Sunday, February 20, 2011

Why support free trade?

Economists are usually in favor of free trade. I myself am both an economist and usually in favor of free trade. But I thought this post on “Kids prefer Cheese” which Mark Thoma recently re-blogged had a good and valid point that economists do well to remember: Even if trade benefits the trading partners, that does not mean that a large number of people in a country may not be hurt by allowing free trade. And even if the monetary gains of the winners are bigger in sum than the monetary losses of the losers, that isn’t always a big help for the losers since there is no redistribution automatically triggered making everyone at least as well off as before.

Economists usually defend their stance on such issues by talking about Pareto efficiency, saying that making someone better off is always good provided someone else isn’t made worse off by it. Then they switch from talking about Pareto improvements (probably rare in actual policy) to talking about potential Pareto improvements, where the winners could compensate the losers and achieve a true Pareto improvement. Of course, they won’t do so in actuality, which makes the policy also have a redistributive element. A common reply is that redistribution should not be solved through trade measures, but through redistributive policies. But, guess what, most of those aren’t that popular amongst economists either: They distort incentives and reduce efficiency and involve moral hazard problems and, besides, inequality isn’t that horrible anyway. I may be completely wrong, but my guess is many of the economists most adamant about the glories of completely free trade are also amongst those staunchest in opposition to redistributive taxation and public welfare schemes. Though, being a guess, that may be just based on stereotypes and shouldn’t be given too much weight.

Anyway, here’s an excerpt:

People, the United States is not a person! Only in DSGE models do we assume that all individuals are identical! There is no "our" to which general statements can be attached.
Yes, going from autarky to free trade will raise the GDPs of both nations, but that is a very far cry from saying that a large number of individuals will not be made worse off in the process. I figure that NGM is familiar with the Stolper-Samuelson theorem, so I guess he is assuming the political process always provides adequate compensation for the losers??

ROFLMAO, anyone?
Here's a case for free trade:

Individuals should be allowed to contract with whoever they wish, without government interference based solely on geography.

Now, that is not much of an economic argument, but, to tell the ugly truth, THERE ISN'T MUCH OF AN ECONOMIC ARGUMENT.

Once you factor in agent heterogeneity, imperfect competition, increasing returns, and an arbitrarily large number of traded goods, the welfare economics of free trade is murky at best.

More good stuff making the same point here