I’m generally in favour of free trade. So are quite a few economists who have reputations for being against it – even though they are not. At one point Keynes, who was a strong free trader argued (I think in the context of England being constrained by fixed exchange rates) that trade restrictions were a lesser evil if they were necessary to underpin economic expansion during a downturn. This caused its share of uproar and outrage. Was he a free trader or not?
Likewise when I outlined a departure from the case for unilaterally reducing our car tariffs to zero, various economist commenters got quite agitated about it. One said it was outrageous and assumed that I didn’t know the very first thing about the economics of trade.
Dani Rodrik is also supportive of free trade though he’s frequently been taken to be against it. Rodrik thinks that incursions on trade can generate more benefits than costs if done right – particularly in the context of economic development. He’s got lots of interesting things to say and think about regarding the whole subject.
And a recent post of his drew readers’ attention to a paper by Robert A. Driskill (pdf) which anatomises some of the foibles of the case for free trade. Just to repeat, it’s not against free trade, but it does outline the various shortcuts that economists take in making the case for free trade. How loose the arguments are sometimes and how much gets left out. If you’re interested in this I strongly suggest a squiz of the paper. If you have no economic training, you may find the terminology a bit off-putting, but there are no equations or anything as nasty as that.
I can’t prove it, but remain convinced in the face of plenty of circumstantial evidence, that the tribalism that economists show on this topic is to be explained by a certain kind of psychology. As Paul Samuelson once said, the case for free trade is one of the few findings of modern social science that is both counter-intuitive and yet at the same time in some fundamental sense true. It’s a piece of logical gold in a fuzzy set of disciplines about which it’s reasonable to ask how much they really know beyond the commonsense of most of us.
David Henderson has painted a perceptive portrait of professional economics battling popular economic misconceptions. Resisting the fallacies of what Henderson calls ‘do-it-yourself’ economics is a motivating preoccupation of much advocacy on public policy by economists. What could be more satisfying than showing the value of your own expertise, the essentially trivial silliness of so many others – including some pretty smart and powerful people – at the same time as being confident that you are on the side of social progress, that you’re doing well by doing good?
I’ve argued in other places that this orientation has led economists to downplay important information being provided by non-economists or even economists who are ‘tainted’ by their proximity to the ‘dark side’ of those with an axe to grind. Thus for instance it was business people who proposed ‘export facilitation’ in the car industry – a mechanism which effectively diverts the benefits from trade liberalisation into the hands of domestic exporters.
Is this as good as putting it in the hands of consumers? Well as far as growth is concerned, the experience of successful Asian countries who pursued the strategy suggests that it was more successful than giving it to consumers – the consumers got theirs in due course as economic development proceeded. Certainly the studies of the time suggested that ‘trade liberalisation on behalf of exporters’ was a very successful strategy, though of course we are in a different situation and this doesn’t necessarily carry over to our own experience.
But the choice between the surplus getting to consumers directly or via exporters is also a value choice. So if you had to choose between gradual trade liberalisation out of the textbook in which trade is liberalised gradually with the surplus going to consumers, and trade liberalisation that was faster because more of the surplus went into the hands of exporters from the industry, what would you choose? Well it’s a hard call.
But when export facilitation was cooked up by General Motors and sold to an economically illiterate Prime Minister Fraser some econocrats held up the cross to it as if they were in a Dracula movie. They were even prepared to support higher tariffs to avoid trade liberalisation on behalf of automotive exporters.
In effect their anti-mercantilist allegiance blinded them to the fruitful leads that were proposed by businessmen, economic amateurs and even some professional economists. A contributing factor might have been what I’d call the positivist culture of economic expertise. Because economics is such a technical discipline – in many ways necessarily so – economists are well trained in the quantitative manipulation of entities which can be reasonably assumed to be the same – tons of wheat for instance – or for which the assumption of being identical might be a bit of a stretch – but which assumption has to be made to get some piece of analysis going. But as J. R. Hicks put it, a lot of reasoning is about judicious analogies – not comparing like with like or counting and comparing quantities, but comparing ‘rather like’ with ‘rather like’ and working out when analogies are more valuable for the insight they provide than they are misleading for the things they leave out.
There are not many prizes in economics school for being good at this second kind of (informal) reasoning. And anyway, it’s the kind of reasoning that is ultimately much trickier to know whether you’re doing a good job at than technical reasoning. So not only don’t we teach it much, but my guess is that it’s pretty hard to teach and to learn. To some substantial extent you might have it or you might not. I don’t think historians – who are trained in this kind of informal thinking – would be so superior at catching onto the potential offered by that kind of reasoning than the smarter economists about.
Anyway, enough from me. In our next exciting episode we show how the same thing has happened in the area of trade negotiation. You’ll laugh, you’ll cry. And you’ll find out why this sentence taken from an old Australian Financial Review in the 1990s is bollocks.
NAFTA is second best. It is trade liberalisation, but it is discriminatory liberalisation. . . . First best would have been a better GATT.