Thursday, July 26, 2007

Why Trade?

So the common objection I have gotten to my draft both on and off line is, why trade? Doesn’t this apply to any policy, not simply trade? Or, we already know that people are afraid of trade?


I am sensitive to this but I think the trade argument is important because of the special status free trade has within economics.

Perhaps, my perception is way off but I think that most economists feel comfortable asserting that the gains to the winners from trade liberalization will outweigh the losses to the losers except in the following cases:

1) There are externalities.

2) There are unexhausted returns to scale.


I am offering a third and I believe more general critique. The very fact that there are winners and losers is inherently costly. Unless you know for certain exactly who those winners and losers are, you are imposing uncertainty on the world.

It is possible that the cost from this uncertainty outweighs the gains from trade liberalization.

In fact, it is possible that freer trade is unambiguously a social ill. That is, the increase in uncertainty could make every single person in the world worse off because of freer trade. In this case there is no social welfare function that would rate this as a good idea.

Since this is a theoretical possibility, the notion that the gains to the winners outweigh the losses to the losers becomes an empirical question that is almost impossible to rule out a priori.

Now, I think that distributional uncertainty is an issue that goes beyond trade. Indeed, I think it affects any policy we might consider. However, I do think that trade is unique in the level of confidence economists display about policy prescriptions.

In a survey reported by Robert Whaples 90.1% of economists disagreed with the suggestion that US should restrict outsourcing.My guess is that the 10% who agreed did so primarily on the grounds of equity and that most of those who disagreed felt that in the absence of externalities or a returns to scale argument trade unambiguously promoted the general welfare.

I am challenging that assumption.

17 comments:

knicksgrl0917 said...

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dWj said...

As one of the commenters kind of hinted at -- and, come to think of it, I mentioned that the same effect could enhance welfare gains -- there is uncertainty without free trade, and trade liberalization may reduce uncertainty, especially in the long term. A famine is far more likely to hit an entire country than the whole world.

Even in the short term, it seems as though extra uncertaintly is likely to be associated with changes in legal institutions, whether they're in the direction of increasing trade or decreasing trade. It's the dislocations that cause this sort of discomfort; if there's going to be a certain amount of dislocation, it might as well be in the direction of increasing long-term efficiency, rather than the opposite direction.

As you said, "status quo bias". Publish the paper and get yourself in Bartlett's.

mvpy said...

I was thinking, Mankiw has a paper on the equity premium; basically the concentration of risk can amplify perceived risk for everyone. This kind of reasoning likely applies to your model too - and could be an interesting extension.

Anonymous said...

I just found a link to the posts outlining this paper idea, and it's downright BRILLIANT. Good job! Rarely does anyone write a paper that is (1) based on simple theoretical concepts, (2) addresses an extremely important real-world problem, and (3) explains a persistent gap between the received wisdom of economists and the stubborn view of the rabble. I can't wait until you become justly famous for this paper.

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