionary science as well – though the dissidents are not really scientists, but “scientists” for media consumption

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Thomas Esmond Knox 03.21.11 at 7:55 am

I agree with Robert Waldman.

Much of the other discussion, I find vacuous.

Good accountants are much more valuable than good(?) economists. Prescott is an exception to this rule.

72

Doc Merlin 03.21.11 at 11:39 am

I think you may have the causality backwards. It seems to me that politics influences economics not so much the other way around. Keynes is a clear example of that, having written his famous work (according to his friend Hayek) as a way to convince english unions to accept lower wages.

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chris 03.21.11 at 1:32 pm

if they really understood or cared about the comparative advantage argument they’d know that provisions in free trade agreements that addressed the wage and pollution and safety concerns of their opponents wouldn’t have the slightest effect on the comparative advantage argument.

If only it were so. But Myles tipped his hand at 53: the “comparative advantage” of paying your workers less is precisely the advantage he would like to see spread freely and brought to those countries that don’t already have (or more precisely, used to have but then politically rejected) the blessings of sweatshops.

Whether lower wages are an “advantage” is obviously different from the perspective of the employer or the employee. But Myles, and his side of the argument generally, aren’t going to admit that’s a genuine disagreement — lower wages are a comparative advantage and economic efficiency demands that industry move where it can find them.

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ScentOfViolets 03.21.11 at 4:57 pm

Whether lower wages are an “advantage” is obviously different from the perspective of the employer or the employee. But Myles, and his side of the argument generally, aren’t going to admit that’s a genuine disagreement—lower wages are a comparative advantage and economic efficiency demands that industry move where it can find them.

Well no, lower wages or less stringent pollution standards or what have you have nothing to do with the economic argument of “comparative advantage”. That’s where I stepped in above (since Henry was letting this guy spout his abuse): you want to sneer at people for being uninformed or economically ignorant? Well, that’s a style thing. But to sneer at people for being ignorant while obviously not understanding the argument yourself, well, that’s going into yellow card territory.

Now of course, something like lower wages being paid to the workers is an advantage. And it is what people like Myles are talking about when discussing “comparative advantage”. But that’s not the economic comparative advantage argument – as I’ve already pointed out, the argument works just as well for trade between countries that have parity wrt to regulations and wage standards. No one thinks there is no benefit to free trade with Canada, for example, even though they have about the same standards.

So these people are either being economically illiterate, or they’re just playing word games of the no cat has nine tails variety.

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Russell Nelson 03.22.11 at 6:24 am

Wow. Most of the commentators here have nothing useful to say. FWOMPT.

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Myles 03.22.11 at 8:55 am

But that’s not the economic comparative advantage argument

No, it’s not, I suppose. Well here’s the thing: I think I was quite clear that I wasn’t referring to environmental standards or labour standards or what-have-you in talking about comparative advantage; I wouldn’t propose that say, less safety equipment or a more permissive safety regimen for a factory in Vietnam should count toward comparative advantage. But to the extent that Detroit automakers shell out genuinely more in pay and bennies than factories in Japan do, I think; that difference should perhaps count toward comparative advantage. That’s what I meant when I say wages (and only wages, not working standards) do matter.

Incidentally, the Australian automotive industry is a classic case of protectionism. Cars costed a complete fortune in Australia because of domestic content rules, and given that the Australian market was never big enough to sustain the relevant economies, it was always produced at a higher cost than most elsewhere, even if its wages and bennies were no higher.

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Myles 03.22.11 at 9:08 am

(I actually do think realistically speaking, it’s better to have sweatshops than no factories at all in those countries that are still desperately deprived. But it’s true that sweatshops don’t go under the classic comparative advantage rubric; it would be horrifying if they did.)

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